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 ___November___ 2006
(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:
Third Quarter Results
dated November 3, 2006
CONSOLIDATED FINANCIAL STATEMENTS
and
MANAGEMENT'S DISCUSSION AND ANALYSIS
_______________________________________________________________________________
TELUS CORPORATION
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2006
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
interim consolidated statements of income (unaudited)
--------------------------------------------------------------------------------
Three months Nine months
Periods ended September 30 (millions except
per share amounts) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 2,210.7 $ 2,062.8 $ 6,426.4 $ 6,056.0
---------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,245.8 1,221.5 3,654.3 3,476.7
Restructuring and workforce reduction costs
(Note 5) 12.5 1.6 59.9 18.4
Depreciation 325.8 335.6 1,000.2 996.4
Amortization of intangible assets 57.5 73.6 168.3 214.1
---------------------------------------------------------------------------------------------------------
1,641.6 1,632.3 4,882.7 4,705.6
---------------------------------------------------------------------------------------------------------
OPERATING INCOME 569.1 430.5 1,543.7 1,350.4
Other expense, net 4.0 7.1 17.9 9.1
Financing costs (Note 6) 116.6 144.8 371.1 451.4
---------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND 448.5 278.6 1,154.7 889.9
NON-CONTROLLING INTEREST
Income taxes (Note 7) 126.5 86.9 261.3 263.2
Non-controlling interests 2.4 1.6 7.1 4.9
---------------------------------------------------------------------------------------------------------
NET INCOME AND COMMON SHARE AND NON-VOTING $ 319.6 $ 190.1 $ 886.3 $ 621.8
SHARE INCOME
---------------------------------------------------------------------------------------------------------
INCOME PER COMMON SHARE AND NON-VOTING
SHARE (Note 8)
- Basic $ 0.94 $ 0.53 $ 2.57 $ 1.74
- Diluted $ 0.92 $ 0.53 $ 2.54 $ 1.72
DIVIDENDS DECLARED PER COMMON SHARE AND
NON-VOTING SHARE $ 0.275 $ 0.20 $ 0.825 $ 0.60
TOTAL WEIGHTED AVERAGE COMMON SHARES AND
NON-VOTING SHARES OUTSTANDING
- Basic 341.4 356.8 345.2 358.3
- Diluted 346.0 361.7 348.8 362.1
The accompanying notes are an integral part of these interim consolidated financial statements
--------------------------------------------------------------------------------
interim consolidated statements of retained earnings (unaudited)
--------------------------------------------------------------------------------
Nine months
Periods ended September 30 (millions) 2006 2005
---------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF PERIOD $ 849.7 $ 1,008.1
Net income 886.3 621.8
---------------------------------------------------------------------------------------------------------
1,736.0 1,629.9
Common Share and Non-Voting Share dividends paid, or payable, in cash (284.5) (215.6)
Purchase of Common Shares and Non-Voting Shares in excess of stated
capital (Note 15(f)) (376.5) (398.4)
Adjustment for purchase of share option awards not in excess of
their fair value 2.1 --
Adjustment of tax treatment of items charged directly to retained earnings 16.1 --
Warrant proceeds used in determining intrinsic value of warrants in excess
of amounts ultimately received -- (2.0)
---------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD (Note 15) $ 1,093.2 $ 1,013.9
---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated financial statements
2
--------------------------------------------------------------------------------
interim consolidated balance sheets (unaudited)
--------------------------------------------------------------------------------
September 30, December 31,
As at (millions) 2006 2005
--------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ -- $ 8.6
Short-term investments 98.8 --
Accounts receivable (Notes 11, 17(b)) 739.7 610.3
Income and other taxes receivable 49.0 103.7
Inventories 144.0 138.8
Prepaid expenses and other (Note 17(b)) 237.2 154.7
Current portion of deferred hedging asset(Note 14(b)) 5.6 --
Current portion of future income taxes -- 226.4
--------------------------------------------------------------------------------
1,274.3 1,242.5
--------------------------------------------------------------------------------
Capital Assets, Net (Note 12)
Property, plant, equipment and other 7,457.2 7,339.4
Intangible assets subject to amortization 551.9 637.5
Intangible assets with indefinite lives 2,966.3 2,964.6
--------------------------------------------------------------------------------
10,975.4 10,941.5
--------------------------------------------------------------------------------
Other Assets
Deferred charges (Note 17(b)) 979.6 850.2
Investments 32.9 31.2
Goodwill (Note 13) 3,192.3 3,156.9
--------------------------------------------------------------------------------
4,204.8 4,038.3
--------------------------------------------------------------------------------
$16,454.5 $ 16,222.3
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ 25.4 $ --
Accounts payable and accrued liabilities
(Note 17(b)) 1,405.0 1,393.7
Income and other taxes payable 12.9 --
Restructuring and workforce reduction
accounts payable and accrued liabilities
(Note 5) 59.3 57.1
Advance billings and customer deposits
(Note 17(b)) 571.0 571.8
Current maturities of long-term debt (Note 14) 1,378.4 5.0
Current portion of deferred hedging liability
(Note 14(b)) 186.4 --
Current portion of future income taxes 119.3 --
--------------------------------------------------------------------------------
3,757.7 2,027.6
--------------------------------------------------------------------------------
Long-Term Debt (Note 14) 3,407.6 4,639.9
--------------------------------------------------------------------------------
Other Long-Term Liabilities (Note 17(b)) 1,330.5 1,635.3
--------------------------------------------------------------------------------
Future Income Taxes 948.5 1,023.9
--------------------------------------------------------------------------------
Non-Controlling Interests 22.3 25.6
--------------------------------------------------------------------------------
Shareholders' Equity (Note 15) 6,987.9 6,870.0
--------------------------------------------------------------------------------
$16,454.5 $ 16,222.3
================================================================================
Commitments and Contingent Liabilities (Note 16)
The accompanying notes are an integral part of these interim consolidated
financial statements
3
--------------------------------------------------------------------------------
interim consolidated statements of cash flows (unaudited)
--------------------------------------------------------------------------------
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 319.6 $ 190.1 $ 886.3 $ 621.8
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 383.3 409.2 1,168.5 1,210.5
Future income taxes 146.3 89.2 284.8 284.2
Share-based compensation 14.2 10.3 35.3 21.2
Net employee defined benefit plans expense (1.5) (0.3) (4.4) 0.8
Employer contributions to employee defined
benefit plans (28.8) (30.1) (104.3) (89.8)
Restructuring and workforce reduction
costs, net of cash payments (Note 5) (1.2) (5.7) 2.2 (19.0)
Amortization of deferred gains on
sale-leaseback of buildings,
amortization of deferred charges and
other, net 3.9 (3.6) 12.5 (3.9)
Net change in non-cash working capital
(Note 17(c)) (265.4) 34.4 (224.4) 83.8
---------------------------------------------------------------------------------------------------------
Cash provided by operating activities 570.4 693.5 2,056.5 2,109.6
---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (Notes 4, 12) (423.9) (263.0) (1,203.2) (944.9)
Acquisitions (25.0) -- (44.5) (29.4)
Proceeds from the sale of property and
other assets 6.9 0.1 14.9 3.5
Change in non-current materials and
supplies, purchase of investments and
other (9.0) (0.4) (20.4) (8.7)
---------------------------------------------------------------------------------------------------------
Cash used by investing activities (451.0) (263.3) (1,253.2) (979.5)
---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 37.2 56.3 82.9 200.3
Dividends to shareholders (93.8) (71.7) (284.5) (215.6)
Purchase of Common Shares and Non-Voting
Shares for cancellation (Note 15(f)) (119.7) (233.1) (600.7) (663.5)
Long-term debt issued (Note 14) 499.0 0.3 1,341.8 4.7
Redemptions and repayment of long-term debt
(Note 14) (448.9) (1.0) (1,064.4) (21.3)
Partial payment of deferred hedging
liability (Note 14(b)) -- -- (309.4) --
Dividends paid by a subsidiary to
non-controlling interests -- -- (3.0) (7.9)
Other -- -- -- (1.2)
---------------------------------------------------------------------------------------------------------
Cash used by financing activities (126.2) (249.2) (837.3) (704.5)
---------------------------------------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in cash and temporary
investments, net (6.8) 181.0 (34.0) 425.6
Cash and temporary investments, net,
beginning of period (18.6) 1,141.1 8.6 896.5
---------------------------------------------------------------------------------------------------------
Cash and temporary investments, net, end of
period $ (25.4) $ 1,322.1 $ (25.4) $ 1,322.1
---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Interest (paid) (Note 17(c)) $ (13.0) $ (12.2) $ (297.6) $ (319.1)
---------------------------------------------------------------------------------------------------------
Interest received $ 0.6 $ 9.3 $ 23.9 $ 34.4
---------------------------------------------------------------------------------------------------------
Income taxes (inclusive of Investment Tax
Credits (Note 7)) received (paid), net $ (0.6) $ 2.9 $ 94.4 $ 22.2
---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated financial statements
4
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Notes to interim consolidated financial statements (unaudited)
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SEPTEMBER 30, 2006
TELUS Corporation is one of Canada's largest telecommunications companies,
providing a full range of telecommunications products and services. The
Company is the largest incumbent telecommunications service provider in
Western Canada and provides data, Internet protocol, voice and wireless
services to Central and Eastern Canada.
Intention to reorganize into income trust
In September 2006, the Company announced its intentions to reorganize itself,
in its entirety, as an income trust. At that time, the conversion was expected
to be accomplished by way of a plan of arrangement under the Business
Corporations Act (British Columbia) that is subject to the approval of at least
66-2/3 per cent of the votes cast by security holders of the Company at a
special meeting originally expected to be held in January 2007. An information
circular describing the reorganization and detailing the proposed plan of
arrangement was originally expected to be mailed to Company shareholders in
December 2006 for the purpose of obtaining Company shareholder approval.In
addition to the requirement for Company shareholder approval, the
reorganization would be contingent on a number of other conditions including
the receipt of all necessary regulatory and court approvals.
On October 31, 2006, the Federal Minister of Finance announced a new tax plan
that affects the future level of taxation of income trusts and corporations.
The application of the Federal Government's new tax plan would be to reduce the
tax efficiency of publicly traded income trusts. The Company is assessing the
impact of this unexpected development on the proposed reorganization of itself.
As a result of the announcement by the Federal Minister of Finance, there can
be no assurance at this time that the Company will proceed with its proposed
income trust conversion, nor can there can be no assurance at this time that if
the income trust conversion were to proceed that all approvals and consents
required or desirable to effect the conversion will be obtained in the time
frame reflected above, or at all, and, accordingly, there can be no assurance
that the conversion will be completed.
Notes to consolidated financial statements Description
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General application
--------------------------------------------------------------------------------
1. Interim financial statements - Summary explanation of basis of
basis of presentation presentation of interim
consolidated financial statements
--------------------------------------------------------------------------------
2. Accounting policy developments Summary review of forthcoming
generally accepted accounting
principle developments that
may affect the Company
--------------------------------------------------------------------------------
3. Financial instruments Summary schedule and review of
financial instruments, including
fair values thereof
--------------------------------------------------------------------------------
Consolidated statements of income focused
--------------------------------------------------------------------------------
4. Segmented information Summary disclosure of segmented
information regularly reported to
the Company's chief operating
decision maker
--------------------------------------------------------------------------------
5. Restructuring and workforce Summary continuity schedules and
reduction costs review of restructuring and
workforce reduction costs
--------------------------------------------------------------------------------
6. Financing costs Summary schedule of items
comprising financing costs by
nature
--------------------------------------------------------------------------------
7. Income taxes Summary reconciliations of
statutory rate income tax expense
to provision for income taxes
--------------------------------------------------------------------------------
8. Per share amounts Summary schedules and review of
numerators and denominators used
in calculating per share amounts
and related disclosures
--------------------------------------------------------------------------------
9. Share-based compensation Summary schedules and review of
compensation arising from share
option awards, restricted stock
units and employee share purchase
plan
--------------------------------------------------------------------------------
10. Employee future benefits Summary and review of employee
future benefits and related
disclosures
--------------------------------------------------------------------------------
Consolidated balance sheets focused
--------------------------------------------------------------------------------
11. Accounts receivable Summary schedule and review of
arm's-length securitization trust
transactions and related
disclosures
--------------------------------------------------------------------------------
12. Capital assets Summary schedule of items
comprising capital assets
--------------------------------------------------------------------------------
13. Goodwill Summary schedule of goodwill and
review of reported fiscal year
acquisitions from which goodwill
arises
--------------------------------------------------------------------------------
14. Long-term debt Summary schedule of long-term debt
and related disclosures
--------------------------------------------------------------------------------
15. Shareholders' equity Summary schedules and review of
shareholders' equity and changes
therein including share option
price stratification and normal
course issuer bid summaries
--------------------------------------------------------------------------------
16. Commitments and contingent liabilities Summary review of contingent
liabilities, guarantees, claims
and lawsuits
--------------------------------------------------------------------------------
5
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
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Notes to consolidated financial statements Description
--------------------------------------------------------------------------------
Other
--------------------------------------------------------------------------------
17. Additional financial information Summary schedules of items
comprising certain primary
financial statement line items
--------------------------------------------------------------------------------
18. Differences between Canadian and Summary schedules and review of
United States generally accepted differences between Canadian and
accounting principles United States generally accepted
accounting principles as they
apply to the Company
--------------------------------------------------------------------------------
1 interim financial statements - basis of presentation
The notes presented in these interim consolidated financial statements include
only significant events and transactions and are not fully inclusive of all
matters normally disclosed in TELUS Corporation's annual audited financial
statements. As a result, these interim consolidated financial statements
should be read in conjunction with the TELUS Corporation audited consolidated
financial statements for the year ended December 31, 2005. These interim
consolidated financial statements follow the same accounting policies and
methods of their application as set out in the TELUS Corporation consolidated
financial statements for the year ended December 31, 2005, including that
certain of the comparative amounts have been reclassified to conform with the
presentation adopted currently. Accordingly, these interim consolidated
financial statements reflect all adjustments (which are of a normal recurring
nature) that are, in the opinion of the Company, necessary for a fair
statement of the results for the interim periods presented.
The term "Company" is used to mean TELUS Corporation and, where the
context of the narrative permits or requires, its subsidiaries.
2 accounting policy developments
(a) Earnings per share; convergence with International Financial Reporting
Standards
Earnings per share: Possibly commencing in the Company's 2006 fiscal year,
proposed amendments to the recommendations of the Canadian Institute of
Chartered Accountants ("CICA") for the calculation and disclosure of earnings
per share (CICA Handbook Section 3500) may have applied to the Company. In
July 2006, the typescript with the current proposed amendments was withdrawn
and an announcement was made indicating that an International Financial
Reporting Standards-based exposure draft would be issued by the end of 2006.
Convergence with International Reporting Standards: In early 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. During
2006, the Accounting Standards Board is expected to develop and publish a
detailed implementation plan with a transition period expected to be
approximately five years. As this convergence initiative is very much in its
infancy as of the date of these interim consolidated financial statements, it
would be premature to currently assess the impact of the initiative, if any,
on the Company.
(b) 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 implementation at the beginning of a fiscal year; the Company
will not be implementing these recommendations in its 2006 fiscal year. The
concept of comprehensive income for purposes of Canadian GAAP will be to
include changes in shareholders' equity arising from unrealized changes in the
values of financial instruments.
Comprehensive income as prescribed by U.S. GAAP, and which is disclosed
in Note 18(h), 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 the concept of minimum pension
liabilities and Canadian GAAP does not. In the first half of 2006, the
Financial Accounting Standards Board exposed a number of draft changes in
respect of accounting for defined benefit pension plans; one of the changes
proposed would result in minimum pension liabilities no longer being
recognized within U.S. GAAP other comprehensive income.
6
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
(c) Accounting changes
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.
(d) Business combinations
Possibly commencing in the Company's 2007 fiscal year, the proposed amended
recommendations of the CICA for accounting for business combinations will
apply to the Company's business combinations, if any, with an acquisition date
subsequent to the amended recommendations coming into force. Whether the
Company would be materially affected by the proposed amended recommendations
would depend upon the specific facts of the business combinations, if any,
occurring subsequent to the amended recommendations coming into force.
Generally, the proposed recommendations will result in measuring business
acquisitions at the fair value of the acquired entities and a prospectively
applied shift from a parent company conceptual view of consolidation theory
(which results in the parent company recording the book values attributable to
non-controlling interests) to an entity conceptual view (which results in the
parent company recording the fair values attributable to non-controlling
interests).
3 Financial instruments
During the first quarter of 2006, the Company entered into a hedging
relationship that fixes the Company's compensation cost arising from a
specific grant of restricted stock units; hedge accounting has been applied to
this relationship. Restricted stock units are further described in Note 9(c).
During the second quarter of 2006, as further discussed in Note 14(b),
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. The
Company entered into these agreements to reduce or eliminate exposure to
interest rate and foreign currency risk. Hedge accounting has been applied to
the new cross currency interest rate swap agreements.
As at September 30, 2006, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rate on U.S.$49
million of fiscal 2006 purchase commitments; hedge accounting has been applied
to these foreign currency forward contracts, all of which relate to the
Wireless segment.
In contemplation of the planned refinancing of the debt maturing June 1,
2007, as set out in Note 14, the Company has entered into forward starting
interest rate swap agreements during 2006 that, as at September 30, 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.
Fair value: The carrying value of cash and temporary investments,
short-term investments, accounts receivable, accounts payable, restructuring
and workforce reduction accounts payable, dividends 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
non-current 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.
7
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
As at September 30, 2006 December 31, 2005
---------------------------------------------------------------------------------------------------------
Hedging item
maximum
maturity Carrying Carrying
(millions) date amount Fair value amount Fair value
---------------------------------------------------------------------------------------------------------
Assets
Derivatives(1)(2) used to
manage changes in
compensation costs
arising from restricted November
stock units (Note 9(c)) 2008 $ 34.7 $ 48.2 $ 12.2 $ 19.5
---------------------------------------------------------------------------------------------------------
Derivatives(1)(2) used to
manage currency risks arising
from U.S. dollar denominated
purchases
- To which hedge December
accounting is applied 2006 $ -- $ 0.3 $ -- $ --
- To which hedge September
accounting is not applied 2007 $ -- $ 0.4 $ -- $ --
---------------------------------------------------------------------------------------------------------
Liabilities
Derivatives(1)(2) used to
manage interest rate risk
associated with planned
refinancing of debt
maturing June 1, 2007 June 2007 $ -- $ 7.5 $ -- $ --
---------------------------------------------------------------------------------------------------------
Long-term debt
Principal (Note 14) $ 4,786.0 $ 5,424.1 $ 4,644.9 $ 5,371.6
Derivatives(1)(2) used to
manage interest rate and
currency risks
associated with U.S.
dollar denominated debt,
net June 2011 982.8 1,292.7 1,154.3 1,470.5
---------------------------------------------------------------------------------------------------------
$ 5,768.8 $ 6,716.8 $ 5,799.2 $ 6,842.1
---------------------------------------------------------------------------------------------------------
Derivatives(1)(2) used to
manage currency risks arising
from U.S. dollar denominated
purchases
- To which hedge
accounting is applied June 2006 $ -- $ -- $ -- $ 0.1
- To which hedge
accounting is not applied March 2006 $ -- $ -- $ -- $ 0.4
---------------------------------------------------------------------------------------------------------
(1) Notional amount of all derivative financial instruments outstanding is
$5,125.4 (December 31, 2005 - $4,904.8).
(2) Designated as cash flow hedging items.
4 segmented information
The Company's reportable segments are Wireline and Wireless. The Wireline
segment includes voice local, voice long distance, data and other
telecommunication services excluding wireless. The Wireless segment includes
digital personal communications services, equipment sales and wireless
Internet services. 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, which is the amount agreed to by the parties.
The following segmented information is regularly reported to the Company's
Chief Executive Officer (the Company's chief operating decision maker).
8
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
Three-month periods
ended September 30 Wireline Wireless Eliminations Consolidated
(millions) 2006 2005 2006 2005 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------
Operating revenues
External revenue $1,200.3 $1,198.6 $1,010.4 $ 864.2 $ -- $ -- $2,210.7 $2,062.8
Intersegment revenue 23.5 23.6 6.0 5.7 (29.5) (29.3) -- --
---------------------------------------------------------------------------------------------------------
1,223.8 1,222.2 1,016.4 869.9 (29.5) (29.3)
2,210.7 2,062.8
---------------------------------------------------------------------------------------------------------
Operating expenses
Operations expense 742.5 794.5 532.8 456.3 (29.5) (29.3) 1,245.8 1,221.5
Restructuring and
work-force
reduction costs 11.7 1.6 0.8 -- -- -- 12.5 1.6
---------------------------------------------------------------------------------------------------------
754.2 796.1 533.6 456.3 (29.5) (29.3)
1,258.3 1,223.1
---------------------------------------------------------------------------------------------------------
EBITDA(1) $ 469.6 $ 426.1 $ 482.8 $ 413.6 $ -- $ -- $ 952.4 $ 839.7
---------------------------------------------------------------------------------------------------------
CAPEX(2) $ 311.4 $ 176.5 $ 112.5 $ 86.5 $ -- $ -- $ 423.9 $ 263.0
---------------------------------------------------------------------------------------------------------
EBITDA less CAPEX $ 158.2 $ 249.6 $ 370.3 $ 327.1 $ -- $ -- $ 528.5 $ 576.7
---------------------------------------------------------------------------------------------------------
EBITDA (from above) $ 952.4 $ 839.7
Depreciation 325.8 335.6
Amortization 57.5 73.6
-----------------------------------------
Operating income 569.1 430.5
Other expense, net 4.0 7.1
Financing costs 116.6 144.8
-----------------------------------------
Income before income 448.5 278.6
taxes and
non-controlling
interests
Income taxes 126.5 86.9
Non-controlling
interests 2.4 1.6
-----------------------------------------
Net income $ 319.6 $ 190.1
-----------------------------------------
Nine-month periods ended
September 30 Wireline Wireless Eliminations Consolidated
(millions) 2006 2005 2006 2005 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------
Operating revenues
External revenue $3,588.8 $3,637.3 $2,837.6 $2,418.7 $ -- $ -- $6,426.4 $6,056.0
Intersegment revenue 71.8 67.4 17.1 17.2 (88.9) (84.6) -- --
---------------------------------------------------------------------------------------------------------
3,660.6 3,704.7 2,854.7 2,435.9 (88.9) (84.6) 6,426.4 6,056.0
---------------------------------------------------------------------------------------------------------
Operating expenses
Operations expense 2,211.5 2,242.9 1,531.7 1,318.4 (88.9) (84.6) 3,654.3 3,476.7
Restructuring and
work-force
reduction costs 56.4 18.4 3.5 -- -- -- 59.9 18.4
---------------------------------------------------------------------------------------------------------
2,267.9 2,261.3 1,535.2 (88.9) (84.6)
1,318.4 3,714.2 3,495.1
---------------------------------------------------------------------------------------------------------
EBITDA(1) $1,392.7 $1,443.4 $1,319.5 $1,117.5 $ -- $ -- $2,712.2 $2,560.9
---------------------------------------------------------------------------------------------------------
CAPEX(2) $ 881.8 $ 684.0 $ 321.4 $ 260.9 $ -- $ -- $1,203.2 $ 944.9
---------------------------------------------------------------------------------------------------------
EBITDA less CAPEX $ 510.9 $ 759.4 $ 998.1 $ 856.6 $ -- $ -- $1,509.0 $1,616.0
---------------------------------------------------------------------------------------------------------
EBITDA (from above) $2,712.2 $2,560.9
Depreciation 1,000.2 996.4
Amortization 168.3 214.1
-----------------------------------------
Operating income
1,543.7 1,350.4
Other expense, net 17.9 9.1
Financing costs 371.1 451.4
-----------------------------------------
Income before income 889.9
taxes and
non-controlling
interests 1,154.7
Income taxes 261.3 263.2
Non-controlling
interests 7.1 4.9
-----------------------------------------
Net income $ 886.3 $621.8
-----------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
is a measure that does not have any standardized meaning prescribed by
GAAP and is therefore unlikely to be comparable to similar measures
presented by other issuers; EBITDA 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").
9
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
5 restructuring and workforce reduction costs
(a) Overview
Three-month periods ended
September 30 (millions) 2006 2005
------------------------------------------------------------------------------------------- ------------
General
programs Office General programs
initiated closures and initiated
in 2006 contracting out prior to 2006 Total Total
---------------------------------------------------------------------------------------------------------
Restructuring and workforce
reduction costs
Workforce reduction
Voluntary $ 6.9 $ -- $ -- $ 6.9 $ 0.3
Involuntary 4.5 0.5 -- 5.0 1.1
Lease termination -- 0.1 -- 0.1 --
Other 0.5 -- -- 0.5 0.2
---------------------------------------------------------------------------------------------------------
11.9 0.6 -- 12.5 1.6
---------------------------------------------------------------------------------------------------------
Disbursements
Workforce reduction
Voluntary(1) 4.6 -- -- 4.6 0.2
Involuntary and other 5.0 0.6 2.7 8.3 6.6
Lease termination -- 0.1 0.2 0.3 0.3
Other 0.5 -- -- 0.5 0.2
---------------------------------------------------------------------------------------------------------
10.1 0.7 2.9 13.7 7.3
---------------------------------------------------------------------------------------------------------
Expenses greater than (less 1.8 (0.1) (2.9) (1.2) (5.7)
than) disbursements
Restructuring and workforce
reduction accounts payable
and accrued liabilities
Balance, beginning of
period 29.1 15.5 15.9 60.5 57.4
---------------------------------------------------------------------------------------------------------
Balance, end of period $ 30.9 $ 15.4 $ 13.0 $ 59.3 $ 51.7
=========================================================================================================
Nine-month periods ended
September 30 (millions) 2006 2005
---------------------------------------------------------------------------------------------------------
General
programs Office General programs
initiated closures and initiated
in 2006 contracting out prior to 2006 Total Total
---------------------------------------------------------------------------------------------------------
Restructuring and workforce
reduction costs
Workforce reduction
Voluntary $ 25.2 $ 3.5 $ -- $ 28.7 $ 0.6
Involuntary 25.2 3.7 -- 28.9 15.3
Lease termination -- 0.1 -- 0.1 1.5
Other 1.7 0.5 -- 2.2 1.0
---------------------------------------------------------------------------------------------------------
52.1 7.8 -- 59.9 18.4
---------------------------------------------------------------------------------------------------------
Disbursements
Workforce reduction
Voluntary(1) 5.1 15.2 -- 20.3 2.1
Involuntary and other 14.4 2.1 18.0 34.5 33.6
Lease termination -- 0.1 0.6 0.7 3.8
Other 1.7 0.5 -- 2.2 1.0
---------------------------------------------------------------------------------------------------------
21.2 17.9 18.6 57.7 40.5
---------------------------------------------------------------------------------------------------------
Expenses greater than (less 30.9 (10.1) (18.6) 2.2 (22.1)
than) disbursements
Other -- -- -- -- 3.1
---------------------------------------------------------------------------------------------------------
Change in restructuring and 30.9 (10.1) (18.6) 2.2 (19.0)
workforce reduction
accounts payable and
accrued liabilities
Balance, beginning of
period -- 25.5 31.6 57.1 70.7
---------------------------------------------------------------------------------------------------------
Balance, end of period $ 30.9 $ 15.4 $ 13.0 $ 59.3 $ 51.7
---------------------------------------------------------------------------------------------------------
(1) Early Retirement Incentive Plan, Voluntary Departure Incentive Plan and other.
10
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
(b) Programs initiated prior to 2006
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 September 30, 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.
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 approximately 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 September 30, 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 September 30, 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 approximately 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 September 30, 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.
Integration of Wireline and Wireless operations: On November 24, 2005, the
Company announced the integration of its Wireline and Wireless operations, an
initiative that will continue into future years and that is a component of the
Company's competitive efficiency program.
(c) Programs initiated in 2006
General: 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.
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). As
affected employees were not required to select an option until after March 31,
2006, the associated expenses were not eligible for recording prior to the
second quarter of 2006. In the second quarter of 2006, approximately 275
bargaining unit employees accepted either the option of redeployment or
participation in a voluntary departure program. For the three-month and
nine-month periods ended September 30, 2006, $0.3 million and $18.1 million,
respectively, of restructuring and workforce reduction costs were recorded in
respect of this initiative and were included with general programs initiated
in 2006. As at September 30, 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 integration of
Wireline and Wireless operations, for the three-month and nine-month periods
ended September 30, 2006, $1.2 million and $8.0 million, respectively, of
restructuring and workforce reduction costs were recorded in respect of this
initiative and were included with general programs initiated in 2006.
The Company's estimate of restructuring and workforce reduction costs in
2006, arising from its competitive efficiency program, which includes the
office closures and contracting out and integration of Wireline and Wireless
operations, is not currently expected to exceed $80 million.
11
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
6 financing costs
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------
Interest on long-term debt $ 125.3 $ 155.8 $ 375.2 $ 489.5
Interest on short-term obligations and 0.3 1.4 2.9 5.2
other
Foreign exchange(1) (0.3) (0.1) 4.5 3.0
----------------------------------------------------------------------------------------------------
125.3 157.1 382.6 497.7
Interest income
Interest on tax refunds (7.9) (3.2) (9.2) (20.7)
Other interest income (0.8) (9.1) (2.3) (25.6)
----------------------------------------------------------------------------------------------------
(8.7) (12.3) (11.5) (46.3)
----------------------------------------------------------------------------------------------------
$ 116.6 $ 144.8 $ 371.1 $ 451.4
===================================================================================================
(1) For the three-month and nine-month periods ended September 30, 2006,
these amounts include gains of NIL (2005 - $0.2) and $0.1 (2005 - $0.1),
respectively, in respect of cash flow hedge ineffectiveness.
7 income taxes
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------
Current $ (19.8) $ (2.3) $ (23.5) $ (21.0)
Future 146.3 89.2 284.8 284.2
----------------------------------------------------------------------------------------------------
$ 126.5 $ 86.9 $ 261.3 $ 263.2
====================================================================================================
The Company's income tax expense differs from that calculated by applying
statutory rates for the following reasons:
Three-month periods ended September 30 ($
in millions) 2006 2005
---------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax $ 150.7 33.6% $ 93.6 33.6%
at statutory income tax rates
Revaluation of future income tax liability
for change in statutory income tax rates -- (12.8)
Tax rate differential on, and consequential
adjustments from, reassessment of prior
year tax issues (24.9) (0.7)
Share option award compensation 1.8 1.4
Change in estimates of available deductible
differences in prior years -- (1.5)
Other (1.1) 2.8
---------------------------------------------------------------------------------------------------------
126.5 28.2% 82.8 29.7%
Large corporations tax -- 4.1
---------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated
Statements of Income $ 126.5 28.2% $ 86.9 31.2%
=========================================================================================================
Nine-month periods ended September 30 ($ in
millions) 2006 2005
---------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax $ 388.0 33.6% $ 304.8 34.2%
at statutory income tax rates
Revaluation of future income tax liability
for change in statutory income tax rates (107.0) (12.8)
Tax rate differential on, and consequential
adjustments from, reassessment of prior
year tax issues (23.9) (12.0)
Share option award compensation 4.9 3.5
Change in estimates of available
deductible differences in prior years -- (37.5)
Other (0.7) 4.0
---------------------------------------------------------------------------------------------------------
261.3 22.6% 250.0 28.1%
Large corporations tax -- 13.2
---------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated
Statements of Income $ 261.3 22.6% $ 263.2 29.6%
=========================================================================================================
12
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
The Company conducts research and development activities, which are
eligible to earn Investment Tax Credits. During the three-month and nine-month
periods ended September 30, 2006, the Company recorded Investment Tax Credits
of NIL (2005 - $0.4 million) and $12.6 million (2005 - $0.4 million),
respectively, all of which was recorded as a reduction of capital (2005 - all
of which was recorded as reduction of "Operations expense").
8 per share amounts
Basic income per Common Share and Non-Voting Share is calculated by dividing
Common Share and Non-Voting Share income by the total weighted average Common
Shares and Non-Voting Shares outstanding during the period. Diluted income per
Common Share and Non-Voting Share is calculated to give effect to share option
awards and, in the comparative period, warrants.
The following table presents the reconciliations of the denominators of
the basic and diluted per share computations. Net income equaled diluted
Common Share and Non-Voting Share income for all periods presented.
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
-----------------------------------------------------------------------------------------
Basic total weighted average Common Shares 341.4 356.8 345.2 358.3
and Non-Voting Shares outstanding
Effect of dilutive securities
Exercise of share option awards 4.6 4.9 3.6 3.8
-----------------------------------------------------------------------------------------
Diluted total weighted average Common
Shares and Non-Voting Shares outstanding 346.0 361.7 348.8 362.1
-----------------------------------------------------------------------------------------
For the three-month and nine-month periods ended September 30, 2006,
certain outstanding share option awards, in the amount of NIL (2005 - 0.1
million) and 0.3 million (2005 - 0.4 million), respectively, were not included
in the computation of diluted income per Common Share and Non-Voting Share
because the share option awards' exercise prices were greater than the average
market price of the Common Shares and Non-Voting Shares during the reported
periods.
9 share-based compensation
(a) Details of share-based compensation expense
Reflected in the Consolidated Statements of Income as "Operations expense" are
the following share-based compensation amounts:
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
------------------------------------------------------------------------------------------------
Share option awards $ 5.2 $ 4.1 $ 14.5 $ 10.4
Restricted stock units 9.6 6.1 23.9 15.0
Employee share purchase plan 8.6 12.0 25.0 26.0
------------------------------------------------------------------------------------------------
Amounts recognized as Operations expense in 23.4 22.2 63.4 51.4
consolidated statements of income
Less - Income tax benefit arising from
share-based compensation (see Note 7) 6.1 6.2 16.5 14.0
------------------------------------------------------------------------------------------------
$ 17.3 $ 16.0 $ 46.9 $ 37.4
------------------------------------------------------------------------------------------------
(b) Share option awards
The Company applies the fair value based method of accounting for share-based
compensation awards granted to employees. Share option awards typically vest
over a three-year period (the requisite service period), but may vest over
periods of up to five years. The vesting method of share option awards, which
is determined at the date of grant, may be either cliff or graded; all share
option awards granted subsequent to 2004 have been cliff-vesting awards.
Some share option awards have a net-equity settlement feature. As
discussed further in Note 15(e), it is at the Company's option whether the
exercise of a share option is settled as a share option or using the
net-equity settlement feature. So as to align with the accounting treatment
that is afforded to the associated share options, the Company has selected the
equity instrument fair value method of accounting for the net-equity
settlement feature.
13
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
The weighted average fair value of share option awards granted, and the
weighted average assumptions used in the fair value estimation at the time of
grant, using the Black-Scholes model (a closed-form option pricing model), are
as follows:
Three months Nine months
Periods ended September 30 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------
Share option award fair value (per share $ 11.96 $ 13.84 $ 12.35 $ 11.33
option)
Risk free interest rate 4.2% 3.5% 4.0% 3.7%
Expected lives(1) (years) 4.5 4.5 4.6 4.5
Expected volatility 30.0% 40.0% 35.9% 40.0%
Dividend yield 2.3% 1.9% 2.6% 2.2%
---------------------------------------------------------------------------------------------------------
(1) The maximum contractual term of the share option awards granted in 2006
and 2005 was seven years.
The risk free interest rate used in determining the fair value of the
share option awards is based on a Government of Canada yield curve that is
current at the time of grant. The expected lives of the share option awards
are based on historical share option award exercise data of the Company.
Similarly, expected volatility considers the historical volatility of the
Company's Non-Voting Shares. The dividend yield is the annualized dividend
current at the date of grant divided by the share option award exercise price.
Dividends are not paid on unexercised share option awards and are not subject
to vesting.
(c) Restricted stock units
The Company uses restricted stock units as a form of incentive compensation.
Each restricted stock unit is equal in value to one Non-Voting Share and the
dividends that would have arisen thereon had it been an issued and outstanding
Non-Voting Share; the notional dividends are recorded as additional issuances
of restricted stock units during the life of the restricted stock unit. The
restricted stock units become payable as they vest over their lives.
Typically, the restricted stock units vest over a period of 33 months. The
vesting method, which is determined at the date of grant, may be either cliff
or graded.
The following table presents a summary of the activity related to the
Company's restricted stock units.
Periods ended September 30, 2006 Three months Nine months
----------------------------------------------------------------------------------------------------------------
Number of restricted Weighted Number of restricted Weighted
Stock Units Average Stock Units Average
------------- grant date ------------ grant date
Non-vested Vested fair value Non-vested Vested fair value
----------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period
Non-vested 2,246,755 -- $ 35.40 1,645,530 -- $ 32.16
Vested -- 11,799 15.51 -- 62,437 26.43
Issued
Initial allocation 7,875 -- 47.09 611,829 -- 43.89
In lieu of dividends 14,406 -- 62.48 54,002 -- 49.52
Vested (16,171) 16,171 31.31 (21,827) 21,827 31.30
Settled in cash -- (16,171) 31.31 -- (72,465) 30.01
Forfeited and cancelled (21,122) -- 33.04 (57,791) -- 32.01
----------------------------------------------------------------------------------------------------------------
Outstanding, end of period
Non-vested 2,231,743 -- 35.52 2,231,743 -- 35.52
Vested -- 11,799 $ 15.51 -- 11,799 $ 15.51
----------------------------------------------------------------------------------------------------------------
With respect to certain issuances of restricted stock units, the Company
entered into cash-settled equity forward agreements that fix the cost to the
Company; that information, as well as a schedule of the Company's non-vested
restricted stock units outstanding as at September 30, 2006, is set out in the
following table:
14
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
Cost fixed
to the Total
Number of Company Number of number of
fixed-cost per variable-cost non-vested
restricted restricted restricted restricted
stock units stock unit stock units stock units
--------------------------------------------------------------------------------
Vesting in years
ending December 31:
2006 652,550 $ 26.61 26,967 679,517
2007 600,000 $ 40.91 89,811 689,811
2008 160,000 $ 50.91
440,000 $ 50.02
------------
600,000 262,415 862,415
--------------------------------------------------------------------------------
1,852,550 379,193 2,231,743
--------------------------------------------------------------------------------
(d) Employee share purchase plan
The Company has an employee share purchase plan under which eligible employees
can purchase Common Shares through regular payroll deductions by contributing
between 1% and 10% of their pay. The Company contributes 45%, for the employee
population up to a certain job classification, for every dollar contributed by
an employee, to a maximum of 6% of employee pay; for more highly compensated
job classifications, the Company contributes 40%. There are no vesting
requirements and the Company records its contributions as a component of
operating expenses.
Three months Nine months
Periods ended September 30
(millions) 2006 2005 2006 2005
--------------------------------------------------------------------------------
Employee contributions $ 20.4 $ 16.0 $ 59.2 $ 48.7
Company contributions 8.6 12.0 25.0 26.0
--------------------------------------------------------------------------------
$ 29.0 $ 28.0 $ 84.2 $ 74.7
--------------------------------------------------------------------------------
Under this plan, the Company has the option of offering shares from
Treasury or having the trustee acquire shares in the stock market. Prior to
February 2001 and subsequent to November 1, 2004, all Common Shares issued to
employees under the plan were purchased on the market at normal trading
prices; in the intervening period, shares were also issued from Treasury.
(e) Unrecognized, non-vested share-based compensation
As at September 30, 2006, compensation cost related to non-vested share-based
compensation that has not yet been recognized is set out in the following
table and is expected to be recognized over a weighted average period of 1.3
years (December 31, 2005 - 2.3 years).
As at (millions) (1)
September 30, December 31,
2006 2005
--------------------------------------------------------------------------------
Share option awards $ 29.2 $ 27.1
Restricted stock units(2) 48.7 31.8
--------------------------------------------------------------------------------
$ 77.9 $ 58.9
--------------------------------------------------------------------------------
(1) These disclosures are not likely to be representative of the effects on
reported net income for future periods for the following reasons: these
amounts reflect an estimate of forfeitures; these amounts do not reflect
any provision for future awards; these amounts do not reflect any
provision changes in the intrinsic value for vested restricted stock
units; and for non-vested restricted stock units, these amounts reflect
intrinsic values as at the balance sheet dates.
(2) The compensation cost that has not yet been recognized in respect of
non-vested restricted stock units is calculated based upon the intrinsic
value of the non-vested restricted stock units as at the balance sheet
dates, net of the impacts of associated cash-settled equity forward
agreements.
15
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
10 employee future benefits
(a) Defined benefit plans
The Company's net defined benefit plan costs were as follows:
Three-month periods ended
September 30 (millions) 2006 2005
------------------------------------------------------------------------------------------------------------------
Incurred Recognized Incurred Recognized
in Matching in in Matching in
period adjustments(1) period period adjustments(1) period
------------------------------------------------------------------------------------------------------------------
Pension benefit plans
Current service cost (employer
portion) $ 24.3 $ -- $ 24.3 $ 17.0 $ -- $ 17.0
Interest cost 79.0 -- 79.0 79.9 -- 79.9
Return on plan assets (170.5) 59.2 (111.3) (300.0) 201.9 (98.1)
Past service costs -- 0.2 0.2 -- 0.2 0.2
Actuarial loss (gain) 10.5 -- 10.5 5.1 -- 5.1
Valuation allowance provided
against accrued benefit asset -- 6.5 6.5 -- 6.4 6.4
Amortization of transitional
asset -- (11.2) (11.2) -- (11.2) (11.2)
------------------------------------------------------------------------------------------------------------------
$ (56.7) $ (54.7) $ (2.0) $(198.0) $ 197.3 $ (0.7)
------------------------------------------------------------------------------------------------------------------
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
Nine-month periods ended
September 30 (millions) 2006 2005
------------------------------------------------------------------------------------------------------------------
Incurred Recognized Incurred Recognized
in Matching in in Matching in
period adjustments(1) period period adjustments(1) period
------------------------------------------------------------------------------------------------------------------
Pension benefit plans
Current service cost (employer
portion) $ 72.9 $ -- $ 72.9 $ 51.2 $ -- $ 51.2
Interest cost 236.9 -- 236.9 239.6 -- 239.6
Return on plan assets (242.6) (91.3) (333.9) (608.1) 313.9 (294.2)
Past service costs -- 0.5 0.5 -- 0.5 0.5
Actuarial loss (gain) 31.5 -- 31.5 15.2 -- 15.2
Valuation allowance provided
against accrued benefit asset -- 19.5 19.5 -- 19.1 19.1
Amortization of transitional
asset -- (33.6) (33.6) -- (33.6) (33.6)
------------------------------------------------------------------------------------------------------------------
$ 98.7 $ (104.9) $ (6.2) $(302.1) $ 299.9 $ (2.2)
------------------------------------------------------------------------------------------------------------------
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
Three-month periods ended
September 30 (millions) 2006 2005
------------------------------------------------------------------------------------------------------------------
Incurred Recognized Incurred Recognized
in Matching in in Matching in
period adjustments(1) period period adjustments(1) period
------------------------------------------------------------------------------------------------------------------
Other benefit plans
Current service cost (employer
portion) $ 0.8 $ -- $ 0.8 $ 0.8 $ -- $ 0.8
Interest cost 0.5 -- 0.5 0.5 -- 0.5
Return on plan assets (0.6) -- (0.6) (0.6) -- (0.6)
Actuarial loss (gain) (0.5) -- (0.5) (0.6) -- (0.6)
Amortization of transitional
obligation -- 0.2 0.2 -- 0.2 0.2
------------------------------------------------------------------------------------------------------------------
$ 0.2 $ 0.2 $ 0.4 $ 0.1 $ 0.2 $ 0.3
------------------------------------------------------------------------------------------------------------------
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
16
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
Nine-month periods ended
September 30 (millions) 2006 2005
------------------------------------------------------------------------------------------------------------------
Incurred Recognized Incurred Recognized
in Matching in in Matching in
period adjustments(1) period period adjustments(1) period
------------------------------------------------------------------------------------------------------------------
Other benefit plans
Current service cost (employer
portion) $ 2.6 $ -- $ 2.6 $ 4.5 $ -- $ 4.5
Interest cost 1.4 -- 1.4 1.4 -- 1.4
Return on plan assets (1.8) (0.1) (1.9) (1.8) (0.1) (1.9)
Actuarial loss (gain) (1.4) -- (1.4) (1.7) -- (1.7)
Amortization of transitional
obligation -- 0.6 0.6 -- 0.6 0.6
------------------------------------------------------------------------------------------------------------------
$ 0.8 $ 0.5 $ 1.3 $ 2.4 $ 0.5 $ 2.9
------------------------------------------------------------------------------------------------------------------
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
(b) Employer contributions
The best estimate of fiscal 2006 employer contributions to the Company's
defined benefit pension plans has been revised to approximately $132 million
(the best estimate at December 31, 2005, was $114 million).
(c) Defined contribution plans
The Company's total defined contribution pension plan costs recognized were as
follows:
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------
Union pension plan and public service $ 8.2 $ 4.1 $ 24.3 $ 23.8
pension plan contributions
Other defined contribution pension plans 4.9 4.1 13.6 11.2
---------------------------------------------------------------------------------------------------------
$ 13.1 $ 8.2 $ 37.9 $ 35.0
---------------------------------------------------------------------------------------------------------
11 accounts receivable
On July 26, 2002, TELUS Communications Inc., a wholly-owned subsidiary of
TELUS, entered into an agreement, which was amended September 30, 2002, and
March 1, 2006, with an arm's-length securitization trust under which TELUS
Communications Inc. 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 has an initial term ending July
18, 2007. TELUS Communications Inc. is required to maintain at least a BBB
(low) credit rating by Dominion Bond Rating Service or the securitization
trust may require the sale program to be wound down prior to the end of the
initial term; at September 30, 2006, the rating was A (low).
As at (millions)
September 30, December 31,
2006 2005
-------------------------------------------------------------------------
Total managed portfolio $ 1,095.8 $ 1,129.3
Securitized receivables (403.3) (599.2)
Retained interest in receivables sold 47.2 80.2
-------------------------------------------------------------------------
Receivables held $ 739.7 $ 610.3
-------------------------------------------------------------------------
For the three-month and nine-month periods ended September 30, 2006, the
Company recognized losses of $0.2 million (2005 - $0.5 million) and $3.1
million (2005 - $1.2 million), respectively, on the sale of receivables
arising from the securitization.
Cash flows from the securitization are as follows:
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, $ 535.0 $ 150.0 $ 500.0 $ 150.0
beginning of period
Proceeds from new securitizations -- -- 260.0 --
Securitization reduction payments (185.0) -- (410.0) --
---------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, $ 350.0 $ 150.0 $ 350.0 $ 150.0
end of period
---------------------------------------------------------------------------------------------------------
Proceeds from collections reinvested in $ 1,080.0 $ 352.8 $ 2,910.6 $ 1,067.4
revolving-period securitizations
---------------------------------------------------------------------------------------------------------
Proceeds from collections pertaining to $ 138.7 $ 58.7 $ 384.8 $ 171.6
retained interest
---------------------------------------------------------------------------------------------------------
17
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
12 capital assets
(a) Capital assets, net
Accumulated
Depreciation
Cost and Amortization Net Book Value
---------------------------------------------------------------------------------------------------------
September 30, December 31,
As at (millions) 2006 2005
---------------------------------------------------------------------------------------------------------
Property, plant, equipment and other
Telecommunications assets $ 17,827.8 $ 12,540.0 $ 5,287.8 $ 5,378.2
Assets leased to customers 684.3 538.4 145.9 176.1
Buildings and leasehold improvements 1,822.8 996.1 826.7 838.0
Office equipment and furniture 1,014.4 768.1 246.3 263.1
Assets under capital lease 18.4 8.5 9.9 12.4
Other 337.2 254.5 82.7 84.9
Land 46.0 -- 46.0 46.7
Assets under construction 779.9 -- 779.9 516.4
Materials and supplies 32.0 -- 32.0 23.6
---------------------------------------------------------------------------------------------------------
22,562.8 15,105.6 7,457.2 7,339.4
---------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscriber base 362.9 132.6 230.3 246.7
Software 1,254.1 996.6 257.5 322.7
Access to rights-of-way and other 122.0 57.9 64.1 68.1
---------------------------------------------------------------------------------------------------------
1,739.0 1,187.1 551.9 637.5
---------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 3,984.8 1,018.5 2,966.3 2,964.6
---------------------------------------------------------------------------------------------------------
$ 28,286.6 $ 17,311.2 $ 10,975.4 $ 10,941.5
---------------------------------------------------------------------------------------------------------
(1) Accumulated amortization of spectrum licences is amortization recorded
prior to 2002 and the transitional impairment amount.
The following table presents items included in capital expenditures.
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------
Additions of intangible assets
- Subject to amortization $ 33.5 $ 30.2 $ 82.5 $ 116.2
- With indefinite lives -- -- 1.7 8.8
---------------------------------------------------------------------------------------------------------
$ 33.5 $ 30.2 $ 84.2 $ 125.0
---------------------------------------------------------------------------------------------------------
The following table presents items included in capital expenditures.
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
--------------------------------------------------------------------------------
Capitalized internal labour costs $ 73.2 $ 32.3 $ 224.7 $ 170.7
--------------------------------------------------------------------------------
(b) Intangible assets subject to amortization
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at September 30, 2006, for
each of the next five fiscal years is as follows:
Years ending December 31 (millions)
--------------------------------------------------------------------------------
2006 (balance of year) $ 54.9
2007 159.0
2008 71.2
2009 21.3
2010 12.8
18
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
13 goodwill
Periods ended September 30, 2006 (millions) Three months Nine months
--------------------------------------------------------------------------------
Balance, beginning of period $ 3,172.3 $ 3,156.9
Goodwill arising from acquisition 20.0 37.5
Foreign exchange on goodwill of
self-sustaining foreign operations -- (0.1)
Other -- (2.0)
--------------------------------------------------------------------------------
Balance, end of period $ 3,192.3 $ 3,192.3
--------------------------------------------------------------------------------
FSC Internet Corp.: Of the 2006 goodwill addition, $17.5 million, none of
which is expected to be deductible for tax purposes, arose from the April 7,
2006, cash acquisition of FSC Internet Corp., operating as Assurent Secure
Technologies, a provider of information technology security services and
products. The investment was made with a view to the ongoing advancement of
the Company's existing suite of security solutions. The primary factor that
contributed to a purchase price that resulted in the recognition of goodwill
is the low degree of net tangible assets relative to the earnings capacity of
the acquired business. Effective the acquisition date, the acquired company's
results are included in the Company's Consolidated Statements of Income and
are included in the Company's Wireline segment.
Ambergris Solutions Inc.: In 2005, the Company acquired control of
Ambergris Solutions Inc., a business process outsourcing company. In the third
quarter of 2006, the Company increased its total effective economic interest
in the entity from 52.5% to 91.3%, resulting in a 2006 goodwill addition of
$20.0 million, none of which is expected to be deductible for tax purposes.
The primary factor that contributed to a purchase price that resulted in the
recognition of goodwill is the low degree of net tangible assets in the
industry relative to the market value of established Asian operations.
Ambergris Solutions Inc.'s results have been included in the Company's
Consolidated Statements of Income and the Company's Wireline segment since the
acquisition of control on February 15, 2005.
19
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
14 long-term debt
(a) Details of long-term debt
As at ($ in millions)
September 30, December 31,
Series Rate of interest Maturity 2006 2005
---------------------------------------------------------------------------------------------------------
TELUS Corporation Notes
U.S. (2) 7.50%(1) June 2007 $ 1,302.8 $ 1,354.4
U.S. (3) 8.00%(1) June 2011 2,144.4 2,230.6
CB 5.00%(1) June 2013 299.7 --
---------------------------------------------------------------------------------------------------------
3,746.9 3,585.0
---------------------------------------------------------------------------------------------------------
TELUS Corporation Credit
Facilities 5.01% May 2008 125.0 142.0
---------------------------------------------------------------------------------------------------------
TELUS Communications Inc.
Debentures
1 12.00%(1) May 2010 50.0 50.0
2 11.90%(1) November 2015 125.0 125.0
3 10.65%(1) June 2021 175.0 175.0
5 9.65%(1) April 2022 249.0 249.0
B 8.80%(1) September 2025 200.0 200.0
---------------------------------------------------------------------------------------------------------
799.0 799.0
---------------------------------------------------------------------------------------------------------
TELUS Communications Inc.
First Mortgage Bonds
U 11.50%(1) July 2010 30.0 30.0
---------------------------------------------------------------------------------------------------------
TELUS Communications Inc.
Medium Term Notes
1 7.10%(1) February 2007 70.0 70.0
---------------------------------------------------------------------------------------------------------
Capital leases issued at varying rates of interest from 4.1% to 16.7% and
maturing on various dates up to 2013 9.9 12.5
---------------------------------------------------------------------------------------------------------
Other 5.2 6.4
---------------------------------------------------------------------------------------------------------
Long-Term Debt 4,786.0 4,644.9
Less - current maturities 1,378.4 5.0
---------------------------------------------------------------------------------------------------------
Long-Term Debt - non-current $ 3,407.6 $ 4,639.9
---------------------------------------------------------------------------------------------------------
(1) Interest is payable semi-annually.
(2) Principal face value of notes is U.S.$1,166.5 million (December 31, 2005
- U.S.$1,166.5 million).
(3) Principal face value of notes is U.S.$1,925.0 million (December 31, 2005
- U.S.$1,925.0 million).
(b) TELUS Corporation notes
The notes are senior, unsecured and unsubordinated obligations of the Company
and rank equally in right of payment with all existing and future unsecured,
unsubordinated obligations of the Company, are senior in right of payment to
all existing and future subordinated indebtedness of the Company, and are
effectively subordinated to all existing and future obligations of, or
guaranteed by, the Company's subsidiaries.
The indentures governing the notes contain certain covenants which, among
other things, place limitations on the ability of TELUS and certain of its
subsidiaries to: grant security in respect of indebtedness, enter into sale
and lease-back transactions and incur new indebtedness.
2007 and 2011 (U.S. Dollar) Notes: In May 2001, the Company publicly
issued U.S.$1.3 billion 2007 Notes at a price of U.S.$995.06 per U.S.$1,000.00
of principal and U.S.$2.0 billion 2011 Notes at a price of U.S.$994.78 per
U.S.$1,000.00 of principal. The notes are redeemable at the option of the
Company, in whole at any time, or in part from time to time, on not fewer than
30 nor more than 60 days' prior notice, at a redemption price equal to the
greater of (i) the present value of the notes discounted at the Adjusted
Treasury Rate plus 25 basis points in the case of the 2007 Notes and 30 basis
points in the case of the 2011 Notes, or (ii) 100% of the principal amount
thereof. In addition, accrued and unpaid interest, if any, will be paid to the
date fixed for redemption.
2007 and 2011 Cross Currency Interest Rate Swap Agreements: With respect
to the 2007 and 2011 (U.S. Dollar) Notes, U.S.$3.1 billion (December 31, 2005
- U.S.$3.1 billion) in aggregate, the Company entered into cross currency
interest rate swap agreements which effectively convert the principal
repayments and interest obligations to Canadian dollar obligations with
effective fixed interest rates and fixed economic exchange rates.
The cross currency interest rate swap agreements contain an optional
early termination provision which states that either party could elect to
terminate these swap agreements on May 30, 2006, if (i) the highest of the
long-term unsecured
20
unsubordinated debt ratings of the Company falls below BBB as determined by
Standard & Poor's Rating Services or Baa2 as determined by Moody's Investors
Service or (ii) in the case of these two ratings having a difference of two or
more rating increments, the lower of the two ratings is below BBB- or Baa3 or
(iii) the rating for the Company's counterparties fall below A or A2.
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,
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).
To terminate the previous cross currency interest rate swap agreements,
the Company made a payment of $354.6 million, including $14.0 million in
respect of hedging of current period interest payments, to the counterparties.
The remaining $340.6 million portion of the payment made to the counterparties
of the previous cross currency interest rate swap agreements exceeded the
associated amount of the deferred hedging liability, such excess being $25.8
million and which will be deferred and amortized over the remainder of the
life of the 2007 (U.S. Dollar) Notes.
The following table sets out the composition of the payments made to the
counterparties to the cross currency interest rate swap agreements and the
related accounting amounts.
At date of early termination
of cross currency interest Amounts to be
rate swap agreements deferred and
--------------------------- amortized over
Hedging remainder of life
Amounts Paid amounts of 2007 (US)
(millions) in advance(1) recorded Dollar) Notes(2)
----------------------------------------------------------------------------------------
In respect of principal $ 309.4 $ 314.8 $ (5.4)
In respect of interest that would
have been incurred subsequent to
termination date and prior to
maturity of 2007 (U.S. Dollar) Notes 31.2 -- 31.2
----------------------------------------------------------------------------------------
340.6 314.8 25.8
In respect of hedge accounting
affecting accrued interest to date
of early termination of cross
currency interest rate swap agreements 14.0 14.0 --
----------------------------------------------------------------------------------------
$ 354.6 $ 328.8 25.8
----------------------------------------------------------------------------------------
Amortization for:
- the three-month
period ended June 30,
2006 (3.1)
- the three-month
period ended
September 30, 2006 (6.2)
------------------------------------------------
- the nine-month period (9.3)
ended September 30,
2006
------------------------------------------------
Prepaid expense arising $ 16.5
from early termination
of cross currency
interest rate swap
agreements,
September 30, 2006
------------------------------------------------
(1) Amounts paid in advance represent present value of cash flows, at early
termination date, which would have arisen pursuant to early terminated
cross currency interest rate swap agreements.
(2) Had the early terminated cross currency interest rate swap agreements
matured in the normal course, the associated period amounts that would
have been recorded would equal the future value of the amounts to
currently be deferred and amortized (assuming that the associated future
exchange and interest rates over the period to maturity of the 2007 (U.S.
Dollar) Notes would be equal to those at the date of early termination of
the cross currency interest rate swap agreements).
21
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
The weighted average effective fixed interest rates and effective fixed
exchange rates arising from the cross currency interest rate swap agreements
are summarized in the following table:
As at September 30, 2006 December 31, 2005
------------------------------------------------------------------------------------------------
Effective fixed
Effective fixed exchange rate Effective fixed exchange rate
interest rate ($:U.S.$1.00) interest rate ($:U.S.$1.00)
------------------------------------------------------------------------------------------------
2007 (U.S. Dollar) Notes 7.046% $ 1.2716 8.109% $ 1.5414
2011 (U.S. Dollar) Notes 8.493% $ 1.5327 8.493% $ 1.5327
------------------------------------------------------------------------------------------------
The counterparties of the swap agreements are highly rated financial
institutions and the Company does not anticipate any non-performance. TELUS
has not required collateral or other security from the counterparties due to
its assessment of their creditworthiness.
The Company translates items such as the U.S. Dollar notes into
equivalent Canadian dollars at the rate of exchange in effect at the balance
sheet date. The swap agreements at September 30, 2006, comprised a net
deferred hedging liability of $982.8 million (December 31, 2005 - $1,154.3
million). The asset value of the swap agreements increases (decreases) when
the balance sheet date exchange rate increases (decreases) the Canadian dollar
equivalent of the U.S. Dollar notes.
2013 (Canadian Dollar) Notes: In May 2006, the Company publicly issued
$300 million 5.00%, Series CB, Notes at a price of $998.80 per $1,000.00 of
principal. The notes are redeemable at the option of the Company, in whole at
any time, or in part from time to time, on not fewer than 30 and not more than
60 days' prior notice, at a redemption price equal to the greater of (i) the
present value of the notes discounted at the Government of Canada yield plus
16 basis points, or (ii) 100% of the principal amount thereof. In addition,
accrued and unpaid interest, if any, will be paid to the date fixed for
redemption.
(c) Long-term debt maturities
Anticipated requirements to meet long-term debt repayments, including related
hedge amounts and calculated upon such long-term debts owing as at September
30, 2006, during each of the five years ending December 31 are as follows:
Deferred hedging
(millions) Principal(1) liability, net Total
----------------------------------------------------------------------------
2006 (balance of year) $ 1.4 $ -- $ 1.4
2007 1,377.5 180.8 1,558.3
2008 130.5 -- 130.5
2009 1.5 -- 1.5
2010 81.7 -- 81.7
(1) Where applicable, principal repayments reflect foreign exchange rates at
September 30, 2006.
22
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
15 shareholders' equity
(a) Details of shareholders' equity
September 30, December 31,
As at ($ in millions) 2006 2005
--------------------------------------------------------------------------------
Preferred equity
Authorized Amount
First Preferred Shares 1,000,000,000
Second Preferred Shares 1,000,000,000
Common equity
Share capital
Shares
Authorized Amount
Common Shares 1,000,000,000
Non-Voting Shares 1,000,000,000
Issued
Common Shares (b) $ 2,262.6 $ 2,311.6
Non-Voting Shares (b) 3,474.1 3,556.7
--------------------------------------------------------------------------------
5,736.7 5,868.3
--------------------------------------------------------------------------------
Options (c) 0.8 5.9
Cumulative foreign currency translation adjustment (6.1) (7.3)
Retained earnings 1,093.2 849.7
Contributed surplus (d) 163.3 153.4
--------------------------------------------------------------------------------
Total Shareholders' Equity $ 6,987.9 $ 6,870.0
--------------------------------------------------------------------------------
(b) Changes in Common Shares and Non-Voting Shares
Periods ended September 30,
2006 ($ in millions) Three months Nine months
---------------------------------------------------------------------------------------------------------
Number of Share Number of Share
shares capital shares capital
---------------------------------------------------------------------------------------------------------
Common Shares
Beginning of period 179,077,554 $ 2,260.9 183,530,655 $ 2,311.6
Common Shares issued pursuant to exercise
of share options (e) 323,188 11.1 566,987 19.5
Purchase of shares for cancellation
pursuant to normal course issuer bid (f) (743,700) (9.4) (5,440,600) (68.5)
---------------------------------------------------------------------------------------------------------
End of period 178,657,042 $ 2,262.6 178,657,042 $ 2,262.6
---------------------------------------------------------------------------------------------------------
Non-Voting Shares
Beginning of period 162,202,578 $ 3,470.9 166,566,504 $ 3,556.7
Non-Voting Shares issued pursuant to
exercise of share options (e) 956,617 30.4 2,462,225 71.1
Non-Voting Shares issued pursuant to use
of share option award net-equity
settlement feature (e) 202,619 1.3 310,885 2.0
Purchase of shares for cancellation
pursuant to normal course issuer bid (f) (1,328,600) (28.5) (7,306,400) (155.7)
---------------------------------------------------------------------------------------------------------
End of period 162,033,214 $ 3,474.1 162,033,214 $ 3,474.1
---------------------------------------------------------------------------------------------------------
Amounts credited to the Common Share capital account upon exercise of
share options is cash received. Amounts credited to the Non-Voting Share
capital account are comprised as follows:
Periods ended September 30, 2006 (millions) Three months Nine months
--------------------------------------------- -----------------------------------------------------------------
Non-Voting Shares issued pursuant to exercising of share options Cash received
from exercise of share
options $ 26.0 $ 63.4
Amounts credited to share capital arising from intrinsic value
accounting applied to former Clearnet Communications Inc. options (c) 4.2 5.0
Share option award expense reclassified from contributed surplus upon
exercise of share options (d) 0.2 2.7
--------------------------------------------- -----------------------------------------------------------------
$ 30.4 $ 71.1
--------------------------------------------- -----------------------------------------------------------------
23
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
(c) Options
Upon its acquisition of Clearnet Communications Inc. in 2000, the Company was
required to record the intrinsic value of Clearnet Communications Inc. options
outstanding at that time. As these options are exercised, the corresponding
intrinsic values are reclassified to share capital. As these options are
forfeited, or as they expire, the corresponding intrinsic values are
reclassified to contributed surplus. Proceeds arising from the exercise of
these options are credited to share capital.
(d) Contributed surplus
The following table presents a summary of the activity related to the
Company's contributed surplus for the three-month and nine-month periods ended
September 30.
Periods ended September 30, 2006 (millions) Three months Nine months
---------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 159.6 $ 153.4
Share option award expense
- Recognized in period (Note 9) 5.2 14.5
- Reclassified to Non-Voting Share capital account
- Upon exercise of share options (0.2) (2.7)
- Upon use of share option award net-equity settlement feature (1.3) (2.0)
Amounts credited to contributed surplus arising from intrinsic value
accounting applied to former Clearnet Communications Inc. options (c) -- 0.1
---------------------------------------------------------------------------------------------------------------
Balance, end of period $ 163.3 $ 163.3
---------------------------------------------------------------------------------------------------------------
(e) Share option plans
The Company has a number of share option plans under which officers and other
employees may receive options to purchase Non-Voting Shares at a price equal
to the fair market value at the time of grant; prior to 2001, options were
also similarly awarded in respect of Common Shares. Prior to 2002, directors
were also awarded options to purchase Non-Voting Shares and Common Shares at a
price equal to the fair market value at the time of grant. Option awards
currently granted under the plans may be exercised over specific periods not
to exceed seven years from the time of grant; prior to 2003, share option
awards were granted with exercise periods not to exceed ten years.
The following table presents a summary of the activity related to the
Company's share option plans for the three-month and nine-month periods ended
September 30.
Periods ended September 30, 2006 Three months Nine months
---------------------------------------------------------------------------------------------------------
Number of Weighted Number of Weighted
share average share share average share
options option price options option price
---------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 13,171,559 $ 30.34 13,894,601 $ 28.14
Granted 18,155 47.22 1,543,737 43.12
Exercised(1)
(1,578,599) 26.54 (3,493,284) 25.86
Forfeited (138,937) 30.85 (472,876) 27.41
---------------------------------------------------------------------------------------------------------
Outstanding, end of period
11,472,178 $ 30.89 11,472,178 $ 30.89
---------------------------------------------------------------------------------------------------------
(1) The total intrinsic values of share option awards exercised for the
three-month and nine-month periods ended September 30, 2006, were $40.1
million and $79.9 million, respectively.
In 2006, certain outstanding grants of share option awards, which were
made after 2001, had a net-equity settlement feature applied to them. This
event does not result in the optionees receiving incremental value and
therefore modification accounting is not required. The optionee does not have
the choice of exercising the net-equity settlement feature. It is at the
Company's discretion whether an exercise of the share option award is settled
as a share option or using the net-equity settlement feature.
The following table reconciles the number of share options exercised and
the associated number of Common Shares and Non-Voting Shares issued.
Periods ended September 30, 2006 Three months Nine months
---------------------------------------------------------------------------------------------------------
Non-Voting Shares issued pursuant to exercise of share 956,617 2,462,225
option awards
Non-Voting Shares issued pursuant to use of share option award
net-equity settlement feature 202,619 310,885
Impact of Company choosing to settle share option award exercises using
net-equity settlement feature 96,175 153,187
---------------------------------------------------------------------------------------------------------
Non-Voting Shares issuable pursuant to exercising of share option awards 1,255,411 2,926,297
Common Shares issued and issuable pursuant to exercise of share option
awards 323,188 566,987
---------------------------------------------------------------------------------------------------------
Share option awards exercised 1,578,599 3,493,284
---------------------------------------------------------------------------------------------------------
24
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
The following is a life and exercise price stratification of the Company's
share options outstanding as at September 30, 2006.
Options outstanding(1) Options exercisable
--------------------------------------------------------------------------------------------------- --------------------
Range of option prices Total
--------------------------------------------------------------------------------------------------- Weighted
Low $5.95 $ 9.14 $14.63 $21.99 $34.88 $ 5.95 Number of average
shares price
High $8.43 $13.56 $19.92 $32.83 $47.22 $47.22 -----------------------
Year of expiry and number of shares:
--------------------------------------------------------------------------------------------------
2007 2,959 5,908 -- 38,266 -- 47,133 47,133 $ 26.81
2008 3,272 -- -- 45,360 118,300 166,932 166,932 $ 41.52
2009 -- 4,462 604,424 128,849 138,182 875,917 875,917 $ 21.23
2010 -- -- 128,826 2,049,334 462,229 2,640,389 806,965 $ 30.94
2011 -- -- 5,566 2,476,742 1,561,763 4,044,071 2,531,382 $ 30.78
2012 23,566 9,267 240,033 75,000 1,808,602 2,156,468 347,866 $ 17.17
2013 -- -- -- -- 1,541,268 1,541,268 -- $ --
-------------------------------------------------------------------------------------------------------------
29,797 19,637 978,849 4,813,551 5,630,344 11,472,178 4,776,195 $ 28.40
-------------------------------------------------------------------------------------------------------------
Weighted average remaining 4.9 3.8 4.0 4.4 5.2 4.8
contractual life (years)
Weighted average price $ 8.00 $10.53 $ 16.03 $ 24.56 $ 39.07 $ 30.89
Aggregate intrinsic value(2) $ 1.6 $ 1.0 $ 45.6 $ 183.2 $132.7 $364.1
(millions) Options exercisable
---------------------------------------------------------------------------------------------------
Number of shares 29,797 19,637 978,849 1,467,438 2,280,474 4,776,195
Weighted average remaining
contractual life (years) 4.9 3.8 4.0 4.5 4.0 4.2
Weighted average price $8.00 $10.53 $16.03 $24.96 $36.34 $28.40
Aggregate intrinsic value(2) $ 1.6 $ 1.0 $ 45.6 $ 55.3 $ 60.1 $163.6
(millions)
(1) As at September 30, 2006, 11,278,654 share options, with a weighted
average remaining contractual life of 4.7 years, a weighted average price
of $30.68 and an aggregate intrinsic value of $360.3 million, are vested
or were expected to vest.
(2) The aggregate intrinsic value is calculated upon September 30, 2006, per
share prices of $62.90 for Common Shares and $62.60 for Non-Voting
Shares.
As at September 30, 2006, 0.9 million Common Shares and 19.3 million
Non-Voting Shares were reserved for issuance, from Treasury, under the share
option plans.
(f) Purchase of shares for cancellation pursuant to normal course issuer bid
The Company purchased, for cancellation, Common Shares and Non-Voting Shares
pursuant to a normal course issuer bid that runs for a twelve-month period
ending December 19, 2006, for up to 12.0 million Common Shares and 12.0
million Non-Voting Shares. The excess of the purchase price over the average
stated value of shares purchased for cancellation was charged to retained
earnings. The Company ceases to consider shares outstanding on the date of the
Company's purchase of its shares although the actual cancellation of the
shares by the transfer agent and registrar occurs on a timely basis on a date
shortly thereafter. As at September 30, 2006, 210,000 Non-Voting Shares had
been purchased and not yet cancelled.
Three-month period ended September 30, 2006
($ in millions)
--------------------------------------------------------------------------------------------------------------
Purchase price
------------------------------------------------
Number of Charged to Charged to
shares Paid share capital retained earnings
--------------------------------------------------------------------------------------------------------------
Common Shares purchased for cancellation
Prior to beginning of period 5,331,369 $ 245.1 $ 67.1 $ 178.0
During current period 743,700 42.2 9.4 32.8
--------------------------------------------------------------------------------------------------------------
Cumulative total 6,075,069 $ 287.3 $ 76.5 $ 210.8
--------------------------------------------------------------------------------------------------------------
Non-Voting Shares purchased for cancellation
Prior to beginning of period 6,585,500 $ 293.4 $ 140.1 $ 153.3
During current period 1,328,600 77.5 28.5 49.0
--------------------------------------------------------------------------------------------------------------
Cumulative total 7,914,100 $ 370.9 $ 168.6 $ 202.3
--------------------------------------------------------------------------------------------------------------
Common Shares and Non-Voting Shares
purchased for cancellation
Prior to beginning of period
11,916,869 $ 538.5 $ 207.2 $ 331.3
During current period 2,072,300 119.7 37.9 81.8
--------------------------------------------------------------------------------------------------------------
Cumulative total 13,989,169 $ 658.2 $ 245.1 $ 413.1
--------------------------------------------------------------------------------------------------------------
25
--------------------------------------------------------------------------------
notes to interim conslidated financial statements (unaudited)
--------------------------------------------------------------------------------
Nine-month period ended September 30, 2006
($ in millions)
--------------------------------------------------------------------------------------------------------------
Purchase price
------------------------------------------------
Number of Charged to Charged to
shares Paid share capital retained earnings
--------------------------------------------------------------------------------------------------------------
Common Shares purchased for cancellation
Prior to beginning of period 634,469 $ 29.7 $ 8.0 $ 21.7
During current period 5,440,600 257.6 68.5 189.1
--------------------------------------------------------------------------------------------------------------
Cumulative total 6,075,069 $ 287.3 $ 76.5 $ 210.8
--------------------------------------------------------------------------------------------------------------
Non-Voting Shares purchased for cancellation
Prior to beginning of period 607,700 $ 27.8 $ 12.9 $ 14.9
During current period 7,306,400 343.1 155.7 187.4
--------------------------------------------------------------------------------------------------------------
Cumulative total 7,914,100 $ 370.9 $ 168.6 $ 202.3
--------------------------------------------------------------------------------------------------------------
Common Shares and Non-Voting Shares
purchased for cancellation
Prior to beginning of period 1,242,169 $ 57.5 $ 20.9 $ 36.6
During current period
12,747,000 600.7 224.2 376.5
--------------------------------------------------------------------------------------------------------------
Cumulative total 13,989,169 $ 658.2 $ 245.1 $ 413.1
--------------------------------------------------------------------------------------------------------------
(g) Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase Plan under which
eligible shareholders may acquire Non-Voting Shares through the reinvestment
of dividends and additional optional cash payments. Excluding Non-Voting
Shares purchased by way of additional optional cash payments, the Company, at
its discretion, may offer the Non-Voting Shares at up to a 5% discount from
the market price. During the three-month period and nine-month periods ended
September 30, 2006, the Company did not offer Non-Voting Shares at a discount.
Shares purchased through optional cash payments are subject to a minimum
investment of $100 per transaction and a maximum investment of $20,000 per
calendar year.
Under this Plan, the Company has the option of offering shares from
Treasury or having the trustee acquire shares in the stock market. Prior to
July 1, 2001, when the acquisition of shares from Treasury commenced, all
Non-Voting Shares were acquired in the market at normal trading prices;
acquisition in the market at normal trading prices recommenced on January 1,
2005.
In respect of Common Share and Non-Voting Share dividends declared during
the three-month and nine-month periods ended September 30, 2006, $4.1 million
(2005 - $0.8 million) and $8.6 million (2005 - $4.8 million), respectively,
were to be reinvested in Non-Voting Shares.
16 commitments and contingent liabilities
(a) Canadian Radio-television Telecommunications Commission Decisions
2002-34, 2002-43 and 2006-9 deferral accounts
On May 30, 2002, and on July 31, 2002, the Canadian Radio-television and
Telecommunications Commission 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, a liability of
$164.8 million as at September 30, 2006 (December 31, 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 Canadian Radio-television and
Telecommunications Commission, upon its periodic review of the Company's
deferral account, disagrees with management's estimates and assumptions, the
Canadian Radio-television and Telecommunications Commission may adjust the
deferral account balance and such adjustment may be material. Ultimately, this
process results in the Canadian Radio-television and Telecommunications
Commission determining if, and when, the deferral account liability is
settled.
On March 24, 2004, the Canadian Radio-television and Telecommunications
Commission 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.
26
--------------------------------------------------------------------------------
notes to interim consolicated financial statements (unaudited)
--------------------------------------------------------------------------------
On February 16, 2006, the Canadian Radio-television and
Telecommunications Commission issued Decision CRTC 2006-9, "Disposition of
funds in the deferral account". In its decision the Canadian Radio-television
and Telecommunications Commission determined that the majority of the
accumulated liability within the respective incumbent local exchange carrier's
deferral account was to be made available for initiatives to expand broadband
services within their incumbent local exchange carrier operating territories
to rural and remote communities where service is currently not available. In
addition, a minimum of five per cent 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 Canadian Radio-television and Telecommunications Commission indicated that
subsequent to May 31, 2006, subject to potential Canadian Radio-television and
Telecommunications Commission changes in amounts estimated by the Company as
noted above, 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 Canadian Radio-television and Telecommunications Commission 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 Canadian Radio-television and Telecommunications
Commission, as noted above. Bell Canada was also granted leave to appeal
Decision 2006-9 on the grounds that the Canadian Radio-television and
Telecommunications Commission 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 Canadian
Radio-television and Telecommunications Commission. Should the consumer groups
be successful in their appeals, the Company may be required to remit a
one-time refund 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, the Canadian Radio-television and Telecommunications
Commission 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 the Canadian
Radio-television and Telecommunications Commission 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 three-month and nine-month periods ended
September 30, 2006, the Company drew down the deferral account by NIL (2005 -
$11.1 million) and $19.9 million (2005 - $40.9 million), respectively, in
respect of discounts on Competitor Digital Network services.
(b) Guarantees
Canadian generally accepted accounting principles require 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.
Performance guarantees: Performance guarantees contingently require a
guarantor to make payments to a guaranteed party based on a third party's
failure to perform under an obligating agreement. TELUS provides sales price
guarantees in respect of employees' principal residences as part of its
employee relocation policies. In the event that the Company is required to
honour such guarantees, it purchases (for immediate resale) the property from
the employee.
The Company has guaranteed third parties' financial obligations as part
of a facility naming rights agreement. The guarantees, in total, run through
to August 31, 2008, on a declining-balance basis and are of limited recourse.
As at September 30, 2006, the Company has no liability recorded in
respect of the aforementioned performance guarantees.
27
--------------------------------------------------------------------------------
notes to interim consolicated financial statements (unaudited)
--------------------------------------------------------------------------------
Financial guarantees: In conjunction with its 2001 exit from the equipment
leasing business, the Company provided a guarantee to a third party with respect
to certain specified telecommunication asset and vehicle leases. If the lessee
were to default, the Company would be required to make a payment to the extent
that the realized value of the underlying asset is insufficient to pay out the
lease; in some instances, the Company could be required to pay out the lease on
a gross basis and realize the underlying value of the leased asset itself. As at
September 30, 2006, the Company has a liability of $0.5 million (December 31,
2005 - $0.5 million) recorded in respect of these lease guarantees.
The following table quantifies the maximum undiscounted guarantee amounts
as at September 30, 2006, without regard for the likelihood of having to make
such payment.
Performance Financial
(millions) guarantees(1) guarantees(1) Total
--------------------------------------------------------------------------------
2006 $ 2.7 $ 0.6 $ 3.3
2007 1.0 0.5 1.5
2008 0.5 0.2 0.7
(1) Annual amounts for performance guarantees and financial guarantees include
the maximum guarantee amounts during any year of the term of the
guarantee.
Indemnification obligations: 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 Canadian Radio-television and Telecommunications Commission
regulatory requirements. The Company's proportionate share would have been 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 Canadian Radio-television and
Telecommunications Commission take any action which 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 September 30, 2006, the Company has no liability recorded in respect
of indemnification obligations.
(c) Claims and lawsuits
General: 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, excepting the items enumerated
following.
Pay equity: On December 16, 1994, the Telecommunications Workers Union
filed a complaint against BC TEL, a predecessor of TELUS Communications Inc.,
with the Canadian Human Rights Commission, alleging that wage differences
between unionized male and female employees in British Columbia were contrary to
the equal pay for work of equal value provisions in the Canadian Human Rights
Act. As a term of the settlement between TELUS Communications Inc. and the
Telecommunications Workers Union that resulted in the collective agreement
effective November 20, 2005, the parties have agreed to settle this complaint
without any admission of liability, on the basis that the Company will establish
a pay equity fund of $10 million to be paid out during the term of the new
collective agreement; the Telecommunications Workers Union withdrew and
discontinued this complaint on December 21, 2005. During the first quarter of
2006, the Canadian Human Rights Commission advised the Company that it accepted
this settlement and that it would close its file on the complaint.
TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan: Two
statements of claim were filed in the Alberta Court of Queen's Bench on December
31, 2001, and January 2, 2002, respectively, by plaintiffs alleging to be either
members or business agents of the Telecommunications Workers Union. In one
action, the three plaintiffs alleged to be suing on behalf of all current or
future beneficiaries of the TELUS Corporation Pension Plan and in the other
action, the two plaintiffs alleged to be suing on behalf of all current or
future beneficiaries of the TELUS Edmonton Pension Plan. The statement of claim
in the TELUS Corporation Pension Plan related action named the Company, certain
of its affiliates and certain present and former trustees of the TELUS
Corporation Pension Plan as defendants, and claims damages in the sum of $445
million. The statement of claim in the TELUS Edmonton Pension Plan related
action named the Company, certain of its affiliates and certain individuals who
are alleged to be trustees of the TELUS Edmonton Pension Plan and
28
--------------------------------------------------------------------------------
notes to interim consolicated financial statements (unaudited)
--------------------------------------------------------------------------------
claims damages in the sum of $15.5 million. On February 19, 2002, the
Company filed statements of defence to both actions and also filed notices of
motion for certain relief, including an order striking out the actions as
representative or class actions. On May 17, 2002, the statements of claim were
amended by the plaintiffs and include allegations, inter alia, that benefits
provided under the TELUS Corporation Pension Plan and the TELUS Edmonton Pension
Plan are less advantageous than the benefits provided under the respective
former pension plans, contrary to applicable legislation, that insufficient
contributions were made to the plans and contribution holidays were taken and
that the defendants wrongfully used the diverted funds, and that administration
fees and expenses were improperly deducted. The Company filed statements of
defence to the amended statements of claim on June 3, 2002. The Company believes
that it has good defences to the actions. As a term of the settlement reached
between TELUS Communications Inc. and the Telecommunications Workers Union that
resulted in a collective agreement effective November 20, 2005, the
Telecommunications Workers Union has agreed to not provide any direct or
indirect financial or other assistance to the plaintiffs in these actions, and
to communicate to the plaintiffs the Telecommunications Workers Union's desire
and recommendation that these proceedings be dismissed or discontinued. The
Company has been advised by the Telecommunications Workers Union that the
plaintiffs have not agreed to dismiss or discontinue these actions. Should the
lawsuits continue because of the actions of the court, the plaintiffs or for any
other reason, and their ultimate resolution differ from management's assessment
and assumptions, a material adjustment to the Company's financial position and
the results of its operations could result.
Uncertified class action: A class action was brought August 9, 2004, under
the Class Actions Act (Saskatchewan), against a number of past and present
wireless service providers including the Company. The claim alleges that each of
the carriers is in breach of contract and has violated competition, trade
practices and consumer protection legislation across Canada in connection with
the collection of system access fees, and seeks to recover direct and punitive
damages in an unspecified amount. Similar proceedings have also been filed by,
or on behalf of, plaintiffs' counsel in other provincial jurisdictions. On July
18, 2006, the Saskatchewan court declined to certify the action as a class
action, but granted the plaintiffs leave to renew their application in order to
further address certain statutory requirements respecting class actions. The
Company believes that it has good defences to the action. Should the ultimate
resolution of this action differ from management's assessments and assumptions,
a material adjustment to the Company's financial position and the results of its
operations could result.
17 additional financial information
(a) Income statement
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------
Operations expense(1):
Cost of sales and service $ 683.9 $ 689.7 $ 2,012.5 $ 1,923.8
Selling, general and administrative 561.9 531.8 1,641.8 1,552.9
---------------------------------------------------------------------------------------------------
$ 1,245.8 $ 1,221.5 $ 3,654.3 $ 3,476.7
---------------------------------------------------------------------------------------------------
Advertising expense $ 64.2 $ 44.5 $ 174.3 $ 124.8
---------------------------------------------------------------------------------------------------
(1) Cost of sales and service include cost of goods sold and costs to operate
and maintain access to and usage of the Company's telecommunication
infrastructure. Selling, general and administrative costs include sales
and marketing costs (including commissions), customer care, bad debt
expense, real estate costs and corporate overhead costs such as
information technology, finance (including billing services, credit and
collection), legal, human resources and external affairs.
Employee salaries, benefits and related costs are included in one of
the two components of operations expense to the extent that the costs are
related to the component functions.
(b) Balance sheet
September 30, December 31,
As at (millions) 2006 2005
-------------------------------------------------------------------------------
Accounts receivable
Customer accounts receivable $ 549.8 $ 451.1
Accrued receivables - customer 127.2 113.2
Allowance for doubtful accounts (55.0) (57.2)
-------------------------------------------------------------------------------
622.0 507.1
Accrued receivables - other 110.7 94.3
Other 7.0 8.9
-------------------------------------------------------------------------------
$ 739.7 $ 610.3
================================================================================
29
--------------------------------------------------------------------------------
notes to interim consolicated financial statements (unaudited)
--------------------------------------------------------------------------------
September 30, December 31,
As at (millions) 2006 2005
-------------------------------------------------------------------------------
Prepaid expense and other
Prepaid expenses $ 142.4 $ 87.7
Deferred customer activation and
connection costs 58.3 66.4
Prepaid expense arising from early
termination of cross currency interest
rate swap agreements
(Note 14(b)) 16.5 --
Other 20.0 0.6
-------------------------------------------------------------------------------
$ 237.2 $ 154.7
================================================================================
Deferred charges
Recognized transitional pension assets
and pension plan contributions in
excess of charges to income $ 803.5 $ 687.9
Deferred customer activation
and connection costs 114.1 104.4
Cost of issuing debt securities,
less amortization 21.5 23.5
Other 40.5 34.4
-------------------------------------------------------------------------------
$ 979.6 $ 850.2
================================================================================
Accounts payable and accrued liabilities
Accrued liabilities $ 464.4 $ 508.6
Payroll and other employee-related
liabilities 381.2 388.7
Asset retirement obligations 4.1 4.1
-------------------------------------------------------------------------------
849.7 901.4
Trade accounts payable 363.4 394.4
Interest payable 150.6 54.8
Other 41.3 43.1
-------------------------------------------------------------------------------
$ 1,405.0 $ 1,393.7
================================================================================
Advance billings and customer deposits
Advance billings $ 329.5 $ 322.4
Regulatory deferral accounts (Note 16(a)) 164.8 158.7
Deferred customer activation and
connection fees 58.3 66.4
Customer deposits 18.4 24.3
-------------------------------------------------------------------------------
$ 571.0 $ 571.8
================================================================================
Other Long-Term Liabilities
Deferred hedging liability (Note 14(b)) $ 802.0 $ 1,154.3
Pension and other post-retirement
liabilities 195.9 189.1
Other 115.7 77.5
-------------------------------------------------------------------------------
1,113.6 1,420.9
Deferred customer activation and connection fees 114.1 104.4
Deferred gain on sale-leaseback of buildings 73.9 81.1
Asset retirement obligations 28.9 28.9
-------------------------------------------------------------------------------
$ 1,330.5 $ 1,635.3
================================================================================
(c) Supplementary cash flow information
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------
Net change in non-cash working capital
Short-term investments $ (98.8) $ -- $ (98.8) $ --
Accounts receivable (225.6) (47.2) (128.1) (20.5)
Inventories (28.2) 26.9 (5.2) 31.2
Prepaid expenses and other 54.0 47.6 (63.1) (28.4)
Accounts payable and accrued liabilities 66.3 12.7 (8.2) 105.7
Income and other taxes receivable and
payable, net (21.5) (4.3) 79.8 (17.8)
Advance billings and customer deposits (11.6) (1.3) (0.8) 13.6
---------------------------------------------------------------------------------------------------
$ (265.4) $ 34.4 $ (224.4) $ 83.8
===================================================================================================
30
--------------------------------------------------------------------------------
notes to interim consolicated financial statements (unaudited)
--------------------------------------------------------------------------------
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
-------------------------------------------------------------------------------------------------------
Interest (paid)
Amount (paid) in respect of interest
expense $ (13.0) $ (12.2) $ (266.4) $ (319.1)
Interest related portion of cross
currency interest rate swap agreement
termination payments (Note 14(b)) -- -- (31.2) --
-------------------------------------------------------------------------------------------------------
$ (13.0) $ (12.2) $ (297.6) $ (319.1)
========================================================================================================
18 differences between Canadian and United States generally accepted
accounting principles
The consolidated financial statements have been prepared in accordance with
Canadian GAAP. The principles adopted in these financial statements conform in
all material respects to those generally accepted in the United States except as
summarized below. Significant differences between Canadian GAAP and U.S. GAAP
would have the following effect on reported net income of the Company:
Three months Nine months
Periods ended September 30 (millions except
per share amounts) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------
(as (as
adjusted - b)) adjusted - b))
Net income in accordance with Canadian GAAP $ 319.6 $ 190.1 $ 886.3 $ 621.8
Adjustments:
Operating expenses
Operations (b) (4.2) (4.2) (12.7) (12.7)
Amortization of intangible assets (c) (12.5) (20.5) (38.2) (61.4)
Financing costs (e) -- 0.6 -- 5.1
Accounting for derivatives (f) 1.7 (3.3) 1.1 1.4
Change in statutory income tax rates
substantively enacted, but not enacted -- (15.1) -- (15.1)
Taxes on the above adjustments and tax rate
changes (g) 5.0 9.8 72.5 24.8
---------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP 309.6 157.4 909.0 563.9
Other comprehensive income (loss) (h)
Foreign currency translation adjustment 0.4 (2.2) 1.2 (4.1)
Change in unrealized fair value of
derivatives designated as cash flow
hedges (33.1) (23.8) 3.0 (135.0)
Change in minimum pension liability (0.7) (0.7) (3.6) (2.0)
---------------------------------------------------------------------------------------------------------
(33.4) (26.7) 0.6 (141.1)
---------------------------------------------------------------------------------------------------------
Comprehensive income in accordance with $ 276.2 $ 130.7 $ 909.6 $ 422.8
U.S. GAAP
---------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP per
Common Share and Non-Voting Share
- Basic $ 0.91 $ 0.44 $ 2.63 $ 1.57
- Diluted $ 0.90 $ 0.44 $ 2.61 $ 1.56
31
--------------------------------------------------------------------------------
notes to interim consolicated financial statements (unaudited)
--------------------------------------------------------------------------------
The following is an analysis of retained earnings (deficit) reflecting the
application of U.S. GAAP:
Nine months
Periods ended September 30 (millions) 2006 2005
--------------------------------------------------------------------------------
(as
adjusted - (b))
Schedule of retained earnings (deficit)
under U.S. GAAP
Balance at beginning of period $ (785.5) $ (590.2)
Transitional amount for share-based compensation
arising from share option awards (b) -- (185.5)
--------------------------------------------------------------------------------
Adjusted opening balance (785.5) (775.7)
Net income in accordance with U.S. GAAP 909.0 563.9
--------------------------------------------------------------------------------
123.5 (211.8)
Common Share and Non-Voting Share dividends paid,
or payable, in cash (284.5) (215.6)
Purchase of Common Shares and Non-Voting Shares
in excess of stated capital (267.1) (241.1)
Adjustment to purchase of share option awards not
in excess of their fair value 2.1 --
Warrant proceeds used in determining intrinsic
value of warrants in excess of amounts
ultimately received -- (2.0)
--------------------------------------------------------------------------------
Balance at end of period $ (426.0) $ (670.5)
================================================================================
The following is an analysis of major balance sheet categories reflecting
the application of U.S. GAAP:
As at (millions)
September 30, December 31,
2006 2005
--------------------------------------------------------------------------------
Current Assets $ 1,274.3 $ 1,242.5
Capital Assets
Property, plant, equipment and other 7,457.2 7,339.4
Intangible assets subject to amortization 2,171.4 2,295.2
Intangible assets with indefinite lives 2,966.3 2,964.6
Goodwill 3,594.8 3,575.5
Other Assets 800.5 736.3
--------------------------------------------------------------------------------
$ 18,264.5 $ 18,153.5
================================================================================
Current Liabilities $ 3,757.7 $ 2,027.5
Long-Term Debt 3,407.6 4,639.9
Other Long-Term Liabilities 1,662.4 2,024.9
Deferred Income Taxes 1,265.8 1,410.8
Non-Controlling Interest 22.3 25.6
Shareholders' Equity 8,148.7 8,024.8
--------------------------------------------------------------------------------
$ 18,264.5 $ 18,153.5
================================================================================
The following is a reconciliation of shareholders' equity incorporating
the differences between Canadian and U.S. GAAP:
Shareholders' Equity
-------------------------------------------------------------------------------------------------
Cumulative
foreign Accumulated
Retained currency other
As at September 30, 2006 Common Non-Voting earnings translation comprehensive Contributed
(millions) Shares Shares Options (deficit) adjustment income(loss) surplus Total
-------------------------------------------------------------------------------------------------------------------------------
Under Canadian GAAP $2,262.6 $3,474.1 $ 0.8 $1,093.2 $ (6.1) $ -- $163.3 $6,987.9
Adjustments:
Merger of BC TELECOM and
TELUS (a), (c), (d) 1,770.6 1,017.7 -- (1,382.5) -- -- -- 1,405.8
Share-based compensation
(b) 10.2 63.3 -- (133.3) -- -- 59.8 --
Acquisition of Clearnet
Communications Inc.
Goodwill (d) -- 131.4 -- (7.9) -- -- -- 123.5
Convertible debentures -- (2.9) -- 4.1 -- -- (1.2) --
Accounting for
derivatives (f) -- -- -- 0.4 -- -- -- 0.4
Accumulated other
comprehensive income
(loss) (h) -- -- -- -- 6.1 (375.0) -- (368.9)
-------------------------------------------------------------------------------------------------------------------------------
Under U.S. GAAP $4,043.4 $4,683.6 $ 0.8 $ (426.0) $ -- $(375.0) $221.9 $8,148.7
================================================================================================================================
32
--------------------------------------------------------------------------------
notes to interim consolicated financial statements (unaudited)
--------------------------------------------------------------------------------
Shareholders' Equity (as adjusted - (b))
-------------------------------------------------------------------------------------------------
Cumulative
foreign Accumulated
Retained currency other
As at September 30, 2006 Common Non-Voting earnings translation comprehensive Contributed
(millions) Shares(b) Shares(b) Options (deficit) adjustment income(loss) surplus Total
-------------------------------------------------------------------------------------------------------------------------------
Under Canadian GAAP $2,311.6 $3,556.7 $ 5.9 $ 849.7 $ (7.3) $ -- $ 153.4 $6,870.0
Adjustments:
Merger of BC TELECOM and
TELUS (a), (c) - (e) 1,824.8 1,069.0 -- (1,493.9) -- -- -- 1,399.9
Share-based compensation
(b) 7.4 50.3 -- (137.2) -- -- 79.5 --
Acquisition of Clearnet
Communications Inc.
Goodwill (d) -- 131.4 -- (7.9) -- -- -- 123.5
Convertible debentures -- (2.9) -- 4.1 -- -- (1.2) --
Accounting for
derivatives (f) -- -- -- (0.3) -- -- -- (0.3)
Accumulated other
comprehensive income
(loss) (h) -- -- -- -- 7.3 (375.6) -- (368.3)
-------------------------------------------------------------------------------------------------------------------------------
Under U.S. GAAP $4,143.8 $4,804.5 $ 5.9 $(785.5) $ -- $(375.6) $ 231.7 $8,024.8
================================================================================================================================
(a) Merger of BC TELECOM and TELUS
The business combination between BC TELECOM and TELUS Corporation (renamed
TELUS Holdings Inc., which was wound up June 1, 2001) was accounted for using
the pooling of interests method under Canadian GAAP. Under Canadian GAAP, the
application of the pooling of interests method of accounting for the merger of
BC TELECOM and TELUS Holdings Inc. resulted in a restatement of prior periods
as if the two companies had always been combined. Under U.S. GAAP, the merger
is accounted for using the purchase method. Use of the purchase method results
in TELUS (TELUS Holdings Inc.) being acquired by BC TELECOM for $4,662.4
million (including merger related costs of $51.9 million) effective January
31, 1999.
(b) Operating expenses - Operations
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------
Future employee benefits $ (4.2) $ (4.2) $ (12.7) $ (12.7)
=====================================================================================================
Future employee benefits: Under U.S. GAAP, TELUS' future employee benefit
assets and obligations have been recorded at their fair values on acquisition.
Accounting for future employee benefits under Canadian GAAP changed to become
more consistent with U.S. GAAP effective January 1, 2000. Canadian GAAP
provides that the transitional balances can be accounted for prospectively.
Therefore, to conform to U.S. GAAP, the amortization of the transitional
amount needs to be removed from the future employee benefit expense.
Share-based compensation: Effective January 1, 2004, Canadian GAAP
required the adoption of the fair value method of accounting for share-based
compensation for awards made after 2001. The Canadian GAAP disclosures for
share-based compensation awards are set out in Note 9.
Effective January 1, 2006, U.S. GAAP required the adoption of the fair
value method of accounting for share-based compensation for awards made after
1994. Prior to the adoption of the fair value method of accounting, the
intrinsic value based method was used to account for share option awards
granted to employees. The Company has selected the modified-retrospective
transition method and such method results in share option award expense being
recognized in net income in accordance with U.S. GAAP in fiscal years prior to
2006. The share option award expense that is recognized in fiscal years
subsequent to 2005 is in respect of share option awards granted after 1994 and
vesting in fiscal periods subsequent to 2005.
As the Company has selected the modified-retrospective transition method,
it must disclose the impact on net income in accordance with U.S. GAAP, and
net income in accordance with U.S. GAAP per Common Share and Non-Voting Share,
as if the fair value based method of accounting for the share-based
compensation had been applied in the comparative period.
On a prospective basis, commencing January 1, 2006, this will result in
there no longer being a difference between Canadian GAAP and U.S. GAAP
share-based compensation expense recognized in the results of operations
arising from current share-based compensation awards. As share option awards
granted subsequent to 1994 and prior to 2002 are captured by U.S. GAAP, but
are not captured by Canadian GAAP, differences in shareholders' equity
accounts arising from these awards will continue.
33
--------------------------------------------------------------------------------
notes to interim consolicated financial statements (unaudited)
--------------------------------------------------------------------------------
The application of the modified-retrospective transition method had the
following effect on comparative net income amounts presented:
Periods ended September 30, 2005 (millions except per share amounts) Three Nine months
months
---------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP
As previously reported $ 161.5 $ 574.3
Deduct: Share-based compensation arising from share option awards
determined under fair value based method for all awards(1) (4.1) (10.4)
---------------------------------------------------------------------------------------------------------
As currently reported $ 157.4 $ 563.9
---------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP per Common Share and Non-Voting
Share
Basic
As previously reported (using intrinsic value method) $ 0.45 $ 1.60
As currently reported (using fair value method) $ 0.44 $ 1.57
Diluted
As previously reported (using intrinsic value method) $ 0.45 $ 1.59
As currently reported (using fair value method) $ 0.44 $ 1.56
(1) The effect of the fair value method of accounting for share-based
compensation arising from share option awards on income before income
taxes and non-controlling interest and net income does not differ.
Further, the fair value method of accounting for share-based compensation
arising from share option awards does not affect cash flows from operating
activities nor does it affect cash flows from financing activities.
To reflect the fair value of share option awards granted subsequent to
1994, and vesting prior to 2006, certain components of shareholders' equity,
reflecting the application of U.S. GAAP, as at December 31, 2005, have been
adjusted as follows:
Shareholders' Equity
-------------------------------------------------------------------------------------
Accumulated
Retained other
Common Non-Voting earnings comprehensive Contributed
(millions) Shares Shares Options (deficit) income surplus Total
---------------------------------------------------------------------------------------------------------------------
Cumulative transition
adjustment for share-based
compensation arising from
share option awards granted
in fiscal years ending
December 31:
2002 and 2003 (total
Canadian GAAP transitional
amounts) $ -- $ 0.4 $ -- $ (25.1) $ -- $ 24.7 $ --
2004 and 2005 -- 25.7 -- (33.3) -- 7.6 --
---------------------------------------------------------------------------------------------------------------------
Total Canadian GAAP amounts -- 26.1 -- (58.4) -- 32.3 --
recognized as at
December 31, 2005
Cumulative transition
adjustment for share-based
compensation (and associated
effects) arising from share
option awards granted in
fiscal years ending
December 31, 1995 through
2001, inclusive(1) 7.4 50.3 -- (137.2) -- 79.5 --
---------------------------------------------------------------------------------------------------------------------
Total U.S. GAAP
transitional amounts 7.4 76.4 -- (195.6) -- 111.8 --
December 31, 2005, U.S.
GAAP amounts, as
previously reported 4,136.4 4,728.1 5.9 (589.9) (375.6) 119.9 8,024.8
---------------------------------------------------------------------------------------------------------------------
January 1, 2006, U.S.
GAAP amounts $4,143.8 $4,804.5 $ 5.9 $(785.5) $(375.6) $231.7 $8,024.8
=====================================================================================================================
(1) As share option awards granted subsequent to 1994 and prior to 2002 are
captured by U.S. GAAP, but are not captured by Canadian GAAP, differences
in shareholders' equity accounts arising from these awards will continue.
34
--------------------------------------------------------------------------------
notes to interim consolicated financial statements (unaudited)
--------------------------------------------------------------------------------
To reflect the fair value of option awards granted subsequent to 1994, and
vesting prior to 2005, certain components of shareholders' equity, reflecting
the application of U.S. GAAP, as at December 31, 2004, have been adjusted as
follows:
Shareholders' Equity
-------------------------------------------------------------------------------------
Options, Accumulated
warrants Retained other
Common Non-Voting and earnings comprehensive Contributed
(millions) Shares Shares other (deficit) income surplus Total
---------------------------------------------------------------------------------------------------------------------
Cumulative transition
adjustment for share-based
compensation arising from
share option awards granted
in fiscal years ending
December 31:
2002 and 2003 (total
Canadian GAAP transitional
amounts) $ -- $ 0.4 $ -- $ (25.1) $ -- $ 24.7 $ --
2004 -- 14.7 -- (19.1) -- 4.4 --
---------------------------------------------------------------------------------------------------------------------
Total Canadian GAAP amounts
recognized as at
December 31, 2004 -- 15.1 -- (44.2) -- 29.1 --
Cumulative transition
adjustment for share-based
compensation (and associated
effects) arising from share
option awards granted in
fiscal years ending
December 31, 1995 through
2001, inclusive(1) 3.4 10.5 -- (141.3) -- 127.4 --
---------------------------------------------------------------------------------------------------------------------
Total U.S. GAAP transitional
amounts 3.4 25.6 -- (185.5) -- 156.5 --
December 31, 2004, U.S. GAAP
amounts, as previously
reported 4,341.0 4,700.8 27.7 (590.2) (249.2) 119.9 8,350.0
---------------------------------------------------------------------------------------------------------------------
January 1, 2005, U.S. GAAP
amounts $4,344.4 $4,726.4 $ 27.7 $(775.7) $(249.2) $276.4 $8,350.0
---------------------------------------------------------------------------------------------------------------------
(1) As share option awards granted subsequent to 1994 and prior to 2002 are
captured by U.S. GAAP, but are not captured by Canadian GAAP, differences
in shareholders' equity accounts arising from these awards will continue.
(c) Operating expenses - Amortization of intangible assets
As TELUS' intangible assets on acquisition have been recorded at their fair
value (see (a)), amortization of such assets, other than for those with
indefinite lives, needs to be included under U.S. GAAP; consistent with prior
years, amortization is calculated using the straight-line method.
The incremental amounts recorded as intangible assets arising from the
TELUS acquisition above are as follows:
Accumulated
Cost Amortization Net Book Value
---------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
As at (millions) 2006 2005
---------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscribers - wireline $ 1,950.0 $ 330.5 $ 1,619.5 $ 1,654.2
Subscribers - wireless 250.0 250.0 -- 3.5
---------------------------------------------------------------------------------------------------------
2,200.0 580.5 1,619.5 1,657.7
---------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 1,833.3 1,833.3 -- --
---------------------------------------------------------------------------------------------------------
$ 4,033.3 $ 2,413.8 $ 1,619.5 $ 1,657.7
---------------------------------------------------------------------------------------------------------
(1) Accumulated amortization of spectrum licences is amortization recorded
prior to 2002 and the transitional impairment amount.
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at September 30, 2006, for
each of the next five fiscal years is as follows:
Years ending December 31 (millions)
---------------------------------------------------------------------------
2006 (balance of year) $ 67.4
2007 209.1
2008 121.3
2009 71.4
2010 62.9
35
--------------------------------------------------------------------------------
notes to interim consolicated financial statements (unaudited)
--------------------------------------------------------------------------------
(d) Goodwill
Merger of BC TELECOM and TELUS: Under the purchase method of accounting,
TELUS' assets and liabilities at acquisition (see (a)) have been recorded at
their fair values with the excess purchase price being allocated to goodwill
in the amount of $403.1 million. Commencing January 1, 2002, rather than being
systematically amortized, the carrying value of goodwill is periodically
tested for impairment.
Additional goodwill on Clearnet purchase: Under U.S. GAAP, shares issued
by the acquirer to effect an acquisition are measured at the date the
acquisition was announced; however, under Canadian GAAP, at the time the
transaction took place, shares issued to effect an acquisition were measured
at the transaction date. This results in the purchase price under U.S. GAAP
being $131.4 million higher than under Canadian GAAP. The resulting difference
is assigned to goodwill. Commencing January 1, 2002, rather than being
systematically amortized, the carrying value of goodwill is periodically
tested for impairment.
(e) Financing costs
Merger of BC TELECOM and TELUS: Under the purchase method, TELUS' long-term
debt on acquisition has been recorded at its fair value rather than at its
underlying cost (book value) to TELUS. Therefore, interest expense calculated
on the debt based on fair values at the date of acquisition under U.S. GAAP
will be different from TELUS' interest expense based on underlying cost (book
value). As of December 31, 2005, the amortization of this difference had been
completed.
(f) Accounting for derivatives
Under U.S. GAAP, all derivatives need to be recognized as either assets or
liabilities and measured at fair value. This is different from the Canadian
GAAP treatment for financial instruments. Under U.S. GAAP, derivatives which
are fair value hedges, together with the financial instrument being hedged,
will be marked to market with adjustments reflected in income and derivatives
which are cash flow hedges will be marked to market with adjustments reflected
in comprehensive income (see (h)).
(g) Income taxes
Three months Nine months
Periods ended September 30 (millions) 2006 2005 2006 2005
----------------------------------------------------------------------------------------------
Current $ (19.8) $ (2.3) $ (23.5) $ (21.0)
Deferred 141.3 94.5 212.3 274.5
----------------------------------------------------------------------------------------------
121.5 92.2 188.8 253.5
Investment Tax Credits -- -- (12.6) --
----------------------------------------------------------------------------------------------
$ 121.5 $ 92.2 $ 176.2 $ 253.5
===============================================================================================
The Company's income tax expense (recovery), for U.S. GAAP purposes,
differs from that calculated by applying statutory rates for the following
reasons:
Three-month periods ended September 30
($ in millions) 2006 2005
---------------------------------------------------------------------------------------------------
- Basic blended federal and provincial tax $ 145.7 33.6% $ 85.5 34.4%
at statutory income tax rates
Revaluation of deferred income tax
liability for change in statutory income
tax rates -- (0.2)
Tax rate differential on, and
consequential adjustments from,
reassessment of prior year tax issues (24.9) (0.7)
Share option award compensation 1.8 1.4
Change in estimates of available deductible
differences in prior years -- (1.5)
Investment Tax Credits -- --
Other (1.1) 3.6
---------------------------------------------------------------------------------------------------
121.5 28.0% 88.1 34.5%
Large corporations tax -- 4.1
---------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 121.5 28.0% $ 92.2 36.1%
====================================================================================================
36
--------------------------------------------------------------------------------
notes to interim consolicated financial statements (unaudited)
--------------------------------------------------------------------------------
Nine-month periods ended September 30
($ in millions) 2006 2005
----------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax $ 367.0 33.6% $ 283.7 34.5%
at statutory income tax rates
Revaluation of deferred income tax
liability for change in statutory income
tax rates (162.7) (1.4)
Tax rate differential on, and consequential
adjustments from, reassessment of prior
year tax issues (23.9) (12.0)
Share option award compensation 4.9 3.5
Change in estimates of available
deductible differences in prior years -- (37.5)
Investment Tax Credits (8.4) --
Other (0.7) 4.0
-----------------------------------------------------------------------------------------------------
176.2 16.1% 240.3 28.9%
Large corporations tax -- 13.2
----------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 176.2 16.1% $ 253.5 30.4%
====================================================================================================
(h) Additional disclosures required under U.S. GAAP - Comprehensive income
U.S. GAAP requires that a statement of comprehensive income be displayed with
the same prominence as other financial statements. Comprehensive income, which
incorporates net income, includes all changes in equity during a period except
those resulting from investments by and distributions to owners. There is no
requirement to disclose comprehensive income under Canadian GAAP prior to
fiscal periods beginning on or after January 1, 2007.
Three-month periods ended
September 30 (millions) 2006 2005
----------------------------------------------------------------------------------------------------------------------------------
Unrealized
fair Unrealized
Cumulative value of Cumulative fair value
foreign derivative foreign of
currency cash Minimum currency derivative Minimum
translation flow pension translation cash flow pension
adjustment hedges liability Total adjustment hedges liability Total
----------------------------------------------------------------------------------------------------------------------------------
Amount arising $ 0.4 $ (49.9) $ (0.9) $ (50.4) $ (2.2) $ (36.5) $ (0.9) $ (39.6)
Income tax expense (recovery) -- (16.8) (0.2) (17.0) -- (12.7) (0.2) (12.9)
----------------------------------------------------------------------------------------------------------------------------------
Net 0.4 (33.1) (0.7) (33.4) (2.2) (23.8) (0.7) (26.7)
Accumulated other
comprehensive income (loss),
beginning of period (6.5) (164.5) (170.6) (341.6) (4.1) (232.3) (127.2) (363.6)
----------------------------------------------------------------------------------------------------------------------------------
Accumulated other
comprehensive income (loss),
end of period $ (6.1) $ (197.6) $ (171.3) $ (375.0) $ (6.3) $ (256.1) $ (127.9) $ (390.3)
==================================================================================================================================
Nine-month periods ended
September 30 (millions) 2006 2005
----------------------------------------------------------------------------------------------------------------------------------
Unrealized
fair Unrealized
Cumulative value of Cumulative fair value
foreign derivative foreign of
currency cash Minimum currency derivative Minimum
translation flow pension translation cash flow pension
adjustment hedges liability Total adjustment hedges liability Total
----------------------------------------------------------------------------------------------------------------------------------
Amount arising $ 1.2 $ 6.3 $ (3.9) $ 3.6 $ (4.1) $ (206.0) $(2.8) $(212.9)
Income tax expense
(recovery) -- 3.3 (0.3) 3.0 -- (71.0) (0.8) (71.8)
----------------------------------------------------------------------------------------------------------------------------------
Net 1.2 3.0 (3.6) 0.6 (4.1) (135.0) (2.0) (141.1)
Accumulated other
comprehensive income
(loss), beginning of
period (7.3) (200.6) (167.7) (375.6) (2.2) (121.1) (125.9) (249.2)
----------------------------------------------------------------------------------------------------------------------------------
Accumulated other $(6.1) $(197.6) $(171.3) $(375.0) $ (6.3) $ (256.1) $(127.9) $(390.3)
comprehensive income
(loss), end of period
==================================================================================================================================
37
--------------------------------------------------------------------------------
notes to interim consolicated financial statements (unaudited)
--------------------------------------------------------------------------------
(i) Recently issued accounting standards not yet implemented
Employee future benefit plans. Under U.S. GAAP, first effective for its annual
financial statements for the year ended December 31, 2006, the Company will be
required to fully recognize the obligations associated with its employee
future benefit plans, as prescribed by Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 158, "Employers' Accounting
for Defined Benefit Pension and other Postretirement Plans". Applying this
standard, the funded status of the Company's plans will be shown gross on the
consolidated balance sheets and the difference between the net funded plan
states and the net accrued benefit asset or liability will be included as a
component of other comprehensive income. Concurrently, accounting for the
minimum pension liability will be discontinued. The Company continues to
assess the provisions of this statement.
Uncertain income tax positions: 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 continues to assess the provisions of the
Interpretation.
Single definition of "fair value". Under U.S. GAAP, effective for its 2008
fiscal year, the Company is expected to be required to comply with a unified
approach to fair value measurement of assets and liabilities, as prescribed by
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements". The Company is assessing the
provisions of this statement.
Other: As would affect the Company, there are no other U.S. accounting
standards currently issued and not yet implemented that would differ from
Canadian accounting standards currently issued and not yet implemented.
38
_______________________________________________________________________________
Management Discussion and Analysis
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 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.
TELUS' intention to reorganize in its entirety as an income trust,
announced on September 11, 2006, is subject to inherent risks and
uncertainties, including changes arising from the October 31, 2006
announcement by the federal Minister of Finance of a proposed new Tax
Fairness Plan affecting the future taxation level of income trusts and
corporations. No assurance can be given that TELUS' income trust
conversion will proceed, or be completed in the originally anticipated
January 2007 time-frame, or that any of the anticipated benefits and
implications of income trust conversion will be realized if the
conversion were to proceed. Unless noted explicitly, forward-looking
statements in Management's discussion and analysis are in the context of
TELUS continuing as a corporation.
Assumptions for 2006 guidance purposes include: economic growth
consistent with recent provincial and national estimates by the
Conference Board of Canada, including gross domestic product growth of
2.7% in Canada; increased wireline competition in both business and
consumer markets; a Canadian wireless industry market penetration gain of
4.5 to five percentage points; up to $80 million of restructuring and
workforce reduction expenses; an effective tax rate of approximately 23%;
no prospective significant acquisitions or divestitures; no change in
foreign ownership rules; and maintenance or improvement of investment-
grade credit ratings.
Factors that could cause actual results to differ materially include but
are not limited to: competition; technology (including reliance on
systems and information technology); regulatory developments (including
wireless number portability and possible future changes to the regulatory
environment); human resources; business integrations and internal
reorganizations; process risks (including billing system conversion);
financing and debt requirements (including share repurchases and debt
redemptions); tax matters (including changes to the taxation of income
trusts and corporations); health, safety and environment developments;
litigation and legal matters; business continuity events (including
manmade and natural threats); economic growth and fluctuations (including
pension performance, funding and expenses); and other risk factors
discussed herein and listed from time to time in TELUS' reports, public
disclosure documents including the Annual Information Form, and 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 and second quarter
Management's discussion and analyses, and this document.
=========================================================================
Management's discussion and analysis
November 1, 2006
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month and nine-month
periods ended September 30, 2006 and 2005, and should be read together with
TELUS' interim consolidated financial statements. 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' interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP"),
which differ in certain respects from U.S. GAAP. See Note 18 to the interim
consolidated financial statements for a summary of the principal differences
between Canadian and U.S. GAAP as they relate to TELUS. The interim
consolidated financial statements and Management's discussion and analysis
were reviewed by TELUS' Audit Committee and approved by TELUS' Board of
Directors. All amounts are in Canadian dollars unless otherwise specified.
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. 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. Overall performance A summary of TELUS' consolidated results for
the third quarter and first nine months of
2006
-------------------------------------------------------------------------
2. Core business, vision Examples of TELUS' activities in support of
and strategy its six strategic imperatives
-------------------------------------------------------------------------
3. Key performance drivers TELUS' 2006 priorities
-------------------------------------------------------------------------
4. Capability to deliver An update on TELUS' capability to deliver
results results
-------------------------------------------------------------------------
5. Results from operations A detailed discussion of operating results
for the third quarter and first nine months
of 2006
-------------------------------------------------------------------------
6. Financial condition A discussion of significant changes in the
balance sheet at September 30, 2006, as
compared to December 31, 2005
-------------------------------------------------------------------------
7. Liquidity and capital A discussion of cash flow, liquidity, credit
resources facilities, off-balance sheet arrangements
and other disclosures
-------------------------------------------------------------------------
8. Critical accounting A description of accounting estimates and
estimates and changes to accounting policies
accounting policy
developments
-------------------------------------------------------------------------
9. Full year guidance for A confirmation and revisions, if any, to
2006 TELUS' annual guidance
-------------------------------------------------------------------------
10. Risks and risk An update of risks and uncertainties facing
management TELUS and how it manages these risks
-------------------------------------------------------------------------
11. Reconciliation of non- A description, calculation and
GAAP measures and reconciliation of certain measures used by
definition of key management
operating indicators
-------------------------------------------------------------------------
1. Overall performance
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
The federal Minister of Finance announced late on October 31, 2006, a new
Tax Fairness Plan that is intended to change the relationships between the
future levels of taxation of income trusts and corporations. One element of
the proposed plan is a tax on distributions of business income earned by non-
passive investments by publicly traded income trusts and limited partnerships
(other than those which hold passive real estate investments). This is
intended to make an income trust's income tax treatment more like that of
public corporations. The announcement by the federal Minister of Finance
indicated that for income trusts, which begin trading after October 31, 2006,
the new tax measures will apply to the later of their 2007 taxation year and
the taxation year in which the income trust begins to trade. The result of the
application of these new proposals is expected to reduce the tax efficiency of
publicly traded income trusts.
TELUS is assessing the impact of this unexpected development on the
proposed reorganization of TELUS in its entirety as an income trust, announced
on September 11, 2006. At that time, TELUS indicated that the conversion would
be accomplished by way of a plan of arrangement under the Business
Corporations Act (British Columbia) that is subject to approval of at least
two thirds of the votes cast by the security holders of TELUS at a special
meeting expected to be held in January 2007. It was also noted that, although
the timing of the completion of the conversion process could not be predicted
with certainty, management anticipated completion in late January 2007.
As a result of the announcement by the federal Minister of Finance, there
can be no assurance at this time that TELUS will proceed with its proposed
income trust conversion. See the related risk discussion in Section 10.5
Income trust reorganization risks.
1.3 Consolidated highlights
-------------------------------------------------------------------------
($ millions, except
shares, per share Quarters ended Nine-month periods
Amounts, subscribers September 30 ended Sept. 30
and ratios) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Consolidated statements of income
-------------------------------------------------------------------------
Operating revenues 2,210.7 2,062.8 7.2 % 6,426.4 6,056.0 6.1 %
Operating income 569.1 430.5 32.2 % 1,543.7 1,350.4 14.3 %
Income before taxes
and non-controlling
interests 448.5 278.6 61.0 % 1,154.7 889.9 29.8 %
Net income 319.6 190.1 68.1 % 886.3 621.8 42.5 %
Earnings per share,
basic ($) 0.94 0.53 77.4 % 2.57 1.74 47.7 %
Earnings per share,
diluted ($) 0.92 0.53 73.6 % 2.54 1.72 47.7 %
Cash dividends
declared per
share ($) 0.275 0.20 37.5 % 0.825 0.60 37.5 %
-------------------------------------------------------------------------
Consolidated statements of cash flows
-------------------------------------------------------------------------
Cash provided by
operating activities 570.4 693.5 (17.8)% 2,056.5 2,109.6 (2.5)%
Cash used by
investing activities 451.0 263.3 71.3 % 1,253.2 979.5 27.9 %
Capital
expenditures 423.9 263.0 61.2 % 1,203.2 944.9 27.3 %
Cash used by financing
activities 126.2 249.2 (49.4)% 837.3 704.5 18.9 %
-------------------------------------------------------------------------
Subscribers and other measures
-------------------------------------------------------------------------
Subscriber
connections(1)
(thousands) at
end of period 10,531 9,981 5.5 %
EBITDA(2) 952.4 839.7 13.4 % 2,712.2 2,560.9 5.9 %
Free cash flow(3) 528.3 581.3 (9.1)% 1,367.0 1,355.7 0.8 %
-------------------------------------------------------------------------
Debt and payout ratios
-------------------------------------------------------------------------
Net debt to total
capitalization
ratio (%) (at end (0.1)
of period)(4) 45.3 45.4 pts
Net debt to EBITDA
ratio (12 months
ended September
30)(5) 1.6 1.8 (0.2)
Dividend payout ratio
(%) (12 months ended
September 30)(6) 39 38 1 pt
-------------------------------------------------------------------------
pt, 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 third quarter and first nine months
of 2006 to the respective periods in 2005):
- Subscriber connections increased over the 12-month period ended
September 30, 2006, as the number of wireless subscribers grew by
13.7% to 4.87 million, the number of Internet subscribers grew by
9.3% to 1.08 million and the number of network access lines decreased
by 2.8% to 4.58 million.
- Operating revenues increased as growth in wireless revenues and
wireline data revenues exceeded erosion in wireline voice local, long
distance and other revenues.
- Operating income grew primarily due to increased EBITDA and lower
amortization of intangible assets. EBITDA increased mainly because of
growth in wireless subscribers and average revenue per subscriber
unit ("ARPU") as well as the absence of labour disruption related
expenses in 2006 wireline EBITDA. Wireless segment EBITDA in the
third quarter of 2006 was a record quarterly amount for TELUS, and
exceeded wireline EBITDA for the first time. In addition, TELUS'
total EBITDA for the third quarter of 2006 was a record quarterly
amount since the merger of BC TELECOM and Alberta-based TELUS
Corporation in 1999.
- 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 in the third quarter and first
nine months 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 third quarter of 2006 included favourable
tax reductions for reassessments of prior years and related interest
income of approximately $30 million or nine cents per share. For the
first nine months of 2006, favourable impacts of tax-related
adjustments, including changes in statutory tax rates, were
approximately $145 million or 42 cents per share, compared with
favourable tax adjustments of approximately $75 million or 21 cents
per share in the first nine months of 2005.
- Based on the results for the first nine months, the Company revised
its annual guidance for 2006, subject to the Forward-looking
statements at the beginning of management's discussion and analysis.
See Section 9: Full year guidance for 2006.
Highlights, as discussed in Section 7: Liquidity and capital resources
include the following (comparing results for the third quarter and first nine
months of 2006 to the respective periods in 2005):
- Cash provided by operating activities decreased primarily due to the
reduction in proceeds from securitized accounts receivable.
- 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(R), strategic
investments in next-generation EVDO-capable higher speed wireless
network technology and continued enhancement of digital wireless
capacity and coverage.
- Cash used by financing activities decreased in the third quarter due
mainly to lower repurchases of shares under normal course issuer
bids. For the first nine months, cash used by financing activities
increased mainly due to lower proceeds from issuance of shares
resulting from a lower number of options being exercised and
implementation of the net equity settlement feature on May 1, 2006.
- Free cash flow decreased in the quarter as improved EBITDA (before
restructuring charges) was more than offset by increased capital
expenditures and lower interest received. For the first nine months,
free cash flow increased due mainly to increased EBITDA (before
restructuring charges), lower taxes and lower interest paid more than
offsetting increased capital expenditures and restructuring payments.
- Net debt to total capitalization at September 30, 2006 continued to
be in the target range of 45 to 50%.
- Net debt to EBITDA continued to be in the target range of 1.5:1 to
2.0:1.
- The dividend payout ratio for the twelve-month period ended
September 30, 2006 was lower than the target guideline of 45 to 55%
for sustainable net earnings due mainly to actual earnings including
the future income tax reduction from tax rate changes in the second
quarter of 2006 and tax recoveries in the third quarter of 2006.
- A dividend of 37.5 cents per share was declared for the fourth
quarter of 2006 for shareholders of record on December 11, 2006,
payable on January 1, 2007. This 36.4% increase in the quarterly
dividend is the third successive increase announced since 2004. This
level is consistent with the dividend payout guideline of 45 to 55%
of sustainable net earnings, based on the midpoint of TELUS' full
year guidance for 2006.
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 and second 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. Recent activities in support of
the Company's six strategic imperatives include the following:
Building national capabilities across data, IP (Internet protocol),
voice and wireless;
Focusing relentlessly on the growth markets of data, IP and wireless;
and
Building integrated solutions that differentiate TELUS from its
competitors
In September 2006, 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 network of
the Government of Ontario. 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, which allows secure
transmission and electronic sharing of information, and includes
videoconferencing and web conferencing services.
TELUS also announced in September 2006 that it intends to invest
$600 million between 2007 and 2009 to enhance broadband infrastructure. This
investment will enable emerging services and expand network coverage across
British Columbia, Alberta and Eastern Quebec. The $600 million complements the
approximately $190 million expected to be invested during 2006.
TELUS' broadband build is an important investment, paving the way for
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 customer 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. See the
related risk discussion in Section 10.1 Regulatory, Price cap regulation -
Disposition of funds in the deferral accounts.
Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy and focus TELUS' resources on core business
In August 2006, TELUS and Amp'd Mobile, Inc. (Amp'd Mobile) 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 expected to be
offered in Canada operating on TELUS' Wireless High Speed network in early
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 better reach
the high value young adult market segment with Amp'd Mobile's highly
differentiated, premium data and content centric services.
TELUS Ventures, the strategic venture investment division of TELUS, also
announced that it made a U.S. $7.5 million equity investment in Amp'd Mobile,
Inc., which is headquartered in California.
Investing in internal capabilities to build a high performance
culture and efficient operations
Two new collective agreements in the Province of Quebec have been
negotiated and ratified in 2006. Most recently, TELUS Quebec and Syndicat
quebecois des employes de TELUS (SQET) reached a tentative agreement in July,
and the membership ratified the agreement at the end of August. The agreement
covers more than 1,000 office, clerical and technical employees and will
remain in effect until the end of 2009. Highlights of the agreement include:
introduction of a variable pay component tied to the Company's performance
with a target payout of 3% in 2007 increasing to 5% in 2009, lump-sum payments
of 1.75% in 2006 and one per cent in 2007 for all salaried employees, general
wage increases of 1% in 2008 and 2009, an increase in the standard work week
by 2.5 paid hours to 37.5 hours for approximately 200 client care
representatives, and introduction of a defined contribution pension plan for
new employees (current employees remain covered by existing pension
arrangements).
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. The agreement
was ratified by union membership and came into effect on April 1, 2006. The
agreement is a one-year contract that included a 1.75% salary increase.
3. Key performance drivers
The Company set new priorities for 2006 to advance its 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 and second quarter
Management's discussion and analyses, and this document.
In addition to the many initiatives taken in 2006 to support priorities
detailed in Section 2 Core Business, vision and strategy, some additional
initiatives are itemized below.
-------------------------------------------------------------------------
2006 corporate priorities across wireline and wireless
-------------------------------------------------------------------------
Advance TELUS' leadership in the consumer market through:
- TELUS' future friendly suite of data applications for customers at
home and on the move
- Best-in-class customer loyalty through cost-effective customer
experience
- Expanding TELUS' channel partner relationships to strengthen its
distribution.
Advance TELUS' position in the business market through:
- Innovative solutions that enhance the competitiveness of TELUS'
customers and deepen their loyalty to TELUS
- Increasing the Company's share in the business market by leveraging
TELUS' mobile solutions such as high-speed data
- Improving delivery of managed solutions to small business customers.
Advance TELUS' position in the wholesale market through:
- Strengthening the Company's North American reach through innovative
IP solutions
- Establishing creative and preferred partnerships to grow TELUS'
national customer base
- Optimizing the use of partner networks to complement TELUS' network
investments.
Drive improvements in productivity and service excellence by:
- Realizing efficiencies from the integration of wireline and wireless
operations
- Driving improvements in enterprise-wide productivity and customer
service excellence to increase competitiveness
TELUS reinforced its commitment to bringing the wireless industry's
best experience to clients with the announcement of its Future
Friendly Promises of a dependable network, fast client service and
new phone offers.
- Capturing value from TELUS' investments in technology and innovation
to streamline operations.
Strengthen the spirit of the TELUS team and brand, and develop the best
talent in the global communications industry by:
- Continuing to leverage best practices across the Company
Through periodic 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.
- Cultivating a business ownership culture that embraces a philosophy
of "our business, our customers, our team, my responsibility"
On September 30, more than 5,000 TELUS team members, alumni and
family across Canada volunteered their time and energy to hundreds of
volunteer activities as part of the TELUS National Day of Service.
- Capitalizing on TELUS' reputation as a progressive, high-performance
Company to attract and retain the best team in Canada
TELUS held 28 information sessions and job fairs across Canada in the
third quarter of 2006, contributing to hiring of needed talent for
the future.
- Providing team members innovative opportunities for growth,
development and employment options.
Earlier this year, TELUS was awarded with a Thomson Illuminati award
for worldwide excellence in employee learning programs and practices;
2006 marked the third consecutive year in which TELUS has received a
prestigious Illuminati award.
-------------------------------------------------------------------------
4. Capability to deliver results
4.1 Operational capabilities across wireline and wireless
Development of a new billing system in the wireline segment
The development of a new wireline billing system progressed in the third
quarter of 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 in
Alberta is currently planned for the first quarter of 2007, with additional
phases of conversion planned over the next few years. See Section 10.4 Process
risks.
Efficiency programs
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 centers, including the consolidation of the retail office and call
center in Victoria into Calgary and Edmonton, as well as consolidation of the
conference operation into the BC lower mainland. 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.
Finally, with respect to 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. Approximately $95 million has been invested in
restructuring and work force reduction charges over the last four quarters.
In areas like office and call center consolidations, TELUS is
experiencing short conventional payback periods, whereas in the area of
outsourcing activities, implementation takes longer and paybacks can extend
over several years. It should be noted, however, that all of these initiatives
are expected to provide positive economic returns. See Section 10.4 Process
risks.
Integration of wireline and wireless operations
The integration of wireline and wireless continues subject to the risk
discussion in Section 10.3 Business integration and internal reorganizations.
4.2 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,
as well as TELUS' annual 2005 Management's discussion and analysis Section 9.3
Financing plan for 2006 and Section 10.7 Financing and debt requirements.
At September 30, 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")
In the first nine months of 2006, the Company repurchased
approximately 5.4 million Common Shares and 7.3 million Non-Voting
Shares for a total of $600.7 million. Between December 20, 2004 and
September 30, 2006, the Company repurchased approximately
16.3 million Common Shares and 19.4 million Non-Voting Shares for a
total of $1.57 billion under two NCIB programs. See Section 7.3 Cash
used by financing activities.
- Pay dividends
The declared dividend for the third quarter of 2006, payable on
October 1, was 27.5 cents per share, as compared to 20 cents per
share one year earlier. A 37.5 cent per share dividend was declared
for the fourth quarter of 2006, payable on January 1, 2007.
- Retain cash-on-hand for corporate purposes
The balance of securitized accounts receivable decreased by
$150 million during the first nine months of 2006, closing at
$350 million on September 30, 2006. Amounts outstanding under the
three-year credit facility and other bank facilities were
$132 million at September 30, a decrease of $10 million since
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 September 30, 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 debt maturing June 1,
2007, the Company had entered into forward starting interest rate
swap agreements during 2006 that, as at September 30, 2006, have the
effect of fixing the underlying interest rate on up to $500 million
of replacement debt.
- Preserve access to the capital markets at a reasonable cost by
maintaining investment grade credit ratings and targeting improved
credit ratings in the range of BBB+ to A-, or the equivalent, in the
future
Investment grade credit ratings from the four rating agencies that
cover TELUS were maintained. The ratings assigned by three credit
rating agencies are currently within TELUS' desired range, while
Moody's Investors Service's "Baa2" rating for TELUS (equivalent to
"BBB") is one position below TELUS' desired range. In September,
following TELUS' announcement of its intention to convert to an
income trust, three of four credit rating agencies that cover the
Company confirmed their ratings and adjusted their outlooks to
"stable" or "developing." Dominion Bond Rating Service placed their
ratings "under review with developing implications." The federal
government announced on October 31, 2006, a new Tax Fairness Plan
that affects the future level of taxation of income trusts and
corporations. TELUS is studying the implications of that announcement
and it is uncertain as of November 1, 2006 what the response of
credit rating agencies may be.
-------------------------------------------------------------------------
5. Results from operations
5.1 General
The Company has two reportable segments: wireline and wireless.
Segmentation is based on similarities in technology, the technical expertise
required to deliver the products and services, the distribution channels used
and regulatory treatment. Intersegment sales are recorded at the exchange
value. Segmented information is regularly reported to the Company's Chief
Executive Officer (the chief operating decision maker). Segmented disclosure
is reported in Note 4 of the interim consolidated financial statements.
5.2 Quarterly results summary
-------------------------------------------------------------------------
($ in millions,
except per share amounts) 2006 Q3 2006 Q2 2006 Q1 2005 Q4
-------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,200.3 1,189.9 1,198.6 1,209.9
Wireless segment 1,010.4 945.3 881.9 876.8
-------------------------------------------------------------------------
Operating revenues (consolidated) 2,210.7 2,135.2 2,080.5 2,086.7
Operations expense 1,245.8 1,207.4 1,201.1 1,316.8
Restructuring and workforce
reduction costs 12.5 30.7 16.7 35.5
-------------------------------------------------------------------------
EBITDA(1) 952.4 897.1 862.7 734.4
Depreciation 325.8 335.2 339.2 346.2
Amortization of intangible assets 57.5 46.9 63.9 67.0
-------------------------------------------------------------------------
Operating income 569.1 515.0 459.6 321.2
Other expense (income) 4.0 9.6 4.3 9.3
Financing costs 116.6 127.5 127.0 171.7
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interests 448.5 377.9 328.3 140.2
Income taxes 126.5 18.7 116.1 58.8
Non-controlling interests 2.4 2.6 2.1 2.9
-------------------------------------------------------------------------
Net income 319.6 356.6 210.1 78.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per weighted average
Common Share and Non-Voting
Share outstanding
- basic 0.94 1.03 0.60 0.22
- diluted 0.92 1.02 0.60 0.22
Dividends declared per Common Share
and Non-Voting Share outstanding 0.275 0.275 0.275 0.275
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in millions,
except per share amounts) 2005 Q3 2005 Q2 2005 Q1 2004 Q4
-------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,198.6 1,216.5 1,222.2 1,209.3
Wireless segment 864.2 802.0 752.5 755.6
-------------------------------------------------------------------------
Operating revenues (consolidated) 2,062.8 2,018.5 1,974.7 1,964.9
Operations expense 1,221.5 1,146.1 1,109.1 1,178.5
Restructuring and workforce
reduction costs 1.6 7.4 9.4 19.8
-------------------------------------------------------------------------
EBITDA(1) 839.7 865.0 856.2 766.6
Depreciation 335.6 330.9 329.9 338.3
Amortization of intangible assets 73.6 68.2 72.3 79.2
-------------------------------------------------------------------------
Operating income 430.5 465.9 454.0 349.1
Other expense (income) 7.1 0.5 1.5 8.7
Financing costs 144.8 168.2 138.4 152.8
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interests 278.6 297.2 314.1 187.6
Income taxes 86.9 106.0 70.3 50.4
Non-controlling interests 1.6 1.7 1.6 1.6
-------------------------------------------------------------------------
Net income 190.1 189.5 242.2 135.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per weighted average
Common Share and Non-Voting
Share outstanding
- basic 0.53 0.53 0.67 0.38
- diluted 0.53 0.52 0.66 0.37
Dividends declared per Common Share
and Non-Voting Share outstanding 0.20 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 arose from the combined effects of increased
average revenue per subscriber unit per month ("ARPU") and a growing
subscriber base. The trend also reflects growth in wireline segment data
revenue, while wireline long distance and other revenues have decreased.
Beginning in 2006, quarterly wireline local revenue decreased when compared to
the same periods in 2005, due to increasing competition for local services.
Wireline revenues until May 31, 2006 include the generally negative effect of
regulatory price cap decisions.
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 quarter of 2005. In addition, Restructuring and work
force reduction charges varied significantly by quarter, depending on the
progress of ongoing initiatives under way. Depreciation expense for the four-
quarter period ended September 30, 2006 increased slightly, when compared with
the four-quarter period ended September 30, 2005, due mainly to continued
investment in shorter-life data and wireless equipment, net of a lower expense
for fully depreciated assets. Amortization of intangible assets is decreasing
as several software assets have been fully amortized. Amortization expense in
the second quarter of 2006 was reduced by approximately $12 million for
investment tax credits due to settlement of outstanding tax matters relating
to assets capitalized in prior years that are now fully amortized. Notable is
the increased contribution of wireless EBITDA to total EBITDA, to 48% per cent
for the four-quarter period ended September 30, 2006, from 42% for the four-
quarter period ended September 30, 2005.
Within Financing costs, interest expenses trended lower except for two
significant one-time charges: a second quarter 2005 accrual of $17.5 million
in respect of a court decision in a lawsuit related to a 1997 BC TEL bond
redemption matter, and a fourth quarter 2005 charge of $33.5 million to early
redeem $1.578 billion of Notes. The early redemption of Notes on December 1,
2005, contributed significantly to lower Financing costs in the first three
quarters of 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 relating to
prior periods, including the current quarter tax recovery of approximately
$30 million, or nine cents per share, and a first quarter of 2005 income tax
recovery and related interest income net of taxes of approximately $54 million
or 15 cents per share.
Historically, there is significant fourth quarter seasonality with higher
wireless subscriber additions, related acquisition costs and equipment sales,
resulting in lower wireless EBITDA. The seasonality affects, to a lesser
extent, the wireline high-speed Internet subscriber additions and related
costs.
5.3 Consolidated results from operations
-------------------------------------------------------------------------
($ in millions Quarters ended Nine-month periods
except EBITDA September 30 ended Sept. 30
margin) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Operating revenues 2,210.7 2,062.8 7.2 % 6,426.4 6,056.0 6.1 %
Operations expense 1,245.8 1,221.5 2.0 % 3,654.3 3,476.7 5.1 %
Restructuring and
workforce reduction
costs 12.5 1.6 n.m. 59.9 18.4 n.m.
-------------------------------------------------------------------------
EBITDA(1) 952.4 839.7 13.4 % 2,712.2 2,560.9 5.9 %
Depreciation 325.8 335.6 (2.9)% 1,000.2 996.4 0.4 %
Amortization of
intangible assets 57.5 73.6 (21.9)% 168.3 214.1 (21.4)%
-------------------------------------------------------------------------
Operating income 569.1 430.5 32.2 % 1,543.7 1,350.4 14.3 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA margin (%)(2) 43.1 40.7 2.4 42.2 42.3 (0.1)
pts pts
Active employees at
end of period(3) 30,620 20,743 47.6 %
-------------------------------------------------------------------------
n.m. - not meaningful
(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.
(3) The total number of active employees at September 30, 2005 does not
include those inactive due to labour disruption. Normalized to
include absences due to the labour disruption, the number of
employees at September 30, 2005 was approximately 29,030, and the
normalized increase over the 12-month period is 5.5%.
-------------------------------------------------------------------------
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 $147.9 million and
$370.4 million, respectively, in the third quarter and first nine months of
2006, when compared with the same periods in 2005. Growth in wireless revenues
and wireline data revenues more than offset erosion in wireline voice local,
long distance and other revenues.
Operations expense
Consolidated operations expense increased by $24.3 million and
$177.6 million, respectively, in the third quarter and first nine months of
2006, when compared with the same periods in 2005. Operations expenses in the
third quarter and first nine months of 2005 included net labour disruption
expenses of approximately $65 million and $81 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 restructuring, advertising and
promotions and costs of sales. 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 approximately 5.5% (normalized to
exclude absences due to the labour disruption in 2005). The increase reflects
growth in the wireless segment, TELUS' international call centre operations
and human resources outsourcing services provided to customers of TELUS.
Restructuring and workforce reduction costs
Restructuring and workforce reduction costs increased by $10.9 million
and $41.5 million, respectively, in the third quarter and first nine months of
2006, when compared with the same periods in 2005. The Company's estimate of
restructuring and workforce reduction costs in 2006, arising from its ongoing
competitive efficiency program, which includes the office closures and
contracting out, and integration of wireline and wireless operations, is not
currently expected to exceed $80 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
September 30, 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 that 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.
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. For the three-month and nine-month periods ended
September 30, 2006, $0.3 million and $18.1 million, respectively, of
restructuring and workforce reduction costs were recorded in respect of this
initiative and were included with general programs initiated in 2006. As at
September 30, 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 integration of
Wireline and Wireless operations, for the three-month and nine-month periods
ended September 30, 2006, $1.2 million and $8.0 million, respectively, of
restructuring and workforce reduction costs were recorded 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 approximately
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 September 30, 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 September 30, 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 approximately 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 September 30, 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 $112.7 million and $151.3 million, respectively, in
the third quarter and first nine months of 2006, when compared with the same
periods in 2005. Excluding labour disruption expense impacts in 2005,
consolidated EBITDA increased in the third quarter and first nine months by
approximately $48 million and $70 million, respectively. The increase was due
primarily to growth in the wireless segment, partly offset by a decrease in
wireline segment EBITDA from increased competition for local services,
continued long distance revenue erosion as well increased operations expenses
and restructuring charges in 2006.
Depreciation and amortization expenses
Depreciation expense decreased by $9.8 million in the third quarter of
2006 and increased by $3.8 million in the first nine months of 2006, when
compared with the same periods in 2005. The decrease for the quarter resulted
mainly from retirements and an increase in fully depreciated assets. The
increase for the first nine months was due to a reduction in service lives for
computer servers and furniture and write-offs of network assets, net of
increased retirements.
Amortization of intangible assets decreased by $16.1 million and
$45.8 million, respectively, in the third quarter and first nine months of
2006, when compared with the same periods in 2005, primarily as a result of
several software assets becoming fully amortized. The decrease for the first
nine months included approximately $12 million of investment tax credits,
recorded in the second quarter of 2006 following the resolution of prior
years' tax matters, for assets capitalized in prior years that are now fully
amortized.
Operating income
Operating income increased by $138.6 million and $193.3 million,
respectively, in the third quarter and first nine months of 2006, when
compared with the same periods in 2005, due primarily to growth in EBITDA and
reduced amortization of intangible assets, as described above.
Other income statement items
-------------------------------------------------------------------------
Quarters ended Nine-month periods
Other expense, net September 30 ended Sept. 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
4.0 7.1 (43.7)% 17.9 9.1 96.7 %
-------------------------------------------------------------------------
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 $3.7 million and $12.4 million,
respectively, in third quarter and first nine months of 2006, as compared to
$1.1 million and $3.1 million, respectively, in the same periods in 2005. The
increase resulted primarily from a higher balance of proceeds from securitized
accounts receivable in 2006 (see Section 7.6 Accounts receivable sale). Net
gains on the sale of investments and real estate in 2006 exceeded net gains in
2005, while charitable donations increased in 2006.
-------------------------------------------------------------------------
Quarters ended Nine-month periods
Financing costs September 30 ended Sept. 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Interest on long-
term debt, short-
term obligations
and other 125.6 157.2 (20.1)% 378.1 494.7 (23.6)%
Foreign exchange
losses (gains) (0.3) (0.1) n.m. 4.5 3.0 n.m.
Interest income (8.7) (12.3) 29.3 % (11.5) (46.3) 75.2 %
-------------------------------------------------------------------------
116.6 144.8 (19.5)% 371.1 451.4 (17.8)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expenses decreased by $31.6 million and $116.6 million,
respectively, in the third quarter and first nine months of 2006, when
compared with same periods in 2005. The decrease was due primarily to lower
debt levels as a result of early redemption of $1.578 billion of 7.50%, Series
CA, Notes on December 1, 2005. The decrease for the first nine months was also
due to two events in the second quarter of 2005: (i) the accrual of
$17.5 million in respect of a court decision in a lawsuit related to a 1997 BC
TEL bond redemption matter; and (ii) the conversion/redemption of convertible
debentures. Debt, measured as the sum of Long-term debt, current maturities
and the net deferred hedging liability, was $5,772 million at September 30,
2006, a 20% reduction from $7,238 million on September 30, 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 $3.6 million and $34.8 million,
respectively, in the third quarter and first nine months of 2006, when
compared with the same periods in 2005, due primarily to: (i) lower cash and
temporary investments as available cash balances were used for the December
2005 debt redemption; and (ii) recognition of greater tax refund interest in
2005.
-------------------------------------------------------------------------
Quarters ended Nine-month periods
Income taxes September 30 ended Sept. 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Blended federal
and provincial
statutory income
tax based on net
income before tax 150.7 93.6 61.0 % 388.0 304.8 27.3 %
Revaluation of future
tax liability for
change in statutory
tax rates - (12.8) n.m. (107.0) (12.8) n.m.
Tax rate differential
on, and consequential
adjustments from,
reassessments for
prior years (24.9) (0.7) n.m. (23.9) (12.0) n.m.
Changes in estimates
of available
deductible
differences in
prior years - (1.5) n.m. - (37.5) n.m.
Other and large
corporations tax 0.7 8.3 n.m. 4.2 20.7 n.m.
-------------------------------------------------------------------------
126.5 86.9 45.6 % 261.3 263.2 (0.7)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Blended federal and
provincial statutory (0.6)
tax rates (%) 33.6 33.6 - 33.6 34.2 pts
Effective tax (3.0) (7.0)
rates (%) 28.2 31.2 pts 22.6 29.6 pts
-------------------------------------------------------------------------
The increase in the blended federal and provincial statutory income tax
expense in the third quarter and first nine months of 2006, when compared with
the same periods in 2005, was due mainly to respective increases of 61% and
30% in income before taxes. In addition, the blended federal and provincial
tax rate decreased for the nine-month period due to a reduction to general
corporate income tax rates on income taxed in B.C. effective July 1, 2005 and
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. The tax rate differential on, and consequential
adjustments from, reassessments for prior years reduced the 2006 income tax
expense in the third quarter and first nine months. Based on management's
current guidance, described in Section 9, the effective tax rate for the full
year of 2006 is expected to be approximately 23% primarily as a result of
provincial and federal tax rate changes and reassessments of prior years.
Excluding the effects of a possible income trust conversion and 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 fully 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, the
Company does not expect to pay Canadian cash income taxes until 2008 due to
the availability of tax losses, reserves and other temporary items.
-------------------------------------------------------------------------
Non-controlling Quarters ended Nine-month periods
interest September 30 ended Sept. 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
2.4 1.6 50.0 % 7.1 4.9 44.9 %
-------------------------------------------------------------------------
Non-controlling interest represents minority shareholders' interests in
several small subsidiaries.
5.4 Wireline segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Nine-month periods
wireline segment September 30 ended Sept. 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Voice local 533.4 541.8 (1.6)% 1,592.3 1,637.4 (2.8)%
Voice long distance 199.1 221.5 (10.1)% 612.6 676.4 (9.4)%
Data 410.8 376.2 9.2 % 1,207.5 1,133.6 6.5 %
Other 57.0 59.1 (3.6)% 176.4 189.9 (7.1)%
-------------------------------------------------------------------------
External operating
revenue 1,200.3 1,198.6 0.1 % 3,588.8 3,637.3 (1.3)%
Intersegment revenue 23.5 23.6 (0.4)% 71.8 67.4 6.5 %
-------------------------------------------------------------------------
Total operating
revenue 1,223.8 1,222.2 0.1 % 3,660.6 3,704.7 (1.2)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
----------------------------------------------
Network access lines As at September 30
(000s) 2006 2005 Change
-------------------------
Residential network
access lines 2,809 2,952 (4.8)%
Business network
access lines 1,770 1,757 0.7 %
-------- -------- -------
Total network access
lines(1) 4,579 4,709 (2.8)%
---------------------------
Quarters ended Nine-month periods
September 30 ended Sept. 30
2006 2005 Change 2006 2005 Change
----------------------------------------------------
Change in residential
network access lines (39) (32) (21.9)% (119) (86) (38.4)%
Change in business
network access lines (1) - n.m. 7 (13) n.m.
-------- -------- ------- -------- -------- -------
Change in total network
access lines(1) (40) (32) (25.0)% (112) (99) (13.1)%
-------------------------------------------------------------------------
(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 September 30
(000s) 2006 2005 Change
-------------------------
High-speed Internet
subscribers 872.3 736.1 18.5 %
Dial-up Internet
subscribers 205.5 249.8 (17.7)%
-------- -------- -------
Total Internet
subscribers(2) 1,077.8 985.9 9.3 %
---------------------------
Quarters ended Nine-month periods
September 30 ended Sept. 30
2006 2005 Change 2006 2005 Change
----------------------------------------------------
High-speed Internet
net additions 41.5 7.1 n.m. 109.3 46.4 135.6 %
Dial-up Internet
net reductions (11.4) (10.7) (6.5)% (30.7) (31.8) 3.5 %
-------- -------- ------- -------- -------- -------
Total Internet
subscriber net
additions 30.1 (3.6) n.m. 78.6 14.6 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 $1.6 million in the third quarter
and decreased by $44.1 million in the first nine months of 2006, when compared
with the same periods in 2005, due to the following:
- Voice local revenue decreased by $8.4 million and $45.1 million,
respectively. 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 first nine months 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 (voice over Internet protocol) 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. In 2006,
competitors' cable telephony is offered in more places within TELUS'
incumbent regions including Fort McMurray, Rimouski, Vancouver and
Victoria, while in 2005 cable telephony was available only in Calgary
(February 2005) and Edmonton (April 2005). Total business lines
increased during the first nine months of 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 the first nine-months of 2005 included the loss of a large
business customer.
- Voice long distance revenues decreased by $22.4 million and
$63.8 million, respectively. 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 America
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.
- Wireline segment data revenues increased by $34.6 million and
$73.9 million, respectively. 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 were relatively unchanged, while broadcast and
videoconferencing services increased modestly.
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 per month rate. In addition, deactivations of existing
customers of high-speed Internet decreased. The comparative third
quarter of 2005 was constrained by a labour disruption that limited
installation activity.
- Other revenue decreased by $2.1 million and $13.5 million,
respectively. The decrease in the third quarter was due primarily to
reduced co-location DC power rates retroactive to November 2000
(Telecom Decision 2006-42-1), partly offset by increased voice
equipment sales. The decrease for the first nine months was primarily
due to lower voice equipment sales and reduced co-location DC power
rates.
- 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
$159.7 million and $485.1 million, respectively, in the third quarter and
first nine months of 2006. This represents increases of 5.5% and 4.0%,
respectively, when compared with the same periods in 2005. Recent contracts
contributed to increased enhanced data and managed workplace service revenues.
Voice local revenues increased modestly, while voice and data equipment sales
decreased. Growth in revenues was partly offset by re-pricing of renewal
contracts and competitive pricing affecting new contracts.
-------------------------------------------------------------------------
Operating expenses -
wireline segment Quarters ended Nine-month periods
($ millions, September 30 ended Sept. 30
except employees) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Salaries, benefits
and other employee-
related costs 416.9 394.9 5.6 % 1,247.0 1,231.5 1.3 %
Other operations
expenses 325.6 399.6 (18.5)% 964.5 1,011.4 (4.6)%
-------------------------------------------------------------------------
Operations expense 742.5 794.5 (6.5)% 2,211.5 2,242.9 (1.4)%
Restructuring and
workforce reduction
costs 11.7 1.6 n.m. 56.4 18.4 n.m.
-------------------------------------------------------------------------
Total operating
expenses 754.2 796.1 (5.3)% 2,267.9 2,261.3 0.3 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Active employees at
end of period(1)(2) 23,369 14,958 56.2 %
-------------------------------------------------------------------------
(1) The total number of active employees at September 30, 2005 does not
include those inactive due to labour disruption. Normalized to
include absences due to the labour disruption, the number of
employees at September 30, 2005 was approximately 22,402, and the
normalized increase over the 12-month period is 4.3%.
(2) The number of employees in TELUS' international call centres was
approximately 3,940 for September 30, 2006 and 2,645 on September 30,
2005. The number of employees providing human resources outsourcing
services to TELUS customers was approximately 450 on September 30,
2006 and 325 on September 30, 2005.
-------------------------------------------------------------------------
Total operating expenses decreased by $41.9 million in the third quarter
of 2006 and increased by $6.6 million in the first nine months of 2006, when
compared with the corresponding periods in 2005. Operations expenses excluding
labour disruption impacts increased by approximately $26 million and
$91 million due primarily to increased charges for restructuring initiatives,
increased advertising and promotion activity, as well as the use of
contractors for network support and maintenance activities in the first
quarter of 2006, facilitating clearance of backlogs and freeing up TELUS staff
to improve customer service, as reflected in improved quality-of-service
metrics defined by the CRTC. When normalized to exclude absences due to the
labour disruption in 2005 as well as increased employment at international
call centres and for the provision of human resource outsourcing services to
customers, the number of employees at September 30, 2006 decreased by
approximately 450, when compared to one year earlier.
- Salaries, benefits and employee-related expenses increased by
$22.0 million and $15.5 million, respectively, in the third quarter
and first nine months 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, which saw all bargaining
unit employees in B.C. and less than half of bargaining unit
employees in Alberta absent at September 30, 2005. Excluding labour
disruption impacts, salaries, benefits and employee-related expenses
decreased by approximately $5 million and $11 million, respectively.
- Other operations expenses decreased by $74.0 million and
$46.9 million, respectively, in the third quarter and first nine
months of 2006, when compared with the same periods in 2005.
Decreases in other expenses were mainly due to the absence of labour
disruption related expenses in the 2006 periods. Excluding labour
disruption related expenses in 2005, other operations expenses
increased by approximately $21 million and $64 million, respectively.
The increases included: (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 broadcast and videoconferencing
equipment sales (iii) increased expenses for outsourcing of non-core
functions; (iv) increased facilities, transit and termination
expenses in the nine month period due to higher traffic volumes to
the U.S.; and (v) increased network support and maintenance costs for
the nine month period; net of (vi) reduced expenses for higher
capitalization of labour associated with 2006 capital programs, as
well as lower bad debt expenses.
- Restructuring and work force reduction costs applicable to the
wireline segment increased by $10.1 million and $38.0 million,
respectively.
Total expenses discussed above included non-ILEC expenses of
$150.0 million and $463.7 million, respectively, in the third quarter and
first nine months of 2006, increases of 0.9% and 2.5%, respectively, when
compared with same periods in 2005. Expense increases for the nine-month
period included increased contract and consulting expenses and higher
salaries, benefits and employee-related costs, as well as higher facilities
costs to support increased data services. These increases were party offset by
a lower cost of sales related to lower equipment sales revenue.
-------------------------------------------------------------------------
EBITDA and EBITDA Quarters ended Nine-month periods
margin - wireline September 30 ended Sept. 30
segment 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 469.6 426.1 10.2 % 1,392.7 1,443.4 (3.5)%
EBITDA margin (%) 38.4 34.9 3.5 38.0 39.0 (1.0)
pts pt
-------------------------------------------------------------------------
Wireline segment EBITDA increased by $43.5 million in the third quarter
and decreased by $50.7 million in the first nine months of 2006, when compared
with the same periods in 2005. This included non-ILEC EBITDA, which improved
by $7.0 million and $7.3 million, respectively, in the third quarter and first
nine months of 2006, when compared to the same periods in 2005. Excluding
labour disruption related expenses in 2005, total wireline EBITDA decreased by
approximately $25 million and $135 million, respectively, in the third quarter
and first nine months of 2006. The decrease was due mainly to lower revenues
from increased competition for local services, continued long distance revenue
erosion, as well as an increase in advertising and promotions costs, network
support and maintenance costs, and restructuring charges.
5.5 Wireless segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Nine-month periods
wireless segment September 30 ended Sept. 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Network revenue 944.5 808.8 16.8 % 2,653.2 2,247.7 18.0 %
Equipment revenue 65.9 55.4 19.0 % 184.4 171.0 7.8 %
-------------------------------------------------------------------------
External operating
revenue 1,010.4 864.2 16.9 % 2,837.6 2,418.7 17.3 %
Intersegment revenue 6.0 5.7 5.3 % 17.1 17.2 (0.6)%
-------------------------------------------------------------------------
Total operating
revenue 1,016.4 869.9 16.8 % 2,854.7 2,435.9 17.2 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
----------------------------------------------
Key operating indicators - wireless segment
(000s) As at September 30
2006 2005 Change
-------------------------
Subscribers -
postpaid 3,949.1 3,523.6 12.1 %
Subscribers -
prepaid 925.2 762.1 21.4 %
-------- -------- -------
Subscribers -
total(1) 4,874.3 4,285.7 13.7 %
Digital POPs(2)
covered including
roaming/resale
(millions)(3) 31.0 30.2 2.6 %
---------------------------
Quarters ended Nine-month periods
September 30 ended Sept. 30
2006 2005 Change 2006 2005 Change
----------------------------------------------------
Subscriber gross
additions - postpaid 215.8 213.2 1.2 % 601.2 608.0 (1.1)%
Subscriber gross
additions - prepaid 116.7 93.4 24.9 % 312.7 250.4 24.9 %
-------- -------- ------- -------- -------- -------
Subscriber gross
additions - total 332.5 306.6 8.4 % 913.9 858.4 6.5 %
Subscriber net
additions - postpaid 108.6 104.6 3.8 % 282.3 283.3 (0.4)%
Subscriber net
additions - prepaid 28.6 33.4 (14.4)% 71.3 66.0 8.0 %
-------- -------- ------- -------- -------- -------
Subscriber net
additions - total 137.2 138.0 (0.6)% 353.6 349.3 1.2 %
Churn, per month 0.03 (0.05)
(%)(4)(5) 1.36 1.33 pts 1.33 1.38 pts
COA(6) per gross
subscriber addition
($)(4) 386 371 4.0 % 402 356 12.9 %
ARPU ($)(4) 65.67 64.01 2.6 % 63.10 61.15 3.2 %
Average minutes of
use per subscriber
per month (MOU) 409 408 0.2 % 403 395 2.0 %
EBITDA to network
revenue (%) 51.1 51.1 - 49.7 49.7 -
Retention spend to
network revenue(4) 1.3 0.8
(%) 6.7 5.4 pts 6.4 5.6 pts
EBITDA ($ millions) 482.8 413.6 16.7 % 1,319.5 1,117.5 18.1 %
EBITDA excluding COA
($ millions)(4) 611.4 527.3 15.9 % 1,686.9 1,423.1 18.5 %
-------------------------------------------------------------------------
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 September 30, 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) Due to a change in business policy early in 2006 requiring postpaid
customers to provide 30 days notice prior to deactivation, a one-time
deferral of approximately 4,800 deactivations. Normalized to exclude
this one-time positive impact, the churn rate was 1.34% in the first
nine months of 2006.
(6) Cost of acquisition.
-------------------------------------------------------------------------
Wireless segment revenues increased by $146.5 million and $418.8 million,
respectively, in the third quarter and first nine months of 2006, when
compared with the same periods in 2005, due to the following:
- Network revenue increased by $135.7 million and $405.5 million,
respectively, as a result of the 13.7% expansion of the subscriber
base combined with increased average revenue per subscriber unit per
month ("ARPU"). ARPU increased by $1.66 and $1.95, respectively, in
the third quarter and first nine months of 2006, when compared to the
same periods in 2005, principally due to increased data usage as well
as higher average minutes of use per subscriber per month ("MOU").
The increase in ARPU represented the 15th successive quarter of year
over year growth.
Data revenues increased to 7.8% of Network revenue, or $74.1 million,
in the third quarter of 2006 as compared with 4.5% of Network
revenues, or $36.3 million, in the third quarter of 2005. Similarly,
data revenues increased to 7.1% of Network revenue, or
$188.2 million, for the first nine months of 2006 as compared with
4.0% of Network revenue, or $88.8 million, for the same period in
2005. Data ARPU increased by 79.3% to $5.11 for the third quarter of
2006 and increased by 85.8% to $4.44 for the first nine months of
2006 as compared with $2.85 and $2.39, respectively, for the same
periods in 2005. This growth was principally related to text
messaging, PDA (personal digital assistant) devices, mobile
computing, Internet browser activities and pay-per-use downloads such
as ringtones, music, games and videos.
At September 30, 2006, postpaid subscribers represented 81.0% of the
total cumulative subscriber base, remaining relatively stable from
one year earlier. The 108,600 postpaid subscriber net additions for
the third quarter of 2006 represented 79.2% of all net additions as
compared with 104,600 or 75.8% of all net additions for the same
period in 2005. This represented a second consecutive quarter that
postpaid subscriber net additions as a percentage of total subscriber
net additions increased year over year. For the first nine months of
2006, postpaid subscriber net additions of 282,300 (79.8% of all net
additions) were consistent when compared with 283,300 (81.1% of all
net additions) for the same period in 2005.
The blended churn rates for the third quarter and first nine months
of 2006 were 1.36% and 1.33%, respectively, as compared with 1.33%
and 1.38% for the same periods in 2005. The postpaid monthly churn
rates for the third quarter and first nine months of 2006 were
approximately one per cent and improved over the same periods last
year. The prepaid churn rates increased in the third quarter and
first nine months of 2006 when compared with the same periods in
2005. Total deactivations were 195,300 for the third quarter and
560,300 for the first nine months of 2006, compared with 168,600 and
509,100, respectively, for the same periods in 2005, which primarily
reflects the growing subscriber base.
- Equipment sales, rental and service revenue increased by
$10.5 million and $13.4 million, respectively, due mainly to
continued subscriber growth. Gross subscriber additions grew to
332,500 and 913,900 in the third quarter and first nine months of
2006, respectively, as compared with 306,600 and 858,400 for the same
periods in 2005. Handset revenues associated with gross subscriber
activations are included in COA per gross subscriber addition.
- Intersegment revenues represent services provided by the wireless
segment to the wireline segment and are eliminated upon consolidation
along with the associated expense in the wireline segment.
-------------------------------------------------------------------------
Operating expenses -
wireless segment Quarters ended Nine-month periods
($ millions, September 30 ended Sept. 30
except employees) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Equipment sales
expenses 148.2 114.7 29.2 % 411.3 328.9 25.1 %
Network operating
expenses 114.9 101.7 13.0 % 332.4 298.9 11.2 %
Marketing expenses 102.0 91.8 11.1 % 287.8 253.5 13.5 %
General and
administration
expenses 167.7 148.1 13.2 % 500.2 437.1 14.4 %
-------------------------------------------------------------------------
Operations expense 532.8 456.3 16.8 % 1,531.7 1,318.4 16.2 %
Restructuring and
workforce reduction
costs 0.8 - n.m. 3.5 - n.m.
-------------------------------------------------------------------------
Total operating
expenses 533.6 456.3 16.9 % 1,535.2 1,318.4 16.4 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Active employees at
end of period(1) 7,251 5,785 25.3 %
-------------------------------------------------------------------------
(1) The total number of active employees at September 30, 2005 does not
include those inactive due to labour disruption. Normalized to
include absences due to the labour disruption, the number of
employees at September 30, 2005 was approximately 6,628, and the
normalized increase over the 12-month period is 9.4%.
-------------------------------------------------------------------------
Wireless segment total operating expenses increased by $77.3 million in
the third quarter and $216.8 million for the first nine months of 2006, when
compared with the same periods in 2005, to promote, retain and support the
13.7% growth in the subscriber base and significant increase in Network
revenue.
- Equipment sales expenses increased by $33.5 million and
$82.4 million, respectively, due principally to an increase in gross
subscriber activations, 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 local number portability (WLNP) in early
2007, are included in the overall retention spend amount.
- Network operating expenses increased by $13.2 million and
$33.5 million, respectively, due principally to higher roaming
volumes within Canada. In addition, transmission and site-related
expenses increased to support the greater number of cell sites, a
larger subscriber base, certain third party data content providers,
and improved network quality and coverage.
- Marketing expenses increased by $10.2 million and $34.3 million,
respectively, due primarily to increased advertising and promotions
costs, higher dealer compensation costs related to the increase in
gross subscriber additions, and increased re-contracting activity.
COA per gross subscriber addition increased by $15 in the third
quarter and $46 for the first nine months of 2006 as compared with
for the same periods in 2005. The increase was principally related to
higher subsidies on certain popular handsets driven by competitive
activity and higher advertising and promotion spending related to new
product launches. Moreover, the increase during the first nine months
included increased advertising and promotion spending (including the
launch in the first quarter of two advertising campaigns, SPARK(TM)
and Broadband on the Fly(TM)). COA per gross subscriber addition
decreased by $8 to $386 when compared to the second quarter of 2006
due to reduced handset subsidies for certain popular handsets.
Notably, this was the second successive quarter in 2006 of improved
COA per gross subscriber addition. Despite a slightly higher churn
rate in the third quarter, the increased ARPU contributed to improved
lifetime revenue per subscriber by $46 to $4,845. For the first nine
months of 2006, lifetime revenue per subscriber increased by $325 to
$4,743. COA as a percentage of lifetime revenue was 8.0% in the third
quarter of 2006, similar to 8.1% recorded in the second quarter of
2006, and an increase from 7.7% in the third quarter of 2005.
- General and administration expenses increased by $19.6 million and
$63.1 million, respectively, due principally to the increase in
employees to support the significant growth in the subscriber base
and continued expansion of the client care team and company-owned
retail stores and to a lesser extent, savings realized as a result of
a labour disruption in the third quarter of 2005.
- Restructuring and workforce reduction expenses were related to staff
reductions associated with the integration of the wireline and
wireless operations.
-------------------------------------------------------------------------
EBITDA and EBITDA Quarters ended Nine-month periods
margin - wireless September 30 ended Sept. 30
segment 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 482.8 413.6 16.7 % 1,319.5 1,117.5 18.1 %
EBITDA margin (%) 47.5 47.5 - 46.2 45.9 0.3
pts
-------------------------------------------------------------------------
Wireless segment EBITDA increased by $69.2 million and $202.0 million,
respectively, in the third quarter and first nine months of 2006, when
compared to the same periods in 2005. The improvement in EBITDA was a result
of the strong revenue growth that was only partially offset by the higher COA
per gross subscriber addition, increased retention investment ahead of the
implementation of WLNP next year, and operations costs to support the growth.
The EBITDA margin, when calculated as a percentage of Network revenue, was
51.1% in the third quarter and 49.7% for the first nine months of 2006
remaining steady over the same periods last year.
6. Financial condition
The following are the significant changes in the consolidated balance
sheets between December 31, 2005 and September 30, 2006.
-------------------------------------------------------------------------
Sept. 30, Dec. 31, % Explanation of the
($ millions) 2006 2005 Change Change change in balance
-------------------------------------------------------------------------
Current Assets
Cash and (25.4) 8.6 (34.0) n.m. The balance of cash
temporary and temporary
investments, investments at
net September 30, 2006
represents net
cheques in
circulation and
overdrafts after
deduction of cash
balances. See Section
7. Liquidity and
capital resources
Short-term 98.8 - 98.8 n.m. Investments of
investments surplus cash
Accounts 739.7 610.3 129.4 21.2 % Increased by $150
receivable million for the net
reduction in
securitized accounts
receivable (see
Section 7.6 Accounts
receivable sale) and
growth in the
wireless business,
partly offset by
lower days
outstanding for
customer receivables,
as well as receipts
from large customers
in the first quarter
Income and 49.0 103.7 (54.7) (52.7)% Refunds of $127
other taxes million including
receivable interest were
received, while a
portion of the
remaining taxes owing
were reclassified to
current Income and
other taxes payable,
net of an increase in
taxes and interest
receivable for recent
reassessments
Inventories 144.0 138.8 5.2 3.7 % --
Prepaid 237.2 154.7 82.5 53.3 % Primarily prepayment
expenses of federal payroll
and other taxes, property
taxes, annual
wireless licence
fees, other licences
and insurance, net of
applicable
amortization, as well
as the deferred loss
on termination and
replacement of cross
currency interest
rate swaps associated
with the June 1, 2007
(U.S. Dollar) Notes.
Current portion 5.6 - 5.6 n.m. --
of deferred
hedging asset
Current portion - 226.4 (226.4) (100.0)% Refer to current
of future liability section
income taxes below
-------------------------------------------------------------------------
Current
Liabilities
Accounts 1,405.0 1,393.7 11.3 0.8 % Primarily an increase
payable in interest payable
and accrued for semi-annual
liabilities payments, net of
reduced payroll
liabilities and trade
accounts payable
Income and 12.9 - 12.9 n.m. Provincial capital
other taxes taxes and foreign
payable income taxes payable
over the next 12
months
Restructuring 59.3 57.1 2.2 3.9 % New obligations
and workforce exceeded payments
reduction under previous
accounts programs
payable and
accrued
liabilities
Advance 571.0 571.8 (0.8) (0.1)% --
billings
and customer
deposits
Current 1,378.4 5.0 1,373.4 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 186.4 - 186.4 n.m. Reclassified from
portion of long-term liabilities
deferred for 2007 U.S. Dollar
hedging Notes
liability
Current 119.3 - 119.3 n.m. The tax effect of
portion of differences between
future income the accounting and
taxes tax basis of
partnership working
capital, net of
losses available for
deduction
-------------------------------------------------------------------------
Working (2,483.4) (785.1)(1,698.3) n.m. Includes an increase
capital(1) in the current
portions of long-term
debt and future
income taxes payable
-------------------------------------------------------------------------
Capital 10,975.4 10,941.5 33.9 0.3 % See Sections 5.3
Assets, Net Consolidated results
from operations -
Depreciation and
amortization and 7.2
Cash used by
investing activities
- capital
expenditures
-------------------------------------------------------------------------
Other Assets
Deferred 979.6 850.2 129.4 15.2 % Primarily pension
charges plan contributions in
excess of charges to
income
Investments 32.9 31.2 1.7 5.4 % New investments net
of divestitures
Goodwill 3,192.3 3,156.9 35.4 1.1 % The acquisition of
FSC Internet Corp.
and an increase in
economic interest in
Ambergris, an
international call
centre operations.
TELUS' ownership
interest in Ambergris
is now 91.3%.
-------------------------------------------------------------------------
Long-Term Debt 3,407.6 4,639.9 (1,232.3) (26.6)% Primarily a
reclassification to
current maturities of
TCI medium-term Notes
maturing in February
2007 and TELUS
Corporation U.S.
Dollar Notes due June
2007, as well as a
decrease in the
Canadian Dollar value
of U.S. Dollar Notes,
partly offset by the
public issue in May
2006 of $300 million
5.00%, Series CB
Notes
-------------------------------------------------------------------------
Other Long- 1,330.5 1,635.3 (304.8) (18.6)% Primarily a reduction
Term in the deferred
Liabilities 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. See Note
14(b) of the
interim
consolidated
financial
statements;
- reclassification of
$186 million to
current
liabilities; and
- partly offset by an
increase due to
appreciation of the
Canadian dollar
-------------------------------------------------------------------------
Future 948.5 1,023.9 (75.4) (7.4)% Revaluation of
Income Taxes liabilities at lower
enacted future income
tax rates net of an
increase in temporary
differences for long-
term assets and
liabilities
-------------------------------------------------------------------------
Non-Controlling 22.3 25.6 (3.3) (12.9)% --
Interests
-------------------------------------------------------------------------
Shareholders'
Equity
Common 6,987.9 6,870.0 117.9 1.7 % Increased during the
equity first nine months or
2006 primarily from:
- Net income of
$886.3 million; and
- An increase of
$92.6 million in
Common Share and
Non-Voting Share
capital for the
exercise of
options;
Partly offset by:
- Normal Course
Issuer Bid
expenditures of
$600.7 million; and
- Dividends of
$284.5 million.
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
-------------------------------------------------------------------------
7. Liquidity and capital resources
7.1 Cash provided by operating activities
-------------------------------------------------------------------------
Quarters ended Nine-month periods
September 30 ended Sept. 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
570.4 693.5 (17.8)% 2,056.5 2,109.6 (2.5)%
-------------------------------------------------------------------------
Cash provided by operating activities decreased by $123.1 million and
$53.1 million, respectively, in the third quarter and first nine months of
2006, when compared with the same periods in 2005. The decreases for the
quarter and first nine months were primarily due to the following:
- Proceeds from securitized accounts receivable were reduced by
$185 million and $150 million, respectively, in the third quarter and
first nine months of 2006, compared with no changes to securitized
accounts receivable in the comparable periods of 2005;
- Short-term investments increased by $98.8 million in the third
quarter and first nine months;
- Employer contributions to employee defined benefits plans increased
by $14.5 million in the first nine months, due to the voluntary net
acceleration of funding in 2006. The best estimate of fiscal 2006
employer contributions to the Company's defined benefit pension plans
was revised to approximately $132 million (the best estimate at
December 31, 2005, was $114 million);
- Restructuring and workforce reduction payments increased by
$6.4 million and $20.3 million, respectively;
- Interest received decreased by $8.7 million and $10.5 million,
respectively, due mainly to lower available cash balances in 2006,
net of increased interest collected in the first nine months of 2006
for settled tax matters; and
- Other changes in non-cash working capital for the first nine months.
The above decreases for the third quarter and first nine months were
partly offset by the following:
- EBITDA increased by $112.7 million and $151.3 million, respectively,
as described in Section 5: Results from operations;
- Income taxes received net of installment payments increased by
$72.0 million in the nine-month period, due mainly to increased
collection of income taxes receivable for settled tax matters;
- Non-cash share based compensation included in EBITDA, increased by
$14.1 million in the first nine months;
- Interest paid decreased by $21.5 million in the first nine months,
due mainly to the early redemption of notes on December 1, 2005.
Interest paid in 2006 included a $31.2 million payment in respect of
the termination of cross currency interest rate swaps, as well as a
partial payment of previously accrued interest in respect of a court
decision in a lawsuit over a BC TEL bond redemption matter dating
back to 1997; and
- Other changes in non-cash working capital for the third quarter.
7.2 Cash used by investing activities
-------------------------------------------------------------------------
Quarters ended Nine-month periods
September 30 ended Sept. 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
451.0 263.3 71.3 % 1,253.2 979.5 27.9 %
-------------------------------------------------------------------------
Cash used by investing activities increased by $187.7 million and
$273.7 million, respectively, in the third quarter and first nine months of
2006, when compared with the same periods in 2005, due primarily to greater
capital expenditures. Funds used for small acquisitions also increased by
$25.0 million and $15.1 million, respectively, primarily due to the increase
in economic interest in Ambergris. Assets under construction increased to
$779.9 million at September 30, 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 Nine-month periods
expenditure September 30 ended Sept. 30
intensity) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Wireline segment 311.4 176.5 76.4 % 881.8 684.0 28.9 %
Wireless segment 112.5 86.5 30.1 % 321.4 260.9 23.2 %
-------------------------------------------------------------------------
TELUS consolidated
capital
expenditures 423.9 263.0 61.2 % 1,203.2 944.9 27.3 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditure 6.5 3.1
intensity(1) (%) 19.2 12.7 pts 18.7 15.6 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.
-------------------------------------------------------------------------
- Wireline segment capital expenditures increased by $134.9 million and
$197.8 million, respectively, in the third quarter and first nine
months of 2006, when compared to the same periods in 2005.
Expenditures in incumbent operations increased by approximately
$128 million to $284 million in the third quarter, and increased by
approximately $194 million to $800 million for the first nine months.
The increased spending was directed primarily to investments in the
broadband networks in B.C., Alberta and Quebec and network access
growth to serve strong housing growth in B.C. and Alberta, as well as
TELUS TV. The increase for the first nine months of 2006 included
catch-up on activities deferred in 2005 due to the labour disruption.
To support business growth in non-incumbent operations, capital
expenditures increased by approximately $7 million to $27 million in
the third quarter, and increased by approximately $4 million to
$82 million for the first nine months of 2006, when compared with the
same periods in 2005.
The wireline segment capital expenditure intensity ratios were 25.4%
and 24.1%, respectively, in the third quarter and first nine months
of 2006, compared with 14.4% and 18.5%, respectively, in the same
periods of 2005. This increase was caused by reduced capital
expenditures during the 2005 labour disruption as well as subsequent
catch-up activity and higher planned expenditures levels in 2006. For
these reasons, wireline cash flow (EBITDA less capital expenditures)
for the third quarter decreased by approximately 37% to
$158.2 million, and decreased by approximately 33% to $510.9 million
in first nine months of 2006, when compared to same periods in 2005.
- Wireless segment capital expenditures increased by $26.0 million in
the third quarter and $60.5 million for the first nine months of
2006. The increases were 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
11.1% in the third quarter and 11.3% in the first nine months of
2006, as compared with 9.9% and 10.7% in the same periods last year.
Wireless cash flow (EBITDA less capital expenditures) set TELUS third
quarter and nine-month records at $370.3 million and $998.1 million,
respectively, or increases of 13.2% and 16.5%, respectively, over the
same periods in 2005.
Capital expenditure intensity in the third quarter and first nine months
of 2006 increased when compared with the same periods in 2005. This increase
was caused by reduced capital expenditures during the 2005 labour disruption
as well as subsequent catch-up activity and higher planned expenditures levels
in 2006. As a result, TELUS' EBITDA less capital expenditures (see Section
11.1 EBITDA for the calculation) decreased by $48.2 million and
$107.0 million, respectively, in the third quarter and first nine months of
2006, when compared with the same periods in 2005.
7.3 Cash used by financing activities
-------------------------------------------------------------------------
Quarters ended Nine-month periods
September 30 ended Sept. 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
126.2 249.2 (49.4)% 837.3 704.5 18.9 %
-------------------------------------------------------------------------
Cash used by financing activities decreased by $123.0 million in the
third quarter and increased by $132.8 million, in the first nine months of
2006, when compared with the same periods in 2005. Financing activities
included:
- Proceeds from Common Shares and Non-Voting Shares issued were
$37.2 million and $82.9 million, respectively, in the third quarter
and first nine months of 2006 - decreases of $19.1 million and
$117.4 million, respectively, when compared with the same periods in
2005. The decreases were due mainly to the exercise of a smaller
number of options in 2006 and implementation of the net equity
settlement feature on May 1, 2006.
- Cash dividends paid to shareholders were $93.8 million and
$284.5 million, respectively in the third quarter and first nine
months of 2006, an increase of $22.1 million and $68.9 million,
respectively. The increase was due to the higher quarterly dividend
paid per share (27.5 cents versus 20 cents), partly offset by lower
average shares outstanding.
- The Company's current NCIB program came into effect on December 20,
2005 and is set to expire on December 19, 2006. TELUS intends to
renew its current NCIB program for an additional 12 month period. In
the absence of an income trust conversion, this would enable
significant purchases consistent with past NCIB programs.
The following table outlines the shares repurchased and costs under the
second NCIB program for the third quarter and first nine months of 2006, and
cumulatively.
Second normal course issuer bid program
-------------------------------------------------------------------------
Shares Purchased for cancellation
--------------------------------------------------
Nine months
ended
2005 Q4 Sept. 30,
(from Dec. 20) 2006 Q3 2006 Cumulative
-------------------------------------------------------------------------
Common Shares 634,469 743,700 5,440,600 6,075,069
Non-Voting Shares 607,700 1,328,600 7,306,400 7,914,100
-------------------------------------------------------------------------
Total 1,242,169 2,072,300 12,747,000 13,989,169
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------
Shares Maximum
permitted Percentage
for of maximum
repurchase repurchased
-------------------------------------------------
Common Shares 12,000,000 50.6%
Non-Voting Shares 12,000,000 66.0%
-------------------------------------------------
Total 24,000,000 58.3%
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------------------------------
$ millions Cost of repurchase
--------------------------------------------------
Nine months
ended
2005 Q4 Sept. 30,
(from Dec. 20) 2006 Q3 2006 Cumulative
-------------------------------------------------------------------------
Reduction of:
Share capital 20.9 37.9 224.2 245.1
Retained earnings 36.6 81.8 376.5 413.1
-------------------------------------------------------------------------
Total 57.5 119.7 600.7 658.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
A previous NCIB program was in place during the same periods in 2005.
Under the previous program, the Company purchased approximately
2.5 million Common Shares and approximately 2.6 million Non-Voting
Shares for total consideration of $233.1 million during the third
quarter of 2005, and the Company purchased approximately 7.6 million
Common Shares and approximately 8.1 million Non-Voting Shares for
total consideration of $663.5 million during the first nine months of
2005. The total repurchases under two NCIB programs for the period of
December 20, 2004 to September 30, 2006 were approximately
16.3 million Common Shares and 19.4 million Non-Voting Shares for
total consideration of $1.57 billion.
- 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. See Note 14(b) of the
interim consolidated financial statements. 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. On a net basis, the amount drawn
from credit facilities in the quarter ended September 30, 2006
increased by $58.7 million, but decreased by $9.8 million since
December 31, 2005.
- A partial payment $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 $300 million, representing a portion of the amount that
would have been due either under the cross currency interest rate
swap agreements or to the 2007 (U.S. Dollar) Note holders (to whom
the amounts would ultimately have been paid would depend upon changes
in interest and foreign exchange rates over the period to maturity of
the underlying debt).
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
As at, or 12-month periods
ended, Sept. 30 2006 2005 Change
-------------------------------------------------------------------------
Components of debt and coverage ratios(1)
-----------------------------------------
($ millions)
Net debt 5,797.2 5,915.8 (118.6)
Total capitalization - book value 12,807.4 13,037.2 (229.8)
EBITDA excluding restructuring 3,542.0 3,365.7 176.3
Net interest cost 542.8 604.2 (61.4)
Debt ratios
-----------
Fixed-rate debt as a proportion of
total indebtedness (%) 98.0 93.1 6.9 pts
Average term to maturity of debt (years) 4.8 4.6 0.2
Net debt to total capitalization (%)(1) 45.3 45.4 (0.1) pts
Net debt to EBITDA(1)(3) 1.6 1.8 (0.2)
Coverage ratios(1)
------------------
Interest coverage on long-term debt 3.3 2.7 0.6
EBITDA(3) interest coverage 6.5 5.6 0.9
Other measures
--------------
Free cash flow ($ millions) -
12-month trailing(2) 1,476.8 1,477.6 (0.8)
Dividend payout ratio (%)(1) 39 38 1 pt
-------------------------------------------------------------------------
(1) See Section 11.4 Definition of liquidity and capital resource
measures.
(2) See Section 11.2 Free cash flow for the definition.
(3) EBITDA excluding restructuring.
-------------------------------------------------------------------------
Net debt measured at September 30, 2006 decreased when compared to one-
year earlier due to early redemption of $1.578 billion of Notes on December 1,
2005, partly offset by the use of cash and temporary investments (cash is
netted against debt for the purposes of this calculation). Total
capitalization also decreased for these reasons as well as a decrease in
common equity due primarily to share repurchases under NCIB share repurchase
programs. The net debt to EBITDA ratio measured at September 30, 2006 improved
as a result of debt reduction and improved EBITDA. The proportion of fixed-
rate debt increased mainly due to the termination of fixed to floating
interest rate swap agreements concurrent with the early redemption of notes in
December 2005.
Interest coverage on long-term debt improved by 0.3 because of increased
income before taxes and interest expense, and improved by 0.3 because of lower
interest expenses. The EBITDA interest coverage ratio improved by 0.6 due to
lower net interest cost and improved by 0.3 due to higher EBITDA (excluding
restructuring). The free cash flow measure for the twelve-month period ended
September 30, 2006 was relatively unchanged when compared with the measure one
year earlier, primarily because increased EBITDA was offset by increased
capital expenditures. The dividend payout ratio for the twelve-month period
ended September 30, 2006 was lower than the target guideline of 45 to 55% for
sustainable net earnings due mainly to actual earnings including the future
income tax reduction from tax rate changes in the second quarter of 2006 and
tax recoveries in the third quarter of 2006. The dividend payout ratio for the
twelve-month period ending September 30, 2005 was also lower than the target
guideline due primarily to actual earnings including tax recoveries, net of
after-tax labour disruption expenses.
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 1.5:1 to 2.0:1
- 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 $1.4 billion at September 30, 2006.
-------------------------------------------------------------------------
Outstanding
Credit Facilities undrawn
At September 30, 2006 letters
($ 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 800.0 125.0 100.1
Other bank facilities - 74.0 7.2 3.8
-------------------------------------------------------------------------
Total - 1,674.0 132.2 103.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 1.6:1 at
September 30, 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 6.5:1 at September 30, 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.
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, 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 has an initial
term ending July 18, 2007. 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
November 1, 2006. The balance of proceeds from securitized receivables varied
between $350 million and $535 million during the third quarter, and varied
between $325 million and $535 million during the first nine months of 2006,
closing at $350 million on September 30, 2006. The balance for the first nine
months of 2005 was constant at $150 million, which is the minimum necessary to
keep this program active.
7.7 Credit ratings
As of November 1, 2006 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. 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. In
September, following TELUS' announcement of its intention to convert to an
income trust, the four credit rating agencies that cover the Company adjusted
their outlooks or trends.
- Dominion Bond Rating Service placed its "BBB(high)" rating for TELUS
and "A(low)" for TCI "under review with developing implications."
- Moody's Investors Service affirmed its "Baa2" rating for TELUS and
changed the outlook from "positive" to "developing."
- Standard and Poor's affirmed its "BBB+" ratings for TELUS and TCI
long-term corporate credit and unsecured debt as well as its "A-"
rating for TCI First mortgage bonds, all with a "stable" outlook.
- Fitch Ratings affirmed its "BBB+" ratings and "stable" outlook for
TELUS and TCI.
At this time, TELUS is uncertain as to how these ratings may be affected
by the October 31, 2006 announcement by the federal Minister of Finance.
7.8 Off-balance sheet arrangements, commitments and contingent
liabilities
Financial instruments (Note 3 of the interim consolidated
financial statements)
During the first quarter of 2006, the Company entered into a hedging
relationship that fixes the Company's compensation cost arising from a
specific grant of restricted stock units; hedge accounting has been applied to
this relationship.
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. The Company entered into these agreements to
reduce or eliminate exposure to interest rate and foreign currency risk. Hedge
accounting has been applied to the new cross currency interest rate swap
agreements.
As at September 30, 2006, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rate on U.S.
$49 million of fiscal 2006 purchase commitments; hedge accounting has been
applied to these foreign currency forward contracts, all of which relate to
the Wireless segment.
In contemplation of the planned refinancing of the debt maturing
June 1, 2007, the Company has entered into forward starting interest rate swap
agreements during 2006 that, as at September 30, 2006, have the effect of
fixing the underlying interest rate on up to $500 million of replacement debt.
Hedge accounting has been applied to these forward starting interest rate swap
agreements.
The fair values of the Company's long-term debt are estimated based on
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same maturity as well as the use of
discounted future cash flows using current rates for similar financial
instruments subject to similar risks and maturities. The fair values of the
Company's derivative financial instruments used to manage exposure to interest
rate and currency risks are estimated similarly. The carrying amount and fair
value of long-term debt are as follows:
As at September 30, As at December 31,
2006 2005
-------------------------------------------------------------------------
Carrying Fair Carrying Fair
($ millions) amount value amount value
-------------------------------------------------------------------------
Long-term debt
Principal 4,786.0 5,424.1 4,644.9 5,371.6
Derivatives used to
manage interest rate
and currency risks
associated with U.S.
dollar denominated
debt, net 982.8 1,292.7 1,154.3 1,470.5
-------------------------------------------------------------------------
5,768.8 6,716.8 5,799.2 6,842.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingent liabilities
The Company has a $59.3 million liability recorded for outstanding
commitments under its restructuring programs as at September 30, 2006. The
Company's commitments and contingent liabilities, which are summarized in Note
16 of the interim consolidated financial statements, have not changed
significantly in the nine-month period ended September 30, 2006, except for
the following:
Deferral accounts
On February 16, 2006, the CRTC issued Telecom Decision 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 incumbent local exchange carrier'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 five per cent 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, subject to
potential CRTC changes in amounts estimated by the Company as noted above, 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 Telecom Decision 2006-9. 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. See the risk discussion in Section 10.1
Regulatory - Price cap regulation - Disposition of funds in the deferral
accounts (Telecom Decision CRTC 2006-9).
Pay equity
On December 16, 1994, the Telecommunications Workers Union ("TWU") filed
a complaint against BC TEL, a predecessor of TELUS Communications Inc. (TCI),
with the Canadian Human Rights Commission ("CHRC"), alleging that wage
differences between unionized male and female employees in British Columbia
were contrary to the equal pay for work of equal value provisions in the
Canadian Human Rights Act. As a term of the negotiated settlement between TCI
and the TWU that resulted in the collective agreement effective November 20,
2005, the parties have agreed to settle this complaint without any admission
of liability, on the basis that the Company will establish a pay equity fund
of $10 million to be paid out during the term of the new five-year collective
agreement; the TWU withdrew and discontinued this complaint on
December 21, 2005. During the first quarter of 2006, the CHRC advised the
Company that it accepted this settlement and that it would close its file on
the complaint.
Uncertified class action
A class action was brought August 9, 2004, under the Class Actions Act
(Saskatchewan), against a number of past and present wireless service
providers including the Company. The claim alleges that each of the carriers
is in breach of contract and has violated competition, trade practices and
consumer protection legislation across Canada in connection with the
collection of system access fees, and seeks to recover direct and punitive
damages in an unspecified amount. Similar proceedings have also been filed by,
or on behalf of, plaintiffs' counsel in other provincial jurisdictions. On
July 18, 2006, the Saskatchewan court declined to certify the action as a
class action, but granted the plaintiffs leave to renew their application in
order to further address certain statutory requirements respecting class
actions. The Company believes that it has good defences to these actions.
Should the ultimate resolution of these actions differ from management's
assessments and assumptions, a material adjustment to the Company's financial
position and the results of its operations could result.
7.9 Outstanding share information
The following is a summary of the outstanding shares for each class of
equity at September 30, 2006 and at October 20, 2006. In addition, for
October 20, 2006 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
Shares Shares Shares
(millions of shares) outstanding outstanding outstanding
-------------------------------------------------------------------------
At September 30, 2006
Common equity - Common Shares
outstanding 178.7 - 178.7
Common equity - Non-Voting
Shares outstanding - 162.0 162.0
-------------------------------------------------------------------------
178.7 162.0 340.7(1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At October 20, 2006
Common equity - Common Shares
outstanding 178.7 - 178.7
Common equity - Non-Voting
Shares outstanding - 162.1 162.1
-------------------------------------------------------------------------
178.7 162.1 340.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Outstanding and issuable
shares(2) at October 20, 2006
Common Shares and Non-Voting
Shares outstanding 178.7 162.1 340.8
Options(3) 0.9 19.2 20.1
-------------------------------------------------------------------------
179.6 181.3 360.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share for the
third quarter of 2006, the number of shares was 346.0.
(2) Assuming full conversion and ignoring exercise prices.
(3) Not reduced by any options that may be forfeited or cancelled during
the period October 1 to October 20.
-------------------------------------------------------------------------
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.
Earnings per share; convergence with International Reporting
Standards
Possibly commencing in the Company's 2006 fiscal year, proposed
amendments to the recommendations of the CICA for the calculation and
disclosure of earnings per share (CICA Handbook Section 3500) may have applied
to the Company. In July 2006, the typescript with the current proposed
amendments was withdrawn and an announcement was made indicating that an
International Financial Reporting Standards-based exposure draft would be
issued by the end of 2006.
In early 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. During 2006, the Accounting Standards Board is expected to develop and
publish a detailed implementation plan with a transition period expected to be
approximately five years. As this convergence initiative is very much in its
infancy as of the date of these interim consolidated financial statements, it
would be premature to currently assess the impact of the initiative, if any,
on the Company.
Other comprehensive income; Accounting changes; and Business
combinations
Amendments and proposed amendments commencing in the Company's 2007
fiscal year or later are described in Note 2 of the interim consolidated
financial statements.
Other recently issued accounting standards not yet implemented
As described in Note 18(i) of the interim consolidated financial
statements, 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. The Company continues to assess the provisions of the
Interpretation.
9. Full year guidance for 2006
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, as well as the first and second quarters of
2006 and this report.
The Company has a practice of confirming or adjusting annual guidance on
a quarterly basis. There is no assurance that these assumptions or the revised
2006 financial and operating targets and projections will turn out to be
accurate. Revised guidance for 2006 shown below reflects expectations based on
performance for nine months, as well as a revised estimate for annual
restructuring charges of up to $80 million (previously up to $100 million),
affecting consolidated EBITDA and wireline EBITDA. Management currently
expects that the Canadian wireless industry market penetration will increase
between 4.5 and five percentage points in 2006, when compared with 2005. The
effective income tax rate for the full year is expected to be approximately
23%. TELUS' full year earnings guidance for 2006 assumes certain positive tax
adjustments in the fourth quarter, which are estimates only, that may not be
realized because the estimates are dependent on future events. In addition,
TELUS' full year earnings guidance includes estimated income trust conversion
expenses of approximately $7 million in 2006, if the income trust conversion
were to proceed.
The Conference Board of Canada recently estimated Canadian real gross
domestic product ("GDP") to be 2.7% for 2006 and 2.9% for 2007, down from
previous Conference Board estimates of 3.1% for each. While TELUS' previous
full year guidance for 2006 had assumed a 3.1% rate for national 2006 GDP,
provincial growth projections show that Alberta and B.C. continue to exceed
the national average.
-------------------------------------------------------------------------
Previous
Revised guidance guidance from
for 2006 2006 Q2 Change
-------------------------------------------------------------------------
Consolidated
Revenues $8.65 to $8.625 to increased low end of
$8.7 billion $8.725 billion range by $25 million
EBITDA(1) $3.55 to $3.5 to increased low end of
$3.6 billion $3.6 billion range by $50 million
Earnings per $3.15 to $2.90 to increased by 15 to
share - basic $3.25 $3.10 25 cents
Capital no Approx.
expenditures change $1.6 billion no change
Free cash $1.6 to $1.55 to increased low end of
flow(2) $1.65 billion $1.65 billion range by $50 million
-------------------------------------------------------------------------
Wireline segment
Revenue $4.8 to $4.825 to lowered low and high
(external) $4.825 billion $4.850 billion ends of range by
$25 million each
Non-ILEC $650 to
revenue no change $675 million no change
EBITDA $1.825 to $1.8 to increased low end of
$1.85 billion $1.85 billion range by $25 million
Non-ILEC $25 to
EBITDA no change $30 million no change
Capital Approx. Approx. increased by approx.
expenditures $1.175 billion $1.15 billion $25 million
High-speed
Internet net More than More than Raised minimum
additions 135,000 125,000 expectation by 10,000
-------------------------------------------------------------------------
Wireless segment
Revenue $3.85 to $3.8 to increased low end of
(external) $3.875 billion $3.875 billion range by $50 million
EBITDA $1.725 to $1.7 to increased low end of
$1.75 billion $1.75 billion range by $25 million
Capital Approx. Approx. reduced by approx.
expenditures $425 million $450 million $25 million
Wireless
subscriber 560,000 to
net additions no change 590,000 no change
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest taxes depreciation and
amortization (EBITDA).
(2) See Section 11.2 Free cash flow.
-------------------------------------------------------------------------
10. Risks and risk management
TELUS' approach to the management of risk has not changed significantly
from that described in Section 10: Risks and risk management of the Company's
2005 annual Management's discussion and analysis. The following are
significant updates to the risks described in Management's discussions and
analyses for the year 2005 as well as the first and second 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.
Reconsideration of Regulatory framework for voice communication
services using Internet Protocol (Telecom Decision CRTC 2006-53)
and
Proceeding to reassess certain aspects of the local forbearance
framework (Telecom Public Notice CRTC 2006-12)
On May 12, 2005, the CRTC released its decision regarding regulatory
requirements for the provision of voice communication services using Internet
protocol, also known as VoIP. Decision 2005-28 divided VoIP service providers
into two groups: ILECs who are regulated in a manner similar to existing local
service regulation; and others, including cable-TV companies, who are not
subject to price regulation. Rules with respect to access to numbers, number
portability, directory listings, equal access, the winback rules, rules on
promotions, bundling and price floors were extended to VoIP services. In 2005,
TELUS and other ILECs jointly petitioned the Federal Cabinet to overturn
Decision 2005-28, and also sought leave to appeal regulation on winbacks with
the Federal Court of Appeal.
On May 4, 2006, the Federal Cabinet issued an Order in Council that
referred Decision 2005-28 back to the CRTC for further consideration and
specified that the CRTC shall complete its reconsideration of the decision
within 120 days (by September 2006). The Order in Council noted that the
March 2006 report from the Telecommunications Policy Review Panel included the
recommendation to rely on market forces to the maximum extent feasible. The
Order in Council also noted VoIP technology had transformed the nature and
extent of competition in telecommunications markets and recent Telecom
Decisions CRTC 2005-62 and 2006-11 allowed for greater flexibility in the
pricing of VoIP services provided by one incumbent telephone company.
On May 10, 2006, in accordance with the Order in Council, the CRTC
initiated a public proceeding to reconsider the appropriate regulatory regime
and any other pertinent matters applicable to the provision of VoIP services.
On September 1, 2006 in Decision 2006-53, the CRTC reaffirmed the regulatory
regime for local VoIP services established in Telecom Decision 2005-28, but
chose to reconsider the market share forbearance criteria of 25% for local
exchange services and the 20% market share loss threshold applicable to the
transitional local winback rule. Notable is that one CRTC commissioner issued
a dissenting opinion that the CRTC should forbear from regulating VoIP
services except for emergency services, privacy protection, access to
underlying structures and telephone number portability. Two CRTC commissioners
agreed with Decision 2006-53 and opposed reconsideration of the forbearance
threshold criteria. To address the local market share forbearance criteria and
the market share loss threshold applicable to the transitional local winback
rule, the CRTC issued Telecom Public Notice 2006-12. The comment period closed
in October 2006 and a decision is expected in late 2006 or early 2007. In
early October 2006, the Industry Minister sought input from provincial
ministries on the regulation of VoIP services.
There can be no assurance that reconsideration of forbearance and winback
restriction criteria by the CRTC or consultations on VoIP regulations by the
federal government will result in more favourable regulation of VoIP services
for TELUS in its incumbent regions of B.C., Alberta and Eastern Quebec.
Appeal to Federal Cabinet of Telecom Decision CRTC 2006-15:
Forbearance from the regulation of retail local exchange services
On May 12, 2006, TELUS and other ILECS jointly filed a petition to the
Federal Cabinet, requesting that the CRTC be directed to reconsider its
April 6, 2006, decision on the regulation of local telephony service, and to
do so in light of the recommendations of the Telecommunications Policy Review
Panel. TELUS believes that the threshold for deregulation is too high and
wireless substitution for local telephony services should be considered in the
forbearance decision. The CRTC is currently conducting proceedings to assess
whether wireless substitution should be considered when determining conditions
for forbearance from regulation of local telephony services (Telecom Public
Notice 2006-9 - Proceeding to examine whether mobile wireless services should
be considered to be in the same relevant market as wireline local exchange
services with respect to forbearance and related issues).
There can be no assurance that the Federal Cabinet will direct the CRTC
to reconsider Decision 2006-15, or if directed to reconsider the decision,
that the CRTC will significantly change the terms and conditions set for
forbearance from regulating local telephony services. There can be no
assurance that the CRTC will consider wireless substitution in determining
market conditions for forbearance from regulating local telephony services.
Federal Court of Appeal grants leave to appeal winback
restrictions imposed on incumbent local telephone companies
In September 2006, the Federal Court of Appeal granted leave to appeal
various decisions dealing with winback rules. TELUS joined with Bell Canada in
launching the appeals, arguing that the winback rules are an infringement of
the freedom of expression enshrined within the Charter of Rights and Freedoms.
For example, the winback rules deprive TELUS of the ability to contact former
local service customers for a period of time. This matter is expected to be
heard in 2007. In a related case, the Federal Court of Appeal also granted
Bell Aliant leave to appeal whether matters like quality of service could be
used to deny forbearance from regulation. If these appeals are successful,
TELUS could enjoy some measure of relief in key ILEC cities of Vancouver,
Calgary and Edmonton, prior to achieving forbearance from regulation under the
current terms set by the CRTC in Telecom Decision 2006-15. However, there can
be no assurance that any of these appeals will be successful.
Price cap regulation - Disposition of funds in the deferral
accounts (Telecom Decision CRTC 2006-9)
On February 16, 2006, the CRTC issued a decision on the use of funds in
the deferral account. The funds that have accumulated in the deferral account
over the second price cap period (2002 to 2006) will be used to expand
broadband facilities (95%) and to improve access to telecommunications
services to persons with disabilities (5%). Any remaining balance in the
deferral account will be addressed through and are to be dealt with via future
residential local 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, TELUS 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, TELUS may be required to remit a one-time refund of approximately
$165 million in individually small amounts to its entire local residential
subscriber base. Given 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. TELUS 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.
It also uncertain what impact the Federal Court of Appeal's granting of
leave to these appeals may have on the Commission's pending consideration of
TELUS' and the other incumbent telephone companies' proposals for disposition
of deferral account funds that were filed on September 1, 2006.
Correction to TELUS' co-location DC power service rates (Telecom
Decision CRTC 2006-42-1)
In August 2006, the CRTC issued a decision "erratum" to increase the
rates that TELUS is allowed to charge for co-location DC power services, as an
incorrect maintenance cost factor was used in the original decision issued on
June 30, 2006. While Decision 2006-42 and Decision 2006-42-1 had approved
rates on a final basis back to November 29, 2000, the Company had previously
accrued most of the retroactive impact, with the balance recorded as an
adjustments in the Company's second and third quarter 2006 financial
statements. The Company estimates that its incumbent wireline revenue will be
reduced by less than $2 million over the subsequent 12-month period, based on
current co-location and power arrangements.
Future environment facing the Canadian broadcasting system
(Broadcasting Public Notice CRTC 2006-72)
On June 8, 2006, the Canadian Federal Government issued an Order in
Council requesting that the CRTC provide a factual report on the future
environment facing the Canadian broadcasting system. To respond to the
request, the CRTC issued Broadcasting Public Notice 2007-72, calling for
comments from interested parties by September 1, 2006. One of the key issues
raised during the current review is a request by over-the-air broadcasters to
receive subscriber fees or a "fee for carriage." The Telco TV Association of
Canada, which includes TELUS, SaskTel and MTS Allstream, opposed this
proposal, arguing that retransmission rights are a copyright issue, not a
broadcasting issue, and therefore, the CRTC is not the appropriate body to
deal with the matter. If over-the-air broadcasters are successful in obtaining
fee-for-carriage, the costs of offering basic television service could
increase significantly. Telco TV also provided evidence that over-the-air
broadcasters are in good financial health.
TELUS called for reform to broadcasting regulation in order to harness
opportunities in emerging technologies. The Company believes that the
fundamental objectives of cultural policy (access, diversity and Canadian
content) remain relevant, but technology is creating consumer friendly ways of
achieving these objectives. In its filing, TELUS called for the following:
- Regulate only where still necessary to achieve these cultural policy
objectives;
- Maintain the new media exemption for Internet and mobile wireless
content and move towards extending that same regime to traditional
broadcasters;
- Move toward a registration system rather than a licensing framework
for competitive areas of broadcasting;
- Remove all restrictions on advertising; and
- Recognize the contribution distributors make to infrastructure
development and give them the option of contributing to new media
development instead of the Canadian Television Fund.
TELUS also urged the government to update copyright legislation in order
to promote flexible and fair use of digital content by consumers.
The deadline for implementing wireless number portability ("WNP")
is March 14, 2007 (Telecom Decision CRTC 2005-72)
On December 20, 2005, the CRTC issued Decision 2005-72 and directed Bell
Mobility, Rogers Wireless Inc. and the wireless division of TELUS to implement
wireless number portability in British Columbia, Alberta, Ontario and Quebec
where local exchange carrier-to-local exchange carrier ("LEC-to-LEC") local
number portability is currently in place by March 14, 2007. In other areas and
for other wireless carriers, wireless number portability (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 wireless number portability in the
required timeframe without incurring significant additional costs and/or
ongoing administration costs. Implementation of wireless number portability
may result in increased migration of network access lines to wireless
services, increased wireless subscriber monthly churn or additional customer
retention costs for TELUS.
WNP, when instituted in the U.S. in 2003, did not lead to a large
increase in churn as was 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 our 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 Human resources
Two new collective agreements reached in the TELUS Quebec region
Two collective agreements in the TELUS Quebec region were open for
renewal in 2006 and negotiations have concluded successfully with the
ratification of new agreements in each case. An agreement between TELUS Quebec
and the Syndicat des agents de maitrise de TELUS came into effect on April 1,
with a one-year term, and covers more than 500 professional and supervisory
employees. Another agreement between TELUS Quebec and the Syndicat quebecois
des employes de TELUS was ratified in August and will remain in effect until
December 31, 2009. The latter agreement covers more than 1,000 office,
clerical and technical employees.
10.3 Business integration and internal reorganizations
On November 24, 2005, TELUS Corporation announced the integration of the
wireline and wireless operations of the business into a single operating
structure. This integration incorporates TELUS' customer-facing business
units, technology infrastructure, operations and shared services. There is no
assurance that this integration will provide the benefits and efficiencies
that are planned and/or that there will not be significant difficulties in
combining the two structures, which could result in a negative impact on
operating and financial results.
10.4 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
of our business, 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. TELUS plans to implement this project in phases
beginning with a pilot and testing in the third quarter of 2006. A commercial
launch of the converged billing system platform for consumer customers in
Alberta is currently planned for the first quarter of 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.
10.5 Income trust reorganization risks
TELUS' intention to reorganize in its entirety as an income trust is
subject to inherent risks and uncertainties including changes arising from the
October 31, 2006 announcement by the federal Minister of Finance of a proposed
new Tax Fairness Plan that is intended to change the relationships between the
future levels of taxation of income trusts and corporations. Other risks and
uncertainties are associated with obtaining approvals from security holders,
courts and regulatory bodies. No assurance can be given that the income trust
conversion will proceed, or be completed in the originally anticipated
January 2007 time-frame, or that any of the anticipated benefits and
implications of income trust conversion will be realized if the conversion
were to proceed.
One element of the proposed plan is a tax on distributions of business
income earned by non-passive investments by publicly traded income trusts and
limited partnerships (other than those which hold passive real estate
investments). This is intended to make an income trust's income tax treatment
more like that of public corporations. The announcement by the federal
Minister of Finance indicated that for income trusts, which begin trading
after October 31, 2006, the new tax measures will apply to the later of their
2007 taxation year and the taxation year in which the income trust begins to
trade. The result of the application of these new proposals would be to reduce
the tax efficiency of publicly traded income trusts.
Should the proposed income trust conversion proceed, TELUS expects that
it would be exposed to a new set of specific risks relating to the income
trust structure that would arise upon closing of the conversion. Such risks
include: the ability to utilize available income tax credits and losses before
they expire, as well as the availability to use tax-related grants, subsidies
or reductions that might otherwise be available to the Company or other
related taxpayers. As TELUS is assessing the proposed conversion in light of
the new tax plan announced on October 31, these risks are not all summarized
above. Should the proposed reorganization proceed, the risks will be
highlighted in the "Risk Factors" section of the information circular that
would be provided to security holders in connection with the special meeting
to consider the proposed conversion.
Furthermore, should the conversion to an income trust proceed, under the
Minister of Finance's Tax Fairness Plan there would be limits to the expected
tax benefits of such a structure as the tax benefits of income trusts are
expected to be eliminated after 2011.
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. 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 Nine-month periods
Sept. 30 ended September 30
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Net income 319.6 190.1 886.3 621.8
Other expense (income) 4.0 7.1 17.9 9.1
Financing costs 116.6 144.8 371.1 451.4
Income taxes 126.5 86.9 261.3 263.2
Non-controlling interest 2.4 1.6 7.1 4.9
-------------------------------------------------------------------------
Operating income 569.1 430.5 1,543.7 1,350.4
Depreciation 325.8 335.6 1,000.2 996.4
Amortization of intangible
assets 57.5 73.6 168.3 214.1
-------------------------------------------------------------------------
EBITDA 952.4 839.7 2,712.2 2,560.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 Nine-month periods
Sept. 30 ended September 30
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
EBITDA 952.4 839.7 2,712.2 2,560.9
Capital expenditures ("Capex") (423.9) (263.0) (1,203.2) (944.9)
-------------------------------------------------------------------------
EBITDA less capital expenditures 528.5 576.7 1,509.0 1,616.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 performance of TELUS
Corporation. 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 Nine-month periods
Sept. 30 ended September 30
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Cash provided by operating
activities 570.4 693.5 2,056.5 2,109.6
Cash (used) by investing
activities (451.0) (263.3) (1,253.2) (979.5)
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119.4 430.2 803.3 1,130.1
Net employee defined benefit
plans expense 1.5 0.3 4.4 (0.8)
Employer contributions to
employee defined benefit plans 28.8 30.1 104.3 89.8
Amortization of deferred gains
on sale-leaseback of buildings,
amortization of deferred
charges and other, net (3.9) 3.6 (12.5) 3.9
Reduction (increase) in
securitized accounts receivable 185.0 - 150.0 -
Non-cash working capital changes
except changes in taxes,
interest, and securitized
accounts receivable, and other 170.4 116.8 267.5 91.1
Acquisition 25.0 - 44.5 29.4
Proceeds from the sale of
property and other assets (6.9) (0.1) (14.9) 3.5
Other investing activities 9.0 0.4 20.4 8.7
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Free cash flow 528.3 581.3 1,367.0 1,355.7
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The following shows management's calculation of free cash flow.
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Quarters ended Nine-month periods
Sept. 30 ended September 30
($ millions) 2006 2005 2006 2005
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EBITDA 952.4 839.7 2,712.2 2,560.9
Restructuring and workforce
reduction costs net of
cash payments (1.2) (5.7) 2.2 (19.0)
Share-based compensation 14.2 10.3 35.3 21.2
Cash interest paid (13.0) (12.2) (297.6) (319.1)
Cash interest received 0.6 9.3 23.9 34.4
Income taxes received (paid),
less investment tax credits
received (0.8) 2.9 94.2 22.2
Capital expenditures (423.9) (263.0) (1,203.2) (944.9)
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Free cash flow 528.3 581.3 1,367.0 1,355.7
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11.3 Definition of key operating indicators
These measures are industry metrics and are useful in assessing the
operating performance of a wireless company.
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.
Average revenue per subscriber unit ("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.
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.
EBITDA excluding COA is a measure of operational profitability normalized
for the period costs of adding new customers. COA for the third quarter and
first nine months of 2006 was $128.6 million and $367.4 million, respectively.
COA for the same periods in 2005 was $113.7 million and $305.6 million,
respectively.
11.4 Definition of liquidity and capital resource measures
The following definitions are presented in the order that they appear in
Section 7.4 Liquidity and capital resource measures.
Net debt is a non-GAAP measure whose nearest GAAP measure is the sum of
Long-term debt and Current maturities of long-term debt, as reconciled below.
Net debt is one component of a ratio used to determine compliance with debt
covenants (refer to the description of Net debt to EBITDA below).
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At September 30
($ millions) 2006 2005
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Current maturities of long-term debt 1,378.4 1,581.6
Long-term debt 3,407.6 4,497.3
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4,786.0 6,078.9
Net deferred hedging liability 985.8 1,159.0
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Debt 5,771.8 7,237.9
Cash and temporary investments 25.4 (1,322.1)
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Net debt 5,797.2 5,915.8
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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 defined as Net debt plus Non-controlling interest
and Shareholders' equity.
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 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 $95.4 million and
$72.4 million, respectively, for the 12-month periods ended September 30, 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. This measure
is substantially the same as the Leverage Ratio covenant in TELUS' credit
facilities. TELUS' guideline range for Net debt to EBITDA is from 1.5:1 to
2.0:1.
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
September 30, 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 September 30, 2006
includes losses on redemption of long-term debt, while for the 12-month period
ended September 30, 2005, it includes a significant accrual 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.
______________________________________________________________________________
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: November 1, 2006
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary