Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of ___February___ 2007
(Commission File No. 000-24876)
TELUS Corporation
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal registered offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
X
Form 20-F _____ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
X
Yes _____ No _____
This Form 6-K consists of the following:
______________________________________________________________________________
TELUS NEWS RELEASE
TELUS Reports Fourth Quarter Results
February 16, 2006
Strong revenue and earnings growth based on strength in wireless and data
VANCOUVER, Feb. 16 - TELUS Corporation (TSX: T and T.A / NYSE: TU)
today reported for the fourth quarter of 2006 an eight per cent increase in
revenues to $2.25 billion from a year ago due to continued strong wireless and
data growth. Earnings before interest, taxes, depreciation and amortization
(EBITDA) increased 20% due to strong wireless and wireline growth, aided by
the absence of expenses from the labour disruption in the fourth quarter of
2005. Earnings per share (EPS) for the fourth quarter were 70 cents, compared
to 22 cents for the same period a year ago. EPS this quarter included
favourable tax related adjustments of six cents per share. When normalizing
for tax, non-recurring financing charges and the labour disruption impacts,
EPS this quarter increased 64% due primarily to EBITDA growth and lower
financing costs.
TELUS achieved or exceeded four of five consolidated financial 2006
targets set more than a year ago. This result was largely driven by the
national wireless business and wireline data growth, which included our
non-incumbent operations in central Canada. The 2006 results were also
generally consistent with the latest guidance update made last December. TELUS
reported full year revenue growth of seven per cent and EBITDA growth of nine
per cent. In 2006, TELUS generated strong free cash flow, up nine per cent to
$1.6 billion, which funded increased dividends, which totaled more than $400
million, as well as $800 million of TELUS share repurchases in the year.
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
C$ in millions, 3 months ended
except per share amounts December 31
-------------------------------------------------------------------------
(unaudited) 2006 2005 % Change
-------------------------------------------------------------------------
Operating revenues 2,254.6 2,086.7 8.0
-------------------------------------------------------------------------
EBITDA(1) 878.1 734.4 19.6
-------------------------------------------------------------------------
Income before income taxes
and non-controlling
interest 327.3 140.2 133.5
-------------------------------------------------------------------------
Net income(2) 236.2 78.5 200.9
-------------------------------------------------------------------------
Earnings per share (EPS),
basic (2) 0.70 0.22 218.2
-------------------------------------------------------------------------
Capital expenditures 415.2 374.1 11.0
-------------------------------------------------------------------------
Cash provided by
operating activities 747.2 805.0 (7.2)
-------------------------------------------------------------------------
Free cash flow (3) 233.4 109.8 112.6
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating revenues less Operations
expense less Restructuring and workforce reduction costs. See
Section 11.1 of Management's discussion and analysis.
Restructuring and workforce reduction costs were $7.9 million
and $35.5 million in the fourth quarters of 2006 and 2005
respectively. Net expenses from the labour disruption were
$52.2M in the fourth quarter of 2005. Underlying EBITDA growth
before restructuring costs and net labour disruption expenses
was 7.8%, compared to the same period a year ago.
(2) Net income and EPS for the three month period in 2006 includes
favourable impacts of tax-related adjustments of approximately
$20 million or six cents per share. Net income and EPS for the
same period in 2005 includes the unfavorable impact of $33.5
million or six cents for financing charges on the redemption of
long-term debt and one cent unfavorable impact for tax-related
adjustments.
(3) See Section 11.2 of Management's discussion and analysis.
Darren Entwistle, president and CEO, said "we closed out the year with
excellent financial results in the fourth quarter underpinned by wireless
revenue growth of 16% and wireline revenue growth of 2%. The consistent and
focused execution of our national growth strategy is resulting in a
comparatively superior asset mix for global telecoms such that 46% of
consolidated revenue is generated by wireless and 19% from wireline data.
Wireless revenue is growing in part due to a 114% increase in the data
component and wireline revenue is up due to a 9% increase in data. The robust
earnings and cash flow being generated at TELUS are being used to invest in
three areas for long-term value creation for investors. The first use is core
business capital investments in both wireless and wireline. Second, are
successive increases under our dividend growth model. Third, are substantial
share buyback programs. Based on 2006 financial results, 2007 targets and
investor friendly programs to return and invest capital, TELUS enters 2007
with considerable momentum."
Robert McFarlane, executive vice president and CFO, said "TELUS has
continued to demonstrate the advantage of its ongoing commitment to balancing
the interest of equity and debt holders. In 2006, TELUS returned $1.2 billion
in capital to shareholders through a combination of dividends and share
repurchases while improving our credit rating. We repurchased 17.4 million
shares in our second 12 month share buyback program and have renewed it for
the purchase of up to 24 million shares by mid-December 2007. Since inception
in December 2004, we have repurchased 39.4 million shares for $1.77 billion.
TELUS enjoys a strong balance sheet providing TELUS with enviable financial
strength and the lowest cost of capital in the Canadian telecom industry.
Today we announced a replacement bank facility of $2.0 billion, which has an
extended five year term as well as more favourable pricing and terms than the
previous $1.6 billion facility. As a result, TELUS is well positioned to take
advantage of the upcoming refinancing of the $1.5 billion of 7.5% debt coming
due in mid-2007."
-------------------------------------------------------------------------
This news release contains statements about expected future events and
financial and operating results of TELUS that are forward-looking. By
their nature, forward-looking statements require the Company to make
assumptions and are subject to inherent risks and uncertainties. There is
significant risk that the forward-looking statements will not prove to be
accurate. Readers are cautioned not to place undue reliance on forward-
looking statements as a number of factors could cause actual future
results and events to differ materially from that expressed in the
forward-looking statements. Accordingly this news release is subject to
the disclaimer and qualified by the assumptions (including assumptions
for 2007 guidance and share purchases), qualifications and risk factors
referred to in the Management's discussion and analysis - February 14,
2007.
-------------------------------------------------------------------------
OPERATING HIGHLIGHTS
TELUS wireless
Profitable subscriber growth continues
- Revenues increased by $143.5 million or 16% to $1.02 billion in the
fourth quarter of 2006, when compared with the same period in 2005
- ARPU (average revenue per subscriber unit per month) improved by $2
to $64.50. The data component increased by 94% to $6.16, which more
than offset the decline in voice ARPU
- EBITDA increased by $106 million over the fourth quarter of 2005
representing 33% growth
- Cost of acquisition per gross addition of $436 decreased 3% year over
year primarily due to lighter advertising and promotional activity
- Net subscriber additions were 181,600, down 23% primarily due to a
43% decline in prepaid loading to 52,100. Postpaid additions totaled
129,500, down 10% from a year ago
- Blended monthly churn was lower at 1.33% compared to 1.42% a year
ago, while postpaid churn remained low at 0.97%
- Cash flow (EBITDA less capital expenditures) increased by $144
million or 79% to $325.5 million in the quarter due to an increase in
EBITDA and a decline in capital expenditures
TELUS wireline
Strong data growth supports revenue growth
- Revenues increased by $24 million or 2% to $1.23 billion in the
fourth quarter of 2006, when compared with the same period in 2005
due to data growth offsetting declines in local and long distance
revenues
- Data revenues increased 8.8% due to strong high-speed Internet and
enhanced data service growth
- The decline in long-distance revenue slowed to 6.7% or $198 million,
reflecting TELUS success in partially offsetting industry trends of
lower volumes, strong price competition and technological
substitution
- EBITDA increased by $38 million or 9.2%, due to the absence of
$52 million of net expenses incurred during the labour disruption in
the fourth quarter last year
- In Central Canada, non-incumbent revenue increased 4.0% and EBITDA
improved to $11 million
- High-speed Internet net additions were 44,400, taking TELUS' high-
speed base to 917,000, which is a 20% increase from a year ago. The
total Internet subscriber base topped 1.1 million
- Network access lines declined by 31,000 in the quarter, with total
NALs down 3.0% from a year ago reflecting residential line losses
from ongoing competitive activity and wireless substitution
- Cash flow (EBITDA less capital expenditures) was down 23% to $137
million, due to increased capital expenditures reflecting increased
spending on broadband infrastructure and to service the strong
housing growth in Western Canada
CORPORATE DEVELOPMENTS
TELUS income trust developments
On September 11, 2006, TELUS proposed to reorganize in its entirety into
an income trust. In light of the federal Minister of Finance's surprise
announcement on October 31, 2006 of a new tax plan that would increase the
level of taxation on income trusts, TELUS announced that it would re-evaluate
its proposal. TELUS management and Board of Directors announced on November 24
that they believed that it was no longer in the best interests of the Company
and its shareholders to proceed with the reorganization.
TELUS supports proposed local forbearance decision changes and CRTC
directive
In December 2006, the Minister of Industry issued a proposed order-in-
council that would make significant changes to the April 2006 CRTC framework
for forbearance from regulation of residential and business local exchange
services. If enacted, it will simplify and significantly reduce the heavy
regulation of local phone services where competition is determined to exist.
The proposed order would eliminate the current marketing restrictions on
winbacks and most other promotions. It would also replace the CRTC's market
share loss test with a simpler competitive presence test: regulation of local
phone services would no longer be required in markets where consumers have the
choice of at least three carriers, or two in the case of enterprise services.
In addition, it would reduce the number of competitor quality of service
criteria that must be met as a precondition for forbearance.
The proposal is subject to a public comment period, following which the
Federal Cabinet can implement the proposed framework in its present or revised
form. This order must be issued by April 6, 2007. TELUS sees this as a
positive development for the Company and Canadian consumers. If it comes into
effect substantially as proposed, TELUS believes it will be in a position to
achieve deregulation in most of its incumbent urban local exchanges in 2007.
Also in December 2006, the federal government issued a directive to the
CRTC to rely on market forces to the maximum extent feasible, to ensure
technological and competitive neutrality, to be as minimally intrusive as
possible, maintain its own performance standards and explore process
streamlining.
TELUS enhances bank facilities and extends accounts receivable
securitization program
TELUS has received commitments from a syndicate of 18 financial
institutions that will result in a new $2 billion credit facility being
established, subject to completion of documentation and normal conditions
precedent. This new facility will replace the $1.6 billion of existing credit
facilities, which consist of an $800 million facility expiring in May 2008 and
an $800 million facility expiring in May 2010. The new credit facility has
more favourable terms and will mature in 2012. The use of proceeds is for
general corporate purposes and may be used to back-up commercial paper
issuance, which could be part of the refinancing of the $1.5 billion of Notes
coming due in June 2007.
Separately, TELUS has also extended the term of its revolving-period,
accounts receivable securitization agreement by one year to July 18, 2008.
TELUS continues share repurchases
During the fourth quarter, TELUS continued to purchase shares under its
Normal Course Issuer Bids. Repurchases totaled approximately 3.6 million
shares for a total outlay of $200 million. Under the Normal Course Issuer Bid
completed on December 19, 2006, TELUS repurchased 17.4 million shares, 73% of
the total authorized amount, for $848 million.
TELUS renewed its Normal Course Issuer Bid program on December 20, 2006
with the intention, if considered advisable, to purchase and cancel, over a
12- month period, up to 12 million of its outstanding common shares and 12
million of its outstanding non-voting shares on the Toronto Stock Exchange.
This represents approximately 6.7% of the common and 7.5% of the non-voting
outstanding public float of each class of shares in mid-December. Under this
third program in the last seven trading days of 2006, a total of 186,000
shares were repurchased, for a total cost of $9.8 million.
Since December 2004, TELUS has repurchased a total of 39.4 million shares
for an outlay of $1.77 billion under three share repurchase programs. TELUS
believes that such purchases are in the best interest of the Company and
constitute an attractive investment opportunity and desirable use of company
funds that should enhance the value of the remaining shares.
Five year Best Buy contract
TELUS signed a five-year, multi-million dollar contract with Best Buy
Canada to connect all of its Canadian stores through a private IP network. The
secure next generation network will enable Best Buy to enhance its
communication capabilities, meeting customer demands through advanced
applications designed to improve efficiencies, support sales staff and deliver
a unique shopping experience to Canadians.
GPS-enabled handset and in-vehicle tracking capabilities for the business
market
TELUS expanded its mobile tracking services in November, making the GPS-
based services affordable for the small and mid-sized business market. TELUS
GPS gives customers access to real-time mobile tracking over wireless handsets
and in-vehicle modems. Hosted by TELUS and running over TELUS' 1X and Mike
wireless networks, the service gives small and mid-sized businesses the
benefits of GPS technology without the usual intensive capital costs.
South Asian wireless content
TELUS partnered with India's largest integrated telecommunications
service provider, Reliance Communications, to introduce authentic South Asian
mobile content to its customers. The Apna Des content site brings customers
North America's largest catalogue of wireless Bollywood content, news, cricket
updates, entertainment and cultural information direct from South Asia.
Cool new phones
TELUS continues to expand its suite of cool new products with the
introduction of eight wireless devices. Celebrating the 10th anniversary of
the Mike network, TELUS also launched the multimedia push-to-talk Motorola
i880 in November. TELUS is the exclusive Canadian provider of two music boxes
- the LG Chocolate music box featuring the LG Chocolate (LG 8500) and the
Sweet Jam music box featuring the Samsung A720. TELUS was the first Canadian
provider to offer the Nokia 6165i Instant Talk phone. TELUS also expanded its
suite of data devices with the introduction of the new BlackBerry 8703e.
TELUS TV development
The development of TELUS TV continued in the quarter with the addition of
Pay Per View service, giving customers front row seats to special
entertainment and sporting events. TELUS TV's neighbourhood-by-neighbourhood
rollout in Calgary, Edmonton and Vancouver continues.
Wireless high-speed extension
With the launch of TELUS wireless high-speed EVDO service into the South
Okanagan Valley, more than half of all Canadians can access the service in
more than 35 communities. The Okanagan Valley launch means customers in
Osoyoos, Okanagan Mountain Provincial Park, Oliver, Peachland, Penticton and
Summerland have access to broadband-like wireless connection.
TELUS also extended the service to more than 230 U.S. cities in the
fourth quarter, making it fast and simple for business and consumer customers
traveling in the U.S. to wirelessly access Internet, e-mail and other
multimedia applications at broadband-like download speeds.
TELUS and Dell announced a strategic relationship that will see TELUS
wireless high-speed technology embedded in select Dell LATITUDE and XPS
notebooks and Dell PRECISION mobile workstations. Customers can wirelessly
access broadband-like download Internet speeds without the need for an
additional aircard or wireless handset.
In addition, TELUS and Lenovo announced that select versions of Lenovo
ThinkPad notebook computers would offer embedded access to our wireless high-
speed service.
Connecting rural communities
TELUS continued connecting rural communities to broadband and wireless
infrastructure. In British Columbia, the partnership with GwaiiTel saw last
mile broadband connections made to seven communities on the Queen Charlotte
Islands in November. TELUS also connected four central coast communities and
Rogers Pass to wireless service.
TELUS launches online photo community
TELUS launched a photo archiving and sharing community on its web portal
mytelus.com. Customers can upload up to one gigabyte of personal photos to the
TELUS photo community for sharing with loved ones or the entire Internet
community. They can also create personalized greeting cards using their
photos, participate in themed photo contests, vote in contests, and post
comments about photographs.
TELUS enhances wholesale IP services
TELUS enhanced its IP network to give wholesale customers around the
world seamless access to their Canadian clients. A new suite of services
allows telecommunications carriers purchasing wholesale services from TELUS to
securely manage their own secure connections on TELUS' Canadian network as
they would on their home networks. Carriers can prioritize traffic and offer
services such as managed virtual private networks and a single IP connection
for voice and data, effectively extending their operations to virtually
anywhere in Canada.
Three TELUS executives among Canada's most powerful women
The Women's Executive Network recognized three TELUS leaders at the 2006
Canada's Most Powerful Women Top 100 awards luncheon. Karen Radford, president
of TELUS Quebec and Partner Solutions; Janet Yale, executive vice-president of
Corporate Affairs; and Judy Shuttleworth, executive vice-president of Human
Resources, were selected for their career successes as well as their
dedication to bettering their communities. This is the third consecutive year
Ms. Radford and Ms. Yale have been awarded this honour and the second year for
Ms. Shuttleworth.
TELUS receives award for best corporate governance disclosure in Canada
The Canadian Institute of Chartered Accountants (CICA) presented TELUS
with the Award of Excellence for best Corporate Governance Disclosure across
all industry sectors for the second year in a row. The CICA also awarded TELUS
the Award of Excellence for Corporate Reporting in the Communications and
Media sector for its 2005 Annual Report, based on the highest average ranking
for its financial reporting, corporate governance disclosure and electronic
disclosure. This is the 12th consecutive year that the CICA has recognized
TELUS with an award for its corporate reporting.
TELUS directory assistance service Canada's best
For the fourth consecutive time TELUS' directory assistance service was
ranked the best in Canada. The Paisley Group, a directory assistance and
operator services company which conducts semi-annual reviews of the industry,
found TELUS scored top marks in all measurements including the critical
"passed calls" measure - the percentage of directory assistance calls where
the customer receives accurate information and is cared for professionally.
For the first time, TELUS' wholesale directory assistance services
provided to several U.S. telecommunications companies were measured in the
same survey, placing second in the rating of third party directory assistance
providers in the United States.
TELUS recognized for IP leadership and innovation in public safety
Computer Dealer News awarded TELUS' Emergency Management Operating System
(EMOS) three international Channel Elite awards: Gold for Solution Provider of
the Year, Gold for Best On-Line Solution, and Silver for Best Enterprise
Solution for demonstrating innovation in product development. TELUS' EMOS is
the only fully integrated safety solution of its kind in North America.
EMOS is part of the TELUS SafetyNet portfolio, a comprehensive set of
safety solutions that protects communities, individuals and assets while
providing coordination and response communications for mass emergency
situations.
IT security product certified
TELUS' AssureLogic IT security product was awarded the NSS Approved
status from the NSS group, a premiere independent security testing facility
based in the U.K. AssureLogic protects online customer transactions such as
Internet banking. Of many tested, AssureLogic is currently the only Web
Application Firewall (WAF) product in the world to achieve this certification.
In the WAF category products are evaluated on performance and reliability,
security and effectiveness, and usability.
Fighting Internet child exploitation
TELUS and other large Canadian Internet service providers (ISPs) joined
forces with Cybertip.ca, Canada's child sexual exploitation tipline, in the
battle against online child sexual abuse. The initiative, Project Cleanfeed
Canada, will see participating ISPs install sophisticated new filters designed
to protect their customers from inadvertently visiting foreign websites
featuring child pornography. Cybertip.ca will establish and maintain a list of
blocked sites.
TELUS invests in the environment
TELUS will invest $1 million over three years in the new Montreal Green
Fund, enhancing green spaces and helping the city adapt to climate change. The
investment is in partnership with the Societe de verdissement du Montreal.
TELUS donated $100,000 towards the Stanley Park Tree Fund following a
series of devastating storms that battered the Vancouver landmark. Working
with partner Global TV, TELUS volunteers applied their call centre expertise
to keep a telethon for the fund going, raising an additional $50,000. TELUS is
also matching employee donations to the fund up to $50,000.
Dividend declaration
The Board of Directors declared a quarterly dividend of thirty-seven and
a half cents ($0.375) per share on outstanding Common and Non-Voting Shares
payable on April 1, 2007 to shareholders of record on the close of business on
March 9, 2007. This represents a 36% increase from the twenty-seven and a half
cent quarterly dividend paid in 2006.
For further information:
Media relations: Investor relations:
Allison Vale, Robert Mitchell,
(416) 629-6425, (416)279-3219,
allison.vale(at)telus.com; ir(at)telus.com
(T.A. T. TU)
Certain products and services named in this release are trade-marks. The
symbols(TM) and (R) indicate those owned by TELUS Corporation or its
subsidiaries. All other trade-marks are the property of their respective
owners.
Forward-looking statements
_________________________________________________________________________
This report and Management's discussion and analysis contain statements
about expected future events and financial and operating results of TELUS
Corporation (TELUS or the Company) that are forward-looking. By their
nature, forward-looking statements require the Company to make
assumptions and are subject to inherent risks and uncertainties. There is
significant risk that predictions, assumptions (see below) and other
forward-looking statements will not prove to be accurate. Readers are
cautioned not to place undue reliance on forward-looking statements as a
number of factors could cause actual future results, conditions, actions
or events to differ materially from financial and operating targets,
expectations, estimates or intentions expressed in the forward-looking
statements.
Assumptions for 2007 targets include: economic growth consistent with
recent provincial and national estimates by the Conference Board of
Canada, including 2007 real GDP (gross domestic product) growth of 2.7%
in Canada; increased wireline competition in both business and consumer
markets, particularly from cable-TV and voice over Internet Protocol
(VoIP) companies; forbearance for local retail wireline services in major
urban incumbent markets by the second half of 2007; no further price cap
mandated consumer price reductions; a wireless industry market
penetration gain of 4.5 to five percentage points; approximately
$50 million restructuring and workforce reduction expenses; statutory tax
rate of 33 to 34%; a discount rate of 5.0% and an expected long-term
average return of 7.25% for pension accounting, unchanged from 2006; and
average shares outstanding of 330 to 335 million. Earnings per share
(EPS), cash balances, net debt and common equity may be affected by the
potential purchases of up to 24 million TELUS shares over a 12-month
period under the normal course issuer bid that commenced December 20,
2006.
Factors that could cause actual results to differ materially include but
are not limited to: competition; economic growth and fluctuations
(including pension performance, funding and expenses); capital
expenditure levels (including possible spectrum asset purchases);
financing and debt requirements (including share repurchases, debt
redemptions, potential issuance of commercial paper and changes to credit
facilities); tax matters (including acceleration or deferral of required
payments of significant amounts of cash taxes); human resource
developments (including possible labour disruptions); technology
(including reliance on systems and information technology); regulatory
developments (including local forbearance, local price cap reductions,
wireless number portability and the timing, rules, process and cost of
future spectrum auctions); process risks (including internal
reorganizations, conversion of legacy systems and billing system
integrations); health, safety and environmental developments; litigation
and legal matters; business continuity events (including manmade and
natural threats); and other risk factors discussed herein and listed from
time to time in TELUS' reports, public disclosure documents including
annual reports, and in other filings with securities commissions in
Canada (filed on SEDAR at www.sedar.com) and the United States (filed on
EDGAR at www.sec.gov).
For further information, see Section 10: Risks and risk management of
TELUS' annual 2005 Management's discussion and analysis, as well as
updates reported in Section 10 of TELUS' 2006 first, second and third
quarter Management's discussion and analyses, and this document.
_________________________________________________________________________
Management's discussion and analysis
February 14, 2007
The following is a discussion of the Consolidated financial condition and
results of operations of TELUS Corporation for the three-month periods and
years ended December 31, 2006 and 2005. This discussion contains forward-
looking information that is qualified by reference to, and should be read
together with, the discussion regarding forward-looking statements above.
TELUS has issued guidance on and reports on certain non-GAAP measures
that are used by management to evaluate performance of business units,
segments and the Company. In addition, non-GAAP measures are used in measuring
compliance with debt covenants and are used to manage the capital structure.
Because non-GAAP measures do not have a standardized meaning, securities
regulations require that non-GAAP measures be clearly defined and qualified,
and reconciled with their nearest GAAP measure. For the readers' reference,
the definition, calculation and reconciliation of consolidated non-GAAP
measures is provided in Section 11: Reconciliation of non-GAAP measures and
definition of key operating indicators.
Management's discussion and analysis contents
-------------------------------------------------------------------------
Section Description
-------------------------------------------------------------------------
1. Introduction and performance A summary of TELUS' consolidated
summary results for the fourth quarter and
full year of 2006 and a description
of performance against 2006 targets
-------------------------------------------------------------------------
2. Core business, vision and Examples of TELUS' activities in
strategy support of its six strategic
imperatives
-------------------------------------------------------------------------
3. Key performance drivers TELUS' 2006 priorities
-------------------------------------------------------------------------
4. Capability to deliver results An update on TELUS' capability to
deliver results
-------------------------------------------------------------------------
5. Results from operations A detailed discussion of operating
results for the fourth quarter and
full year of 2006
-------------------------------------------------------------------------
6. Financial condition A discussion of changes in the
balance sheet for the year ended
December 31, 2006
-------------------------------------------------------------------------
7. Liquidity and capital A discussion of cash flow, liquidity,
resources credit facilities, off-balance sheet
arrangements and other disclosures
-------------------------------------------------------------------------
8. Critical accounting estimates A description of accounting estimates
and accounting policy and changes to accounting policies
developments
-------------------------------------------------------------------------
9. Looking forward to 2007 TELUS' annual guidance for 2007
-------------------------------------------------------------------------
10. Risks and risk management An update of risks and uncertainties
facing TELUS and how it manages these
risks
-------------------------------------------------------------------------
11. Reconciliation of non-GAAP A description, calculation and
measures and definition of reconciliation of certain measures
key operating indicators used by management
-------------------------------------------------------------------------
1. Introduction and performance summary
1.1 Materiality for disclosures
Management determines whether or not information is material based on
whether it believes a reasonable investor's decision to buy, sell or hold
securities in the Company would likely be influenced or changed if the
information were omitted or misstated.
1.2 Proposed reorganization as an income trust
On November 24, 2006, the Company announced that it had re-evaluated its
proposal announced on September 11, 2006 to reorganize in its entirety into an
income trust. TELUS management and the Board of Directors believe it is no
longer in the best interests of the Company and its shareholders to proceed
with the reorganization. This decision is in light of the federal Minister of
Finance's announcement on October 31, 2006 of a new tax fairness plan that
would increase the taxation of income trusts.
1.3 Canadian telecommunications market
Canadian real GDP growth was recently estimated at 2.7% in 2006 by the
Conference Board of Canada. Canadian wireless industry revenues grew by an
estimated 17% as market penetration for the industry increased by
approximately 4.6 percentage points to 57% of the population. TELUS' wireless
segment achieved 17% revenue growth and 12% subscriber growth in 2006.
The Canadian wireline industry continued to face pressures in 2006 in the
form of expanding voice over Internet protocol (VoIP) offers by cable-TV
competitors and others, as well as continued technological substitution of
voice services to wireless, which contributed to losses of residential access
lines by incumbent telephone companies. TELUS' external wireline segment
revenues decreased by 0.5% in 2006 as growth in data services nearly offset
losses in voice services. TELUS' residential access lines decreased 5% in
2006, while TELUS' total access lines decreased 3% due to modest growth in
business lines.
While the Company's major cable-TV competitors and others expand their
VoIP telephony offers in the Company's incumbent territories, TELUS continues
a limited commercial launch of TELUS TV(R) services to select neighbourhoods
in its incumbent territories. The business market continues to adopt Internet
protocol (IP) and managed services as a means of achieving operational
efficiencies and improving revenue generation. Technology also continues to
evolve, both increasing the Company's opportunities and facilitating increased
competition.
In addition, the regulatory environment is undergoing change. The federal
government undertook a review of Canada's telecommunications policy and
regulatory framework in 2005 and the review panel released its Telecom Policy
Review report of recommendations to the Minister of Industry in March 2006.
Some of the key points of this report were: there should be an end to the
presumption that telecom services must be regulated and a shift to reliance on
market forces, and where regulation remains, it should be light-handed and
flexible and must be justified in all circumstances. The federal government
directed the Canadian Radio-television and Telecommunications Commission
(CRTC) to make specific changes to the regulation of incumbent telephone
companies, some of which took effect in 2006 and some are expected to take
effect in 2007. See Risks and Risk management - Section 10.1 Regulatory.
1.4 Consolidated highlights
-------------------------------------------------------------------------
($ millions, except
shares, per share Quarters ended Years ended
amounts, subscribers December 31 December 31
and ratios) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Consolidated statements of income
-------------------------------------------------------------------------
Operating revenues 2,254.6 2,086.7 8.0 % 8,681.0 8,142.7 6.6 %
Operating income 471.0 321.2 46.6 % 2,014.7 1,671.6 20.5 %
Income before
income taxes and
non-controlling
interest 327.3 140.2 133.5 % 1,482.0 1,030.1 43.9 %
Net income 236.2 78.5 n.m. 1,122.5 700.3 60.3 %
Earnings per share,
basic ($) 0.70 0.22 n.m. 3.27 1.96 66.8 %
Earnings per share,
diluted ($) 0.69 0.22 n.m. 3.23 1.94 66.5 %
Cash dividends
declared per
share ($) 0.375 0.275 36.4 % 1.20 0.875 37.1 %
-------------------------------------------------------------------------
Consolidated statements of cash flows
-------------------------------------------------------------------------
Cash provided by
operating activities 747.2 805.0 (7.2)% 2,803.7 2,914.6 (3.8)%
Cash used by
investing activities 422.0 375.7 12.3 % 1,675.2 1,355.2 23.6 %
Capital
expenditures 415.2 374.1 11.0 % 1,618.4 1,319.0 22.7 %
Cash used by
financing activities 311.3 1,742.8 (82.1)% 1,148.6 2,447.3 (53.1)%
-------------------------------------------------------------------------
Subscribers and other measures
-------------------------------------------------------------------------
Subscriber
connections(1)
(thousands) at
Dec. 31 10,715 10,211 4.9 %
EBITDA(2) 878.1 734.4 19.6 % 3,590.3 3,295.3 9.0 %
Free cash flow(3) 233.4 109.8 112.6 % 1,600.4 1,465.5 9.2 %
-------------------------------------------------------------------------
Debt and payout ratios
-------------------------------------------------------------------------
Net debt to total
capitalization (0.2)
ratio (%)(4) 47.5 47.7 pts
Net debt to EBITDA
ratio(5) 1.7 1.9 (0.2)
Dividend payout (10)
ratio (%)(6) 46 56 pts
-------------------------------------------------------------------------
n.m. - not meaningful; pts - percentage point(s)
(1) The sum of wireless subscribers, network access lines and Internet
subscribers measured at the end of the respective periods.
(2) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(3) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash
flow.
(4) See Section 11.4 Definition of liquidity and capital resource
measures.
(5) Net debt to EBITDA, where EBITDA excludes restructuring. See Section
11.4 Definition of liquidity and capital resource measures.
(6) The current annualized rate of dividend declared per share
multiplied by four and divided by basic earnings per share for the
12-month trailing period.
-------------------------------------------------------------------------
Highlights, as discussed in Section 5: Results from operations, include
the following (comparing results for the fourth quarter and full year of 2006
to the respective periods in 2005):
- The Company met or exceeded four of its five consolidated targets,
and met or exceeded seven of the ten segmented targets for 2006. See
Section 1.5 Performance scorecard for 2006 results.
- Subscriber connections increased by 504,000 in the year ended
December 31, 2006, as the number of wireless subscribers grew by
11.8% to 5.06 million, the number of Internet subscribers grew by
11.2% to 1.11 million and the number of network access lines
decreased by 3.0% to 4.55 million.
- Operating revenues increased due primarily to growth in wireless and
data revenues, which make up approximately 63% of consolidated
revenues in 2006, compared to 59% in 2005.
- Operating income increased mainly because of growth in wireless
subscribers and average revenue per subscriber unit per month (ARPU)
as well as the absence in 2006 of expenses related to the labour
disruption. In addition, the amortization of intangible assets
decreased as several software assets are fully amortized and certain
investment tax credits were recognized following a determination of
eligibility by a revenue authority.
- Net income and earnings per share increased due to improved operating
performance, described above, as well as lower financing costs. The
average numbers of shares outstanding for the fourth quarter and full
year of 2006 were approximately 4% lower than the same periods in
2005 due to share repurchase programs, which contributed to increased
2006 earnings per share. In addition, Net income and earnings per
share in the fourth quarter of 2006 included favourable tax
reductions for reassessments of prior years and related interest
income of approximately $20 million or six cents per share. For the
full year of 2006, favourable impacts of tax-related adjustments,
including changes in statutory tax rates affecting future income tax
liabilities, were approximately $165 million or 48 cents per share,
compared with approximately $70 million or 20 cents per share in
2005.
Highlights, as discussed in Section 7: Liquidity and capital resources
include the following (comparing results for the fourth quarter and full year
of 2006 to the respective periods in 2005):
- Cash provided by operating activities decreased primarily due to
changes in proceeds from securitized accounts receivable (an increase
of $150 million in proceeds in the fourth quarter of 2006 and
unchanged for the full year of 2006, compared with an increase of
$350 million in both the fourth quarter and full year of 2005).
- Cash used by investing activities increased primarily due to greater
capital expenditures for investments in the broadband networks in
B.C., Alberta and Quebec, network access growth to serve strong
housing growth in B.C. and Alberta, TELUS TV, strategic investments
in EVDO-capable higher-speed wireless network technology and
continued enhancement of digital wireless capacity and coverage. To a
lesser extent, there was a deferral of activity from 2005 to 2006 due
to the 2005 labour disruption.
- Cash used by financing activities decreased due mainly to the early
redemption of $1.578 billion of Canadian dollar Notes on December 1,
2005.
- Free cash flow increased primarily due to higher EBITDA and lower
interest paid, which were partly offset by higher capital
expenditures, and for the fourth quarter, lower taxes recovered.
- Net debt to total capitalization at December 31, 2006 continued to be
in the target range of 45 to 50%.
- Net debt to EBITDA continued to be in the target range of 1.5 to
2.0 times.
- The dividend payout ratio for 2006, measured as the annualized
dividend declared in the fourth quarter divided by 2006 earnings per
share, was near the low end of the target guideline of 45 to 55% for
sustainable net earnings due mainly to actual earnings including
positive impacts from 2006 tax-related adjustments.
1.5 Performance scorecard for 2006 results
Eleven of 15 original targets for 2006 were met or exceeded. The
following items were not met:
- Consolidated capital expenditures and wireline capital expenditures
exceeded target ranges as a result of access growth requirements in
Alberta and B.C. and other factors;
- Wireline external revenue was just under the bottom of the target
range; and
- The number of wireless subscribers was approximately 3% lower than
TELUS' original target for 2006 as a result of market growth being
slower than originally expected, as discussed further below. By
retaining focus on profitable subscriber growth and retention
activity, the lifetime revenue per average subscriber increased by
$346 to $4,771 in 2006, when compared with 2005. Churn rates remained
low, while postpaid subscriber net additions in 2006 were 77% of the
total net subscriber additions, comparing favourably to 73% in 2005.
The following table summarizes TELUS' 2006 performance against its
original targets and compares 2007 targets to 2006 results. For further detail
on expectations for 2007, see Section 9: Looking forward to 2007.
-------------------------------------------------------------------------
Performance to 2006
targets and 2007
targets
++ Exceeded target
range Original
+ Met target 2006 targets Targets Change
x Missed target results for 2006 Result for 2007 from 2006
-------------------------------------------------------------------------
Consolidated
Revenues $8.681 $8.6 to + $9.175 to 6 to 7%
billion $8.7 billion $9.275 billion
EBITDA(1)
excluding
charge for
cash
settlement
feature for
vested
options in
2007(2) $3.590 $3.5 to + $3.725 to 4 to 7%
billion $3.6 billion $3.825 billion
Earnings per
share (EPS)
- basic $3.27 $2.40 to $2.60 ++ No target -
EPS excluding
after-tax
charge for
cash settlement
of options in
2007(3) - - - $3.25 to $3.45 (1) to 6%
Capital
expenditures $1.618 $1.5 to x $Approx.
billion $1.55 billion $1.75 billion 8%
Free cash
flow(4) $1.600 $1.55 to + No target -
billion $1.65 billion
-------------------------------------------------------------------------
Wireline segment
Revenue
(external) $4.823 $4.825 to x $4.85 to
billion $4.875 billion $4.9 billion 1 to 2%
Non-ILEC(5)
revenue $657 million $650 to + No target -
$700 million
EBITDA
excluding
charge for
cash
settlement of
vested options
in 2007(2) $1.839 $1.8 to + $1.775 to (3) to
billion $1.85 billion $1.825 billion (1)%
Non-ILEC
EBITDA $32 million $25 to $40 + No target -
million
Capital
expenditures $1.191 $1.05 to x Approx. Unchanged
billion $1.1 billion $1.2 billion
High-speed
Internet
subscriber Continued
net additions 153,700 More than ++ More than strong
100,000 135,000 growth
-------------------------------------------------------------------------
Wireless segment
Revenue
(external) $3.858 $3.775 to ++ $4.325 to
billion $3.825 billion $4.375 billion 12 to 13%
EBITDA
excluding
charge for
cash settlement
of vested
options in
2007(2) $1.751 $1.7 to ++ $1.95 to
billion $1.75 billion $2.0 billion 11 to 14%
Capital
expenditures $427 Approx. ++ Approx.
million $450 million $550 million 29%
Wireless
subscriber
net additions 535,200 More than x More than 3% or more
550,000 550,000
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest, taxes, depreciation and
amortization (EBITDA).
(2) Excluding an expense of $150 to $200 million in 2007 for a change to
add a cash settlement choice for vested option, of which, $120 to
$150 million is in wireline and $30 to $50 million is in wireless.
(3) Excluding $0.30 to $0.40 for cash settlement of options in 2007.
(4) See Section 11.2 Free cash flow.
(5) Non-incumbent local exchange carrier.
-------------------------------------------------------------------------
The following key assumptions were made at the time the original targets
for 2006 were announced on December 16, 2005.
-------------------------------------------------------------------------
Key assumption for 2006 targets Actual result and impact on results
-------------------------------------------------------------------------
Canadian real GDP growth of 3.1% 2.7% (estimate). Canadian real GDP
growth was lower than originally
expected, although recent estimates
showed very high growth rates in
Alberta and B.C. The modestly lower
national growth rate did not affect
results significantly.
Increased wireline competition Confirmed. Examples of increased
in both business and consumer competition in the business market
markets include bundling of web-based and
information technology services with
access, wireless and other data
services. Increased competition in the
consumer market with cable-TV phone
sales was one factor in the 5.2%
decrease in residential access lines
in 2006.
Canadian wireless industry market Estimated at 4.6 percentage points.
penetration gain would be Market growth was at the low end of
approximately five percentage expectations and contributed to
points achieving 3% fewer net additions of
wireless subscribers than original
targets.
TELUS would record approximately $67.8 million. A lower charge was
$100 million of restructuring recorded primarily as a result of the
and workforce reduction charges restructuring initiatives being
implemented more efficiently than
expected with a greater number of
staff being redeployed to growth areas
of the business and therefore not
requiring severance costs.
An effective income tax rate of Approximately 24%. The tax rate was
approximately 35% reduced by the revaluation of the
future tax liability from the
enactment of lower federal and
provincial tax rates, elimination of
the federal large corporations tax and
reassessments relating to prior years.
No prospective significant Confirmed.
acquisitions or divestitures and
no change in foreign ownership
rules
Maintenance or improvement in Confirmed. Moody's Investors Service's
credit ratings placed its "Baa2" rating for TELUS
under review for possible upgrade.
-------------------------------------------------------------------------
2. Core business, vision and strategy
The following discussion is qualified in its entirety by the Forward-
looking statements at the beginning of Management's discussion and analysis.
It is also qualified by Section 10: Risks and risk management of TELUS' annual
2005 Management's discussion and analysis, as well as updates reported in
Section 10 of TELUS' 2006 first, second and third quarter Management's
discussion and analyses, and this document.
TELUS' core business, vision and strategy were detailed in its 2005
annual Management's discussion and analysis. Activities during 2006 that
supported the Company's six strategic imperatives include the following:
Building national capabilities across data, IP, voice and wireless
With a focus on key vertical market segments (energy sector, financial
services, public sector and the healthcare industry), TELUS offers
differentiated applications to win new business contracts. For example, in the
healthcare sector, Ontario's Saint Elizabeth Health Care has contracted TELUS
to deploy its IP network to deliver hosting, voice and data communications
services. The Peterborough Regional Health Centre became the first to deploy
TELUS' unique Integrated Bedside Terminal solution with an order for
500 units. The bedside terminals provide patients and their caregivers with
clinical information, communication and entertainment on one interactive
screen. TELUS also launched Wireless Physician, an all-in-one wireless medical
database held in wireless devices that provides healthcare professionals with
up-to-date drug and diagnostic information in the palm of their hand to save
time and reduce errors.
In the public sector, TELUS was selected by the Ontario Ministry of
Government Services to provide, manage and supply its portfolio of network
services including information technology security for the entire government
network. The five-year contract is expected to generate approximately
$140 million of revenue. TELUS' network solution for the Government of Ontario
is based on an IP platform that provides secure transmission and electronic
sharing of information, and includes videoconferencing and web conferencing
services.
Indicative of TELUS' growing presence in Central Canada is the increase
in team members from just over 300 people in early 2000 to almost 10,000 in
Ontario and Quebec at the end of 2006.
Focusing relentlessly on the growth markets of data, IP and wireless
TELUS expanded the availability of its wireless high-speed service to 20
Canadian cities and regions in 2006 and to more than 35 in early 2007.
Wireless high-speed services have typical download speeds of 400 to 700
kilobits per second, based on the CMDA 1xEVDO standard, the newest third
generation (3G) wireless data technology available. TELUS also offers a
variety of wireless high-speed PCS phones and data devices, providing
customers with the ability to use them on TELUS' national 1X data network
(which covers 92% of the Canadian population). In December 2006, wireless
high-speed roaming was extended to 230 U.S. cities.
TELUS introduced SPARK(TM), a new name for its portfolio of mobile
entertainment, information and messaging services for consumers, and launched
TELUS Mobile Music and TELUS Mobile Radio. The SPARK portfolio also includes
TELUS Mobile TV, multimedia messaging, downloadable images, ringtones, videos
and games, and new Web browser features, including search tools and a broad
range of new online content.
TELUS continued its targeted launch of TELUS TV service in selected
neighbourhoods in B.C., Alberta and Eastern Quebec. Employee trials of TELUS
TV began in Quebec. In addition, TELUS constructed a "head end" facility in
B.C. to gather TV signals from dozens of satellites for transmission to
customers in B.C. and Alberta. This new facility and the existing one in
Edmonton both serve customers in the two provinces and provide back-up
capability to each other in the event of an outage.
Building integrated solutions that differentiate TELUS from its
competitors
TELUS announced in September 2006 that it intends to invest $600 million
between 2007 and 2009 to enhance its broadband infrastructure. This investment
will enable emerging high-speed Internet services and expand network coverage
across British Columbia, Alberta and Eastern Quebec.
TELUS' broadband project is an important investment, paving the way for
additional gains in the competitive high-speed Internet market and emerging
services including high-definition TELUS TV. The Company is installing
advanced Internet equipment in more than 7,000 sites across its network and
running fibre optic cable closer to customers' homes. Bringing fibre closer to
homes is expected to provide Internet access speeds of 15 to 30 megabits per
second and beyond.
The broadband project complements a rural capital investment program to
bring high-speed Internet services to more than 450 additional remote
communities in British Columbia, Alberta, and Eastern Quebec by 2010. Certain
of these initiatives are eligible to be recognized for deferral account
treatment. See the related discussion in Section 7.8, Subsection - Commitments
and contingent liabilities - Price cap deferral accounts.
Partnering, acquiring and divesting to accelerate the implementation of
TELUS' strategy and focus TELUS' resources on core business
Under a previously announced agreement with the Government of B.C., TELUS
has completed construction of fibre to distribution points in 113 remote
communities in British Columbia, which enables future provision of high-speed
Internet service to these communities by regional or community-based Internet
service providers. An additional five communities specified in the agreement
are expected to be connected in early 2007.
In August 2006, TELUS and Amp'd Mobile, Inc. announced an exclusive
relationship for the sale and distribution of Amp'd branded services in
Canada. As a result, Amp'd Mobile's highly interactive and customized mobile
entertainment, information and messaging services are currently expected to be
offered in Canada operating on TELUS' wireless high-speed network in the
second quarter of 2007. Under the terms of the Licensing and Services
Agreement, Amp'd Mobile will be responsible for bringing unique entertainment
content to TELUS' subscribers as well as providing optimized handsets capable
of fast download speeds. TELUS will manage sales and distribution, billing,
client care, network operations and pricing. TELUS will have the exclusive
right to use Amp'd trademarks, premium data services, handsets and content
delivery platforms in Canada. This represents an opportunity for TELUS to more
effectively reach the high-value young adult (18 to 35) market with Amp'd
Mobile's highly differentiated, premium data and content centric services.
TELUS Ventures, the strategic venture investment division of TELUS, also made
a U.S. $7.5 million equity investment in Amp'd Mobile, Inc., which is
headquartered in California.
Going to the market as one team under a common brand, executing a single
strategy
TELUS continues to make progress toward merging into a single customer-
oriented organization that is focused on being one team and defined by one
national brand. The TELUS logo replaced the logos of TELUS Mobility(R), TELUS
Quebec(R), TELUS Partner Solutions and TELUS Business Solutions where they
appeared in the marketplace and internally across the company. The adoption of
one TELUS logo reinforces the strength of the TELUS brand and advances the
Company's corporate brand strategy as it pertains to an integrated and
differentiated approach in the marketplace.
Investing in internal capabilities to build a high performance culture
and efficient operations
As the Company implemented the new collective agreement signed in late
2005, it began to realize the benefits - aligning systems and processes,
integrating business units, and focusing on its core business. TELUS'
operating efficiency initiatives fall into three broad categories: outsourcing
of non-core or peak-load work; consolidation of offices and call centers; and
process improvement and automation.
With respect to outsourcing, TELUS has fully or partially contracted out
a number of non-core functions including property management, custodial
services, building maintenance, mail services, fleet maintenance, and pay
phone coin counting. As a result of these outsourcing initiatives,
approximately 250 employees have either accepted an offer of redeployment or a
voluntary departure package.
With respect to office consolidation, to achieve greater efficiency and
improve customer service, management has rationalized a number of offices into
larger centres, including the consolidation of the retail office and call
centre in Victoria into Calgary and Edmonton, as well as consolidation of the
conference operation into the Lower Mainland of B.C. Additionally, management
has completed the consolidation of two field dispatch centers in Greater
Vancouver into Calgary. Through these initiatives, approximately 525 employees
have either accepted an offer of redeployment or a voluntary departure
package. The Company is also transforming to a more variable cost structure
through the increased use of temporary employees, which management expects to
allow better synchronization of resources with variable customer demand.
In the area of process improvement and automation, TELUS continues to
focus on streamlining functional area processes, which includes building on
the learnings from the deployment of management team during the 2005 labour
disruption. Examples include automating directory listing functions and making
process improvements in business support functions, such as human resources.
TELUS is experiencing short conventional payback periods with respect to
office and call centre consolidations, whereas in the area of outsourcing
activities, implementation takes longer and paybacks can extend over several
years. It should be noted, however, that all such initiatives are expected to
provide positive economic returns.
In addition, two new collective agreements in the province of Quebec were
negotiated and ratified in 2006. In the first quarter of 2006, TELUS Quebec
and the Syndicat des agents de maitrise de TELUS concluded negotiations for a
new collective agreement covering more than 500 professional and supervisory
employees. This one-year agreement came into effect on April 1. In July, TELUS
Quebec and Syndicat quebecois des employes de TELUS reached an agreement,
which was ratified at the end of August. The agreement covers more than 1,000
office, clerical and technical employees, and is effective until the end of
2009.
3. Key performance drivers
Management developed new corporate priorities for 2006 to advance its
industry-leading strategy, achieve meaningful commercial differentiation in
the markets, capitalize on the technology convergence of wireless and
wireline, and drive continued operating efficiency and effectiveness. The
following discussion is qualified in its entirety by the Forward-looking
statements at the beginning of Management's discussion and analysis. It is
also qualified by Section 10: Risks and risk management of TELUS' annual 2005
Management's discussion and analysis, as well as updates reported in Section
10 of TELUS' 2006 first, second and third quarter Management's discussion and
analyses, and this document.
-------------------------------------------------------------------------
2006 corporate priorities across wireline and wireless
-------------------------------------------------------------------------
Advance TELUS' leadership in the consumer market
- TELUS expanded wireless high-speed (EVDO) service to more than 20
communities across Canada. Combined with the newest portable
communications devices, TELUS is delivering innovative mobile data
and entertainment solutions.
- TELUS introduced SPARK, a new name for its portfolio of mobile
entertainment, information and messaging services for consumers.
These services include TELUS Mobile Music, TELUS Mobile Radio, TELUS
Mobile TV and Apnes Des, a South Asian entertainment service
featuring video, news and sports.
- To reaffirm the Company's commitment to excellent customer service
TELUS launched three Future Friendly Promises to mobile clients: a
dependable network, fast client service and new phone offers. The
success of this program is evident by TELUS' churn rates that are
among the lowest in North America.
- A three-year, $600 million investment program to enhance TELUS'
broadband network in B.C., Alberta and Eastern Quebec was announced,
paving the way for emerging services such as high-definition TELUS
TV.
- TELUS TV services were rolled into select neighbourhoods in the Lower
Mainland of B.C., delivering 100% digital TV to consumers. In
addition, employee trials of TELUS TV service began in Eastern
Quebec.
- Compelling high-speed Internet (ADSL) promotions helped TELUS achieve
153,700 net additions of Internet subscribers in 2006, which outpaced
a major cable-TV competitor.
- Implemented community-focused general manager positions across B.C.,
Alberta and Quebec to improve consumer and business service delivery.
- The Company expanded ADSL service to 117 rural neighbourhoods in
Quebec in preparation for the 2007 consumer launch of TELUS TV and
continued growth in TELUS' share of the Quebec market.
Advance TELUS' position in the business market
- A five-year, $140 million contract was won with the Government of
Ontario to provide fully managed network access services.
- Several other multi-million dollar contracts were also secured,
including those with the Alberta Treasury Branches Financial,
Consumer Impact Marketing and Finning International.
- The business brand "Backed by TELUS" was launched and innovative
solutions were introduced, including the TELUS Business One(R)
bundle, TELUS SafetyNet(TM) service, Wireless Physician, Integrated
Bedside Terminal, Crisis Management Conferencing and Wireless Field
Ticketing. In addition, the portfolio of wireless solutions was
expanded, including wireless high-speed services, Push To Talk
service and GPS solutions.
- TELUS strengthened its capabilities by acquiring Assurent Secure
Technologies, a world-leading Canadian information technology
security services company. TELUS' security solution AssureLogic
received the globally recognized NSS Approved certification.
Advance TELUS' position in the wholesale market
- TELUS was recognized for the fourth time by The Paisley Group as a
leader in directory assistance services, and was named number one in
Canada and number two in the U.S.
Drive improvements in productivity and service excellence
- TELUS successfully launched a pilot conversion for a sample set of
more than 20,000 Alberta customers, as part of a major billing system
development project.
- In major centres in B.C. and Alberta, TELUS increased the proportion
of installation and repair appointments offered to customers on a
two-hour or four-hour window basis.
- More than 1200 field technicians were trained to promote and provide
additional services during installation and repair visits, as part
the TELUS Solutions Program, generating additional sales.
- TELUS opened a new centre of excellence in Montreal to align tier 1
and tier 2 technical support operations for small business, and to
consolidate call centre entry points from four to one, providing
quicker resolution of issues and bilingual support.
- TELUS aligned the human resources, finance, logistics and project
management systems and processes of TELUS Quebec, TELUS Solutions
d'Affaires and the eastern operations of TELUS Mobility.
- TELUS launched "Habitat," an integrated, bilingual portal for all
team members across Canada.
Strengthen the spirit of the TELUS team and brand, and develop the best
talent in the global communications industry
- Through periodic electronic surveys of employees, known as pulse
check, TELUS obtains crucial feedback about the business. In the
latest survey, notable improvements were measured in team member
engagement, pride and outlook for the future.
- On September 30, more than 5,000 TELUS team members, alumni and
family across Canada volunteered their time and energy to 1,400 of
volunteer projects and activities as part of the TELUS National Day
of Service.
- TELUS, its team members and retirees pledged $5.5 million in the 2006
Dollars for Dollars campaign, which will be distributed in 2007 to
Canadian charities.
- In 2006, TELUS held more than 150 external recruiting events to
attract talented new team members to the Company at all levels across
many disciplines. The events included job fairs, information
sessions, academic sponsorships and innovative canvassing efforts.
- TELUS' brand was showcased through hosting of events such as the
TELUS Skins and TELUS World Ski and Snowboard Festival.
- For the third consecutive year, TELUS was awarded with a Thomson
Illuminati award for worldwide excellence in employee learning
programs and practices.
- The Company launched the TELUS Community Ambassadors(TM) program
giving support to team members and alumni for programs such as those
that supply backpacks of schools supplies to children in need.
- The Company now has seven fully functional TELUS Community Boards,
which consist of external community leaders who help direct annual
donations of $3.5 million to worthwhile causes in seven cities across
Canada.
-------------------------------------------------------------------------
4. Capability to deliver results
4.1 Principal markets addressed and competitors
-------------------------------------------------------------------------
National wireless services for consumers and businesses
-------------------------------------------------------------------------
TELUS has facilities-based services with access to approximately 95%
of Canadian population, operating a CDMA network with state-of-the-art
high-speed EVDO (evolution data optimize) in major centres, and
iDEN-based Push To Talk service focused on the commercial marketplace.
Competition includes: (i) facilities-based competitors such as Rogers
Wireless and Bell Mobility, nationally, and wireless offerings by
various regional telcos including SaskTel and MTS Mobility; and
(ii) resellers of Bell and Rogers networks, such as the Virgin Mobile
Group, 7-Eleven and certain cable-TV companies.
-------------------------------------------------------------------------
National wireline business services
-------------------------------------------------------------------------
TELUS has an IP-based national network overlaying an extensive switched
network in incumbent territories in B.C., Alberta and Eastern Quebec.
Access services and certain competitive digital network access services
are subject to rate regulation in these incumbent territories.
Operations in non-incumbent areas of Ontario and Quebec are not rate
regulated. Managed solutions, such as the provision of human resources
outsourcing services to business customers, are offered nationally.
Wholesale services are provided to telecommunications carriers,
resellers, Internet service providers (ISPs), wireless communications
companies, competitive local access providers and cable-TV operators.
Competition for voice and data communications services includes Bell
Canada and Manitoba Tel (Allstream) competing with their own national
infrastructures, and others such as Navigata (owned by SaskTel), as
well as substitution to wireless services including those offered by
TELUS. Competitors for managed solutions include system integrators
CGI, EDS and IBM.
-------------------------------------------------------------------------
Wireline consumer services in incumbent territories
-------------------------------------------------------------------------
TELUS has access to virtually every urban and rural home in its
incumbent territories in B.C., Alberta and Eastern Quebec. Through an
extensive switched network and significant investment in Internet
infrastructure, the Company provides local, long distance, and Internet
services. The Company also has broadcasting distribution licences to
offer digital television services in select communities across its
incumbent territories, and licences to offer commercial video-on-demand
services. A staged neighbourhood-by-neighbourhood rollout of TELUS TV
services is underway.
Competition includes: (i) substitution of wireless services, including
TELUS' own wireless offerings, for local and long distance services;
(ii) cable-TV providers Shaw Communications Inc. in B.C. and Alberta,
and Cogeco Cable Inc. in Eastern Quebec, which have access to most
urban and suburban homes, and provide Internet, entertainment and
VoIP-based telephony services; (iii) Rogers Communications, Navigata,
Primus, Vonage, Bell Canada and various others that collectively offer
local service, Internet and long distance services; and (iv)
satellite-based entertainment and Internet services.
-------------------------------------------------------------------------
4.2 Operational capabilities
Regulation
Less than one-third of the Company's revenues are from wireline segment
regulated services and subject to CRTC price regulation. None of the Company's
wireless segment revenues are currently subject to CRTC regulation. Wireline
regulated services include residential and business services in incumbent
local exchange carrier (ILEC) regions, competitor services and payphone
services. Services that are forborne from regulation include non-incumbent
local exchange carrier (non-ILEC) services, long distance services, Internet
services, international telecommunications services, inter-exchange private
line services, certain data services, and the sale of customer premises
equipment.
Major areas of regulatory review in 2007 include the framework for
forbearance from regulation of local exchange services, price cap regulation,
high-speed intra exchange digital services, and the use of funds in ILEC's
deferral accounts.
There has been some speculation that Industry Canada may encourage
additional competition through a spectrum auction, expected in 2008, by
capping the amount of spectrum any one provider can purchase or setting
spectrum aside for a new entrant. See Section 10.1 Regulatory - Future
availability of wireless spectrum.
Development of a new billing system in the wireline segment
The development of a new wireline billing system progressed in 2006. The
development includes re-engineering processes for order entry, pre-
qualification, service fulfillment and assurance, customer care,
collections/credit, customer contact, and information management. The expected
customer service and cost benefits of this project include streamlined and
standardized processes and the elimination over time of multiple legacy
information systems. In the third quarter of 2006, the Company successfully
implemented a pilot conversion for a sample set of customers. A commercial
launch of the converged billing system platform for consumer customers is
expected to progress in 2007, with additional phases of conversion planned
over the next few years. See Section 10.2 Process risks.
4.3 Liquidity and capital resources
The following discussion is qualified in its entirety by the Forward-
looking statements at the beginning of Management's discussion and analysis.
Capital structure financial policies
The Company's objectives when managing capital are: (i) to maintain a
flexible capital structure which optimizes the cost of capital at acceptable
risk; and (ii) to manage capital in a manner which balances the interests of
equity and debt holders.
In the management of capital, the Company includes shareholders' equity,
long-term debt (including any associated hedging assets or liabilities), cash
and temporary investments and securitized accounts receivable in the
definition of capital.
The Company manages the capital structure and makes adjustments to it in
light of changes in economic conditions and the risk characteristics of the
underlying assets. In order to maintain or adjust the capital structure, the
Company may adjust the amount of dividends paid to shareholders, purchase
shares for cancellation pursuant to normal course issuer bids, issue new
shares, issue new debt, issue new debt to replace existing debt with different
characteristics and/or increase or decrease the amount of sales of trade
receivables to an arm's-length securitization trust. In its annual
Management's discussion and analysis, management describes its financing plan.
The results of TELUS' 2006 financing plan are presented in the table below.
The Company monitors capital on a number of bases, including: net debt to
total capitalization; net debt to EBITDA - excluding restructuring and
workforce reduction costs; and dividend payout ratio of sustainable net
earnings. For further discussion and specific guidelines, see Section 7.4
Liquidity and capital resource measures.
Liquidity and financing
At December 31, 2006, TELUS had access to undrawn credit facilities of
more than $1.4 billion. The Company believes it has sufficient capability to
fund its requirements from these facilities and expected cash flow from
operations. The following table describes the status of TELUS' financing plan.
-------------------------------------------------------------------------
2006 financing plan and results
-------------------------------------------------------------------------
TELUS' 2006 financing plan is to use free cash flow generated by its
business operations to:
-------------------------------------------------------------------------
- Repurchase TELUS Common Shares and TELUS Non-Voting Shares under the
normal course issuer bid (NCIB)
The Company's NCIB program was renewed effective December 20, 2006
and with an expiry of December 19, 2007. During 2006, approximately
5.5 million Common Shares and 10.9 million Non-Voting Shares were
repurchased for cancellation for a total outlay of approximately
$800 million. Between December 20, 2004 and December 31, 2006, the
Company repurchased approximately 16 million Common Shares and
23 million Non-Voting Shares for a total outlay of $1.77 billion
under three NCIB programs. See Section 7.3 Cash used by financing
activities.
- Pay dividends
Quarterly dividends of 27.5 cents per share were paid in 2006 for an
annual total of $1.10. The declared dividend for the fourth quarter
of 2006, payable on January 1, 2007, was 37.5 cents per share, an
increase of 36.4% .
- Retain cash-on-hand for corporate purposes
The $500 million balance of securitized accounts receivable was
unchanged at December 31, 2006 when compared to one year earlier.
During 2006, the balance varied between $325 million and
$535 million.
Amounts outstanding under the three-year credit facility and other
bank facilities were $121 million at December 31, a decrease of
$21 million from December 31, 2005.
-------------------------------------------------------------------------
Other financing objectives included:
-------------------------------------------------------------------------
- Maintain a minimum $1 billion in unutilized liquidity
TELUS had available liquidity from unutilized credit facilities of
more than $1.4 billion at December 31, 2006.
- Maintain position of fully hedging foreign exchange exposure for
indebtedness
In contemplation of the planned refinancing of the 2007 (U.S. dollar)
Notes, in May 2006 the Company replaced approximately 63% of the
notional value of the existing cross currency interest rate swap
agreements with a like amount of new cross currency interest rate
swap agreements which have a lower effective fixed interest rate and
a lower effective fixed exchange rate. This replacement happened
concurrent with the issuance of the 2013 (Canadian dollar) Notes (see
below); the two transactions had the composite effect of deferring,
from June 2007 to June 2013, the payment of $300 million.
- Give consideration to refinancing all or a portion of U.S dollar
denominated Notes due June 1, 2007 in advance of its scheduled
maturity
Concurrently with the above, in May 2006, the Company publicly issued
$300 million 5.00%, Series CB, Notes, which mature in 2013. In
contemplation of the planned refinancing of the U.S. $1.17 billion of
debt maturing June 1, 2007, the Company had entered into forward
starting interest rate swap agreements during 2006 that, as at
December 31, 2006, have the effect of fixing the underlying interest
rate on up to $500 million of replacement debt.
- Preserve access to the capital markets at a reasonable cost by
maintaining investment grade credit ratings and targeting improved
credit ratings in the range of "BBB+" to "A-," or the equivalent, in
the future
Investment grade credit ratings from the four rating agencies that
cover TELUS were maintained. The ratings assigned by three credit
rating agencies are currently within TELUS' desired range, while
Moody's Investors Service's "Baa2" rating for TELUS (equivalent to
"BBB") is one position below TELUS' desired range. In November 2006,
Moody's placed its rating for TELUS under review for possible
upgrade.
-------------------------------------------------------------------------
5. Results from operations
5.1 General
The Company has two reportable segments: wireline and wireless.
Segmentation is based on similarities in technology, the technical expertise
required to deliver the products and services, the distribution channels used
and regulatory treatment. Intersegment sales are recorded at the exchange
value. Segmented information is regularly reported to the Company's Chief
Executive Officer (the chief operating decision maker).
5.2 Quarterly results summary
-------------------------------------------------------------------------
($ in millions,
except per share amounts) 2006 Q4 2006 Q3 2006 Q2 2006 Q1
-------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,234.3 1,200.3 1,189.9 1,198.6
Wireless segment 1,020.3 1,010.4 945.3 881.9
-------------------------------------------------------------------------
Operating revenues (consolidated) 2,254.6 2,210.7 2,135.2 2,080.5
Operations expense 1,368.6 1,245.8 1,207.4 1,201.1
Restructuring and workforce
reduction costs 7.9 12.5 30.7 16.7
-------------------------------------------------------------------------
EBITDA(1) 878.1 952.4 897.1 862.7
Depreciation 353.2 325.8 335.2 339.2
Amortization of intangible assets 53.9 57.5 46.9 63.9
-------------------------------------------------------------------------
Operating income 471.0 569.1 515.0 459.6
Other expense (income) 10.1 4.0 9.6 4.3
Financing costs 133.6 116.6 127.5 127.0
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 327.3 448.5 377.9 328.3
Income taxes 89.7 126.5 18.7 116.1
Non-controlling interests 1.4 2.4 2.6 2.1
-------------------------------------------------------------------------
Net income 236.2 319.6 356.6 210.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income per Common Share and
Non-Voting Share
- basic 0.70 0.94 1.03 0.60
- diluted 0.69 0.92 1.02 0.60
Dividends declared per Common Share
and Non-Voting Share 0.375 0.275 0.275 0.275
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in millions,
except per share amounts) 2005 Q4 2005 Q3 2005 Q2 2005 Q1
-------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,209.9 1,198.6 1,216.5 1,222.2
Wireless segment 876.8 864.2 802.0 752.5
-------------------------------------------------------------------------
Operating revenues (consolidated) 2,086.7 2,062.8 2,018.5 1,974.7
Operations expense 1,316.8 1,221.5 1,146.1 1,109.1
Restructuring and workforce
reduction costs 35.5 1.6 7.4 9.4
-------------------------------------------------------------------------
EBITDA(1) 734.4 839.7 865.0 856.2
Depreciation 346.2 335.6 330.9 329.9
Amortization of intangible assets 67.0 73.6 68.2 72.3
-------------------------------------------------------------------------
Operating income 321.2 430.5 465.9 454.0
Other expense (income) 9.3 7.1 0.5 1.5
Financing costs 171.7 144.8 168.2 138.4
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 140.2 278.6 297.2 314.1
Income taxes 58.8 86.9 106.0 70.3
Non-controlling interests 2.9 1.6 1.7 1.6
-------------------------------------------------------------------------
Net income 78.5 190.1 189.5 242.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income per Common Share and
Non-Voting Share
- basic 0.22 0.53 0.53 0.67
- diluted 0.22 0.53 0.52 0.66
Dividends declared per Common Share
and Non-Voting Share 0.275 0.20 0.20 0.20
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
-------------------------------------------------------------------------
The trend in consolidated Operating revenues continues to reflect strong
growth in wireless revenue, which is a record quarterly amount for TELUS in
the fourth quarter of 2006. In addition, wireline revenue for the fourth
quarter of 2006 is the highest quarterly amount in four years. Wireless
revenue growth is due to increasing ARPU as well as a growing subscriber base.
ARPU, in turn, is growing due to increasing provision and adoption of wireless
data services, which is more than offsetting the decline in voice ARPU. The
trend also reflects growth in wireline segment data revenue, while wireline
voice local and long distance revenues are decreasing. In addition to
continued substitution to wireless services, the impact from increased
competition from VoIP competitors and resellers on wireline revenues became
apparent in 2006. Decreases in long distance revenues are consistent with
industry-wide trends of strong price competition and technological
substitution (to Internet and wireless). Wireline revenues until May 31, 2006
include the generally negative effect of regulatory price cap decisions.
Historically, there is significant fourth quarter seasonality with higher
wireless subscriber additions and related acquisition costs and equipment
sales, resulting in lower wireless EBITDA. The seasonality affects, to a
lesser extent, the wireline high-speed Internet subscriber additions and
related costs.
The trend in Operating income was affected by temporary net expenses
leading up to and resulting from an extended labour disruption in 2005; such
temporary expenses included in Operations expense were estimated to be
approximately $16 million, $65 million and $52 million, respectively, for the
second, third and fourth quarters of 2005. Restructuring and workforce
reduction charges varied by quarter, depending on the progress of ongoing
initiatives underway. Depreciation expense in the fourth quarter of 2006
includes a provision of approximately $17 million to align estimated useful
lives for TELUS Quebec assets, resulting from integration of financial
systems. Amortization of intangible assets is decreasing as several software
assets have been fully amortized. Amortization expenses in the second quarter
and fourth quarter of 2006 were reduced by approximately $12 million and
$5 million, respectively, for investment tax credits following a determination
of eligibility by a revenue authority relating to assets capitalized in prior
years that are now fully amortized.
Within Financing costs, interest expenses trended lower except for the
following items: (i) interest expense in respect of a court decision in a
lawsuit related to a 1997 BC TEL bond redemption (including $17.5 million in
the second quarter of 2005 and $7.8 million in the fourth quarter of 2006 -
see Section 10.3 Litigation and legal matters); and (ii) a charge of
$33.5 million in the fourth quarter of 2005 for early redemption of
$1.578 billion of Notes. The early redemption of Notes on December 1, 2005,
contributed to lower financing costs in 2006. Financing costs are net of
varying amounts of interest income.
The trend in Net income and earnings per share reflect the items noted
above as well as a second quarter 2006 future income tax reduction arising
from enacted income tax rate reductions and the elimination of federal large
corporations tax. The trend was also affected by tax adjustments and related
interest for prior periods; the larger quarterly amounts were approximately
$20 million or six cents per share in the fourth quarter of 2006,
approximately $30 million (nine cents per share) in the third quarter of 2006,
approximately $115 million (33 cents per share) in the second quarter of 2006,
approximately $17 million (five cents per share) in the third quarter of 2005
and approximately $54 million (15 cents per share) in the first quarter of
2005.
5.3 Consolidated results from operations
-------------------------------------------------------------------------
($ in millions Quarters ended Years ended
except EBITDA December 31 December 31
margin) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Operating revenues 2,254.6 2,086.7 8.0 % 8,681.0 8,142.7 6.6 %
Operations expense 1,368.6 1,316.8 3.9 % 5,022.9 4,793.5 4.8 %
Restructuring and
workforce reduction
costs 7.9 35.5 (77.7)% 67.8 53.9 25.8 %
-------------------------------------------------------------------------
EBITDA(1) 878.1 734.4 19.6 % 3,590.3 3,295.3 9.0 %
Depreciation 353.2 346.2 2.0 % 1,353.4 1,342.6 0.8 %
Amortization of
intangible assets 53.9 67.0 (19.6)% 222.2 281.1 (21.0)%
-------------------------------------------------------------------------
Operating income 471.0 321.2 46.6 % 2,014.7 1,671.6 20.5 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA margin (%)(2) 38.9 35.2 3.7 41.4 40.5 0.9
pts pts
Total employees at
end of period 31,955 29,819 7.2 %
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) EBITDA margin is EBITDA divided by Operating revenues.
-------------------------------------------------------------------------
The following discussion is for the consolidated results of TELUS.
Further detail by segment is provided for Operating revenues, Operations
expense, Restructuring and workforce reduction costs, EBITDA and Capital
expenditures in Section 5.4 Wireline segment results, Section 5.5 Wireless
segment results and Section 7.2 Cash used by investing activities - capital
expenditures.
Operating revenues
Consolidated Operating revenues increased by $167.9 million and
$538.3 million, respectively, in the fourth quarter and full year of 2006,
when compared with the same periods in 2005. The increase was due to growth in
wireless revenues and wireline data revenues, which exceeded erosion in
wireline voice local and long distance revenues.
Operations expense
Consolidated operations expense increased by $51.8 million and
$229.4 million, respectively, in the fourth quarter and full year of 2006,
when compared with the same periods in 2005. Operations expenses in the fourth
quarter and full year of 2005 included net labour disruption expenses of
approximately $52 million and $133 million, respectively, which were primarily
in the wireline segment. Excluding labour disruption impacts, consolidated
operations expenses increased primarily due to growth in the wireless segment
and increased wireline advertising, promotions, costs of sales, and full year
restructuring charges. The net expense for defined benefit pension plans did
not change significantly, as favourable returns on plan assets in 2005 offset
the use of a lower discount rate for 2006.
The number of employees increased by 7.2% reflecting growth in the
wireless segment and TELUS' wireline international call centre operations.
Restructuring and workforce reduction costs
Restructuring and workforce reduction costs decreased by $27.6 million in
the fourth quarter of 2006, when compared to the same period in 2005, due to
delay in implementation of certain initiatives until the end of the labour
disruption in late November 2005. Restructuring and workforce reduction costs
were $67.8 million in 2006, an increase of $13.9 million when compared to
2005. The Company's estimate of restructuring and workforce reduction costs in
2007, which arises from its competitive efficiency program and includes the
continued integration of wireline and wireless operations, does not currently
exceed $50 million.
General
In 2005, the Company undertook a number of smaller initiatives, such as
operational consolidation, rationalization and integrations. These initiatives
aimed to improve the Company's operating and capital productivity. As at
December 31, 2006, no future expenses remain to be accrued or recorded under
the smaller initiatives, but variances from estimates currently recorded may
be recorded in subsequent periods. On November 24, 2005, the Company announced
the integration of its wireline and wireless operations, an initiative that
will continue into future years and is a component of the Company's
competitive efficiency program.
In the first quarter of 2006, arising from its competitive efficiency
program, the Company undertook a number of smaller initiatives, such as
operational consolidation, rationalization and integration. These initiatives
are aimed to improve the Company's operating productivity and competitiveness.
For the year ended December 31, 2006, $37.9 million of restructuring and
workforce reduction costs were recorded in respect of these smaller
initiatives.
Also arising from its competitive efficiency program, the Company
undertook an initiative for a departmental reorganization and reconfiguration,
resulting in integration and consolidation. In the first quarter of 2006,
approximately 600 bargaining unit employees were offered the option of
redeployment or participation in a voluntary departure program (either the
Early Retirement Incentive Plan or the Voluntary Departure Incentive Plan). In
the second quarter of 2006, approximately 275 bargaining unit employees
accepted either the option of redeployment or participation in a voluntary
departure program. In 2006, $17.7 million of restructuring and workforce
reduction costs were recorded in respect of this initiative and were included
with general programs initiated in 2006. As at December 31, 2006, no future
expenses remain to be accrued or recorded under this initiative, but variances
from estimates currently recorded may be recorded in subsequent periods.
Continuing with its competitive efficiency program for the integration of
wireline and wireless operations, $12.2 million of restructuring and workforce
reduction costs were recorded for the year ended December 31, 2006 in respect
of this initiative and were included with general programs initiated in 2006.
Office closures and contracting out
In connection with the collective agreement signed in the fourth quarter
of 2005, an accompanying letter of agreement set out the planned closure, on
February 10, 2006, of a number of offices in British Columbia. This initiative
is a component of the Company's competitive efficiency program and is aimed at
improving the Company's operating and capital productivity. The approximate
250 bargaining unit employees affected by these office closures were offered
the option of redeployment or participation in a voluntary departure program
(either the Early Retirement Incentive Plan or the Voluntary Departure
Incentive Plan).
As at December 31, 2006, no future expenses remain to be accrued or
recorded under the letter of agreement setting out the planned closure of a
number of offices in British Columbia, but variances from estimates currently
recorded may be recorded in subsequent periods. Other costs, such as other
employee departures and those associated with real estate, will be incurred
and recorded subsequent to December 31, 2006.
Similarly, an additional accompanying letter of agreement set out that
the Company intends to contract out specific non-core functions over the term
of the collective agreement. This initiative is a component of the Company's
competitive efficiency program and is aimed at allowing the Company to focus
its resources on those core functions that differentiate the Company for its
customers. The approximate 250 bargaining unit employees currently affected by
contracting out initiatives were offered the option of redeployment or
participation in the voluntary departure program (either the Early Retirement
Incentive Plan or the Voluntary Departure Incentive Plan.)
As at December 31, 2006, no future expenses remain to be accrued or
recorded under the letter agreement setting out the contracting out of
specific non-core functions, in respect of the approximately 250 bargaining
unit employees currently affected, but variances from estimates currently
recorded may be recorded in subsequent periods. Future costs will be incurred
as the initiative continues.
EBITDA
EBITDA increased by $143.7 million and $295.0 million, respectively, in
the fourth quarter and full year of 2006, when compared with the same periods
in 2005. Excluding labour disruption expense impacts in 2005, consolidated
EBITDA increased in the fourth quarter and full year of 2006 by approximately
$91 million and $162 million, respectively. The increases were due primarily
to growth in the wireless segment, partly offset by decreases in wireline
segment EBITDA.
Depreciation and amortization expenses
Depreciation expense increased by $7.0 million and $10.8 million,
respectively, in the fourth quarter and full year of 2006, when compared with
the same periods in 2005. The increases primarily reflected a fourth quarter
provision of approximately $17 million to align estimated useful lives for
TELUS Quebec assets upon integration of financial systems, partly offset by a
reduction in expense as more assets are fully depreciated.
Amortization of intangible assets decreased by $13.1 million and
$58.9 million, respectively, in the fourth quarter and full year of 2006, when
compared with the same periods in 2005, primarily as a result of several
software assets becoming fully amortized. The decrease included approximately
$5 million and $17 million, respectively, in the fourth quarter and full year
of 2006, to recognize investment tax credits following a determination of
eligibility by a revenue authority, for assets capitalized in prior years that
are now fully amortized.
Operating income
Operating income increased by $149.8 million and $343.1 million,
respectively, in the fourth quarter and full year of 2006, when compared with
the same periods in 2005, due primarily to growth in EBITDA and reduced
amortization of intangible assets, as described above.
Other income statement items
-------------------------------------------------------------------------
Quarters ended Years ended
Other expense, net December 31 December 31
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
10.1 9.3 8.6 % 28.0 18.4 52.2 %
-------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense,
charitable donations, gains and losses on disposal of real estate, and income
(loss) or impairments in equity or portfolio investments. The accounts
receivable securitization expense was $5.6 million and $18.0 million,
respectively, in fourth quarter and full year of 2006, as compared to
$4.2 million and $7.3 million, respectively, in the same periods in 2005. The
increase resulted primarily from a higher balance of proceeds from securitized
accounts receivable in 2006 (see Section 7.6 Accounts receivable sale). For
the full year of 2006, net gains on the sale of investments and real estate in
2006 exceeded net gains in 2005, and charitable donations increased.
-------------------------------------------------------------------------
Quarters ended Years ended
Financing costs December 31 December 31
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Interest on long-
term debt:
Before estimates
for settlement
of a lawsuit 125.0 146.0 (14.4)% 499.0 618.0 (19.3)%
Estimates for
settlement of a
lawsuit 7.8 - n.m. 9.0 17.5 (48.6)%
Interest on short-
term debt and other (0.3) 3.0 n.m. 2.6 8.2 (68.3)%
-------------------------------------------------------------------------
Interest on long-
term debt, short-
term obligations
and other 132.5 149.0 (11.1)% 510.6 643.7 (20.7)%
Loss on debt
redemption - 33.5 (100.0)% - 33.5 (100.0)%
Foreign exchange
losses (gains) 1.9 1.6 18.8 % 6.4 4.6 39.1 %
Interest income (0.8) (12.4) 93.5 % (12.3) (58.7) 79.0 %
-------------------------------------------------------------------------
133.6 171.7 (22.2)% 504.7 623.1 (19.0)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest on long-term debt, excluding estimates to settle a lawsuit,
decreased by $21.0 million and $119.0 million, respectively, in the fourth
quarter and full year of 2006, when compared with same periods in 2005. The
decrease was due primarily to early redemption of $1.578 billion of 7.50%,
Series CA, Notes on December 1, 2005, for which a $33.5 million loss on
redemption was recorded in 2005. The decrease for the full year of 2006 was
also due to the conversion/redemption of convertible debentures in the second
quarter of 2005. Amounts totalling $26.5 million were recorded in 2005 and
2006 in respect of court decisions in a lawsuit related to a 1997 BC TEL bond
redemption matter. See Section 10.3 Litigation and legal matters. Debt,
measured as the sum of Long-term debt, current maturities and the net deferred
hedging liability, was $5,767 million at December 31, 2006, as compared to
$5,803 million on December 31, 2005.
Increased interest expense associated with the May 2006 public issue of
$300 million of Notes was offset by a reduction in interest expense resulting
from replacement of certain previous cross currency interest rate swap
agreements associated with 2007 (U.S. dollar) Notes. The replacement swaps
have a lower effective fixed interest rate as well as a more favourable
effective fixed exchange rate. TELUS' hedging program using cross currency
swaps continues for its 2007 and 2011 U.S. dollar Notes.
Interest income decreased by $11.6 million and $46.4 million,
respectively, in the fourth quarter and full year of 2006, when compared with
the same periods in 2005, due primarily to: (i) lower cash and temporary
investments as available cash balances were used for the December 2005 debt
redemption; and (ii) recognition of greater tax refund interest in 2005.
-------------------------------------------------------------------------
Quarters ended Years ended
Income taxes December 31 December 31
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Blended federal
and provincial
statutory income
tax based on net
income before tax 109.3 47.5 130.1 % 497.3 352.3 41.2 %
Revaluation of future
tax liability for
change in statutory
tax rates - 7.7 - (107.0) (5.1) -
Tax rate differential
on, and consequential
adjustments from,
reassessments for
prior years (16.4) (1.9) - (40.3) (13.9) -
Changes in estimates
of available
deductible
differences in
prior years - - - - (37.5) -
Other and large
corporations tax (3.2) 5.5 - 1.0 26.2 -
-------------------------------------------------------------------------
89.7 58.8 52.6 % 351.0 322.0 9.0 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Blended federal and
provincial statutory (0.5) (0.6)
tax rates (%) 33.4 33.9 pts 33.6 34.2 pts
Effective tax (14.5) (7.6)
rates (%) 27.4 41.9 pts 23.7 31.3 pts
-------------------------------------------------------------------------
The increase in the blended federal and provincial statutory income tax
expense in the fourth quarter and full year of 2006, when compared with the
same periods in 2005, relates primarily to respective increases of 133.5% and
43.9% in income before taxes. The blended federal and provincial tax rate for
2006 decreased from 2005 due primarily to a reduction to general corporate
income tax rates on income taxed in Alberta effective April 1, 2006, partly
offset by an increase to general corporate income tax rates in Quebec
beginning January 1, 2006.
The revaluation of net future income tax liabilities in 2006 arose from
the second quarter enactment of both lower federal tax rates for future years
and lower Alberta tax rates. The federal large corporations tax was eliminated
effective January 1, 2006. Reductions in tax expense also resulted from
reassessments for prior years and, in 2005, from changes in estimates of
available deductible differences in prior years.
Based on the assumption of the continuation of the rate of TELUS
earnings, the existing legal entity structure, and no substantive changes to
tax regulations, the Company expects to be able to substantially utilize its
non-capital losses before the end of 2007. The Company's assessment is that
the risk of expiry of such non-capital losses is remote. Under the existing
legal entity structure, TELUS currently expects cash tax payments to be
minimal in 2007, increasing in 2008, with substantial cash tax payments in
2009. The blended federal and provincial statutory tax rate for 2007 is
expected to be approximately 33 to 34%.
-------------------------------------------------------------------------
Non-controlling Quarters ended Years ended
interests December 31 December 31
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
1.4 2.9 (51.7)% 8.5 7.8 9.0 %
-------------------------------------------------------------------------
Non-controlling interests represents minority shareholders' interests in
several small subsidiaries.
5.4 Wireline segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Years ended
wireline segment December 31 December 31
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Voice local 527.5 536.7 (1.7)% 2,119.8 2,174.1 (2.5)%
Voice long distance 197.7 212.0 (6.7)% 810.3 888.4 (8.8)%
Data 435.0 399.8 8.8 % 1,642.5 1,533.4 7.1 %
Other 74.1 61.4 20.7 % 250.5 251.3 (0.3)%
-------------------------------------------------------------------------
External operating
revenue 1,234.3 1,209.9 2.0 % 4,823.1 4,847.2 (0.5)%
Intersegment
revenue 26.5 23.0 15.2 % 98.3 90.4 8.7 %
-------------------------------------------------------------------------
Total operating
revenue 1,260.8 1,232.9 2.3 % 4,921.4 4,937.6 (0.3)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
----------------------------------------------
Network access lines As at December 31
(000s) 2006 2005 Change
--------------------------
Residential network
access lines 2,775 2,928 (5.2)%
Business network
access lines 1,773 1,763 0.6 %
-------- -------- --------
Total network access
lines(1) 4,548 4,691 (3.0)%
---------------------------
Quarters ended Years ended
December 31 December 31
2006 2005 Change 2006 2005 Change
-----------------------------------------------------
Change in residential
network access lines (34) (24) (41.7)% (153) (110) 39.1 %
Change in business
network access lines 3 6 (50.0)% 10 (7) n.m.
-------- -------- -------- -------- -------- --------
Change in total
network access
lines(1) (31) (18) (72.2)% (143) (117) (22.2)%
-------------------------------------------------------------------------
(1) Network access lines are measured at the end of the reporting period
based on information in billing and other systems. Consistent with
the presentation for 2006, network access lines for 2005, and for
the end of 2004, include a reclassification of approximately
9 thousand from residential to business; no change was recorded in
total access lines.
-------------------------------------------------------------------------
----------------------------------------------
Internet subscribers As at December 31
(000s) 2006 2005 Change
--------------------------
High-speed Internet
subscribers 916.7 763.1 20.1 %
Dial-up Internet
subscribers 194.1 236.1 (17.8)%
-------- -------- --------
Total Internet
subscribers(2) 1,110.8 999.2 11.2 %
---------------------------
Quarters ended Years ended
December 31 December 31
2006 2005 Change 2006 2005 Change
-----------------------------------------------------
High-speed Internet
net additions 44.4 27.0 64.4 % 153.7 73.4 109.4 %
Dial-up Internet
net reductions (11.4) (13.7) 16.8 % (42.1) (45.5) 7.5 %
-------- -------- -------- -------- -------- --------
Total Internet
subscriber net
additions 33.0 13.3 148.1 % 111.6 27.9 n.m.
-------------------------------------------------------------------------
(2) Internet subscribers are measured at the end of the reporting period
based on Internet access counts from billing and other systems.
-------------------------------------------------------------------------
Wireline segment revenues increased by $27.9 million in the fourth
quarter and decreased by $16.2 million in the full year of 2006, when compared
with the same periods in 2005.
- Voice local revenue decreased by $9.2 million and $54.3 million,
respectively, in the fourth quarter and full year of 2006 when
compared with the same periods in 2005. The decreases were due
primarily to lower revenues from basic access and optional enhanced
services arising from increased competition for residential
subscribers, partly offset by increased managed voice local services
for business. In addition, the decrease for the full year includes
the impact of one-time regulatory recoveries of approximately
$13 million recorded in the first quarter of 2005.
Residential line losses include the effect of increased competition
from resellers, VoIP competitors including cable-TV companies,
technological substitution to wireless services, and a lower number
of second lines resulting from migration of dial-up Internet
subscribers to high-speed Internet service. In 2006, competitors'
cable telephony was introduced in more places within TELUS' incumbent
regions including Fort McMurray, Rimouski and Vancouver, while in
2005 cable telephony was available in Calgary (February 2005),
Edmonton (April 2005) and Victoria (October 2005). Total business
lines increased in 2006 as growth in non-incumbent regions exceeded
competitive losses and migration to more efficient ISDN (integrated
services digital network) services in incumbent local exchange
carrier (ILEC) regions. Business lines losses in 2005 included the
loss of a large wholesale business customer.
- Voice long distance revenues decreased by $14.3 million and
$78.1 million, respectively, in the fourth quarter and full year of
2006 when compared with the same periods in 2005. The decreases were
due primarily to lower consumer and retail business minute volumes
and prices, consistent with industry-wide trends of strong price
competition and technological substitution (to Internet and
wireless). In September 2006, the Company introduced a simpler set of
domestic, North American and international long distance calling
plans directly targeted to the usage patterns of customers. The plans
are for various usage levels combining set per-minute rates with
monthly subscription fees and are designed to help retain and win
back customers. Improved winback levels were achieved in the fourth
quarter.
- Wireline segment data revenues increased by $35.2 million and
$109.1 million, respectively, in the fourth quarter and full year of
2006 when compared with the same periods in 2005. This growth was
primarily due to increased Internet, enhanced data and hosting
service revenues from growth in business services and high-speed
Internet subscribers. Monthly rates for high-speed Internet services
were raised by one dollar per month in the second quarter of 2006 for
those customers not on rate protection plans, which contributed to an
overall increase in average revenue per subscriber. Managed data
revenues from the provision of business process outsourcing services
to customers also increased. Basic data services and data equipment
sales decreased, partly offset by increased broadcast and
videoconferencing sales and services.
The improvement in high-speed Internet subscriber net additions
during 2006 was due partly to new promotions, resulting in increased
gross additions particularly for premium Internet services, which
have a higher monthly rate. In addition, deactivations of existing
customers of high-speed Internet decreased. In contrast, the second
half of 2005 was constrained by a labour disruption that limited
installation activity.
- Other revenue increased by $12.7 million in the fourth quarter of
2006 and decreased by $0.8 million for the full year of 2006 when
compared with the same periods in 2005. The increase in the fourth
quarter was primarily due to lower quality of service rate rebates
due to improvement in retail and competitor service levels in 2006 as
compared to 2005 when the labour disruption adversely affected
service levels. The Company applied to the CRTC in 2006 for an
exclusion from quality of service rate rebates related to the 2005
labour disruption and severe flooding events; a decision by the CRTC
on the exclusion application is expected in 2007. Voice equipment
sales also increased in the fourth quarter, but were slightly lower
for the full year. In addition, the full year of 2006 included a
negative adjustment for reduced co-location DC power rates mandated
by the CRTC to be retroactive to November 2000 (Telecom Decision
2006-42-1).
- Intersegment revenue represents services provided by the wireline
segment to the wireless segment. These revenues are eliminated upon
consolidation together with the associated expense in the wireless
segment.
Total external operating revenue included non-ILEC revenues of
$171.8 million and $656.9 million, respectively, in the fourth quarter and
full year of 2006, representing increases of 4.0% when compared with the same
periods in 2005. The increases were primarily due to growth in enhanced data
and managed workplace service revenues. Voice local revenues increased
modestly, while voice and data equipment sales decreased. Growth in revenues
was partly offset by re-pricing of renewal contracts and competitive pricing
affecting new contracts.
-------------------------------------------------------------------------
Operating expenses -
wireline segment Quarters ended Years ended
($ millions, December 31 December 31
except employees) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Salaries, benefits
and other employee-
related costs 441.7 381.3 15.8 % 1,688.7 1,612.8 4.7 %
Other operations
expenses 367.3 407.2 (9.8)% 1,331.8 1,418.6 (6.1)%
-------------------------------------------------------------------------
Operations expense 809.0 788.5 2.6 % 3,020.5 3,031.4 (0.4)%
Restructuring and
workforce reduction
costs 5.2 35.5 (85.4)% 61.6 53.9 14.3 %
-------------------------------------------------------------------------
Total operating
expenses 814.2 824.0 (1.2)% 3,082.1 3,085.3 (0.1)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total employees at
end of period(1) 24,228 22,888 5.9 %
-------------------------------------------------------------------------
(1) The number of employees in TELUS' international call centres was
approximately 4,890 on December 31, 2006 and 3,320 on December 31,
2005.
-------------------------------------------------------------------------
Total operating expenses decreased by $9.8 million and $3.2 million,
respectively, in the fourth quarter and full year of 2006, when compared with
the same periods in 2005. Operations expenses excluding labour disruption
impacts in 2005 increased by approximately $70 million and $122 million due
primarily to increased advertising and promotion activity and cost of sales
for higher subscriber loadings for Internet services. For the full year of
2006, network support and maintenance activities increased due to the use of
contractors for in the first quarter, facilitating clearance of backlogs and
freeing up TELUS staff to improve customer service. Quality-of-service metrics
defined by the CRTC improved during 2006. Excluding employment at
international call centres, the number of employees at December 31, 2006
decreased by approximately 230, when compared to one year earlier.
- Salaries, benefits and employee-related expenses increased by
$60.4 million and $75.9 million, respectively, in the fourth quarter
and full year of 2006 when compared with the same periods in 2005.
The increase was mainly a result of lower net expenses recorded in
2005 because of the labour disruption that lasted from late July to
late November.
- Other operations expenses decreased by $39.9 million and
$86.8 million, respectively, in the fourth quarter and full year of
2006, when compared with the same periods in 2005 mainly due to the
absence of labour disruption expenses in the 2006 periods. Labour
disruption expenses in 2005 included third-party security and
contractors. Aside from labour disruption impacts in 2005, other
operations expenses increased when compared with the same periods in
2005 due to: (i) advertising and promotions increases primarily for
high-speed Internet offers and business advertising; (ii) increased
product cost of sales consistent with increased high-speed Internet
additions and business equipment sales (iii) increased expenses for
outsourcing of non-core functions; (iv) increased facilities, transit
and termination expenses due to increased service demand and traffic
volumes; and (v) increased network support and maintenance costs for
the full year as a result of increased network elements to support
new products and services and growth; net of (vi) reduced expenses
for higher capitalization of labour associated with 2006 capital
programs.
- Restructuring and work force reduction costs applicable to the
wireline segment decreased by $30.3 million in the fourth quarter of
2006, and increased by $7.7 million in full year of 2006, when
compared with the same periods in 2005.
Total expenses discussed above included non-ILEC expenses of
$160.8 million and $624.5 million, respectively, in the fourth quarter and
full year of 2006, increases of 1.7% and 2.3%, respectively, when compared
with same periods in 2005. Expense increases supported the 4.0% growth in
revenue, and included higher salaries, benefits and employee-related costs,
and increased contract and consulting expenses, as well as higher facilities,
transit and termination costs to support increased data and voice services.
These increases were party offset by a lower cost of sales related to lower
equipment sales revenue.
-------------------------------------------------------------------------
EBITDA and EBITDA Quarters ended Years ended
margin - wireline December 31 December 31
segment 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 446.6 408.9 9.2 % 1,839.3 1,852.3 (0.7)%
EBITDA margin (%) 35.4 33.2 2.2 37.4 37.5 (0.1)
pts pts
-------------------------------------------------------------------------
Wireline segment EBITDA increased by $37.7 million in the fourth quarter
of 2006 and decreased by $13.0 million in the full year of 2006 when compared
with the same periods in 2005. This included non-ILEC EBITDA, which improved
by $3.9 million and $11.2 million, respectively, in the fourth quarter and
full year of 2006, when compared to the same periods in 2005. Excluding labour
disruption impacts, total wireline EBITDA decreased by approximately
$12 million and $146 million, respectively, in the fourth quarter and full
year of 2006 when compared to the same periods in 2005. The decrease was due
mainly to increased competition for local services, continued long distance
revenue erosion, as well as an increase in advertising, promotions and cost of
sales. For the full year, the increased network support and maintenance costs
and increased restructuring charges contributed to reduce EBITDA.
5.5 Wireless segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Years ended
wireless segment December 31 December 31
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Network revenue 952.3 816.9 16.6 % 3,605.5 3,064.6 17.6 %
Equipment revenue 68.0 59.9 13.5 % 252.4 230.9 9.3 %
-------------------------------------------------------------------------
External operating
revenue 1,020.3 876.8 16.4 % 3,857.9 3,295.5 17.1 %
Intersegment revenue 6.3 6.3 - 23.4 23.5 (0.4)%
-------------------------------------------------------------------------
Total operating
revenue 1,026.6 883.1 16.2 % 3,881.3 3,319.0 16.9 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
----------------------------------------------
Key operating indicators - wireless segment
(000s) As at December 31
2006 2005 Change
--------------------------
Subscribers -
postpaid 4,078.6 3,666.8 11.2 %
Subscribers -
prepaid 977.3 853.9 14.5 %
-------- -------- --------
Subscribers -
total(1) 5,055.9 4,520.7 11.8 %
Digital POPs(2)
covered including
roaming/resale
(millions)(3) 31.0 30.6 1.3 %
---------------------------
Quarters ended Years ended
December 31 December 31
2006 2005 Change 2006 2005 Change
-----------------------------------------------------
Subscriber gross
additions -
postpaid 236.3 262.3 (9.9)% 837.5 870.3 (3.8)%
Subscriber gross
additions -
prepaid 142.8 158.3 (9.8)% 455.5 408.7 11.5 %
-------- -------- -------- -------- -------- --------
Subscriber gross
additions - total 379.1 420.6 (9.9)% 1,293.0 1,279.0 1.1 %
Subscriber net
additions -
postpaid 129.5 143.2 (9.6)% 411.8 426.5 (3.4)%
Subscriber net
additions -
prepaid 52.1 91.8 (43.2)% 123.4 157.8 (21.8)%
-------- -------- -------- -------- -------- --------
Subscriber net
additions - total 181.6 235.0 (22.7)% 535.2 584.3 (8.4)%
Churn, per month (0.09) (0.06)
(%)(4)(5) 1.33 1.42 pts 1.33 1.39 pts
COA(6) per gross
subscriber addition
($)(4) 436 449 (2.9)% 412 386 6.7 %
ARPU ($)(4) 64.50 62.54 3.1 % 63.46 61.51 3.2 %
Average minutes of
use per subscriber
per month (MOU) 404 410 (1.5)% 403 399 1.0 %
EBITDA to network 5.5 1.5
revenue (%) 45.3 39.8 pts 48.6 47.1 pts
Retention spend to
network revenue(4) 0.4 0.7
(%) 7.7 7.3 pts 6.7 6.0 pts
EBITDA ($ millions) 431.5 325.5 32.6 % 1,751.0 1,443.0 21.3 %
EBITDA excluding COA
($ millions)(4) 596.7 514.2 16.0 % 2,283.6 1,937.3 17.9 %
-------------------------------------------------------------------------
pts - percentage points
(1) Subscribers are measured at the end of the reporting period based on
information from billing systems.
(2) POPs is an acronym for population. A POP refers to one person living
in a population area, which in whole or substantial part is included
in the coverage areas.
(3) At December 31, 2006, TELUS' wireless PCS digital population
coverage included expanded coverage of approximately 7.5 million PCS
POPs due to roaming/resale agreements principally with Bell Mobility
and Bell Canada (Aliant Mobility).
(4) See Section 11.3 Definition of key operating indicators. These are
industry measures useful in assessing operating performance of a
wireless company, but are not defined under accounting principles
generally accepted in Canada and the U.S.
(5) A change in business policy early in 2006, requiring postpaid
customers to provide 30 days notice prior to deactivation, resulted
in a one-time deferral of approximately 4,800 deactivations.
Excluding this one-time positive impact, the churn rate was 1.34% in
2006.
(6) Cost of acquisition.
-------------------------------------------------------------------------
Wireless segment revenues increased by $143.5 million and $562.3 million,
respectively, in the fourth quarter and full year of 2006, when compared with
the same periods in 2005, due to the following:
- Network revenue increased by $135.4 million and $540.9 million,
respectively, for the fourth quarter and full year of 2006, when
compared to the same periods in 2005, as a result of the 11.8%
expansion of the subscriber base combined with increased average
revenue per subscriber unit per month. ARPU increased by $1.96 in the
fourth quarter of 2006, when compared to the same period in 2005,
principally due to increased data usage partially offset by lower
voice minutes of use per subscriber per month (MOU). The increase in
ARPU represented the 16th successive quarter of year over year
growth. Similarly, ARPU for the full year of 2006 grew by $1.95 over
the same period last year due to increased data usage combined with
higher MOU.
Data revenues increased to 9.6% of Network revenue, or $91.7 million,
in the fourth quarter of 2006 as compared with 5.1% of Network
revenues, or $41.8 million, in the fourth quarter of 2005 -
reflecting a growth rate of 119.4%. Similarly, data revenues for the
full year of 2006 increased to 7.8% of Network revenue, or
$279.9 million, as compared with 4.3% of Network revenue, or
$130.6 million, for the same period in 2005 - reflecting a growth
rate of 114.3%. Data ARPU increased by 94.3% to $6.16 for the fourth
quarter of 2006 and increased by 88.8% to $4.89 for the full year of
2006 as compared with $3.17 and $2.59, respectively, for the same
periods in 2005. This growth was principally related to text
messaging, PDA devices, mobile computing, Internet browser activities
and pay-per-use downloads such as ringtones, music, games and videos.
At December 31, 2006, postpaid subscribers represented 80.7% of the
total cumulative subscriber base, remaining relatively stable from
one year earlier. The 129,500 postpaid subscriber net additions for
the fourth quarter of 2006 represented 71.3% of all net additions as
compared with 143,200 or 60.9% of all net additions for the same
period in 2005. This represented a third consecutive quarter that
postpaid subscriber net additions as a percentage of total subscriber
net additions increased year over year. Consequently, for the full
year of 2006, postpaid subscriber net additions improved to 76.9% of
all net additions when compared with 73.0% of all net additions for
the same period in 2005.
The blended churn rates for the fourth quarter and full year of 2006
were both 1.33% as compared with 1.42% and 1.39% for the respective
periods in 2005. The postpaid monthly churn rates for the fourth
quarter and full year of 2006 were both less than one per cent, an
improvement over the same periods in 2005. The prepaid churn rates
increased slightly in the fourth quarter and full year of 2006 when
compared with the same periods in 2005. Total deactivations were
197,500 for the fourth quarter and 757,800 for the full year of 2006,
compared with 185,600 and 694,700, respectively, for the same periods
in 2005, which primarily reflects the growing subscriber base. The
improved churn and favourable subscriber net addition mix reflects
the continued focus on profitable subscriber growth and retention.
- Equipment sales, rental and service revenue increased by $8.1 million
and $21.5 million, respectively, for the fourth quarter and full year
of 2006, when compared to the same periods in 2005. The increase was
due mainly to continued subscriber growth and increased retention
activity. Gross subscriber additions were 379,100 and 1,293,000 in
the fourth quarter and full year of 2006, respectively, as compared
with 420,600 and 1,279,000 for the same periods in 2005. Handset
revenues associated with gross subscriber activations are included in
COA per gross subscriber addition, while handset revenues associated
with retention efforts are included in the overall retention spend
amount.
- Intersegment revenues represent services provided by the wireless
segment to the wireline segment and are eliminated upon consolidation
along with the associated expense in the wireline segment.
-------------------------------------------------------------------------
Operating expenses -
wireline segment Quarters ended Years ended
($ millions, December 31 December 31
except employees) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Equipment sales
expenses 163.6 150.0 9.1 % 574.9 478.9 20.0 %
Network operating
expenses 118.8 93.4 27.2 % 451.2 392.2 15.0 %
Marketing expenses 134.7 150.1 (10.3)% 422.5 403.7 4.7 %
General and
administration
expenses 175.3 164.1 6.8 % 675.5 601.2 12.4 %
-------------------------------------------------------------------------
Operations expense 592.4 557.6 6.2 % 2,124.1 1,876.0 13.2 %
Restructuring and
workforce reduction
costs 2.7 - n.m. 6.2 - n.m.
-------------------------------------------------------------------------
Total operating
expenses 595.1 557.6 6.7 % 2,130.3 1,876.0 13.6 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total employees at
end of period 7,727 6,931 11.5 %
-------------------------------------------------------------------------
Wireless segment total operating expenses increased by $37.5 million and
$254.3 million, respectively, in the fourth quarter and full year of 2006,
when compared with the same periods in 2005, to promote, retain and support
the 11.8% growth in the subscriber base and increase in Network revenue.
- Equipment sales expenses increased by $13.6 million and
$96.0 million, respectively, in the fourth quarter and full year of
2006, when compared to the same periods in 2005, due principally to
an increase in gross subscriber activations for the full year, higher
handset costs related to product mix, and increased retention
activity. Handset costs associated with gross subscriber activations
are included in COA per gross subscriber addition. Handset cost
related to retention efforts, ahead of the implementation of wireless
number portability (WNP) in early 2007, are included in the overall
retention spend amount.
- Network operating expenses increased by $25.4 million and
$59.0 million, respectively, in the fourth quarter and full year of
2006, when compared to the same periods in 2005. The increases were
principally due to higher roaming volumes combined with transmission
and site-related expenses to support the greater number of cell
sites, a larger subscriber base, third party data content providers,
and improved network quality and coverage. Moreover, the fourth
quarter of 2005 included competitive digital network services
discounts arising from CRTC Decision 2005-6 as well as a $5.3 million
credit related to years 2003 to 2005, which reflected the December 6,
2005 Federal Court ruling that TELUS should not be required to
include wireless revenues in the calculation of telecommunications
fees payable to the CRTC.
- Marketing expenses decreased by $15.4 million in the fourth quarter
of 2006 when compared with the same period in 2005, primarily due to
reduced advertising and promotions costs and lower dealer
compensation costs related to the decrease in gross subscriber
additions, partially offset by increased re-contracting activity.
Notably, COA per gross subscriber addition improved by $13 in the
fourth quarter as compared with the same period in 2005. Marketing
expenses increased by $18.8 million for the full year of 2006 when
compared with the same period last year. COA per gross subscriber
addition increased by $26 for the full year of 2006 when compared
with the same period last year. The increase was principally related
to higher subsidies on certain popular handsets driven by competitive
activity, increased dealer compensation costs related to the higher
gross subscriber additions, and higher advertising and promotion
spending related to new product launches. With the lower churn rate
and higher ARPU in the fourth quarter, the lifetime revenue per
subscriber improved by $446 to $4,850. Similarly, for the full year
of 2006, lifetime revenue per subscriber increased by $346 to $4,771.
COA as a percentage of lifetime revenue was 9.0% in the fourth
quarter of 2006 and 8.6% for the full year of 2006 representing
record lows for the respective periods and reflecting continued
execution of its profitable growth strategy.
- General and administration expenses increased by $11.2 million and
$74.3 million, respectively, in the fourth quarter and full year of
2006, when compared to the same periods in 2005, due principally to
the increase in employees to support the significant growth in the
subscriber base and continued expansion of the client care team and
company-owned retail stores. Moreover, occupancy and client-related
costs were higher as well as bad debts expense related to increased
write-offs. The fourth quarter of 2005 also included incremental
expenses of $3.0 million related to the labour disruption with no
impact for the full year of 2005.
- Restructuring and workforce reduction expenses were related to staff
reductions associated with the integration of the wireline and
wireless operations.
-------------------------------------------------------------------------
EBITDA and EBITDA Quarters ended Years ended
margin - wireless December 31 December 31
segment 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 431.5 325.5 32.6 % 1,751.0 1,443.0 21.3 %
EBITDA margin (%) 42.0 36.9 5.1 45.1 43.5 1.6
pts pts
-------------------------------------------------------------------------
Wireless segment EBITDA increased by $106.0 million and $308.0 million,
respectively, in the fourth quarter and full year of 2006, when compared to
the same periods in 2005. The improvement in EBITDA for the fourth quarter of
2006 was a result of the strong revenue growth combined with a lower COA per
gross subscriber addition, partially offset by increased retention investment
ahead of the implementation of wireless number portability in 2007 and
increased operations costs to support the growth. Similarly, EBITDA for the
full year of 2006 grew significantly despite the higher COA per gross
subscriber addition and increased retention spend due to solid revenue growth.
The EBITDA margin, when calculated as a percentage of Network revenue, was a
fourth quarter TELUS record of 45.3% and a full year TELUS record of 48.6% in
2006, as compared to 39.8% and 47.1%, respectively, in the same periods in
2005.
6. Financial condition
The following are the significant changes in the Consolidated balance
sheets in the year ended December 31, 2006.
-------------------------------------------------------------------------
Dec. 31, Dec. 31, % Explanation of the
($ millions) 2006 2005 Change Change change in balance
-------------------------------------------------------------------------
Current Assets
Cash and (11.5) 8.6 (20.1) n.m. The balance of cash
temporary and temporary
investments, investments at
net December 31, 2006
represents net
cheques in
circulation and
overdrafts after
deduction of cash
balances. See Section
7. Liquidity and
capital resources
Short-term 110.2 - 110.2 n.m. Investments of
investments surplus cash
Accounts 707.2 610.3 96.9 15.9 % Primarily growth in
receivable the wireless business
and accrued
inducements for
renegotiated leases
Income and 95.4 103.7 (8.3) (8.0)% Refunds of $127
other taxes million including
receivable interest were
received, net of an
increase for recent
reassessments and
investment tax credit
accruals
Inventories 196.4 138.8 57.6 41.5 % An increase in
wireless handset
inventories due to
the introduction of
several new handsets
and lower than
anticipated gross
subscriber additions
in the fourth quarter
Prepaid 195.3 154.7 40.6 26.2 % Includes the deferred
expenses loss on termination
and other and replacement of
cross currency
interest rate swaps,
prepaid licences and
insurance
Deferred 40.4 - 40.4 n.m. New hedges entered
hedging into for 2007 U.S.
asset dollar Notes had
favourable exchange
rates compared to the
rate at the balance
sheet date.
Current - 226.4 (226.4) (100.0)% Refer to current
portion liability section
of future below
income taxes
-------------------------------------------------------------------------
Current
Liabilities
Accounts 1,363.6 1,393.7 (30.1) (2.2)% Primarily reduced
payable payroll and employee-
and accrued related liabilities
liabilities
Income and 10.3 - 10.3 n.m. Provincial capital
other taxes taxes and foreign
payable income taxes payable
over the next 12
months
Restruct- 53.1 57.1 (4.0) (7.0)% Payments under
uring and previous and current
workforce programs exceeded new
reduction obligations
accounts
payable and
accrued
liabilities
Advance 606.3 571.8 34.5 6.0 % Increased billings,
billings price cap deferred
and customer revenue and
deposits activation and
connection fees
Current 1,434.4 5.0 1,429.4 n.m. Includes $70 million
maturities of 7.1% TCI medium-
of long- term Notes, maturing
term debt in February 2007 and
$1,303 million of
7.5% TELUS
Corporation U.S.
dollar Notes due June
2007
Current 165.8 - 165.8 n.m. Reclassified from
portion of long-term liabilities
deferred for 2007 U.S. dollar
hedging Notes
liability
Current 93.2 - 93.2 n.m. The tax effect of
portion of differences between
future income the accounting and
taxes tax basis of working
capital, net of
losses available for
deduction within the
next 12 months
-------------------------------------------------------------------------
Working (2,393.3) (785.1) (1,608.2) n.m. Includes an increase
capital(1) in the current
portions of long-term
debt
-------------------------------------------------------------------------
Capital 10,982.1 10,941.5 40.6 0.4 % See Sections 5.3
Assets, Consolidated results
Net from operations -
Depreciation and
amortization and 7.2
Cash used by
investing activities
- capital
expenditures
-------------------------------------------------------------------------
Other Assets
Deferred 976.5 850.2 126.3 14.9 % Primarily pension
charges plan contributions in
excess of charges to
income
Investments 35.2 31.2 4.0 12.8 % New investments net
of divestitures
Goodwill 3,169.5 3,156.9 12.6 0.4 % The acquisition of
FSC Internet Corp.
and an increase in
economic interest in
Ambergris
(international call
centre operations) to
97.4%, partly offset
by a reclassification
of goodwill to a
reduction of the
current future income
tax liability for a
change in estimate of
available tax losses
for prior years
-------------------------------------------------------------------------
Long-Term 3,493.7 4,639.9 (1,146.2) (24.7)% Primarily a
Debt reclassification to
current maturities of
TCI medium-term
Notes maturing in
February 2007 and
TELUS Corporation
U.S. dollar Notes due
June 2007, partly
offset by the public
issue in May 2006 of
$300 million 5.00%,
Series CB Notes
-------------------------------------------------------------------------
Other Long- 1,257.3 1,635.3 (378.0) (23.1)%
Term
Liabilities Primarily a reduction
in the deferred
hedging liability
through:
- Replacement of
previous cross
currency interest
rate swap
agreements
associated with
2007 (U.S. dollar)
Notes with a like
amount of new cross
currency interest
rate swap
agreements, which
have a lower
effective fixed
interest rate and a
lower effective
fixed exchange
rate; and
- Reclassification of
$165.8 million to
current liabilities
Partly offset by
deferred lease
inducements from
renegotiated building
leases
-------------------------------------------------------------------------
Future 1,067.3 1,023.9 43.4 4.2 % An increase in
Income temporary differences
Taxes for long-term assets
and liabilities net
of a revaluation of
liabilities at lower
enacted future income
tax rates
-------------------------------------------------------------------------
Non- 23.6 25.6 (2.0) (7.8)% -
Controlling
Interests
-------------------------------------------------------------------------
Shareholders'
Equity
Common 6,928.1 6,870.0 58.1 0.8 % Increased primarily
equity from:
- Net income in 2006
of $1,122.5
million; and
- An increase of
$118.5 million in
Common Share and
Non-Voting Share
capital for the
exercise of
options;
Partly offset by:
- Normal course
issuer bid
expenditures of
$800.2 million; and
- Dividends of
$411.7 million.
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
-------------------------------------------------------------------------
7. Liquidity and capital resources
7.1 Cash provided by operating activities
-------------------------------------------------------------------------
Quarters ended Years ended
December 31 December 31
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
747.2 805.0 (7.2)% 2,803.7 2,914.6 (3.8)%
-------------------------------------------------------------------------
Cash provided by operating activities decreased by $57.8 million and
$110.9 million, respectively, in the fourth quarter and full year of 2006,
when compared with the same periods in 2005. The decreases were primarily due
to the following:
- Proceeds from securitized accounts receivable increased by
$150 million in the fourth quarter of 2006 compared with an increase
of $350 million in the same period in 2005. Proceeds were unchanged
in the full year of 2006 compared with an increase of $350 million in
the full year of 2005;
- Short-term investments increased by $110.2 million for the full year;
- Income taxes received net of installment payments decreased by
$43.4 million in the fourth quarter of 2006, when compared to the
same period in 2005;
- Cash payments for share based compensation in excess of expense
included in EBITDA, increased by $13.3 million in the fourth quarter
of 2006, when compared to the same period in 2005;
- Employer contributions to employee defined benefits plans increased
by $4.5 million for the full year of 2006 to $123.3 million. The best
estimate of fiscal 2007 employer contributions to the Company's
defined benefit pension plans is approximately $111 million;
- Interest received decreased by $12.6 million and $23.1 million,
respectively, in the fourth quarter and full year of 2006, when
compared to the same periods in 2005, due primarily to lower cash
balances in 2006; and
- Other changes in non-cash working capital.
The above decreases were partly offset by the following:
- EBITDA increased by $143.7 million and $295.0 million, respectively,
in the fourth quarter and full year of 2006 when compared to the same
periods in 2005, as described in Section 5: Results from operations;
- Restructuring and workforce reduction payments decreased by
$19.1 million in the fourth quarter of 2006, when compared with the
same period in 2005;
- Employer contributions to employee defined benefits plans decreased
by $10.0 million in the fourth quarter of 2006 when compared to the
same period in 2005 due to accelerated funding in 2006;
- Income taxes received net of installment payments increased by
$28.8 million for the full year of 2006, when compared to 2005, due
mainly to collection of income taxes receivable during 2006; and
- Interest paid decreased by $100.7 million and $122.2 million,
respectively, in the fourth quarter and full year of 2006, when
compared to the same periods in 2005. The decrease was due mainly to
the early redemption of notes on December 1, 2005. Interest paid in
2006 included a $31.2 million payment in respect of the termination
of cross currency interest rate swaps, as well as a partial payment
of previously accrued interest in respect of a court decision in a
lawsuit over a BC TEL bond redemption matter dating back to 1997.
7.2 Cash used by investing activities
-------------------------------------------------------------------------
Quarters ended Years ended
December 31 December 31
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
422.0 375.7 12.3 % 1,675.2 1,355.2 23.6 %
-------------------------------------------------------------------------
Cash used by investing activities increased by $46.3 million and
$320.0 million, respectively, in the fourth quarter and full year of 2006,
when compared with the same periods in 2005, due primarily to greater capital
expenditures. Funds used for small acquisitions increased $19.6 million in
2006, when compared with 2005. Assets under construction increased to
$725.4 million at December 31, 2006, compared with $516.4 million at
December 31, 2005, due to capitalized costs related to development of a new
wireline billing system as well as in-progress costs for TELUS TV and network
enhancement.
-------------------------------------------------------------------------
Capital expenditures
($ in millions,
except capital Quarters ended Years ended
expenditure December 31 December 31
intensity) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Wireline segment 309.2 230.2 34.3 % 1,191.0 914.2 30.3 %
Wireless segment 106.0 143.9 (26.3)% 427.4 404.8 5.6 %
-------------------------------------------------------------------------
TELUS consolidated
capital
expenditures 415.2 374.1 11.0 % 1,618.4 1,319.0 22.7 %
-------------------------------------------------------------------------
Capital expenditure
intensity(1) (%) 18.4 17.9 0.5 pts 18.6 16.2 2.4 pts
-------------------------------------------------------------------------
(1) Capital expenditure intensity is measured by dividing capital
expenditures by operating revenues. This measure provides a method
of comparing the level of capital expenditures to other companies of
varying size within the same industry.
-------------------------------------------------------------------------
TELUS' capital expenditure intensity for the fourth quarter and full year
of 2006 increased when compared with the same periods in 2005. Despite
increased capital intensity, EBITDA less capital expenditures (see Section
11.1 EBITDA for the calculation) increased by 28.5% to $462.9 million in the
fourth quarter of 2006, when compared to the same period in 2005. For the full
year of 2006, EBITDA less capital expenditures decreased by 0.2% to
$1.97 billion as growth in EBITDA largely offset increased capital
expenditures.
- Wireline segment capital expenditures increased by $79.0 million and
$276.8 million, respectively, in the fourth quarter and full year of
2006, when compared to the same periods in 2005. ILEC expenditures
increased by approximately $78 million to $271 million in the fourth
quarter of 2006, and increased by approximately $272 million to
$1,071 million for the full year of 2006, when compared with the same
periods in 2005. The increased ILEC spending was directed primarily
to investments in the broadband networks in B.C., Alberta and Quebec,
network access growth to serve strong housing growth in B.C. and
Alberta, TELUS TV and service development. To a lesser extent, there
was a deferral of activity from 2005 due to the 2005 labour
disruption. The remaining increases supported non-incumbent
operations.
The wireline segment capital expenditure intensity ratios were
approximately 24% for the fourth quarter and full year of 2006,
compared with approximately 19% in the same periods of 2005. This
increase was caused by reduced capital expenditures during the 2005
labour disruption and higher planned expenditures levels in 2006. For
these reasons, wireline cash flow (EBITDA less capital expenditures)
for the fourth quarter decreased by approximately 23% to
$137.4 million, and decreased by approximately 31% to $648.3 million
for the full year of 2006, when compared to same periods in 2005.
- Wireless segment capital expenditures decreased by $37.9 million in
the fourth quarter when compared to the same period in 2005. The
fourth quarter of 2005 included network capital expenditures deferred
from the third quarter of 2005 as a result of the labour disruption.
The increase of $22.6 million for the full year of 2006, when
compared with 2005 was principally related to strategic investments
in next-generation EVDO-capable higher-speed wireless network
technology and continued enhancement of digital wireless capacity and
coverage. Capital expenditure intensity for the wireless segment was
10.3% in the fourth quarter and 11.0% for the full year of 2006, as
compared with 16.3% and 12.2%, respectively, in the same periods of
2005. Wireless cash flow (EBITDA less capital expenditures) set TELUS
fourth quarter and full year records at $325.5 million and
$1,323.6 million, respectively, or increases of 79.2% and 27.5%,
respectively, over the same periods in 2005.
7.3 Cash used by financing activities
-------------------------------------------------------------------------
Quarters ended Years ended
December 31 December 31
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
311.3 1,742.8 (82.1)% 1,148.6 2,447.3 (53.1)%
-------------------------------------------------------------------------
Cash used by financing activities decreased by $1,431.5 million and
$1,298.7 million, respectively, in the fourth quarter and full year of 2006,
when compared with the same periods in 2005. Financing activities included:
- Proceeds from Common Shares and Non-Voting Shares issued were
$21.6 million and $104.5 million, respectively, in the fourth quarter
and full year of 2006. For the full year of 2006, this reflected a
decrease of $114.9 million when compared to 2005. The decrease was
due mainly to a smaller number of options being exercised in 2006 and
implementation of the net equity settlement feature on May 1, 2006.
- Cash dividends paid to shareholders were $127.2 million and
$411.7 million, respectively in the fourth quarter and full year of
2006, an increase of $30.6 million and $99.5 million, respectively.
The increase was due to the higher quarterly dividend paid per share,
partly offset by lower average shares outstanding.
- Consistent with its intent to return surplus cash to shareholders,
the Company renewed its NCIB program, which has been in place since
December 2004. The renewed program (Program 3) came into effect on
December 20, 2006 and is set to expire on December 19, 2007. The
maximum number of shares that may be purchased under Program 3 is
12 million Common Shares and 12 million Non-Voting Shares. The shares
are purchased on the Toronto Stock Exchange (TSX) and all repurchased
shares will be cancelled. Investors may obtain a copy of the notice
filed with the TSX without charge by contacting TELUS Investor
Relations.
The Company repurchased 73% of the maximum shares allowed under the
program that ended December 19, 2006 (Program 2) and 85% of the
maximum shares allowed under the program ending December 19, 2005
(Program 1).
During the fourth quarter of 2006, the Company repurchased 50,000
Common Shares and approximately 3.6 million Non-Voting Shares for a
total outlay of $199.5 million. This compares to repurchases of
approximately 2.5 million Common Shares and 2.5 million Non-Voting
Shares for a total outlay of $229.1 million during the fourth quarter
of 2005. The following table summarizes the shares repurchased and
costs under NCIB programs since Program 1 began in 2004.
Normal course issuer bid programs
-------------------------------------------------------------------------
Shares repurchased
------------------------------------
Common Non-Voting
By fiscal year and program Shares Shares Total
------------------------------ ------------------------------------
2004
Program 1 beginning Dec. 20 755,711 1,451,400 2,207,111
------------------------------ ------------------------------------
2005
Program 1 ending Dec. 19 9,503,300 10,048,600 19,551,900
Program 2 beginning Dec. 20 634,469 607,700 1,242,169
------------------------------ ------------------------------------
10,137,769 10,656,300 20,794,069
------------------------------ ------------------------------------
2006
Program 2 ending Dec. 19 5,490,600 10,701,400 16,192,000
Program 3 beginning Dec. 20 - 186,723 186,723
------------------------------ ------------------------------------
5,490,600 10,888,123 16,378,723
------------------------------ ------------------------------------
Totals
Program 1 10,259,011 11,500,000 21,759,011
Program 2 6,125,069 11,309,100 17,434,169
Program 3 - 186,723 186,723
------------------------------ ------------------------------------
Cumulative 16,384,080 22,995,823 39,379,903
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Purchase cost ($ millions)
------------------------------------
Charged to Charged to
Share Retained
By fiscal year and program capital(1) earnings(2) Paid
------------------------------ ------------------------------------
2004
Program 1 beginning Dec. 20 39.4 38.6 78.0
------------------------------ ------------------------------------
2005
Program 1 ending Dec. 19 330.1 504.5 834.6
Program 2 beginning Dec. 20 20.9 36.6 57.5
------------------------------ ------------------------------------
351.0 541.1 892.1
------------------------------ ------------------------------------
2006
Program 2 ending Dec. 19 297.6 492.8 790.4
Program 3 beginning Dec. 20 4.0 5.8 9.8
------------------------------ ------------------------------------
301.6 498.6 800.2
------------------------------ ------------------------------------
Totals
Program 1 369.5 543.1 912.6
Program 2 318.5 529.4 847.9
Program 3 4.0 5.8 9.8
------------------------------ ------------------------------------
Cumulative 692.0 1,078.3 1,770.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Represents the book value of shares repurchased
(2) Represents the cost in excess of the book value of shares repurchased
-------------------------------------------------------------------------
- Long-term debt issues in 2006 included the May 2006 public issue of
$300 million 5.00%, Series CB Notes at a price of $998.80 per
$1,000.00 of principal, which mature in 2013. The net proceeds of the
offering were used to terminate cross currency swap agreements. The
remaining debt issues in 2006 were mainly periodic draws on the TELUS
Corporation credit facilities, which were offset by periodic
repayments of the credit facilities. In 2005, on December 1,
$1.578 billion Canadian dollar Notes were redeemed early. On a net
basis, the amount drawn from credit facilities at December 31, 2006
decreased by $21 million since December 31, 2005.
- A partial payment of $309.4 million of the deferred hedging liability
was completed the second quarter of 2006. In contemplation of the
planned refinancing of the 2007 (U.S. dollar) Notes, in May 2006, the
Company replaced approximately 63% of the notional value of the
existing cross currency interest rate swap agreements with a like
amount of new cross currency interest rate swap agreements which have
a lower effective fixed interest rate and a lower effective fixed
exchange rate. This replacement happened concurrent with the issuance
of the 2013 (Canadian dollar) Notes; the two transactions had the
composite effect of deferring, from June 2007 to June 2013, the
payment of $300 million, representing a portion of the amount that
would have been due either under the cross currency interest rate
swap agreements or to the 2007 (U.S. dollar) Note holders (to whom
the amounts would ultimately have been paid would depend upon changes
in interest and foreign exchange rates over the period to maturity of
the underlying debt).
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
As at, or years ended,
December 31 2006 2005 Change
-------------------------------------------------------------------------
Components of debt and coverage ratios(1)
-----------------------------------------
($ millions)
Net debt (including securitized
accounts receivables) 6,278.1 6,294.4 (16.3)
Total capitalization - book value 13,229.8 13,190.0 39.8
EBITDA excluding restructuring
and workforce reduction costs 3,658.1 3,349.2 308.9
Net interest cost 504.7 623.1 (118.4)
Debt ratios
-----------
Fixed-rate debt as a proportion
of total indebtedness (%) 90.6 89.8 0.8 pts
Average term to maturity of debt (years) 4.5 5.4 (0.9)
Net debt to total capitalization (%)(1) 47.5 47.7 (0.2)pts
Net debt to EBITDA(1)(3) 1.7 1.9 (0.2)
Coverage ratios(1)
------------------
Interest coverage on long-term debt 3.9 2.5 1.4
EBITDA(3) interest coverage 7.2 5.4 1.8
Other measures
--------------
Free cash flow ($ millions)(2) 1,600.4 1,465.5 134.9
Dividend payout ratio (%)(1) 46 56 (10)pts
-------------------------------------------------------------------------
(1) See Section 11.4 Definition of liquidity and capital resource
measures.
(2) See Section 11.2 Free cash flow.
(3) EBITDA excluding restructuring.
-------------------------------------------------------------------------
TELUS revised the definition of net debt to include securitized accounts
receivable to be more consistent with the practice of credit rating agencies.
Total capitalization increased from higher common equity (mainly increased
retained earnings net of lower share capital). The net debt to EBITDA ratio
measured at December 31, 2006 improved primarily as a result of higher EBITDA.
The average term to maturity of debt is now less than five years as more debt
was redeemed than issued over the course of 2005 and 2006.
Interest coverage on long-term debt improved by 0.9 because of lower
interest expenses, and improved by 0.5 because of increased income before
taxes and interest expense. The EBITDA interest coverage ratio improved by 1.3
due to lower net interest cost and improved by 0.5 due to higher EBITDA
(excluding restructuring). The free cash flow measure improved for the year
ended December 31, 2006 primarily because increased EBITDA and lower interest
paid were partly offset by increased capital expenditures. The dividend payout
ratio for December 31, 2006 was near the low end of the target guideline of 45
to 55% for sustainable net earnings due mainly to actual earnings including
positive impacts from 2006 tax rate changes and tax recoveries. The dividend
payout ratio was about 54% when calculated excluding these 2006 income tax
items. The dividend payout ratio for December 31, 2005 was higher than the
target guideline due primarily to actual earnings including after-tax labour
disruption expenses.
During 2006, the Company's strategy, which was unchanged from 2005, was
to maintain the liquidity measures set out below. The Company believes that
these liquidity measure targets are currently at the optimal level and provide
access to capital at a reasonable cost by maintaining credit ratings in the
range of "BBB+" to "A-", or the equivalent.
Long-term guidelines for certain of TELUS' liquidity measures as defined
in Section 11.4 Definition of liquidity and capital resource measures are:
- Net debt to total capitalization of 45 to 50%;
- Net debt to EBITDA of 1.5 to 2.0 times; and
- Dividend payout ratio of 45 to 55% of sustainable net earnings.
7.5 Credit facilities
TELUS had available liquidity from unutilized credit facilities of more
than $1.4 billion at December 31, 2006.
-------------------------------------------------------------------------
Credit Facilities Outstanding
At December 31, 2006 undrawn letters
($ in millions) Expiry Size Drawn of credit
-------------------------------------------------------------------------
Five-year revolving
facility(1) May 4, 2010 800.0 - -
Three-year revolving
facility(1) May 7, 2008 800.0 120.0 100.1
Other bank facilities - 74.0 1.2 2.6
-------------------------------------------------------------------------
Total - 1,674.0 121.2 102.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Canadian dollars or U.S. dollar equivalent.
-------------------------------------------------------------------------
TELUS' credit facilities contain customary covenants including a
requirement that TELUS not permit its consolidated Leverage Ratio (Funded Debt
to trailing 12-month EBITDA) to exceed 4.0:1 (approximately 1.7:1 at
December 31, 2006) and not permit its consolidated Coverage Ratio (EBITDA to
Interest Expense on a trailing 12-month basis) to be less than 2.0:1
(approximately 7.4:1 at December 31, 2006) at the end of any financial
quarter. There are certain minor differences in the calculation of the
Leverage Ratio and Coverage Ratio under the credit agreement as compared with
the calculation of Net debt to EBITDA and EBITDA interest coverage.
Historically, the calculations have not been materially different. The
covenants are not impacted by revaluation of capital assets, intangible assets
and goodwill for accounting purposes. Continued access to TELUS' credit
facilities is not contingent on the maintenance by TELUS of a specific credit
rating.
TELUS has received commitments from a syndicate of 18 financial
institutions that are expected to result in a new $2 billion credit facility
being established, subject to completion of documentation and normal
conditions precedent. This new facility would replace the $1.6 billion of
existing credit facilities. The new credit facility is expected to have more
favourable terms and mature in 2012. The use of proceeds is for general
corporate purposes and may be used to back up commercial paper issuance.
7.6 Accounts receivable sale
On July 26, 2002, TCI, a wholly owned subsidiary of TELUS, entered into
an agreement, which was amended September 30, 2002, and March 1, 2006, and
November 30, 2006, with an arm's-length securitization trust under which TCI
is able to sell an interest in certain of its trade receivables up to a
maximum of $650 million. As a result of selling the interest in certain of the
trade receivables on a fully serviced basis, a servicing liability is
recognized on the date of sale and is, in turn, amortized to earnings over the
expected life of the trade receivables. This "revolving-period" securitization
agreement had an initial term ending July 18, 2007; the November 30, 2006
amendment resulted in the term being extended to July 18, 2008.
TCI is required to maintain at least a "BBB (low)" credit rating by
Dominion Bond Rating Service Limited (DBRS) or the securitization trust may
require the sale program to be wound down. The necessary credit rating was
exceeded by three levels at "A (low)" as of February 14, 2007. The balance of
proceeds from securitized receivables varied between $325 million and
$535 million during 2006, closing at $500 million on December 31, 2006. The
balances in 2005 were $150 million from January 1 to November 29 (the minimum
necessary to keep this program active), and $500 million for the remainder of
the year.
7.7 Credit ratings
As of February 14, 2007 TELUS and TCI investment grade credit ratings
were unchanged from those reported in TELUS' annual 2005 Management's
discussion and analysis in Section 7.7. However, in November 2006, Moody's
Investor Service affirmed its rating of "Baa2" and placed TELUS under review
for possible upgrade. TELUS has an objective to preserve access to capital
markets at a reasonable cost by maintaining and improving investment grade
credit ratings in the range of "BBB+" to "A-" or the equivalent.
-------------------------------------------------------------------------
Credit rating summary DBRS(1) S&P(1) Moody's(2) Fitch(1)
-------------------------------------------------------------------------
TELUS Corporation
Senior bank debt - - - BBB+
Notes BBB (high) BBB+ Baa2 BBB+
TELUS Communications Inc.
Debentures A (low) BBB+ - BBB+
Medium-term Notes A (low) BBB+ - BBB+
First mortgage bonds A (low) A- - -
-------------------------------------------------------------------------
(1) Outlook or trend stable.
(2) Under review for possible upgrade
-------------------------------------------------------------------------
7.8 Off-balance sheet arrangements, commitments and contingent
liabilities
Financial instruments
The Company's financial instruments consist of cash and temporary
investments, accounts receivable, investments accounted for using the cost
method, accounts payable, restructuring and workforce reduction accounts
payable, short-term obligations, long-term debt, interest rate swap
agreements, share-based compensation cost hedges and foreign exchange hedges.
The Company uses various financial instruments, the fair values of some
which are not reflected on the balance sheets, to reduce or eliminate exposure
to interest rate and foreign currency risks and to reduce or eliminate
exposure to increases in the compensation cost arising from specified grants
of restricted stock units and cash settled options; effective January 1, 2007,
the fair values of all such financial instruments will be reflected on the
balance sheets. These instruments are accounted for on the same basis as the
underlying exposure being hedged. The majority of the notional value of these
instruments was added during 2001 and pertains to TELUS' U.S. dollar
borrowing. During the second quarter of 2006, the Company terminated a number
of cross currency interest rate swap agreements and entered into new cross
currency interest rate swap agreements in respect of the Company's U.S. dollar
Notes maturing in June 2007.
Use of these instruments is subject to a policy, which requires that no
derivative transaction be entered into for the purpose of establishing a
speculative or a levered position, and sets criteria for the creditworthiness
of the transaction counterparties.
Price risk
Interest rates: the Company is exposed to interest rate risk arising from
fluctuations in interest rates on its temporary investments, short-term
obligations and long-term debt. In contemplation of the planned refinancing of
the debt maturing June 1, 2007, the Company has entered into forward starting
interest rate swap agreements that, as at December 31, 2006, have the effect
of fixing the underlying interest rate on up to $500 million of replacement
debt. Hedge accounting has been applied to these forward starting interest
rate swap agreements.
Currency: the Company is exposed to currency risks arising from
fluctuations in foreign exchange rates on its U.S. dollar denominated
long-term debt. Currency hedging relationships have been established for the
related semi-annual interest payments and principal payments at maturity.
The Company's foreign exchange risk management also includes the use of
foreign currency forward contracts to fix the exchange rates on short-term
foreign currency transactions and commitments. Hedge accounting is applied to
these short-term foreign currency forward contracts on an exception basis
only.
As at December 31, 2006, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rates on U.S.
$13 million of fiscal 2007 purchase commitments; hedge accounting has been
applied to these foreign currency forward contracts, all of which relate to
the wireless segment.
Other: the Company is exposed to a market risk with respect to its
short-term investments in that the fair value will fluctuate because of
changes in market prices.
Credit risk
The Company is exposed to credit risk with respect to its short-term
deposits, accounts receivable, interest rate swap agreements and foreign
exchange hedges. Credit risk associated with short-term deposits is minimized
substantially by ensuring that these financial assets are placed with
governments, well-capitalized financial institutions and other creditworthy
counterparties. An ongoing review is performed to evaluate changes in the
status of counterparties.
Credit risk associated with accounts receivable is minimized by the
Company's large customer base, which covers substantially all consumer and
business sectors in Canada. The Company follows a program of credit
evaluations of customers and limits the amount of credit extended when deemed
necessary. The Company maintains provisions for potential credit losses, and
any such losses to date have been within management's expectations.
Counterparties to the Company's interest rate swap agreements, foreign
exchange hedges and share-based compensation cost hedges are major financial
institutions that have all been accorded investment grade ratings by a primary
rating agency. The dollar amount of credit exposure under contracts with any
one financial institution is limited and counterparties' credit ratings are
monitored. The Company does not give or receive collateral on swap agreements
and hedges due to its credit rating and those of its counterparties. While the
Company is exposed to credit losses due to the non-performance of its
counterparties, the Company considers the risk of this remote; if all
counterparties were not to perform, the pre-tax effect would be limited to the
value of any deferred hedging assets.
Fair value
The carrying value of cash and temporary investments, accounts
receivable, accounts payable, restructuring and workforce reduction accounts
payable and short-term obligations approximates their fair values due to the
immediate or short-term maturity of these financial instruments. The carrying
values of the Company's investments accounted for using the cost method would
not exceed their fair values.
The fair values of the Company's long-term debt are estimated based on
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same maturity as well as the use of
discounted future cash flows using current rates for similar financial
instruments subject to similar risks and maturities. The fair values of the
Company's derivative financial instruments used to manage exposure to interest
rate and currency risks are estimated similarly.
-------------------------------------------------------------------------
As at December 31 2006 2005
-------------------------------------------------------------------------
Hedging
item
maximum
maturity Carrying Fair Carrying Fair
($ millions) date amount value amount value
-------------------------------------------------------------------------
Liabilities
Long-term debt
Principal 4,928.1 5,535.9 4,644.9 5,371.6
Derivatives(1)(2)
used to manage
interest rate
and currency
risks associated
with U.S. dollar
denominated debt
- Deferred
hedging asset (40.4) -
- Deferred
hedging
liability
- Current 165.8 -
- Non-current 710.3 1,154.3
---------- ----------
835.7 1,154.3
- Interest
payable 6.3 9.7
---------- ----------
Net June 2011 842.0 1,090.6 1,164.0 1,470.5
Derivatives(1)(2)
used to manage
interest rate
risk associated
with planned
refinancing of
debt maturing
June 1, 2007 June 2007 - 6.5 - -
-------------------------------------------------------------------------
5,770.1 6,633.0 5,808.9 6,842.1
-------------------------------------------------------------------------
(1) Notional amount of all derivative financial instruments outstanding
is $5,138.6 (2005 - $4,904.8).
(2) Designated as cash flow hedging items.
Commitments and contingent liabilities
The Company has a $53.1 million liability recorded for outstanding
commitments under its restructuring programs as at December 31, 2006. In
addition, the Company disclosed in its targets for 2007 that it expected to
record approximately $50 million of restructuring and employee reduction costs
in 2007. See Forward-looking statements at the beginning of Management's
discussion and analysis.
Price cap deferral accounts
On May 30, 2002, and on July 31, 2002, the CRTC issued Decisions 2002-34
and 2002-43, respectively, and introduced the concept of a deferral account.
The Company must make significant estimates and assumptions in respect of the
deferral accounts given the complexity and interpretation required of
Decisions 2002-34 and 2002-43. Accordingly, the Company estimates, and
records, an aggregate liability of $164.8 million as at December 31, 2006
(2005 - $158.7 million), to the extent that activities it has undertaken,
other qualifying events and realized rate reductions for Competitor Services
do not extinguish it; management is required to make estimates and assumptions
in respect of the offsetting nature of these items. If the CRTC, upon its
periodic review of the Company's deferral account, disagrees with management's
estimates and assumptions, the CRTC may adjust the deferral account balance
and such adjustment may be material. Ultimately, this process results in the
CRTC determining if, and when, the deferral account liability is settled.
On March 24, 2004, the CRTC issued Telecom Public Notice CRTC 2004-1
"Review and disposition of the deferral accounts for the second price cap
period", which initiated a public proceeding inviting proposals on the
disposition of the amounts accumulated in the incumbent local exchange
carriers' deferral accounts during the first two years of the second price cap
period.
On February 16, 2006, the CRTC issued Decision CRTC 2006-9, "Disposition
of funds in the deferral account." In its decision, the CRTC determined that
the majority of the accumulated liability within the respective ILEC's
deferral account was to be made available for initiatives to expand broadband
services within their ILEC operating territories to rural and remote
communities where service is currently not available. In addition, a minimum
of 5% of the accumulated deferral account balance must be used for initiatives
that enhance accessibility to telecommunication services for individuals with
disabilities. To the extent that the deferral account balance exceeds the
approved initiatives, the remaining balance will be distributed in the form of
a one-time rebate to local residential service customers in non-high cost
serving areas. Finally, the CRTC indicated that, subsequent to May 31, 2006,
no additional amounts are to be added to the deferral account and, instead,
are to be dealt with via prospective rate reductions.
In September 2006, the Federal Court of Appeal granted the Consumers
Association of Canada and the National Anti Poverty Organization leave to
appeal CRTC Telecom Decision 2006-9. These consumer groups are expected to
file their appeal over the coming months asking the Court to direct rebates to
local telephone subscribers, rather than have the accumulated deferral account
funds used for purposes determined by the CRTC, as noted above. Bell Canada
was also granted leave to appeal Decision 2006-9 on the grounds that the CRTC
exceeded its jurisdiction to the extent it approves rebates from the deferral
account. These matters are expected to be heard in 2007. In the event that
Bell Canada is successful in its appeal, the Company may realize additional
revenue equal to the amount of the deferral account that would otherwise have
been rebated by the CRTC. Should the consumer groups be successful in their
appeals, the Company may be required to remit a one-time refund of an amount
up to, but not exceeding, the aggregate liability of approximately
$165 million in individually small amounts to its entire local residential
subscriber base. As the deferral account balance was fully provided for in
previous financial statements, the potential refund will not impact the
Company's subsequent income from operations. In addition, subject to the
potential outcome of this leave to appeal, the Company may need to re-address
its intent to extend broadband services to uneconomic remote and rural
communities. The Company supports Decision 2006-9 and its designated uses of
the deferral account in order to extend high-speed broadband Internet service
to rural and remote communities and improve telecommunications services for
people with disabilities.
Due to the Company's use of the liability method of accounting for the
deferral account, CRTC Decision 2005-6, as it relates to the Company's
provision of Competitor Digital Network services, is not expected to affect
the Company's consolidated revenues. Specifically, to the extent that CRTC
Decision 2005-6 requires the Company to provide discounts on Competitor
Digital Network services, through May 31, 2006, the Company drew down the
deferral account by an offsetting amount; subsequent to May 31, 2006, the
income statement effects did not change and the Company no longer needed to
account for these amounts through the deferral account. For the year ended
December 31, 2006, the Company drew down the deferral account by $19.9 million
(2005 - $50.5 million) in respect of discounts on Competitor Digital Network
services.
On November 30, 2006, the CRTC issued Telecom Public Notice CRTC 2006-15,
"Review of proposals to dispose of the funds accumulated in the deferral
accounts," which initiated a public proceeding to consider the proposals
submitted by the incumbent local exchange carriers to dispose of the funds
accumulated in their respective deferral accounts. The Company expects the
CRTC to render its decision in this matter in the latter part of 2007.
Contractual obligations
The Company's known contractual obligations at December 31, 2006, are
quantified in the following table. Interest obligations are not included in
the table.
-------------------------------------------------------------------------
Long-term debt
maturities
-------------------
Other
All except long-term Purchase
capital Capital liabil- Operating obliga-
($ millions) leases leases ities leases tions Total
-------------------------------------------------------------------------
2007 1,555.0 4.0 18.0 197.6 506.6 2,281.2
2008 122.2 2.6 23.1 184.9 127.2 460.0
2009 0.7 0.8 28.2 198.3 73.7 301.7
2010 80.0 1.7 17.6 185.5 30.8 315.6
2011 2,950.5 0.1 17.7 168.3 11.5 3,148.1
Thereafter 1,049.0 - 150.7 1,202.6 33.8 2,436.1
-------------------------------------------------------------------------
Total 5,757.4 9.2 255.3 2,137.2 783.6 8,942.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Guarantees
Canadian GAAP requires the disclosure of certain types of guarantees and
their maximum, undiscounted amounts. The maximum potential payments represent
a "worst-case scenario" and do not necessarily reflect results expected by the
Company. Guarantees requiring disclosure are those obligations that require
payments contingent on specified types of future events. In the normal course
of its operations, the Company enters into obligations that GAAP may consider
to be guarantees. As defined by Canadian GAAP, guarantees subject to these
disclosure guidelines do not include guarantees that relate to the future
performance of the Company.
In the normal course of operations, the Company may provide
indemnification in conjunction with certain transactions. The term of these
indemnification obligations range in duration and often are not explicitly
defined. Where appropriate, an indemnification obligation is recorded as a
liability. In many cases, there is no maximum limit on these indemnification
obligations and the overall maximum amount of the obligations under such
indemnification obligations cannot be reasonably estimated. Other than
obligations recorded as liabilities at the time of the transaction,
historically the Company has not made significant payments under these
indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the
Company agreed to bear a proportionate share of the new owner's increased
directory publication costs if the increased costs were to arise from a change
in the applicable CRTC regulatory requirements. The Company's proportionate
share would be 80% through May 2006, declining to 40% in the next five-year
period and then to 15% in the final five years. As well, should the CRTC take
any action that would result in the owner being prevented from carrying on the
directory business as specified in the agreement, TELUS would indemnify the
owner in respect of any losses that the owner incurred. As at December 31,
2006, the Company has no liability recorded in respect of indemnification
obligations.
Claims and lawsuits
A number of claims and lawsuits seeking damages and other relief are
pending against the Company. It is impossible at this time for the Company to
predict with any certainty the outcome of such litigation. However, management
is of the opinion, based upon legal assessment and information presently
available, that it is unlikely that any liability, to the extent not provided
for through insurance or otherwise, would be material in relation to the
Company's consolidated financial position.
7.9 Outstanding share information
The following is a summary of the outstanding shares for each class of
equity at December 31, 2006 and at January 31, 2007. In addition, for January
31, 2007 the total number of outstanding and issuable shares is presented
assuming full conversion of options including those shares held in reserve,
but not yet issued.
-------------------------------------------------------------------------
Class of equity security Common Non-Voting Total
(millions of shares) Shares Shares shares
-------------------------------------------------------------------------
Common equity
Outstanding shares at
December 31, 2006 178.7 159.2 337.9(1)
-------------------------------------------------------------------------
Outstanding shares at
January 31, 2007 178.7 159.2 337.9
Options outstanding and issuable(2)
at January 31, 2007 0.8 18.2 19.0
-------------------------------------------------------------------------
179.5 177.4 356.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share, the
number of shares was 343.8 for the fourth quarter of 2006 and 347.4
for the full year of 2006.
(2) Assuming full conversion and ignoring exercise prices.
-------------------------------------------------------------------------
8. Critical accounting estimates and accounting policy developments
8.1 Critical accounting estimates
TELUS' critical accounting estimates are described Section 8.1 of its
2005 annual Management's discussion and analysis. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
8.2 Accounting policy developments
Accounting policies are consistent with those described in Note 1 of
TELUS' annual 2005 Consolidated financial statements. Commencing with the
Company's 2006 fiscal year, the Company adopted the amended recommendations of
the Canadian Institute of Chartered Accountants (CICA) for measurement of
non-monetary transactions (CICA Handbook Section 3830). The Company's
operations were not materially affected by the amended recommendations.
Convergence with International Reporting Standards
In 2006, Canada's Accounting Standards Board ratified a strategic plan
that will result in Canadian GAAP, as used by public companies, being
converged with International Financial Reporting Standards over a transitional
period currently expected to be approximately five years. The precise timing
of convergence will depend on an Accounting Standards Board "progress review"
to be undertaken by early 2008. As this convergence initiative is very much in
its infancy as of the date of these Consolidated financial statements, it
would be premature to currently assess the impact of the initiative, if any,
on the Company.
Other comprehensive income;
Commencing with the Company's 2007 fiscal year, the new recommendations
of the CICA for accounting for comprehensive income (CICA Handbook Section
1530), for the recognition and measurement of financial instruments (CICA
Handbook Section 3855) and for hedges (CICA Handbook Section 3865) will apply
to the Company. In the Company's specific instance, the transitional rules for
these sections require prospective implementation at the beginning of a fiscal
year (the exception being in respect of the cumulative foreign currency
translation adjustment, which is retroactively adjusted for at the beginning
of the fiscal year of adoption). Currently, the concept of comprehensive
income for purposes of Canadian GAAP, in the Company's specific instance, will
be primarily to include changes in shareholders' equity arising from
unrealized changes in the fair values of financial instruments.
Comprehensive income as prescribed by U.S. GAAP is largely aligned with
comprehensive income as prescribed by Canadian GAAP, including the impacts of
the new recommendations for the recognition and measurement of financial
instruments and for hedges. In the Company's specific instance, however, there
is currently a difference in other comprehensive income in that U.S. GAAP
includes, in respect of pension and other defined benefit plans, the
difference between the net funded plan states and the net accrued benefit
asset or liability; Canadian GAAP does not include this currently, but an
exposure draft from Canada's Accounting Standards Board is expected in the
first half of 2007 that would eliminate this difference.
The majority of the impact on the Company of adopting the other
comprehensive income and related standards currently arises from the Company's
cross currency interest rate swap agreements, and to a lesser extent, the
cash-settled equity forward agreements that the Company entered into in
respect of share-based compensation.
Accounting changes; and Business combinations
Commencing with the Company's 2007 fiscal year, the new recommendations
of the CICA for accounting changes (CICA Handbook Section 1506) will apply to
the Company. Most significantly, the new recommendations stipulate that
voluntary changes in accounting policy are made only if they result in the
financial statements providing reliable and more relevant information and that
new disclosures are required in respect of changes in accounting policies,
changes in accounting estimates and correction of errors. The Company is not
currently materially affected by the new recommendations.
Capital disclosures
Effective December 31, 2006, the Company early adopted the new
recommendations of the CICA for disclosure of the Company's objectives,
policies and processes for managing capital (CICA Handbook Section 1535).
Earnings per share
Amendments were proposed to the recommendations of the CICA for the
calculation and disclosure of earnings per share (CICA Handbook Section 3500)
and would have applied to the Company; such amendments had progressed to the
typescript stage. In July 2006, the typescript with the proposed amendments
was withdrawn and an announcement was made indicating that an International
Financial Reporting Standards-based exposure draft from Canada's Accounting
Standards Board would be issued at a later date, now expected in the first
half of 2007.
Other recently issued accounting standards not yet implemented
Under U.S. GAAP, effective for its 2007 fiscal year, the Company is
expected to be required to comply with accounting for uncertain income tax
positions, as prescribed by Financial Accounting Standards Board Financial
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes". The
Company has assessed the cumulative impact of adopting this new standard as of
January 1, 2007. Based upon this review, the Company does not expect the
adoption of this Interpretation will have a material impact on its
Consolidated financial statements.
9. Looking forward to 2007
Financial and operating targets for 2007
The following discussion is qualified in its entirety by the
Forward-looking statements at the beginning of Management's discussion and
analysis, as well as Section 10: Risks and risk management of TELUS'
Management's discussion and analysis for 2005, the first, second and third
quarters of 2006 and this report. TELUS' 2007 targets were originally
announced on December 14, 2006.
The Company has received regulatory approval to amend its share option
plans to provide for cash settlement, and in January 2007, determined that the
feature would be available for substantially all currently vested options and
those vesting in 2007. Cash settlement mitigates shareholder dilution from
issuing shares from treasury, and allows cash payments for the difference in
value between the market value and the exercise price of shares to be
deductible for tax purposes when options are exercised, which is expected to
result in significant future tax savings. This change results in an increased
non-cash option expense (an operating expense) for accounting purposes, which
is estimated at $150 to $200 million ($120 to $150 million in wireline and
$30 to $50 million in wireless). The expense is expected to be substantially
recorded in the first quarter of 2007. TELUS' 2007 stated targets for
segmented EBITDA, consolidated EBITDA, and EPS exclude the non-cash accounting
expense expected to be recorded in regards to implementing the cash settlement
for options.
Wireline revenue is expected to increase 1 to 2% in 2007, driven largely
by data. Wireline EBITDA, prior to the change to 2007 expenses for cash
settlement of options, is expected to be down 1 to 3% as a result of continued
competitive pressures, initial expenses related to launch of growth-oriented
products and services, and lower profitability margins.
Wireless revenue is expected to increase 12 to 13% in 2007 due to
continued strong growth in wireless subscribers and increased wireless data
adoption and usage. Wireless EBITDA, prior to the change to 2007 expenses for
cash settlement of options, is expected to increase 11 to 14% in the year.
The expected earnings per share in 2007 reflects overall higher operating
profitability, lower financing costs as a consequence of reduced debt levels
and lower interest rates on debt refinancing, and an expected decrease in
total outstanding shares. The 2007 EPS growth is affected by increased
depreciation expense and $0.30 to $0.40 for an after-tax impact from the
change to cash settlement of options. TELUS' comparative EPS for 2006 included
approximately $0.48 of positive impacts from the settlement of tax matters and
changes to tax legislation. Because of these factors, EPS for 2007, excluding
the change to cash settlement of options, is expected to be flat to 6% higher
than reported for 2006.
Earnings per share, cash balances, net debt and common equity may be
affected by the potential purchases of up to 24 million TELUS shares over a
12-month period under the normal course issuer bid that commenced December 20,
2006.
-------------------------------------------------------------------------
Targets for 2007 Results for 2006 Change
-------------------------------------------------------------------------
Consolidated
Revenues $9.175 to $9.275 billion $8.681 billion 6 to 7%
EBITDA(1)
excluding charge
for cash
settlement feature
for vested options
in 2007(2) $3.725 to $3.825 billion $3.590 billion 4 to 7%
Earnings per share
(EPS) excluding
after-tax charge
for cash
settlement of
options in 2007(3) $3.25 to $3.45 $3.27 (1) to 6%
Capital
expenditures Approx. $1.75 billion $1.618 billion 8%
-------------------------------------------------------------------------
Wireline segment
Revenue (external) $4.85 to $4.9 billion $4.823 billion 1 to 2%
EBITDA excluding
charge for cash
settlement of
options in 2007(2) $1.775 to $1.825 billion $1.839 billion (3) to (1)%
Capital expenditures Approx. $1.2 billion $1.191 billion Unchanged
High-speed Internet Continued
net additions More than 135,000 153,700 strong growth
-------------------------------------------------------------------------
Wireless segment
Revenue (external) $4.325 to $4.375 billion $3.858 billion 12 to 13%
EBITDA excluding
charge for cash
settlement of
options in 2007(2) $1.95 to $2.0 billion $1.751 billion 11 to 14%
Capital expenditures Approx. $550 million $427 million 29%
Wireless subscriber
net additions More than 550,000 535,200 3% or more
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest taxes depreciation and
amortization (EBITDA), alternatively calculated as Operating
revenues less Operations expense less Restructuring and workforce
reduction costs.
(2) Excluding an expense of $150 to $200 million in 2007 for a change to
add a cash settlement choice for vested options, of which, $120 to
$150 million is in wireline and $30 to $50 million is in wireless.
(3) Excluding $0.30 to $0.40 for cash settlement of options.
-------------------------------------------------------------------------
Assumptions for 2007 targets purposes include:
- Economic growth consistent with recent provincial and national
estimates by the Conference Board of Canada, including the revised
2007 real GDP growth of 2.7% in Canada;
- Increased wireline competition in both business and consumer markets,
particularly from cable-TV and VoIP companies;
- Forbearance for local retail wireline services in major urban markets
by the second half of 2007;
- No further price cap mandated consumer price reductions;
- A wireless industry market penetration gain of 4.5 to five percentage
points;
- Approximately $50 million restructuring and workforce reduction
expenses ($67.8 million in 2006);
- A statutory tax rate of approximately 33 to 34%;
- A discount rate of 5.0% and an expected long-term average return of
7.25% for pension accounting, unchanged from 2006; and
- Average shares outstanding of 330 to 335 million shares for the full
year.
As described in Section 5 Consolidated results from operations - Income
taxes, TELUS currently expects minimal cash tax payments in 2007.
TELUS continues to have long-term policy guidelines including Net debt to
EBITDA of 1.5 to 2.0 times, Net debt to total capitalization of 45 to 50% and
a dividend payout ratio guideline of 45 to 55% of sustainable net earnings.
The 2007 targets are in compliance with these policy guidelines.
10. Risks and risk management
The following are significant updates to the risks described in
Management's discussions and analyses for the year 2005 as well as the first,
second and third quarters of 2006.
10.1 Regulatory
The outcome of any existing or future regulatory reviews, proceedings,
court appeals, Federal Cabinet appeals or other regulatory developments could
have a material impact on TELUS' operating procedures, costs and revenues.
Local Forbearance
On December 11, 2006, the Minister of Industry proposed significant
changes to the CRTC's framework for forbearance from regulation of residential
and business local exchange services. The proposal would eliminate the current
marketing restrictions on winbacks and most other promotions including the
prohibition on waiving service charges for winback customers. The proposal
would also replace the 25% market share loss test with a simple competitive
presence test that would require the presence of at least three
facilities-based telecommunications service providers (one of which could be
an unaffiliated wireless service provider) for residential local exchange
services or at least two facilities-based telecommunications service providers
for business local exchange services. As well, the proposal would reduce the
competitor quality of service criteria that must be met as a pre-condition for
forbearance and permit the ex parte filing of tariff applications for
promotions. The proposed forbearance framework is subject to a public comment
period after which the federal cabinet can issue an Order in Council to
implement the proposed framework in its present form or revised to reflect
input received during the comment period. There is no guarantee that this
forbearance framework will be issued exactly as proposed.
On December 18, 2006, the Governor General in Council issued a direction
to the CRTC to rely on market forces to the maximum extent feasible; to ensure
technological and competitive neutrality and enable competition from new
technologies; to use tariff approval mechanisms that are as minimally
intrusive as possible; to complete a review of the framework for mandated
access to wholesale services; to publish and maintain performance standards
for its various processes; and, to continue to explore new ways of
streamlining its processes.
Price cap regulation
Price cap regulation continues to apply to a basket of local services
provided by ILECs. TELUS is subject to price cap regulation as an ILEC in
Alberta, B.C. and Eastern Quebec. The CRTC undertook a thorough review of the
current price regulation regime in 2006 for the purpose of establishing the
parameters for the next price cap period. This review was completed in
November 2006 and the CRTC is expected to render its decision in this
proceeding by the end of April 2007. There can be no assurance that the price
regulation regime for TELUS beginning in June 2007 will be as, or more
favourable for TELUS than the current regime.
In February, 2006, the CRTC issued Telecom Decision CRTC 2006-9 in which
the CRTC determined that initiatives to expand broadband services to rural and
remote communities and initiatives to improve accessibility to
telecommunications services for individuals with disabilities are an
appropriate use of the funds accumulated in the ILEC deferral accounts. To the
extent that the accumulated deferral account exceeds approved initiatives, the
remaining balance would be distributed in the form of a one-time rebate to
local non-high cost serving area residential customers. Finally, the CRTC
indicated that prospectively no further amounts are to be added to the
deferral account and are to be dealt with via prospective residential local
rate reductions.
In response to Decision 2006-9, TELUS filed its proposal for the use of
the funds accumulated in its deferral account during the second price cap
period. TELUS proposed to expand broadband services to rural and remote
communities and undertake initiatives to improve accessibility to
telecommunications services for individuals with disabilities in September
2006. On November 30, 2006, the CRTC issued Review of proposals to dispose of
the funds accumulated in the deferral accounts, Telecom Public Notice CRTC
2006-15. This proceeding will more closely examine the ILECs' proposals for
broadband expansion and allow Internet Service Providers an opportunity to
identify where they are providing, and intend to provide, high-speed Internet
service. TELUS is also waiting for decisions on two appeals filed with the
Federal Court on how the funds in the ILECs' deferral accounts should be
treated. See Section 10.3 Litigation and legal matters. There is no guarantee
that the ILECs will be able to proceed with their proposals for the use of
deferral account funds pending the outcome of the CRTC proceeding initiated by
Public Notice 2006-15 and the appeals to the Federal Court.
Voice over Internet protocol
In Regulatory framework for voice communication services using Internet
protocol, Decision 2005-28, the CRTC determined that local VoIP services are
functionally equivalent to local exchange service and that the current
regulatory framework governing local competition will apply to local VoIP
service providers. The CRTC also determined that ILECs may only provide VoIP
services in their incumbent territories in accordance with approved tariffs.
In Decision 2006-53, the CRTC reaffirmed Decision 2005-28 and the
regulatory regime established for VoIP services. However, on November 9, 2006,
the Governor in Council issued Order in Council P.C. 2006-1314 and varied
Decisions 2005-28 and 2006-53. As a result, the CRTC will no longer regulate
the provision of access independent VoIP services provided by the ILECs within
their incumbent territories.
Future availability of wireless spectrum
Pursuant to the release of the Telecommunications Policy Review Report in
2006, and an anticipated spectrum auction policy consultation process, there
has been speculation that the government may license a fourth national carrier
either on a preferential basis, or in conjunction with a removal of foreign
ownership restrictions, or by mandating roaming or tower sharing. This could
likely increase competitive intensity. While the current government has
clearly indicated its preference to rely on market forces in the
telecommunications sector, there is no guarantee that it will leave it to
market forces to determine the number of competitors or the basis of
competition.
The deadline for implementing wireless number portability (WNP) is
March 14, 2007 (Telecom Decision CRTC 2005-72)
In Decision 2005-72, the CRTC directed Bell Mobility, Rogers Wireless
Inc. and the wireless division of TELUS to implement WNP in British Columbia,
Alberta, Ontario and Quebec where local exchange carrier-to-local exchange
carrier (LEC-to-LEC) local number portability is in place by March 14, 2007.
In other areas and for other wireless carriers, WNP (where LEC-to-LEC local
number portability is currently in place) for porting-out must be implemented
by March 14, 2007 and for porting-in must be implemented by September 12,
2007. There is no assurance that TELUS and the other Canadian wireless
carriers will be able to implement WNP in the required timeframe and/or
without incurring significant additional costs and/or ongoing administration
costs. Implementation of WNP may result in increased migration of network
access lines to wireless services, increased wireless subscriber monthly churn
and/or additional customer retention costs for TELUS.
When instituted in the U.S. in 2003, WNP did not cause a large increase
in churn as initially anticipated. In addition, TELUS believes that WNP may
open up an opportunity to more effectively market into the business/enterprise
market in Central Canada where TELUS has a lower market share than its
wireless competitors and lack of WNP is believed to have decreased its sales
effectiveness. However, there can be no assurance that this will be the case.
10.2 Process risks
TELUS systems and processes could negatively impact financial results
and customer service - Billing/revenue assurance and efficiency
programs
TELUS continues to develop a new billing system for the wireline segment,
which includes re-engineering processes for order entry, pre-qualification,
service fulfillment and assurance, customer care, collections/credit, customer
contract and information management. This customer-focused project requires
extensive system development and, in itself, presents implementation risks due
to the complexity of the implementation task and resource constraints, as well
as reliance on newly developed third party software code. TELUS plans to
implement this project in phases beginning with certain consumer accounts
during 2007, with additional phases of conversion planned over the next few
years. There can be no assurance that this undertaking will not negatively
impact TELUS' customer service levels, competitive position and financial
results. As well, significant time delays in implementing this system could
negatively impact TELUS' competitive ability to quickly and effectively launch
new products and services; achieve and maintain a competitive cost structure;
and deliver better information and analytics to management.
Also, as a result of system changes, staff reduction and training
requirements associated with TELUS' ongoing efficiency improvement efforts,
there is potential for further impact on the operations of TELUS' internal
processes involved with billing that could negatively affect TELUS' earnings.
10.3 Litigation and legal matters
Ontario Court of Appeal ruling in 2005
In June 2005, the Ontario Court of Appeal unanimously overturned a 2003
trial court decision and ruled that when TCI's predecessor BC TEL redeemed its
$125 million Series AL Bonds in December 1997, it was in breach of a covenant
contained in the deed of trust and mortgage under which the Bonds were issued.
The Ontario Court of Appeal returned the case to the trial courts to determine
damages, and the Supreme Court of Canada denied leave to appeal by the Company
in January 2006. The Ontario Court's ruled in November 2006 that this lawsuit
should be treated as a representative action by all bondholders and not just
the named plaintiffs. The magnitude of amounts ultimately paid will depend in
part on the method of calculating damages and who are entitled to damages,
which remain to be litigated. Should the assessed damages be significantly
different than management's expectations, a material adjustment could be
recorded in the Company's Consolidated statements of income.
The Company believes that it has conservatively accrued for damages. This
ruling relates to a matter prior to the 1999 merger of BC TELECOM and TELUS
Corporation (Alberta), and does not impact TELUS' current debt instruments.
11. Reconciliation of non-GAAP measures and definition of key operating
indicators
11.1 Earnings before interest taxes depreciation and amortization
(EBITDA)
TELUS has issued guidance on and reports EBITDA because it is a key
measure used by management to evaluate performance of business units, segments
and the Company. EBITDA is also utilized in measuring compliance with debt
covenants - see Section 11.4 EBITDA excluding restructuring and workforce
reduction costs. EBITDA is a measure commonly reported and widely used by
investors as an indicator of a company's operating performance and ability to
incur and service debt, and as a valuation metric. The Company believes EBITDA
assists investors in comparing a company's performance on a consistent basis
without regard to depreciation and amortization, which are non-cash in nature
and can vary significantly depending upon accounting methods or non-operating
factors such as historical cost.
EBITDA is not a calculation based on Canadian or U.S. GAAP and should not
be considered an alternative to Operating income or Net income in measuring
the Company's performance, nor should it be used as an exclusive measure of
cash flow, because it does not consider the impact of working capital growth,
capital expenditures, debt principal reductions and other sources and uses of
cash, which are disclosed in the Consolidated statements of cash flows.
Investors should carefully consider the specific items included in TELUS'
computation of EBITDA. While EBITDA has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance and debt
servicing ability relative to other companies, investors should be cautioned
that EBITDA as reported by TELUS may not be comparable in all instances to
EBITDA as reported by other companies.
The following is a reconciliation of EBITDA with Net income and Operating
income:
Quarters ended Years ended
Dec. 31 December 31
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Net income 236.2 78.5 1,122.5 700.3
Other expense (income) 10.1 9.3 28.0 18.4
Financing costs 133.6 171.7 504.7 623.1
Income taxes 89.7 58.8 351.0 322.0
Non-controlling interest 1.4 2.9 8.5 7.8
-------------------------------------------------------------------------
Operating income 471.0 321.2 2,014.7 1,671.6
Depreciation 353.2 346.2 1,353.4 1,342.6
Amortization of intangible assets 53.9 67.0 222.2 281.1
-------------------------------------------------------------------------
EBITDA 878.1 734.4 3,590.3 3,295.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In addition to EBITDA, TELUS calculates EBITDA less capital expenditures
as a simple proxy for cash flow in its two reportable segments. EBITDA less
capital expenditures is used for comparison to the reported results for other
telecommunications companies and is subject to the potential comparability
issues of EBITDA described above. EBITDA less capital expenditures is
calculated for TELUS as follows:
Quarters ended Years ended
Dec. 31 December 31
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
EBITDA 878.1 734.4 3,590.3 3,295.3
Capital expenditures (Capex) (415.2) (374.1) (1,618.4) (1,319.0)
-------------------------------------------------------------------------
EBITDA less capital expenditures 462.9 360.3 1,971.9 1,976.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11.2 Free cash flow
The Company has issued guidance on and reports free cash flow because it
is a key measure used by management to evaluate its performance. Free cash
flow excludes certain working capital changes and other sources and uses of
cash, which are disclosed in the Consolidated statements of cash flows. Free
cash flow is not a calculation based on Canadian or U.S. GAAP and should not
be considered an alternative to the Consolidated statements of cash flows.
Free cash flow is a measure that can be used to gauge TELUS' performance over
time. Investors should be cautioned that free cash flow as reported by TELUS
may not be comparable in all instances to free cash flow as reported by other
companies. While the closest GAAP measure is Cash provided by operating
activities less Cash used by investing activities, free cash flow is
considered relevant because it provides an indication of how much cash
generated by operations is available after capital expenditures, but before
proceeds from divested assets, and changes in certain working capital items
(such as trade receivables, which can be significantly distorted by
securitization changes that do not reflect operating results, and trade
payables).
The following reconciles free cash flow with Cash provided by operating
activities less Cash used by investing activities:
Quarters ended Years ended
Dec. 31 December 31
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Cash provided by
operating activities 747.2 805.0 2,803.7 2,914.6
Cash (used) by investing activities (422.0) (375.7) (1,675.2) (1,355.2)
-------------------------------------------------------------------------
325.2 429.3 1,128.5 1,559.4
Net employee defined
benefit plans expense 1.0 (3.1) 5.4 (3.9)
Employer contributions to employee
defined benefit plans 19.0 29.0 123.3 118.8
Amortization of deferred gains on
sale-leaseback of buildings,
amortization of deferred charges
and other, net (39.2) (5.0) (51.7) (1.1)
Reduction (increase) in securitized
accounts receivable (150.0) (350.0) - (350.0)
Non-cash working capital changes
except changes in taxes, interest,
and securitized accounts
receivable, and other 70.6 8.0 338.1 106.1
Acquisitions 4.5 - 49.0 29.4
Proceeds from the sale of
property and other assets - (1.0) (14.9) (4.5)
Other investing activities 2.3 2.6 22.7 11.3
-------------------------------------------------------------------------
Free cash flow (2006 definition) 233.4 109.8 1,600.4 1,465.5
Donations and securitization
fees included in Other expense (8.5) (6.8) (29.1) (14.6)
-------------------------------------------------------------------------
Free cash flow (2007 definition) 224.9 103.0 1,571.3 1,450.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following shows management's calculation of free cash flow.
Quarters ended Years ended
Dec. 31 December 31
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
EBITDA 878.1 734.4 3,590.3 3,295.3
Restructuring and workforce
reduction costs net
of cash payments (6.2) 5.4 (4.0) (13.6)
Share-based compensation (10.2) 3.1 25.1 24.3
Cash interest paid (218.5) (319.2) (516.1) (638.3)
Cash interest received 0.3 12.9 24.2 47.3
Income taxes received (paid),
less investment tax credits
received that were previously
recognized in either EBITDA or
capital expenditures; and other 5.1 47.3 99.3 69.5
Capital expenditures (415.2) (374.1) (1,618.4) (1,319.0)
-------------------------------------------------------------------------
Free cash flow (2006 definition) 233.4 109.8 1,600.4 1,465.5
Donations and securitization
fees included in Other expense (8.5) (6.8) (29.1) (14.6)
-------------------------------------------------------------------------
Free cash flow (2007 definition) 224.9 103.0 1,571.3 1,450.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11.3 Definition of key operating indicators
These measures are industry metrics and are useful in assessing the
operating performance of a wireless company.
Average revenue per subscriber unit per month (ARPU) is calculated as
Network revenue divided by the average number of subscriber units on the
network during the period and expressed as a rate per month. Data ARPU is a
component of ARPU, calculated on the same basis for revenues derived from
services such text messaging, mobile computing, personal digital assistance
devices, Internet browser activity and pay-per-use downloads.
Churn per month is calculated as the number of subscriber units
disconnected during a given period divided by the average number of subscriber
units on the network during the period, and expressed as a rate per month. A
prepaid subscriber is disconnected when the subscriber has no usage for 90
days following expiry of the prepaid card.
Cost of acquisition (COA) consists of the total of handset subsidies,
commissions, and advertising and promotion expenses related to the initial
subscriber acquisition during a given period. As defined, COA excludes costs
to retain existing subscribers ("retention spend").
COA per gross subscriber addition is calculated as cost of acquisition
divided by gross subscriber activations during the period.
EBITDA excluding COA is a measure of operational profitability normalized
for the period costs of adding new customers. COA for the fourth quarter and
full year of 2006 was $165.2 million and $532.6 million, respectively. COA for
the same periods in 2005 was $188.7 million and $494.3 million, respectively.
Retention spend to Network revenue represents direct costs associated
with marketing and promotional efforts aimed at the retention of the existing
subscriber base divided by Network revenue.
11.4 Definition of liquidity and capital resource measures
The following definitions are presented in the order that they appear in
Section 7.4 Liquidity and capital resource measures.
Net debt is a non-GAAP measure whose nearest GAAP measure is the sum of
Long-term debt and Current maturities of long-term debt, as reconciled below.
The definition was changed in 2006 to include securitized accounts receivable,
which is closer to methods used by credit rating agencies. Net debt, before
addition of securitized accounts receivable and certain other minor
differences, is one component of a ratio used to determine compliance with
debt covenants (refer to the description of Net debt to EBITDA below).
At December 31
($ millions) 2006 2005
-------------------------------------------------------------------------
Current maturities of long-term debt 1,434.4 5.0
Long-term debt 3,493.7 4,639.9
-------------------------------------------------------------------------
4,928.1 4,644.9
Net deferred hedging liability 838.5 1,158.1
-------------------------------------------------------------------------
Debt 5,766.6 5,803.0
Cash and temporary investments 11.5 (8.6)
Securitized accounts receivable 500.0 500.0
-------------------------------------------------------------------------
Net debt 6,278.1 6,294.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The deferred hedging liability in the table above relates to cross
currency interest rate swaps that effectively convert principal repayments and
interest obligations to Canadian dollar obligations in respect of the U.S.
$1,166.5 million debenture maturing June 1, 2007 and the U.S. $1,925.0 million
debenture maturing June 1, 2011. Management believes that Net debt is a useful
measure because it incorporates the exchange rate impact of cross currency
swaps put into place that fix the value of U.S. dollar-denominated debt, and
because it represents the amount of long-term debt obligations that are not
covered by available cash and temporary investments.
Total capitalization is calculated as follows.
At December 31
($ millions) 2006 2005
-------------------------------------------------------------------------
Net debt 6,278.1 6,294.4
Non-controlling interests 23.6 25.6
Shareholders equity 6,928.1 6,870.0
-------------------------------------------------------------------------
Total capitalization (book value) 13,229.8 13,190.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net debt to total capitalization provides a measure of the proportion of
debt used in the Company's capital structure. The long-term target ratio for
Net debt to total capitalization is 45 to 50%.
EBITDA excluding restructuring and workforce reduction costs is used for
the calculation of Net debt to EBITDA and EBITDA interest coverage, consistent
with the calculation of the Leverage Ratio and the Coverage Ratio in credit
facility covenants. Restructuring and workforce reduction costs were $67.8
million and $53.9 million, respectively, for the years ended December 31, 2006
and 2005.
Net debt to EBITDA is defined as Net debt as at the end of the period
divided by the 12-month trailing EBITDA excluding restructuring and workforce
reduction costs. TELUS' guideline range for Net debt to EBITDA is from 1.5 to
2.0 times. Historically, Net debt to EBITDA is substantially the same as the
Leverage Ratio covenant in TELUS' credit facilities.
Net interest cost is defined as Financing costs before gains on
redemption and repayment of debt, calculated on a 12-month trailing basis. No
gains on redemption and repayment of debt were recorded in the respective
periods. Losses recorded on the redemption of long-term debt are included in
net interest cost. Net interest costs for the 12-months ending December 31,
2006 and 2005 are equivalent to reported quarterly financing costs over those
periods.
Interest coverage on long-term debt is calculated on a 12-month trailing
basis as Net income before interest expense on long-term debt and income tax
expense divided by interest expense on long-term debt. Interest expense on
long-term debt for the 12-month trailing period ending December 31, 2006
includes losses on redemption of long-term debt. The 12-month periods ended
December 31, 2006 and 2005 include accruals for estimated costs to settle a
lawsuit.
EBITDA interest coverage is defined as EBITDA excluding restructuring
divided by Net interest cost. This measure is substantially the same as the
Coverage Ratio covenant in TELUS' credit facilities.
Dividend payout ratio is defined as the most recent quarterly dividend
declared per share multiplied by four and divided by basic earnings per share
for the 12-month trailing period. The target guideline for the annual dividend
payout ratio on a prospective basis, rather than on a trailing basis, is 45 to
55% of sustainable net earnings.
Funded debt, in general terms, is borrowed funds less cash on hand as
defined in the Company's bank agreements.
TELUS Corporation
consolidated statements of income
Three months Twelve months
Periods ended December 31
(millions except per
share amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------
OPERATING REVENUES $ 2,254.6 $ 2,086.7 $ 8,681.0 $ 8,142.7
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,368.6 1,316.8 5,022.9 4,793.5
Restructuring and
workforce reduction
costs 7.9 35.5 67.8 53.9
Depreciation 353.2 346.2 1,353.4 1,342.6
Amortization of
intangible assets 53.9 67.0 222.2 281.1
-------------------------------------------------------------------------
1,783.6 1,765.5 6,666.3 6,471.1
-------------------------------------------------------------------------
OPERATING INCOME 471.0 321.2 2,014.7 1,671.6
Other expense, net 10.1 9.3 28.0 18.4
Financing costs 133.6 171.7 504.7 623.1
-------------------------------------------------------------------------
INCOME BEFORE INCOME
TAXES AND NON-CONTROLLING
INTEREST 327.3 140.2 1,482.0 1,030.1
Income taxes 89.7 58.8 351.0 322.0
Non-controlling
interests 1.4 2.9 8.5 7.8
-------------------------------------------------------------------------
NET INCOME AND COMMON
SHARE AND NON-VOTING
SHARE INCOME $ 236.2 $ 78.5 $ 1,122.5 $ 700.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INCOME PER COMMON SHARE
AND NON-VOTING SHARE
- Basic $ 0.70 $ 0.22 $ 3.27 $ 1.96
- Diluted $ 0.69 $ 0.22 $ 3.23 $ 1.94
DIVIDENDS DECLARED PER
COMMON SHARE AND
NON-VOTING SHARE $ 0.375 $ 0.275 $ 1.20 $ 0.875
TOTAL WEIGHTED AVERAGE
COMMON SHARES AND
NON-VOTING SHARES
OUTSTANDING
- Basic 339.5 353.6 343.8 357.1
- Diluted 343.8 358.1 347.4 361.0
TELUS Corporation
consolidated balance sheets
As at December 31 (millions) 2006 2005
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ - $ 8.6
Short-term investments 110.2 -
Accounts receivable 707.2 610.3
Income and other taxes receivable 95.4 103.7
Inventories 196.4 138.8
Prepaid expenses and other 195.3 154.7
Current portion of deferred hedging asset 40.4 -
Current portion of future income taxes - 226.4
-------------------------------------------------------------------------
1,344.9 1,242.5
-------------------------------------------------------------------------
Capital Assets, Net
Property, plant, equipment and other 7,466.5 7,339.4
Intangible assets subject to amortization 549.2 637.5
Intangible assets with indefinite lives 2,966.4 2,964.6
-------------------------------------------------------------------------
10,982.1 10,941.5
-------------------------------------------------------------------------
Other Assets
Deferred charges 976.5 850.2
Investments 35.2 31.2
Goodwill 3,169.5 3,156.9
-------------------------------------------------------------------------
4,181.2 4,038.3
-------------------------------------------------------------------------
$ 16,508.2 $ 16,222.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ 11.5 $ -
Accounts payable and accrued liabilities 1,363.6 1,393.7
Income and other taxes payable 10.3 -
Restructuring and workforce reduction
accounts payable and accrued liabilities 53.1 57.1
Advance billings and customer deposits 606.3 571.8
Current maturities of long-term debt 1,434.4 5.0
Current portion of deferred hedging liability 165.8 -
Current portion of future income taxes 93.2 -
-------------------------------------------------------------------------
3,738.2 2,027.6
-------------------------------------------------------------------------
Long-Term Debt 3,493.7 4,639.9
-------------------------------------------------------------------------
Other Long-Term Liabilities 1,257.3 1,635.3
-------------------------------------------------------------------------
Future Income Taxes 1,067.3 1,023.9
-------------------------------------------------------------------------
Non-Controlling Interests 23.6 25.6
-------------------------------------------------------------------------
Shareholders' Equity 6,928.1 6,870.0
-------------------------------------------------------------------------
$ 16,508.2 $ 16,222.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
consolidated statements of cash flows
Three months Twelve months
Periods ended December 31
(millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 236.2 $ 78.5 $ 1,122.5 $ 700.3
Adjustments to reconcile
net income to cash provided
by operating activities:
Depreciation and
amortization 407.1 413.2 1,575.6 1,623.7
Future income taxes 124.4 55.8 409.2 340.0
Share-based compensation (10.2) 3.1 25.1 24.3
Net employee defined
benefit plans expense (1.0) 3.1 (5.4) 3.9
Employer contributions
to employee defined
benefit plans (19.0) (29.0) (123.3) (118.8)
Restructuring and
workforce reduction costs,
net of cash payments (6.2) 5.4 (4.0) (13.6)
Amortization of deferred
gains on sale-leaseback
of buildings,
amortization of deferred
charges and other, net 39.2 5.0 51.7 1.1
Net change in non-cash
working capital (23.3) 269.9 (247.7) 353.7
-------------------------------------------------------------------------
Cash provided by operating
activities 747.2 805.0 2,803.7 2,914.6
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (415.2) (374.1) (1,618.4) (1,319.0)
Acquisitions (4.5) - (49.0) (29.4)
Proceeds from the sale of
property and other assets - 1.0 14.9 4.5
Change in non-current
materials and supplies,
purchase of investments
and other (2.3) (2.6) (22.7) (11.3)
-------------------------------------------------------------------------
Cash used by investing
activities (422.0) (375.7) (1,675.2) (1,355.2)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and
Non-Voting Shares issued 21.6 19.1 104.5 219.4
Dividends to shareholders (127.2) (96.6) (411.7) (312.2)
Purchase of Common Shares
and Non-Voting Shares
for cancellation (199.5) (228.6) (800.2) (892.1)
Long-term debt issued 244.1 142.7 1,585.9 147.4
Redemptions and repayment
of long-term debt (250.3) (1,579.8) (1,314.7) (1,601.1)
Partial payment of deferred
hedging liability - - (309.4) -
Dividends paid by a
subsidiary to non-
controlling interests - - (3.0) (7.9)
Other - 0.4 - (0.8)
-------------------------------------------------------------------------
Cash used by financing
activities (311.3) (1,742.8) (1,148.6) (2,447.3)
-------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in
cash and temporary
investments, net 13.9 (1,313.5) (20.1) (887.9)
Cash and temporary
investments, net,
beginning of period (25.4) 1,322.1 8.6 896.5
-------------------------------------------------------------------------
Cash and temporary
investments, net,
end of period $ (11.5) $ 8.6 $ (11.5) $ 8.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS
Interest (paid) $ (218.5) $ (319.2) $ (516.1) $ (638.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest received $ 0.3 $ 12.9 $ 24.2 $ 47.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income taxes (inclusive
of Investment Tax
Credits) received
(paid), net $ 3.9 $ 47.3 $ 98.3 $ 69.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
segmented information
Three-month periods ended
December 31 Wireline Wireless
(millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating revenues
External revenue $ 1,234.3 $ 1,209.9 $ 1,020.3 $ 876.8
Intersegment revenue 26.5 23.0 6.3 6.3
-------------------------------------------------------------------------
1,260.8 1,232.9 1,026.6 883.1
-------------------------------------------------------------------------
Operating expenses
Operations expense 809.0 788.5 592.4 557.6
Restructuring and
workforce reduction
costs 5.2 35.5 2.7 -
-------------------------------------------------------------------------
814.2 824.0 595.1 557.6
-------------------------------------------------------------------------
EBITDA(1) $ 446.6 $ 408.9 $ 431.5 $ 325.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 309.2 $ 230.2 $ 106.0 $ 143.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 137.4 $ 178.7 $ 325.5 $ 181.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three-month periods ended
December 31 Eliminations Consolidated
(millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 2,254.6 $ 2,086.7
Intersegment revenue (32.8) (29.3) - -
-------------------------------------------------------------------------
(32.8) (29.3) 2,254.6 2,086.7
-------------------------------------------------------------------------
Operating expenses
Operations expense (32.8) (29.3) 1,368.6 1,316.8
Restructuring and
workforce reduction
costs - - 7.9 35.5
-------------------------------------------------------------------------
(32.8) (29.3) 1,376.5 1,352.3
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 878.1 $ 734.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 415.2 $ 374.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 462.9 $ 360.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Twelve-month periods
ended December 31 Wireline Wireless
(millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating revenues
External revenue $ 4,823.1 $ 4,847.2 $ 3,857.9 $ 3,295.5
Intersegment revenue 98.3 90.4 23.4 23.5
-------------------------------------------------------------------------
4,921.4 4,937.6 3,881.3 3,319.0
-------------------------------------------------------------------------
Operating expenses
Operations expense 3,020.5 3,031.4 2,124.1 1,876.0
Restructuring and
workforce reduction
costs 61.6 53.9 6.2 -
-------------------------------------------------------------------------
3,082.1 3,085.3 2,130.3 1,876.0
-------------------------------------------------------------------------
EBITDA(1) $ 1,839.3 $ 1,852.3 $ 1,751.0 $ 1,443.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 1,191.0 $ 914.2 $ 427.4 $ 404.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 648.3 $ 938.1 $ 1,323.6 $ 1,038.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Twelve-month periods
ended December 31 Eliminations Consolidated
(millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 8,681.0 $ 8,142.7
Intersegment revenue (121.7) (113.9) - -
-------------------------------------------------------------------------
(121.7) (113.9) 8,681.0 8,142.7
-------------------------------------------------------------------------
Operating expenses
Operations expense (121.7) (113.9) 5,022.9 4,793.5
Restructuring and
workforce reduction
costs - - 67.8 53.9
-------------------------------------------------------------------------
(121.7) (113.9) 5,090.7 4,847.4
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 3,590.3 $ 3,295.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 1,618.4 $ 1,319.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 1,971.9 $ 1,976.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is a non-GAAP measure and is defined by the Company as
operating revenues less operations expense and restructuring and
workforce reduction costs. The Company has issued guidance on, and
reports, EBITDA because it is a key measure used by management to
evaluate performance of its business segments and is utilized in
measuring compliance with certain debt covenants.
(2) Total capital expenditures ("CAPEX").
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: February 16, 2007
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary