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 May, 2007
Commission File No. 000-24876
TELUS CORPORATION
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
Form 20-F [ ] Form 40-F |X|
Indicate by check mark whether by furnishing the information contained in this
Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2 (b) under the Securities Exchange Act of
1934:
Yes [ ] No |X|
This Form 6-K consists of the following:
[TELUS GRAPHIC OMITTED]
May 2, 2007
TELUS Reports First Quarter Results
Strong operational execution continues
Vancouver, B.C. - TELUS Corporation (TSX: T and T.A / NYSE: TU) today reported
its financial results for the first quarter of 2007, including a six per cent
increase in revenues to $2.21 billion from a year ago due to continued strong
wireless and data growth.
Reported earnings before interest, taxes, depreciation and amortization (EBITDA)
and earnings per share (EPS) were negatively impacted in the quarter by a
previously announced non-recurring and non cash charge of $173.5 million
associated with the introduction of a new cash settlement feature for employee
share options granted prior to 2005. The benefits of the new feature include
reducing share dilution and generating cash tax savings of up to $70 million
over three years.
Adjusted for this charge, underlying EBITDA and EPS increased 8.7% and 50%, to
$938 million and 90 cents, respectively, when compared to the same period a year
ago. EBITDA as adjusted increased due to wireless growth and lower restructuring
costs. EPS as adjusted increased due to higher EBITDA, lower depreciation and
amortization, less financing costs and reduced income taxes. Free Cash Flow this
quarter was lower due to higher capital expenditures and the receipt, in the
first quarter of 2006, of a large income tax recovery.
During the first quarter TELUS successfully issued $1 billion of debt in five
and 10 year maturities with an average coupon of 4.8%, the net proceeds of which
were to be used for general corporate purposes including the redemption of
TELUS' approximately $1.5 billion of 7.5% Notes maturing in June 2007. In
addition, the company completed $201 million of share buy backs in the quarter,
which brings to 42.9 million shares in total that have been repurchased for $2.0
billion since the first of three share repurchase programs began in December
2004.
FINANCIAL HIGHLIGHTS
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C$ in millions, except per share amounts 3 months ended
March 31
(unaudited) 2007 2006 % Change
-------------------------------------------------------------------------------
Operating revenues 2,205.6 2,080.5 6.0
EBITDA(1) 764.3 862.7 (11.4)
EBITDA (as adjusted)(2) 937.8 862.7 8.7
Income before income taxes and
non-controlling interest 275.6 328.3 (16.1)
Net income 194.8 210.1 (7.3)
Earnings per share (EPS), basic 0.58 0.60 (3.3)
EPS (as adjusted)(3) 0.90 0.60 50.0
Cash provided by operating activities 460.6 673.1 (31.6)
Capital expenditures 381.9 320.5 19.2
Free cash flow (4) 480.8 635.6 (24.4)
(1) Earnings before interest, taxes, depreciation and amortization (EBITDA)
is defined as Operating revenues less Operations expense less
Restructuring costs. See Section 11.1 of Management's discussion and
analysis.
1
(2) Excludes a non-cash charge of $173.5 million to Operations expense in
2007 for introducing a net cash settlement feature for share option
awards granted prior to 2005.
(3) Excludes approximately $0.32 after tax charge in 2007 for introducing
a net cash settlement feature for share option awards granted prior
to 2005.
(4) See Section 11.2 of Management's discussion and analysis.
Darren Entwistle, president and CEO, said "the momentum from our winning
strategy since its inception in 2000 has continued in 2007 and we have started
the year strongly with good first quarter financial results underpinned by
wireless revenue growth of 13% and underlying wireline data revenue growth of
almost 11%. The focused execution of our national growth strategy is producing a
superior asset mix for TELUS such that 46% of our consolidated revenue is
generated by wireless and 19% from wireline data."
"The continued resilience of TELUS' traditional wireline business is also
encouraging," Mr. Entwistle added. "Particularly important was the recent
landmark federal government decision to set reasonable local forbearance rules
that will allow TELUS to compete fairly. Accordingly we have made applications
for deregulation in six cities that cover almost one million consumers in our
incumbent territories."
Mr. Entwistle added, "TELUS in the quarter continued to build on its track
record of investing and returning cash to investors for ongoing share value
creation. This three pronged approach includes capital investments in our core
businesses, on an annual basis successively higher dividends under our dividend
growth model, and substantial normal course share repurchase programs that are
followed through upon."
Robert McFarlane, executive vice president and CFO, noted "TELUS completed a
very successful debt issuance in the quarter of $1 billion comprised of $300
million of 4.50% five year Notes and $700 million of 4.95% ten year Notes. By
applying the proceeds of this issuance combined with a potential new commercial
paper program to our forthcoming June repayment of our 7.5% Notes, we would
generate approximately $33 million in reduced annualized financing costs."
Mr. McFarlane added, "The combination of our strong financial position and
excellent operating performance record is translating to an earnings expansion,
which provides a position of strength to observe the notable competitive
developments in the Canadian telecom industry."
================================================================================
This news release contains statements about expected future events and financial
and operating results of TELUS that are forward-looking. By their nature,
forward-looking statements require the Company to make assumptions and are
subject to inherent risks and uncertainties. There is significant risk that the
forward-looking statements will not prove to be accurate. Readers are cautioned
not to place undue reliance on forward-looking statements as a number of factors
could cause actual future results and events to differ materially from that
expressed in the forward-looking statements. Accordingly this news release is
subject to the disclaimer and qualified by the assumptions (including
assumptions for 2007 guidance and share purchases), qualifications and risk
factors referred to in the Management's discussion and analysis - May 1, 2007.
================================================================================
2
OPERATING HIGHLIGHTS
TELUS wireless
Profitable subscriber growth continues
o Revenues increased by $118 million or 13% to $1.0 billion in the
first quarter of 2007, when compared with the same period in 2006
o ARPU (average revenue per subscriber unit per month) improved by 2.9%
to $62.03. The data component increased by 69% to $6.27, which more
than offset the decline in voice ARPU
o EBITDA (as adjusted) increased by $68 million over the first quarter
of 2006 representing 17% growth
o Cost of acquisition per gross addition of $438 increased slightly at
2% year over year.
o Net subscriber additions were 90,500, down slightly by 2%. Postpaid
additions totaled 60,800 while prepaid loading was 29,700
o Blended monthly churn was stable at 1.35% compared to 1.33% a year
ago, while postpaid churn remained low at 0.97%
o Cash flow (EBITDA less capital expenditures) based on EBITDA as
adjusted increased $18 million or 5.4% to $353 million in the quarter
due to higher EBITDA partially offset by increased capital
expenditures, which included implementation of wireless number
portability.
TELUS wireline
Strong data growth supports revenue growth
o Revenues increased slightly by $7 million or 0.6% to $1.21 billion in
the first quarter of 2007, when compared with the same period in 2006
due to data growth, offsetting declines in local and long distance
revenues
o Data revenues increased by $31 million or 8% due to strong high-speed
Internet and enhanced data service growth. Excluding the impact of
two retroactive mandated competitor price reductions the actual
underlying growth rate was 10.8%
o Long-distance revenue declined $20 million or 10% due primarily to
lower average per-minute rates partly offset by increased retail and
wholesale minute volumes
o EBITDA (as adjusted) increased by $7 million or 1.5%, due to a modest
increase in revenues and lower restructuring charges
o High-speed Internet net additions were 32,100, taking TELUS'
high-speed base to 949,000, an 18% increase from a year ago. The
total Internet subscriber base topped 1.13 million
o Network access lines declined by 22,000 in the quarter, with total
NALs down 2.9% from a year ago reflecting continued residential line
losses from ongoing competitive activity and wireless substitution
partially mitigated by an increase in business access lines
o Cash flow (EBITDA less capital expenditures) based on EBITDA as
adjusted declined 2% to $203 million, due to increased capital
expenditures reflecting increased spending to support new enterprise
customers in Central Canada as well as on broadband infrastructure.
TELUS applies for local phone service deregulation
TELUS has applied to the Canadian Radio-television and Telecommunications
Commission (CRTC) for local phone service deregulation in five cities following
the Federal Government's April 4, 2007 Order-In-Council that set new conditions
for the deregulation of local phone markets - a process called forbearance in
regulatory terminology.
The new rules, which came into effect on April 18, allow incumbent
telecommunications carriers to apply to the CRTC for deregulation in any
community where customers can choose between service providers, and where they
meet specific Quality of Service measures for six months on average. The new
rules state that local business services will be deregulated where there is a
choice of at least two phone providers with their own network infrastructure.
Deregulation for consumer services will occur where there is a choice of at
least three service providers with their own network infrastructure, one of
which can be a wireless provider.
TELUS' forbearance applications in mid-April cover almost one million customers
in Victoria, Vancouver, Calgary, Edmonton and Rimouski who by the end of a 120
day processing period should for the first time enjoy the benefits of full
competition in local phone service. TELUS intends to apply for forbearance in
many more communities in the near future.
3
TELUS issues $1 billion in debt
In March, TELUS successfully issued five and 10 year Canadian dollar notes
raising gross proceeds of $1.0 billion. TELUS sold $300 million of 4.50% Series
CC notes due March 15, 2012, and $700 million of 4.95% Series CD notes due March
15, 2017. Net proceeds of the offering, combined with a possible issuance of
commercial paper, and increased accounts receivable securitization proceeds, are
expected to be used for the repayment of approximately $1.5 billion 7.50% (U.S.
$1.17 billion) Notes maturing in June 2007.
TELUS closes enhanced $2 billion bank facility
In February, TELUS closed a new five year, $2 billion credit facility with a
syndicate of 18 financial institutions. The new facility replaces $1.6 billion
of existing facilities. Reflecting TELUS' strong financial position and
favourable market conditions, the new facility brings TELUS reduced interest
cost and an extended term. It may be used for general corporate purposes
including the backstop of a commercial paper program.
TELUS continues share repurchases
During the first quarter, TELUS continued to purchase shares under its Normal
Course Issuer Bid (NCIB). Repurchases totaled approximately 3.5 million shares
for a total outlay of $201 million. Since commencement in December 2004, TELUS
has repurchased a total of 42.9 million shares for $1.97 billion under three
NCIB programs.
TELUS successfully implements wireless number portability
On March 14, as part of a nation-wide industry initiative, the Company
successfully implemented wireless number portability (WNP), such that customer
telephone numbers are now fully portable between competing carriers whether
wireless-to-wireless, wireless-to-wireline and wireline-to-wireless.
TELUS awarded major proportion of Government of Canada wireless contract
In February 2007, following a competitive bid process the Federal Government
awarded TELUS the largest proportion (over 60 per cent) of a contract for the
provision of federal government wireless phones. This is expected to result in
approximately 30,000 net wireless subscriber additions to TELUS over the coming
12 months. This enterprise contract win is associated with the March
implementation of WNP in Canada as government employees will be able to retain
and port their existing phone numbers.
Amp'd Mobile now available in Canada
Amp'd Mobile, a leading provider of next generation mobile entertainment service
in the United States, officially launched service in Canada through an exclusive
partnership with TELUS in March. This partnership offers Canadian mobile clients
access to Amp'd Live, a unique user interface designed specifically for 3G
technology where users can access personalized content, such as their favourite
songs, video clips, images and games.
Powered by TELUS' wireless high speed EVDO service, Amp'd Mobile is focused on
content and marketing targeted to the 18 to 35 year old demographic. TELUS
supports sales and distribution, billing, client support and network operations.
TELUS invests $23 million to expand Quebec wireless network
TELUS announced that it is investing $23 million in 2007 to extend and enhance
coverage of its 1X digital wireless network in Quebec. By this fall, almost 30
communities are expected to have access to TELUS' enhanced digital features and
wireless business services for the first time.
Havre-Saint-Pierre in the Cote-Nord region; St-Ubalde in Mauricie; Matapedia,
Ste-Irene, Val-Brillant et Sayabec in the Gaspe Peninsula; and Pont-Rouge in
central Quebec have already been connected to the service and are enjoying
assured call security, improved sound quality, extended battery life, and
web-based features.
TELUS extends wireless high-speed services
TELUS expanded wireless high speed (EVDO) service to several communities in
Atlantic Canada. This service is now available in Bathurst, Florenceville,
Fredericton, Moncton, Saint John, Coldbrook, Kentville, Halifax, Truro, New
Glasgow, Stellarton, Sydney, North Sydney, Wolfville, Charlottetown and St.
John's.
With typical download speeds of approximately 400 to 700 kilobits per second,
and maximum possible speeds of more than 2 megabits per second, TELUS wireless
high speed service offers clients the speed they need for powerful mobile
4
computing and exciting SPARK(TM) mobile entertainment applications like TELUS
Mobile TV(TM), TELUS Mobile Radio(TM), and TELUS Mobile Music(R).
TELUS delivers Canada's first EVDO Rev A network card
TELUS introduced the Sierra Wireless AirCard 595 in the first quarter. The
network card for portable PCs and laptops is the first in Canada to operate on
TELUS' next generation wireless high speed Rev A network being deployed later
this year. EVDO Rev A technology offers typical upload speeds of approximately
300 to 400 kilobits per second with a maximum possible upload speed of 1.8
megabits per second, and typical download speeds of approximately 450 to 800
kilobits per second with a maximum possible download speed of 3.1 megabits per
second. TELUS plans to introduce EVDO Rev A service in selected markets across
Canada later this year. The AirCard 595 offers forward compatibility with TELUS'
EVDO Rev A network through a simple software upgrade.
Cool new phones
TELUS continued to expand its suite of cool wireless services with the
introduction of six new handsets. TELUS and High Tech Computer Corporation (HTC)
teamed up to offer TELUS customers two HTC smartphones - the HTC P4000 and HTC
S720. The Windows Mobile-based handsets are compatible with the next generation
TELUS EVDO Rev A wireless high-speed service to be introduced later this year.
The P4000 is now available to clients while the HTC S720 is expected to be
available in the second quarter.
The new Samsung u510 mobile entertainment device is also exclusive to TELUS in
Canada, giving customers stylish access to a robust array of SPARK(TM) mobile
entertainment, information, and messaging services.
Also in the quarter, TELUS was the first to offer Canadians the LG Chocolate
Flip, a clamshell phone loaded with TELUS Mobile TV(TM), TELUS Mobile Music(R),
TELUS Mobile Radio(TM), TELUS Navigator, My Email, downloadable video clips and
games, Bluetooth capabilities, as well as a camera.
Finally, TELUS introduced the affordable, feature-rich Pantech PN-8200. The
smartphone is a powerful business tool that looks like a traditional wireless
flip phone.
TELUS brings banks and credit unions wireless banking toolkit
TELUS Mobile Customer Self Service supplies Canadian banks the technology to
allow their customers to pay bills, check balances and transfer funds from their
wireless phones and handsets. The technology is unique in Canada, utilizing
existing messaging capabilities built into phones for secure transactions rather
than requiring customers to download new software onto their wireless devices.
TELUS Mobile Customer Self Service allows banks to bring the service to all
customers regardless of their wireless carrier, brand of cellphone, operating
system, or wireless transmission standard. The service can be customized to
bring bank and credit union customers features including alerts of questionable
account activity, on-demand account information, and no-hold service allowing
customers to enter a call centre queue via text message rather than waiting on
hold.
TELUS part of team to implement e.health record system in British Columbia
TELUS is part of a consortium led by Sun Microsystems chosen by the Government
of British Columbia to develop and implement the Provincial Laboratory
Information Solution (PLIS) and the interoperable Electronic Health Record
(iEHR) system. Under the terms of the $148 million contract, the consortium will
jointly create a system giving health care practitioners across the province
access to any patient's information, test results and scans. By providing faster
access to patient information, the system will reduce wait times for procedures
and save healthcare costs by reducing re-testing. As part of the consortium,
TELUS is leading managed operations services and is responsible for the hosting
of patient laboratory data in its secure data centres.
TELUS Fleet Tracking Bundle
TELUS launched the TELUS Fleet Tracking Bundle, a package of Global Positioning
System (GPS) services designed for small and medium businesses. Rather than
purchasing components to track their fleet in real time separately, the bundle
5
allows businesses to obtain TELUS wireless data services, Fleet Complete GPS
software from Complete Innovations, a GPS modem and installation in one package.
The service gives businesses the cost effective tools they need to optimize
route scheduling, reduce fuel consumption, and enhance customer service.
Second annual Women's Leadership Forum
More than 2,000 women expanded their professional networks, broadened their
knowledge base and honed their leadership skills at the two-day annual Women's
Leadership Forum held in Calgary. Karen Radford, executive vice-president and
president of TELUS Quebec and TELUS Partner Solutions, was the keynote speaker
at this year's forum held in March. More than 20 speakers representing the most
accomplished business women in Canada presented their business acumen and
personal leadership smarts at the event where TELUS was a platinum sponsor.
Karen Radford named Woman of the Year by Canadian Women in Communications
Karen Radford, president of TELUS Quebec and Partner Solutions, was named Woman
of the Year by Canadian Women in Communications (CWC) in February. Ms. Radford
was among four women recognized for their leadership, support of the advancement
of women and contribution to the Canadian communications industry at the CWC
Awards Gala in February. She is the second TELUS executive to hold this
prestigious title - Janet Yale was named Woman of the Year in 2001.
TELUS Skins Game Ontario bound
The TELUS Skins Game is set to return this year to Ontario for the first time
since 2003. The annual event will be held at the new Raven Golf Club at Lora Bay
June 17 to 19. This year's event will celebrate a world theme, with each player
representing a different home country. TELUS has selected the Juvenile Diabetes
Research Foundation as this year's TELUS Skins Game charity of choice.
TELUS Spell It gets home viewers involved in spelling bee
TELUS partnered with CanWest to invite viewers of the CanWest CanSpell National
Spelling Bee held April 14 to get involved through text messaging. Viewers who
sent text messages with the correct spelling of words showing on their TV
screens were entered to win one of five, $4,000 Registered Education Savings
Plan (RESP) contributions.
Dividend Declaration
The Board of Directors declared a quarterly dividend of thirty-seven and a half
cents ($0.375) per share on outstanding Common and Non-Voting Shares payable on
July 1, 2007 to shareholders of record on the close of business on June 8, 2007.
This represents a 36% increase form the twenty-seven and a half cent quarterly
dividend paid in 2006.
Media relations: Investor relations:
Allison Vale Robert Mitchell
(416) 629-6425 (416) 279-3219
allison.vale@telus.com ir@telus.com
---------------------- ------------
Certain products and services named in this release are trade-marks. The symbols
(TM) and (R) indicate those owned by TELUS Corporation or its subsidiaries. All
other trade-marks are the property of their respective owners.
About TELUS
TELUS (TSX: T, T.A; NYSE: TU) is a leading national telecommunications company
in Canada, with $8.8 billion of annual revenue and 10.8 million customer
connections including 5.1 million wireless subscribers, 4.5 million wireline
network access lines and 1.1 million Internet subscribers. TELUS provides a wide
range of communications products and services including data, Internet protocol
(IP), voice, entertainment and video. Committed to being Canada's premier
corporate citizen, we give where we live. Since 2000, TELUS and our team members
have contributed more than $91 million to charitable and non-profit
organizations and volunteered more than 1.7 million hours of service to local
6
communities. Eight TELUS Community Boards across Canada lead our local
philanthropic initiatives. For more information about TELUS, please visit
telus.com.
7
TELUS Corporation
interim consolidated statements of income (unaudited)
Three months
Periods ended March 31 (millions except per share amounts) 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
(restated)
OPERATING REVENUES $ 2,205.6 $ 2,080.5
---------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,436.6 1,201.1
Restructuring costs 4.7 16.7
Depreciation 317.7 339.2
Amortization of intangible assets 49.6 63.9
---------------------------------------------------------------------------------------------------------------------------------
1,808.6 1,620.9
---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 397.0 459.6
Other expense, net 3.8 4.3
Financing costs 117.6 127.0
---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 275.6 328.3
Income taxes 79.3 116.1
Non-controlling interests 1.5 2.1
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME AND COMMON SHARE AND NON-VOTING SHARE INCOME 194.8 210.1
OTHER COMPREHENSIVE INCOME
Change in unrealized fair value of derivatives designated as cash flow hedges 27.9 --
Change in unrealized gains and losses on translating financial statements of
self-sustaining foreign operations 2.4 0.7
---------------------------------------------------------------------------------------------------------------------------------
30.3 0.7
---------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 225.1 $ 210.8
=================================================================================================================================
NET INCOME PER COMMON SHARE AND NON-VOTING SHARE
- Basic $ 0.58 $ 0.60
- Diluted $ 0.57 $ 0.60
DIVIDENDS DECLARED PER COMMON SHARE AND NON-VOTING SHARE $ 0.375 $ 0.275
TOTAL WEIGHTED AVERAGE COMMON SHARES AND NON-VOTING SHARES OUTSTANDING
- Basic 337.1 349.3
- Diluted 340.5 352.9
8
TELUS Corporation
interim consolidated balance sheets (unaudited)
As at (millions) March 31, 2007 December 31, 2006
------------------------------------------------------------------------------------------------------------------------------------
(adjusted)
ASSETS
Current Assets
Cash and temporary investments, net $ 534.0 $ --
Short-term investments 110.7 110.2
Accounts receivable 959.3 707.2
Income and other taxes receivable 94.2 95.4
Inventories 159.4 196.4
Prepaid expenses and other 255.8 195.3
Derivative assets 62.6 40.4
----------------------------------------------------------------------------------------------------------------------------------
2,176.0 1,344.9
----------------------------------------------------------------------------------------------------------------------------------
Capital Assets, Net
Property, plant, equipment and other 7,195.7 7,466.5
Intangible assets subject to amortization 832.1 549.2
Intangible assets with indefinite lives 2,966.5 2,966.4
----------------------------------------------------------------------------------------------------------------------------------
10,994.3 10,982.1
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Other Assets
Deferred charges 1,022.0 956.6
Investments 41.5 35.2
Goodwill 3,169.6 3,169.5
----------------------------------------------------------------------------------------------------------------------------------
4,233.1 4,161.3
----------------------------------------------------------------------------------------------------------------------------------
$ 17,403.4 $ 16,488.3
==================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ -- $ 11.5
Accounts payable and accrued liabilities 1,585.1 1,363.6
Income and other taxes payable 8.9 10.3
Restructuring accounts payable and accrued liabilities 36.1 53.1
Advance billings and customer deposits 609.7 606.3
Current maturities of long-term debt 1,351.6 1,433.5
Current portion of derivative liabilities 172.4 165.8
Current portion of future income taxes 238.7 250.9
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4,002.5 3,895.0
----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 4,312.5 3,474.7
----------------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities 1,498.4 1,257.3
----------------------------------------------------------------------------------------------------------------------------------
Future Income Taxes 934.5 909.6
----------------------------------------------------------------------------------------------------------------------------------
Non-Controlling Interests 25.1 23.6
----------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 6,630.4 6,928.1
----------------------------------------------------------------------------------------------------------------------------------
$ 17,403.4 $ 16,488.3
==================================================================================================================================
9
TELUS Corporation
interim consolidated statements of cash flows (unaudited)
Three months
Periods ended March 31 (millions) 2007 2006
----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 194.8 $ 210.1
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 367.3 403.1
Future income taxes 78.2 113.1
Share-based compensation 138.6 8.4
Net employee defined benefit plans expense (24.0) (1.6)
Employer contributions to employee defined benefit plans (33.9) (30.5)
Restructuring costs, net of cash payments (17.0) (15.6)
Amortization of deferred gains on sale-leaseback of buildings, amortization
of deferred charges and other, net (9.1) 15.9
Net change in non-cash working capital (234.3) (29.8)
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Cash provided by operating activities 460.6 673.1
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INVESTING ACTIVITIES
Capital expenditures (381.9) (320.5)
Proceeds from the sale of property and other assets -- 7.4
Change in non-current materials and supplies, purchase of investments and other (10.4) (3.0)
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Cash used by investing activities (392.3) (316.1)
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FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 0.4 33.2
Dividends to shareholders (125.9) (95.9)
Purchase of Common Shares and Non-Voting Shares for cancellation (200.7) (231.6)
Long-term debt issued 1,097.8 180.6
Redemptions and repayment of long-term debt (293.5) (253.0)
Other (0.9) --
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Cash provided (used) by financing activities 477.2 (366.7)
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CASH POSITION
Increase (decrease) in cash and temporary investments, net 545.5 (9.7)
Cash and temporary investments, net, beginning of period (11.5) 8.6
----------------------------------------------------------------------------------------------------------------------------------
Cash and temporary investments, net, end of period $ 534.0 $ (1.1)
==================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Interest (paid) $ (23.6) $ (13.1)
==================================================================================================================================
Interest received $ 1.9 $ 22.5
==================================================================================================================================
Income taxes (inclusive of Investment Tax Credits received, net $ 6.2 $ 95.7
==================================================================================================================================
10
TELUS Corporation
segmented information (unaudited)
Three month periods ended
March 31 Wireline Wireless Eliminations Consolidated
(millions) 2007 2006 2007 2006 2007 2006 2007 2006
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Operating revenues
External revenue $1,205.6 $1,198.6 $1,000.0 $ 881.9 $ -- $ - $2,205.6 $2,080.5
Intersegment revenue 25.1 23.5 6.3 5.9 (31.4) (29.4) -- --
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1,230.7 1,222.1 1,006.3 887.8 (31.4) (29.4) 2,205.6 2,080.5
----------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Operations expense 905.4 740.4 562.6 490.1 (31.4) (29.4) 1,436.6 1,201.1
Restructuring costs 4.4 14.9 0.3 1.8 -- -- 4.7 16.7
----------------------------------------------------------------------------------------------------------------------------------
909.8 755.3 562.9 491.9 (31.4) (29.4) 1,441.3 1,217.8
----------------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $ 320.9 $ 466.8 $ 443.4 $ 395.9 $ -- $ -- $ 764.3 $ 862.7
==================================================================================================================================
CAPEX((2)) $ 270.7 $ 259.0 $ 111.2 $ 61.5 $ -- $ -- $ 381.9 $ 320.5
==================================================================================================================================
EBITDA less CAPEX $ 50.2 $ 207.8 $ 332.2 $ 334.4 $ -- $ -- $ 382.4 $ 542.2
==================================================================================================================================
Operating expenses
(as adjusted)((3))
Operations expense
(as adjusted)((3)) 752.3 740.4 542.2 490.1 (31.4) (29.4) 1,263.1 1,201.1
Restructuring costs 4.4 14.9 0.3 1.8 -- -- 4.7 16.7
-------------------------- ----------- ------------ ----------------------- ------------ ---------------------------------------
756.7 755.3 542.5 491.9 (31.4) (29.4) 1,267.8 1,217.8
-------------------------- ----------- ------------ ----------------------- ------------ ---------------------------------------
EBITDA (as adjusted)((3)) $ 474.0 $ 466.8 $ 463.8 $ 395.9 $ -- $ -- $ 937.8 $ 862.7
==================================================================================================================================
CAPEX((2)) $ 270.7 $ 259.0 $ 111.2 $ 61.5 $ -- $ -- $ 381.9 $ 320.5
==================================================================================================================================
EBITDA (as adjusted)
less CAPEX $ 203.3 $ 207.8 $ 352.6 $ 334.4 $ -- $ -- $ 555.9 $ 542.2
==================================================================================================================================
EBITDA (as adjusted)
(from above) $ 937.8 $ 862.7
Incremental charge(3) 173.5 --
-----------------------------------------------------
EBITDA (from above) 764.3 862.7
Depreciation 317.7 339.2
Amortization 49.6 63.9
-----------------------------------------------------
Operating income 397.0 459.6
Other expense, net 3.8 4.3
Financing costs 117.6 127.0
----------------------------- -----------------------
Income before income
taxes and non-controlling
interests 275.6 328.3
Income taxes 79.3 116.1
Non-controlling
interests 1.5 2.1
-----------------------------------------------------
Net income $ 194.8 $ 210.1
=====================================================
(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 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").
(3) Substantially all of the Company's share option awards that were granted
prior to January 1, 2005, and which were outstanding on January 1, 2007,
were amended by adding a net-cash settlement feature; such amendment
resulted in an incremental charge to operations of $173.5 and did not
result in an immediate cash outflow. In respect of 2007 results provided to
the Company's chief operating decision maker, operations expense and EBITDA
are being presented both with, and without, the impact of such amendment.
11
TELUS Corporation - Management's discussion and analysis - 2007 Q1
FORWARD-LOOKING STATEMENTS
================================================================================
This report and Management's discussion and analysis contain statements about
expected future events and financial and operating results of TELUS Corporation
(TELUS or the Company) that are forward-looking. By their nature,
forward-looking statements require the Company to make assumptions and are
subject to inherent risks and uncertainties. There is significant risk that
predictions, assumptions (see below) and other forward-looking statements will
not prove to be accurate. Readers are cautioned not to place undue reliance on
forward-looking statements as a number of factors could cause actual future
results, conditions, actions or events to differ materially from financial and
operating targets, expectations, estimates or intentions expressed in the
forward-looking statements.
Assumptions for 2007 guidance purposes include: economic growth consistent with
recent provincial and national estimates by the Conference Board of Canada,
including 2007 real GDP (gross domestic product) growth of approximately 2.8% in
Canada; increased wireline competition in both business and consumer markets,
particularly from cable-TV and voice over Internet Protocol (VoIP) companies;
forbearance for local retail wireline services in major urban incumbent markets
by the second half of 2007; no further price cap mandated consumer price
reductions; a wireless industry market penetration gain of 4.5 to five
percentage points; restructuring expenses not to exceed $50 million; statutory
tax rate of 33 to 34%; a discount rate of 5.0% and an expected long-term average
return of 7.25% for pension accounting, unchanged from 2006; average shares
outstanding of 330 to 335 million; and no prospective significant acquisitions
or divestitures. Earnings per share (EPS), cash balances, net debt and common
equity may be affected by the potential purchases of up to 24 million TELUS
shares over a 12-month period under the normal course issuer bid that commenced
December 20, 2006.
Factors that could cause actual results to differ materially include but are not
limited to: competition; economic growth and fluctuations (including pension
performance, funding and expenses); capital expenditure levels (including
possible spectrum asset purchases); financing and debt requirements (including
share repurchases, debt redemptions and potential issuance of commercial paper);
tax matters (including acceleration or deferral of required payments of
significant amounts of cash taxes); human resource developments (including
possible labour disruptions); technology (including reliance on systems and
information technology); regulatory developments (including possible local price
cap reductions, local forbearance, wireless number portability, the timing,
rules, process and cost of future spectrum auctions, and possible changes to
foreign ownership restrictions); process risks (including internal
reorganizations, conversion of legacy systems and billing system integrations);
health, safety and environmental developments; litigation and legal matters;
business continuity events (including manmade and natural threats); and other
risk factors discussed herein and listed from time to time in TELUS' public
disclosure documents including its annual report, annual information form, and
other filings with securities commissions in Canada (at www.sedar.com) and
filings in the United States including Form 40-F (on EDGAR at www.sec.gov).
For further information, see Section 10: Risks and risk management of TELUS'
2006 Management's discussion and analysis, as well as updates reported in
Section 10 of this document.
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
May 1, 2007
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month periods ended
March 31, 2007 and 2006, and should be read together with TELUS' 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' 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 19 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 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 and are used to manage the capital structure. Because non-GAAP
measures do not have a standardized meaning, securities regulations require that
non-GAAP measures be clearly defined and qualified, and reconciled with their
nearest GAAP measure. For the readers' reference, the definition, calculation
and reconciliation of consolidated non-GAAP measures is provided in Section 11:
Reconciliation of non-GAAP measures and definition of key operating indicators.
Page 1 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTENTS
--------------------------------------- --------------------------------------
SECTION DESCRIPTION
--------------------------------------- --------------------------------------
1. Introduction and performance A summary of TELUS' consolidated
summary results for the first quarter of
2007
--------------------------------------- --------------------------------------
2. Core business, vision and strategy Examples of TELUS' activities in
support of its six strategic
imperatives
--------------------------------------- --------------------------------------
3. Key performance drivers TELUS' 2007 priorities
--------------------------------------- --------------------------------------
4. Capability to deliver results An update on TELUS' capability
to deliver results
--------------------------------------- --------------------------------------
5. Results from operations A detailed discussion of operating
results for the first quarter of
2007
--------------------------------------- --------------------------------------
6. Financial condition A discussion of changes in the
balance sheet for the three-months
ended March 31, 2007
--------------------------------------- --------------------------------------
7. Liquidity and capital resources A discussion of cash flow, liquidity,
credit facilities and other
disclosures
--------------------------------------- --------------------------------------
8. Critical accounting estimates A description of accounting
and accounting policy estimates and changes to
developments accounting policies
--------------------------------------- --------------------------------------
9. Annual guidance for 2007 TELUS' confirmed annual guidance
for 2007
--------------------------------------- --------------------------------------
10. Risks and risk management An update of risks and uncertainties
facing TELUS and how it manages these
risks
--------------------------------------- --------------------------------------
11. Reconciliation of non-GAAP A description, calculation and
measures and definition reconciliation of certain measures
of key operating indicators used by management
--------------------------------------- --------------------------------------
1. INTRODUCTION AND PERFORMANCE SUMMARY
1.1 MATERIALITY FOR DISCLOSURES
Management determines whether or not information is material based on whether it
believes a reasonable investor's decision to buy, sell or hold securities in the
Company would likely be influenced or changed if the information were omitted or
misstated.
Page 2 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
1.2 CONSOLIDATED HIGHLIGHTS
------------------------------------------------------------------------------------------------------------
($ millions, except shares, per share QUARTERS ENDED MARCH 31
amounts, subscribers and ratios) 2007 2006 Change
--------------------------------------------------------------------------- --------------- ----------------
Consolidated statements of income
--------------------------------------------------------------------------- --------------- ----------------
Operating revenues 2,205.6 2,080.5 6.0%
Operating income 397.0 459.6 (13.6)%
Net-cash settlement feature expense 173.5 -- --
Operating income (as adjusted) 570.5 459.6 24.1%
Income before income taxes 275.6 328.3 (16.1)%
Net-cash settlement feature expense 173.5 -- --
Income before income taxes (as adjusted) 449.1 328.3 36.8%
Net income 194.8 210.1 (7.3)%
Net-cash settlement feature expense, after tax 107.7 -- --
Net income (as adjusted) 302.5 210.1 44.0%
Earnings per share, basic ($) 0.58 0.60 (3.3)%
Net-cash settlement feature per share 0.32 -- --
Earnings per share, basic (as adjusted) ((1)) ($) 0.90 0.60 50.0%
Earnings per share, diluted ($) 0.57 0.60 (5.0)%
Cash dividends declared per share ($) 0.375 0.275 36.4%
--------------------------------------------------------------------------- --------------- ----------------
Consolidated statements of cash flows
--------------------------------------------------------------------------- --------------- ----------------
Cash provided by operating activities 460.6 673.1 (31.6)%
Cash used by investing activities 392.3 316.1 24.1 %
Capital expenditures 381.9 320.5 19.2 %
Cash provided (used) by financing activities 477.2 (366.7) n.m.
--------------------------------------------------------------------------- --------------- ----------------
Subscribers and other measures
--------------------------------------------------------------------------- --------------- ----------------
Subscriber connections ((2)) (thousands) at Mar. 31 10,800 10,306 4.8%
EBITDA ((3)) 764.3 862.7 (11.4)%
Net-cash settlement feature expense 173.5 -- --
EBITDA (as adjusted) ((3)) 937.8 862.7 8.7%
Free cash flow ((4)) 480.8 635.6 (24.4)%
--------------------------------------------------------------------------- --------------- ----------------
Debt and payout ratios
--------------------------------------------------------------------------- --------------- ----------------
Net debt to total capitalization ratio (%) ((5)) 47.6 47.3 0.3
Net debt to EBITDA - excluding restructuring ((5)) 1.7 1.8 (0.1)
Dividend payout ratio (%) ((6)) 46 59 (13)pts
------------------------------------------------------------------------------------------------------------
n.m. - not meaningful; pts - percentage point(s)
(1) An after-tax charge of approximately $0.32 per share was recorded in 2007
for introducing a net-cash settlement feature for share option awards
granted prior to 2005. Earnings per share - basic (as adjusted) is
regularly reported to the chief operating decision-maker and corresponds to
the definition used in setting TELUS' 2007 basic earnings per share targets
and revised guidance.
(2) The sum of wireless subscribers, network access lines and Internet
subscribers measured at the end of the respective periods.
(3) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before interest,
taxes, depreciation and amortization (EBITDA). EBITDA (as adjusted) is
regularly reported to the chief operating decision-maker and corresponds to
the definition used in setting TELUS' 2007 EBITDA targets and revised
guidance. (
(4) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash flow.
(5) See Section 11.4 Definition of liquidity and capital resource measures.
(6) The current annualized rate of dividend declared per share divided by basic
earnings per share for the 12-month trailing period.
---------------------------------------------------------------------------------------------------------------
As previously communicated, the Company expected to record a non-cash charge of
$150 to $200 million in Operations expense (30 to 40 cents per share on an
after-tax basis) for introducing a net-cash settlement feature for share option
awards granted prior to 2005. In the first quarter of 2007, $173.5 million in
respect of this charge was recorded in Operations expense ($107.7 million
after-tax impact in Net income or approximately 32 cents per share),
representing a large portion of the estimated charge for the full year.
Highlights for the first quarter of 2007, as discussed in Section 5: Results
from operations, include the following:
o Subscriber connections increased by 494,000 during the 12-month period
ended March 31, 2007. The number of wireless subscribers grew by 11.5% to
5.14 million, the number of Internet subscribers grew by 9.8% to 1.13
million and the number of network access lines decreased by 2.9% to 4.53
million.
o Operating revenues increased by $125.1 million when compared to the same
period in 2006 due primarily to growth in wireless revenues and wireline
data revenues.
Page 3 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
o Operating income decreased by $62.6 million, when compared with the same
period in 2006, primarily due to the non-cash charge of $173.5 million
described above. Operating income adjusted to exclude this charge increased
by $110.9 million due primarily to improved wireless revenues and EBITDA
(as adjusted).
o Net income decreased by $15.3 million and EPS decreased by two cents, when
compared to the same period in 2006. However, after removing the charge for
the net-cash settlement feature, Net income (as adjusted) and EPS -basic
(as adjusted) increased by $92.4 million or approximately 30 cents per
share, respectively.
o The average number of shares outstanding in the first quarter of 2007 was
approximately 3.5% lower than in the same period in 2006 due to share
repurchase programs, contributing favourably to earnings per share in 2007.
Highlights for the first quarter of 2007 as discussed in Section 7: Liquidity
and capital resources include the following:
o Cash provided by operating activities decreased by $212.5 million when
compared to the same period in 2006 mainly due to a $350 million reduction
in the balance of securitized receivables during the first quarter of 2007,
as compared to a $100 million reduction in the same period in 2006.
o Cash used by investing activities increased by $76.2 million when compared
to the same period in 2006 due primarily to increased capital expenditures
for up-front capital investment to support new enterprise customers as well
as increased expenditures for wireless capacity and coverage and enablement
of wireless number portability.
o Cash provided by financing activities in the first quarter of 2007 resulted
primarily from a $1 billion debt issue with two different maturities, net
of dividend payments, repurchases of shares, and repayment of amounts drawn
on the Company's bank facility.
o Free cash flow decreased by $154.8 million when compared to the same period
in 2006 mainly because of the receipt in the first quarter of 2006 of
income tax recoveries and related interest and higher capital expenditures
in 2007.
o Net debt to total capitalization at March 31, 2007 continued to be in the
target range of 45 to 50%.
o Net debt to EBITDA continued to be in the target range of 1.5 to 2.0 times.
o The dividend payout ratio, measured as the annualized dividend declared in
the first quarter divided by earnings per share for the 12-month trailing
period, was within guideline of 45 to 55% of sustainable net earnings.
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' 2006 Management's
discussion and analysis, as well as updates reported in Section 10 of this
document.
TELUS' core business, vision and strategy were detailed in its 2006 Management's
discussion and analysis. Activities that supported the Company's six strategic
imperatives during 2007 include the following:
BUILDING NATIONAL CAPABILITIES ACROSS DATA, IP, VOICE AND WIRELESS
On March 14, 2007 as part of a nation-wide initiative, the Company successfully
implemented the first phase of wireless telephone number portability (WNP), such
that local telephone numbers are portable: wireless-to-wireless,
wireless-to-wireline and wireline-to-wireless. The Company does not believe that
there was a significant effect on wireless churn rates over the two week period
that WNP was available.
FOCUSING RELENTLESSLY ON THE GROWTH MARKETS OF DATA, IP AND WIRELESS
In February 2007, the Federal Government, after a competitive bid process,
awarded approximately 60 per cent of its wireless business to TELUS. This
minimum two-year contract is expected to result in approximately 30,000 net
additions to TELUS over the next 12 months. A significant factor in this
enterprise contract win was the March implementation of WNP in Canada as
government employees will be able to retain and port their existing phone
numbers.
PARTNERING, ACQUIRING AND DIVESTING TO ACCELERATE THE IMPLEMENTATION OF TELUS'
STRATEGY AND FOCUS TELUS' RESOURCES ON CORE BUSINESS
In March 2007, Amp'd Mobile launched its interactive and customized mobile
entertainment, information and messaging services that targets the high value
young adult (ages 18 to 35) market segment in Canada and operates on TELUS'
wireless higher-speed EVDO (evolution data optimized) network. Amp'd Mobile is
responsible for bringing entertainment content to TELUS' subscribers as well as
providing optimized handsets with fast download speeds. TELUS manages sales and
distribution, billing, client care, network operations and pricing. TELUS also
has exclusive rights in Canada to Amp'd trademarks, premium data services,
handsets and content delivery platforms.
Page 4 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
3. KEY PERFORMANCE DRIVERS
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' 2006 Management's
discussion and analysis and updates reported in Section 10 of this document.
--------------------------------------------------------------------------------
2007 CORPORATE PRIORITIES ACROSS WIRELINE AND WIRELESS
--------------------------------------------------------------------------------
ADVANCING TELUS' LEADERSHIP POSITION IN THE CONSUMER MARKET
o Combining TELUS' suite of data applications with deregulated heritage
services
o Attaining best-in-class customer loyalty and growth through unparalleled
customer experiences
o Achieving customer addition targets by expanding distribution channels and
addressing key market segments with new service offerings.
ADVANCING TELUS' LEADERSHIP POSITION IN THE BUSINESS MARKET
o Progressing further in key industry verticals with specific applications
that provide non-price-based differentiation
o Leveraging wireless number portability to expand TELUS' business market
share in Central Canada
o Focusing on small business customer loyalty and growth with innovative
solutions.
ADVANCING TELUS' LEADERSHIP POSITION IN THE WHOLESALE MARKET
o Growing in domestic and international markets through recognition that
TELUS is Canada's IP leader
o Achieving excellence in customer service to support local forbearance in
key incumbent markets
o Expanding the Company's markets, channels and products by focusing on
strategic relationships with TELUS' partners.
DRIVING TELUS' TECHNOLOGY EVOLUTION AND IMPROVEMENTS IN PRODUCTIVITY AND
SERVICE EXCELLENCE
o Implementing technology roadmaps for Future Friendly Home and wireless
service offerings that simplify TELUS' product portfolio and improve
service development and execution
o Rolling out consolidated customer care systems to replace multiple
legacy systems in Alberta and B.C.
o Accelerating customer service delivery dates.
STRENGTHENING THE SPIRIT OF THE TELUS TEAM AND BRAND, AND DEVELOPING THE BEST
TALENT IN THE GLOBAL COMMUNICATIONS INDUSTRY
o Growing TELUS' business ownership culture with a team philosophy of our
business, our customers, our team, my responsibility thereby attracting,
developing and retaining great talent
o Leading the way in corporate social responsibility as TELUS strives to be
Canada's premier corporate citizen.
--------------------------------------------------------------------------------
4. CAPABILITY TO DELIVER RESULTS
The following discussion is qualified in its entirety by the Forward-looking
statements at the beginning of Management's discussion and analysis.
4.1 PRINCIPAL MARKETS ADDRESSED AND COMPETITORS
The principal markets addressed and competitors have not changed significantly
from those described in TELUS' annual 2006 Management's discussion and analysis.
4.2 OPERATIONAL CAPABILITIES
Regulation
On April 4, 2007, the Federal Government issued an Order-in-Council that varied
the conditions for forbearance from regulation of local services. The Company
has filed forbearance applications for Victoria, Vancouver, Calgary, Edmonton
and Rimouski, and expects to do so for other communities in the near future. In
addition, the Company had previously received a forbearance decision for Ft.
McMurray that was contingent on meeting competitor quality of service measures.
For further discussion, see Section 10.1 Regulatory.
Development of a new billing system in the wireline segment
In late-March 2007, the Company converted more than one million wireline
customers in Alberta to a new billing and client care system. 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. See Section 10.3 Process risks.
Page 5 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
4.3 LIQUIDITY AND CAPITAL RESOURCES
Capital structure financial policies (Note 3 of the interim Consolidated
financial statements)
The Company monitors capital on a number of bases, including: net debt to total
capitalization; net debt to EBITDA - excluding restructuring costs; and dividend
payout ratio of sustainable net earnings. For further discussion and specific
guidelines, see Section 7.4 Liquidity and capital resource measures. The TELUS'
2007 financing plan was described in Section 9.3 of its 2006 Management's
discussion and analysis. Progress against the financing plan is outlined below.
------------------------------------------------------------------------------
TELUS' 2007 FINANCING PLAN AND RESULTS
------------------------------------------------------------------------------
o REPURCHASE TELUS COMMON SHARES AND TELUS NON-VOTING SHARES UNDER THE
NORMAL COURSE ISSUER BID (NCIB)
During the first quarter of 2007, approximately 2.0 million Common
Shares and 1.5 million Non-Voting Shares were repurchased for
cancellation for a total outlay of approximately $201 million. From
December 20, 2004 to March 31, 2007, TELUS has repurchased
approximately 18.4 million Common Shares and 24.5 million Non-Voting
Shares for $1.97 billion under three NCIB programs.
o PAY DIVIDENDS
The dividend declared in the first quarter of 2007, payable on April 1,
was 37.5 cents per share, an increase of 36.4% from the dividend declared
in the first quarter of 2006.
o USE PROCEEDS FROM SECURITIZED RECEIVABLES AND BANK FACILITIES, AS NEEDED,
TO SUPPLEMENT FREE CASH FLOW AND MEET OTHER CASH REQUIREMENTS
The balance of securitized accounts receivable was reduced by $350
million to $150 million at March 31, 2007 from $500 million at December
31, 2006.
No amounts were outstanding under the five-year credit facility and other
bank facilities at March 31, 2007 as compared to approximately $121
million from December 31, 2006.
o MAINTAIN A MINIMUM $1 BILLION IN UNUTILIZED LIQUIDITY
TELUS had approximately $2 billion of available liquidity from unutilized
credit facilities as well as $534 million Cash and temporary investments
at March 31, 2007. On March 2, 2007, the Company closed a new five-year
$2 billion credit facility that has a May 2012 maturity date. The new
facility replaced $1.6 billion of credit facilities, of which $800
million would have expired in 2008 and $800 million would have expired in
2010. The new facility may be used for general corporate purposes
including the backstop of a potential commercial paper program.
o MAINTAIN POSITION OF FULLY HEDGING FOREIGN EXCHANGE EXPOSURE FOR
INDEBTEDNESS
Maintained.
o GIVE CONSIDERATION TO REFINANCING ALL OR A PORTION OF U.S. DOLLAR NOTES
IN ADVANCE OF ITS JUNE 1, 2007 SCHEDULED MATURITY
In March 2007, the Company publicly issued $300 million 4.50%, Series CC,
2012 Canadian dollar Notes and $700 million 4.95%, Series CD, 2017
Canadian dollar Notes. Proceeds from these debt issues, combined with a
potential issue of commercial paper and a possible increase in
securitized accounts receivable, are expected to be used for general
corporate purposes, including repayment of U.S. $1,166.5 million 7.50%
Notes due on June 1 (approximately $1,500 million).
o PRESERVE ACCESS TO THE CAPITAL MARKETS AT A REASONABLE COST BY
MAINTAINING INVESTMENT GRADE CREDIT RATINGS AND TARGETING IMPROVED CREDIT
RATINGS IN THE RANGE OF BBB+ TO A-, OR THE EQUIVALENT, IN THE FUTURE
At May 1, 2007, investment grade credit ratings from the four rating
agencies that cover TELUS were in the desired range. On February 26,
2007, Moody's Investors Services upgraded its rating for TELUS by one
level to Baa1 (equivalent to BBB+) and assigned an outlook of stable. On
March 5, 2007, Dominion Bond Rating Service (DBRS) upgraded the rating of
TELUS Notes to A (low) from BBB (high) and confirmed its A (low) ratings
for TCI and R-1 (low) rating for TELUS' commercial paper, all with a
stable trend.
------------------------------------------------------------------------------
4.4 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in internal control over financial reporting in the
three-month period ended March 31, 2007 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
5. RESULTS FROM OPERATIONS
5.1 GENERAL
The Company has two reportable segments: wireline and wireless. Segmentation is
based on similarities in technology, the technical expertise required to deliver
the products and services, the distribution channels used and regulatory
treatment. Intersegment sales are recorded at the exchange value. Segmented
information is regularly reported to the
Page 6 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
Company's Chief Executive Officer (the chief operating decision-maker).
See Note 5 of the interim Consolidated financial statements.
5.2 QUARTERLY RESULTS SUMMARY
----------------------------------------------------------------------------------------------------------------------------------
($ in millions, except per share amounts) 2007 Q1 2006 Q4 2006 Q3 2006 Q2 2006 Q1 2005 Q4 2005 Q3 2005 Q2
----------------------------------------------------------------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,205.6 1,234.3 1,200.3 1,189.9 1,198.6 1,209.9 1,198.6 1,216.5
Wireless segment 1,000.0 1,020.3 1,010.4 945.3 881.9 876.8 864.2 802.0
----------------------------------------------------------------------------------------------------------------------------------
Operating revenues (consolidated) 2,205.6 2,254.6 2,210.7 2,135.2 2,080.5 2,086.7 2,062.8 2,018.5
Operations expense 1,436.6 1,368.6 1,245.8 1,207.4 1,201.1 1,316.8 1,221.5 1,146.1
Restructuring costs 4.7 7.9 12.5 30.7 16.7 35.5 1.6 7.4
----------------------------------------------------------------------------------------------------------------------------------
764.3 878.1 952.4 897.1 862.7 734.4 839.7 865.0
EBITDA (1)
Depreciation 317.7 353.2 325.8 335.2 339.2 346.2 335.6 330.9
Amortization of intangible assets 49.6 53.9 57.5 46.9 63.9 67.0 73.6 68.2
----------------------------------------------------------------------------------------------------------------------------------
Operating income 397.0 471.0 569.1 515.0 459.6 321.2 430.5 465.9
Other expense (income) 3.8 10.1 4.0 9.6 4.3 9.3 7.1 0.5
Financing costs 117.6 133.6 116.6 127.5 127.0 171.7 144.8 168.2
----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 275.6 327.3 448.5 377.9 328.3 140.2 278.6 297.2
Income taxes 79.3 89.7 126.5 18.7 116.1 58.8 86.9 106.0
Non-controlling interests 1.5 1.4 2.4 2.6 2.1 2.9 1.6 1.7
----------------------------------------------------------------------------------------------------------------------------------
Net income 194.8 236.2 319.6 356.6 210.1 78.5 190.1 189.5
==================================================================================================================================
Net income per Common Share and
Non-Voting Share
- basic 0.58 0.70 0.94 1.03 0.60 0.22 0.53 0.53
- diluted 0.57 0.69 0.92 1.02 0.60 0.22 0.53 0.52
Dividends declared per Common Share
and Non-Voting Share 0.375 0.375 0.275 0.275 0.275 0.275 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 continued to reflect strong growth
in wireless revenue due to a growing subscriber base and increasing ARPU. The
increase in ARPU was due to increasing provision and adoption of wireless data
services, which more than offset the declining voice component of ARPU. The
trend also reflected growth in wireline segment data revenue, while wireline
voice local and long distance revenues continue to decrease. In addition to
continued substitution to wireless services, the impact from increased
competition from VoIP competitors and resellers on wireline revenues became
apparent in 2006. Decreases in wireline long distance revenues are consistent
with industry-wide trends of strong price competition and technological
substitution (to Internet and wireless). Wireline revenues continue to be
impacted by generally negative regulatory price cap decisions including
retroactive rate adjustments.
Historically, there is significant fourth quarter seasonality with higher
wireless subscriber additions and related acquisition costs and equipment sales,
resulting in lower wireless EBITDA. The seasonality affects, to a lesser extent,
the wireline high-speed Internet subscriber additions and related costs.
Operations expense in the first quarter of 2007 included a $173.5 million
non-cash charge for introducing a net-cash settlement feature for share option
awards granted prior to 2005, as described earlier. Operations expense in 2005
was also affected by temporary net expenses leading up to and resulting from an
extended labour disruption; such temporary expenses were estimated to be
approximately $16 million, $65 million and $52 million, respectively, for the
second, third and fourth quarters of 2005. Restructuring costs varied by
quarter, depending on the progress of ongoing initiatives underway.
Depreciation expense in the fourth quarter of 2006 included a provision of
approximately $17 million to align estimated useful lives for TELUS Quebec
assets, resulting from integration of financial systems. Amortization of
intangible assets continued to decrease as several software assets have been
fully amortized. Amortization expenses in the second quarter and fourth quarter
of 2006 as well as the first quarter of 2007 were reduced by approximately $12
million, $5 million and $5 million, respectively, for investment tax credits
relating to assets capitalized in prior years that are now fully amortized,
following a determination of eligibility by a government revenue authority.
Within Financing costs, interest expenses trended lower except for the following
items: (i) interest expense in respect of a court decision in a lawsuit related
to a 1997 BC TEL bond redemption (including $17.5 million in the second quarter
of 2005 and $7.8 million in the fourth quarter of 2006); and (ii) a charge of
$33.5 million in the fourth quarter of 2005 for early redemption of $1.578
billion of Notes. The early redemption of Notes on December 1, 2005, contributed
to lower financing costs in the first half of 2006. Financing costs are net of
varying amounts of interest income.
Page 7 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
The trend in Net income and earnings per share reflect the items noted above as
well as adjustments arising from income tax changes and tax adjustments and
related interest for prior periods.
------------------------------------------------------------------------------------------------------------------------------
INCOME TAX-RELATED ADJUSTMENTS
($ in millions, except EPS amounts) 2007 Q1 2006 Q4 2006 Q3 2006 Q2 2006 Q1 2005 Q4 2005 Q3 2005 Q4
------------------------------------------------------------------------------------------------------------------------------
Approximate Net income impact 4 20 30 115 -- (3) 17 2
Approximate EPS impact 0.01 0.06 0.09 0.33 -- (0.01) 0.05 0.01
Approximate basic EPS excluding
tax-related impacts 0.57 0.64 0.85 070 0.60 0.23 0.48 0.52
------------------------------------------------------------------------------------------------------------------------------
5.3 CONSOLIDATED RESULTS FROM OPERATIONS
----------------------------------------------------------------------------------------------------
($ in millions except EBITDA margin in % and QUARTERS ENDED MARCH 31
Employees) 2007 2006 Change
----------------------------------------------------------------------------------------------------
Operating revenues 2,205.6 2,080.5 6.0 %
Operations expense 1,436.6 1,201.1 19.6 %
Restructuring costs 4.7 16.7 (71.9)%
----------------------------------------------------------------------------------------------------
EBITDA (1) 764.3 862.7 (11.4)%
Depreciation 317.7 339.2 (6.3)%
Amortization of intangible assets 49.6 63.9 (22.4)%
----------------------------------------------------------------------------------------------------
Operating income 397.0 459.6 (13.6)%
====================================================================================================
Operations expense (as adjusted) (2) 1,263.1 1,201.1 5.2 %
EBITDA (as adjusted) (2) 937.8 862.7 8.7 %
EBITDA margin (3) 34.7 41.5 (6.8) pts
EBITDA margin (as adjusted) (4) 42.5 41.5 1.0 pt
Full-time equivalent employees at end of period 31,304 28,261 10.8 %
----------------------------------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before interest, taxes, depreciation
and amortization (EBITDA).
(2) Excludes a non-cash charge of $173.5 million in 2007 for introducing a net-cash settlement
feature for share option awards granted prior to 2005. Operations expense (as adjusted)
and EBITDA (as adjusted) are both regularly reported to the chief operating decision-maker.
EBITDA (as adjusted) corresponds to the definition used in setting TELUS' 2007 EBITDA
target and revised guidance.
(3) EBITDA divided by Operating revenues.
(4) EBITDA (as adjusted) divided by Operating revenues.
----------------------------------------------------------------------------------------------------
The following discussion is for the consolidated results of TELUS. Further
detail by segment is provided for Operating revenues, Operations expense,
Restructuring 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 $125.1 million in the first quarter
of 2007, when compared with the same period in 2006. The increase was due
primarily to growth in wireless revenues and wireline data revenues, which
exceeded erosion in wireline voice local and long distance revenues.
OPERATIONS EXPENSE AND OPERATIONS EXPENSE (AS ADJUSTED)
Consolidated Operations expense increased by $235.5 million in the first quarter
of 2007, when compared with the same period in 2006. The increase includes the
$173.5 million non-cash charge recorded in the first quarter of 2007 for
introducing a net-cash settlement feature for share option awards granted before
2005. Operations expense adjusted to exclude this non-cash charge increased by
$62.0 million primarily due to increased expenses in the wireless segment to
support an 11.5% growth in the subscriber base. The net defined benefit pension
plan expense decreased by approximately $22 million due primarily to favourable
returns on plan assets in 2006.
The number of employees increased to support the wireline segment's provision of
outsourcing services to TELUS' customers, including human resources outsourcing
services and international call centre services, and to support the growing
wireless segment subscriber base.
RESTRUCTURING COSTS
Restructuring costs decreased by $12.0 million in the first quarter of 2007,
when compared to the same period in 2006. The $4.7 million restructuring expense
in 2007 was in respect of several smaller efficiency initiatives. The Company's
estimate of restructuring costs for the full year of 2007, which arises from its
competitive efficiency program, are not expected to exceed $50 million.
Page 8 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
EBITDA and EBITDA (AS ADJUSTED)
EBITDA decreased by $98.4 million in the first quarter 2007 when compared with
the same period in 2006. The decrease includes the $173.5 million non-cash
charge recorded in the first quarter of 2007 for introducing a net-cash
settlement feature for share option awards. EBITDA adjusted to exclude this
charge increased by $75.1 million in the first quarter of 2007 when compared
with the same period in 2006. The increase was primarily in the wireless segment
due to strong revenue growth partially offset by the 2.1% COA per gross
subscriber addition, increased retention spend and higher operations costs to
support an 11.5% growth in total wireless subscribers.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation decreased by $21.5 million in the first quarter of 2007 when
compared to the same period in 2006 primarily due to an increase in
fully-depreciated assets as well as an adjustment in the 2006 period. The
depreciation expense adjustment in 2006 reflected a reduction in the estimated
useful service lives for computer servers and furniture.
Amortization of intangible assets decreased by $14.3 million in the first
quarter of 2007, when compared to the same period in 2006, due primarily to
several software assets becoming fully amortized, as well as recognition of
approximately $5 million of investment tax credits relating to assets
capitalized in prior years that are now fully amortized.
OPERATING INCOME
Operating income decreased by $62.6 million in the first quarter of 2007, when
compared to the same period in 2006. The decrease included the $173.5 million
non-cash charge recorded in the first quarter of 2007 for introducing a net-cash
settlement feature for share option awards. This charge more than offset
underlying growth in EBITDA and reduced depreciation and amortization expenses,
as described above. Operating income as adjusted to exclude this charge
increased by $110.9 million or 24.1%.
OTHER INCOME STATEMENT ITEMS
-----------------------------------------------------------------------------
OTHER EXPENSE, NET QUARTERS ENDED MARCH 31
($ millions) 2007 2006 Change
-----------------------------------------------------------------------------
3.8 4.3 (11.6)%
-----------------------------------------------------------------------------
Other expense was not significantly changed in the first quarter of 2007, when
compared to the same period in 2006. The accounts receivable securitization
expense was $3.2 million in the first quarter of 2007, did not change
significantly from the same period in 2006. At March 31, 2007, the balance of
proceeds of securitized receivables was $150 million (see Section 7.6 Accounts
receivable sale).
----------------------------------------------------------------------------
FINANCING COSTS QUARTERS ENDED MARCH 31
($ millions) 2007 2006 Change
----------------------------------------------------------------------------
Interest on long-term debt,
short-term obligations and other 119.3 127.0 (6.1)%
Foreign exchange losses (gains) 1.9 1.1 72.7 %
Interest income (3.6) (1.1) n.m.
----------------------------------------------------------------------------
117.6 127.0 (7.4)%
============================================================================
Interest expenses decreased by $7.7 million in the first quarter of 2007 when
compared with same period in 2006 due primarily to an adjustment for application
of the effective rate method for issue costs as required under CICA Handbook
Section 3855 (recognition and measurement of financial instruments). In March
2007, the Company publicly issued $300 million of five-year notes and $700
million of 10-year notes (see Section 7.3). Also in March, forward starting
interest rate swaps were terminated, resulting in a net loss of approximately
$10 million that was deferred and will be amortized over 10 years, which is the
term of the new debt.
The Company's debt, as calculated in Section 11.4, was $6,563 million at March
31, 2007, as compared to $5,732 million at March 31, 2006. Net debt was $6,179
million and $6,133 million, respectively, with the March 31, 2007 figure
reflecting a large cash and temporary investments balance and reduced
securitized receivables.
Interest income increased by $2.5 million in the first quarter of 2007 when
compared with the same period in 2006, due primarily to interest earned on cash
and temporary investments in 2007.
Page 9 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
-------------------------------------------------------------------------------
INCOME TAXES QUARTERS ENDED MARCH 31
($ millions) 2007 2006 Change
-------------------------------------------------------------------------------
Blended federal and provincial
statutory income tax based
on net income before tax 92.3 111.5 (17.2)%
Revaluation of future income
tax liability (3.7) -- --
Share option award expense (7.7) 1.5 --
Other (1.6) 3.1 --
-------------------------------------------------------------------------------
79.3 116.1 (31.7)%
===============================================================================
Blended federal and provincial
statutory tax rates (%) 33.5 34.0 (0.5) pts
Effective tax rates (%) 28.8 35.4 (6.6) pts
-------------------------------------------------------------------------------
The decrease in the blended federal and provincial statutory income tax expense
in the first quarter of 2007, when compared with the same period in 2006,
relates primarily to the 16.1% decrease in income before taxes as well as a
lower blended statutory tax rate. The blended federal and provincial tax rate
for the first quarter of 2007 decreased from the same period in 2006 due
primarily to a reduction to general corporate income tax rates on income taxed
in Alberta effective April 1, 2006. The decrease in the effective tax rate was
mainly due to revaluation of the future income tax liability as well as a future
income tax recovery associated with introducing the net-cash settlement feature
for share option awards.
Based on the assumption of the continuation of the rate of TELUS earnings, the
existing legal entity structure, and no substantive changes to tax regulations,
the Company expects to be able to substantially utilize its non-capital losses
before the end of 2007. The Company's assessment is that the risk of expiry of
such non-capital losses is remote. Under the existing legal entity structure,
TELUS currently expects cash tax payments to be minimal in 2007, increasing in
2008, with substantial cash tax payments in 2009. The blended federal and
provincial statutory tax rate for 2007 is expected to be approximately 33 to
34%.
-------------------------------------------------------------------------------
NON-CONTROLLING INTERESTS QUARTERS ENDED MARCH 31
($ millions) 2007 2006 Change
-------------------------------------------------------------------------------
1.5 2.1 (28.6)%
-------------------------------------------------------------------------------
Non-controlling interests represents minority shareholders' interests in several
small subsidiaries.
COMPREHENSIVE INCOME
As discussed in more detail in Section 8.2 Accounting policy developments,
commencing with the 2007 fiscal year, the Company adopted the recommendations of
the Canadian Institute of Chartered Accountants (CICA) for accounting for
comprehensive income (CICA Handbook Section 1530). Currently, the concept of
comprehensive income for purposes of Canadian GAAP, in the Company's specific
instance, is primarily to include changes in shareholders' equity arising from
unrealized changes in the fair values of financial instruments (see Section
7.8). The calculation of earnings per share is based on Net income and Common
Share and Non-Voting Share income, as required by GAAP.
5.4 WIRELINE SEGMENT RESULTS
-----------------------------------------------------------------------------
OPERATING REVENUES - WIRELINE SEGMENT QUARTERS ENDED MARCH 31
($ millions) 2007 2006 Change
-----------------------------------------------------------------------------
Voice local (1) 532.1 535.6 (0.7)%
Voice long distance 187.6 207.8 (9.7)%
Data ((2)) 424.8 393.6 7.9 %
Other 61.1 61.6 (0.8)%
-----------------------------------------------------------------------------
External operating revenue 1,205.6 1,198.6 0.6 %
Intersegment revenue 25.1 23.5 6.8 %
-----------------------------------------------------------------------------
Total operating revenues 1,230.7 1,222.1 0.7 %
=============================================================================
(1) Voice local revenue decreased by approximately $18 million or 3.4% once
adjusted to exclude the impact of regulatory adjustments.
(2) Data revenue grew by approximately $43 million or 10.8% once adjusted
to exclude the impact of the two mandated retroactive competitor price
reductions.
-----------------------------------------------------------------------------
Page 10 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
-----------------------------------------------------------------------------
NETWORK ACCESS LINES AS AT MARCH 31
(000s) 2007 2006 Change
-----------------------------------------------------------------------------
Residential network access lines 2,741 2,900 (5.5)%
Business network access lines 1,785 1,763 1.3%
------- ------- -------
Total network access lines(1) 4,526 4,663 (2.9)%
QUARTERS ENDED MARCH 31
(000s) 2007 2006 Change
-----------------------------------------------------------------------------
Change in residential network access lines (34) (28) (21.4)%
Change in business network access lines 12 -- n.m.
------- ------- -------
Change in total network access lines(1) (22) (28) 21.4%
----------------------------------------------------------------------------
(1) Network access lines are measured at the end of the reporting period
based on information in billing and other systems.
----------------------------------------------------------------------------
-----------------------------------------------------------------------------
INTERNET SUBSCRIBERS AS AT MARCH 31
(000s) 2007 2006 Change
-----------------------------------------------------------------------------
High-speed Internet subscribers 948.8 801.7 18.3 %
Dial-up Internet subscribers 181.6 227.8 (20.3)%
------- ------- -------
Total Internet subscribers (1) 1,130.4 1,029.5 9.8 %
QUARTERS ENDED MARCH 31
(000s) 2007 2006 Change
-----------------------------------------------------------------------------
High-speed Internet net additions 32.1 38.6 (16.8)%
Dial-up Internet net reductions (12.5) (8.3) (50.6)%
------- ------- -------
Total Internet subscriber net additions 19.6 30.3 (35.3)%
-----------------------------------------------------------------------------
(1) 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 $8.6 million in the first quarter of 2007
when compared with the same period in 2006.
o Voice local revenue decreased by $3.5 million in the first quarter of 2007
when compared with the same period in 2006. The decrease was due primarily
to lower revenues from basic access and optional enhanced services arising
from increased competition for residential subscribers. These reductions
were partly offset by recoveries of approximately $14.5 million from the
price cap deferral account in the first quarter of 2007, which offset
unfavourable mandated retroactive rate adjustments for basic data revenue
pursuant to two recent CRTC (Canadian Radio-television and
Telecommunications Commission) decisions and included recovery of
previously incurred amounts associated with mandated local number
portability and start-up costs.
Residential line losses include the effect of increased competition from
resellers, VoIP competitors (including cable-TV companies, which have
expanded their geographic coverage), technological substitution to wireless
services, and a lower number of second lines resulting from migration of
dial-up Internet subscribers to high-speed Internet service. The increase
in business lines was mainly in Central Canada.
o Voice long distance revenues decreased by $20.2 million in the first
quarter of 2007 when compared with the same period in 2006 due primarily to
lower average per-minute rates (due to industry-wide price competition)
partly offset by increased retail and wholesale minute volumes.
o Wireline segment data revenues increased by $31.2 million in the first
quarter of 2007 when compared with the same period in 2006. This growth was
primarily due to increased Internet, enhanced data and hosting service
revenues from growth in business services and high-speed Internet
subscribers. High-speed Internet subscriber net additions decreased
somewhat from one year earlier, reflecting competitive markets, but
continue in line with annual guidance. 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.
Pursuant to CRTC Decision 2007-6 (relating to digital network access link
charges) and CRTC Decision 2007-10 (relating to basic service extension
feature charges), retroactive rate reductions totalling approximately $11
million were recorded in basic data services revenues. Data revenue grew by
approximately $43 million or 10.8% once adjusted to exclude the impact of
the two mandated competitor price reductions.
o Other revenue decreased by $0.5 million in the first quarter of 2007 when
compared with the same period in 2006, primarily due to lower voice
equipment sales being somewhat offset by reduced quality of service rate
rebates.
Page 11 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
o Intersegment revenue represents services provided by the wireline segment
to the wireless segment. These revenues are eliminated upon consolidation
together with the associated expense in the wireless segment.
-----------------------------------------------------------------------------
OPERATING EXPENSES - WIRELINE SEGMENT QUARTERS ENDED MARCH 31
($ millions, except employees) 2007 2006 Change
-----------------------------------------------------------------------------
Salaries, benefits and
other employee-related costs 582.0 413.2 40.9 %
Other operations expenses 323.4 327.2 (1.2)%
-----------------------------------------------------------------------------
Operations expense 905.4 740.4 22.3 %
Restructuring costs 4.4 14.9 (70.5)%
-----------------------------------------------------------------------------
Total operating expenses 909.8 755.3 20.5 %
=============================================================================
Operations expense (as adjusted) (1) 752.3 740.4 1.6 %
Total operating expenses (as adjusted) (1) 756.7 755.3 0.2 %
=============================================================================
Full-time equivalent employees,
end of period (2) 24,006 21,789 10.2 %
-----------------------------------------------------------------------------
(1) Excludes a non-cash charge of $153.1 million in 2007 for introducing a
net-cash settlement feature for share option awards granted prior to
2005. Operations expense (as adjusted) and total operating expenses (as
adjusted) are regularly reported to the chief operating decision-maker.
(2) The number of full-time equivalent employees providing outsourcing
services to the Company's customers was 5,377 on March 31, 2007 and was
3,542 on March 31, 2006. Full-time equivalent staff in other wireline
operations increased by 382 or 2.1%.
-----------------------------------------------------------------------------
Total operating expenses increased by $154.5 million in the first quarter of
2007, when compared with the same period in 2006, due primarily to a $153.1
million non-cash charge for share option awards granted prior to 2005, which was
recorded in salaries and benefits during the first quarter of 2007.
Restructuring costs in the first quarter of 2007 were for several small
efficiency initiatives and decreased by $10.5 million when compared with the
same period in 2006.
Operations expense:
o Salaries, benefits and employee-related expenses increased by $168.8
million in the first quarter of 2007 when compared with the same period in
2006. When adjusted to exclude the non-cash option expense in the first
quarter of 2007, the increase was $15.7 million or 3.8%, when compared with
the first quarter of 2006. The increase was mainly due to scheduled
compensation increases and increased staffing, partly offset by a lower
defined benefit pension plan pension expense.
o Other operations expenses decreased by $3.8 million in the first quarter of
2007 when compared with the same period in 2006 due primarily to higher
labour capitalization. The increase in labour capitalization was associated
with the higher capital expenditure levels in 2007. Increased facility
costs associated with service growth in Central Canada were offset by lower
transit and termination charges as well as migration to TELUS' facilities.
Offsetting lower expenses were higher external labour costs to help clear
backlogs caused by severe winter weather on the west coast as well as the
use of more contracting resources in 2007 for software development.
----------------------------------------------------------------------------
EBITDA ($ MILLIONS) AND EBITDA MARGIN (%) QUARTERS ENDED MARCH 31
WIRELINE SEGMENT 2007 2006 Change
----------------------------------------------------------------------------
EBITDA 320.9 466.8 (31.3)%
EBITDA (as adjusted)(1) 474.0 466.8 1.5 %
EBITDA margin 26.1 38.2 (12.1)pts
EBITDA margin (as adjusted) (1) 38.5 38.2 0.3 pts
----------------------------------------------------------------------------
(1) Excludes a non-cash charge of $153.1 million in 2007 for introducing a
net-cash settlement feature for share option awards granted prior to
2005. EBITDA (as adjusted) is regularly reported to the chief operating
decision-maker and corresponds to the definition used in setting TELUS'
2007 Wireline EBITDA target and revised guidance.
=============================================================================
Wireline EBITDA decreased by $145.9 million mainly due to the non-cash charge
for share option awards prior to 2005, which was recorded in 2007. Wireline
EBITDA adjusted to exclude this charge increased by $7.2 million mainly due to a
modest increase in revenues and lower restructuring charges.
5.5 WIRELESS SEGMENT RESULTS
-----------------------------------------------------------------------------
OPERATING REVENUES - WIRELESS SEGMENT QUARTERS ENDED MARCH 31
($ millions) 2007 2006 Change
-----------------------------------------------------------------------------
Network revenue 944.5 824.7 14.5 %
Equipment revenue 55.5 57.2 (3.0)%
-----------------------------------------------------------------------------
External operating revenue 1,000.0 881.9 13.4 %
Intersegment revenue 6.3 5.9 6.8 %
-----------------------------------------------------------------------------
Total operating revenues 1,006.3 887.8 13.3 %
=============================================================================
Page 12 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
-----------------------------------------------------------------------------
KEY OPERATING INDICATORS - WIRELESS SEGMENT AS AT MARCH 31
(000s) 2007 2006 Change
-----------------------------------------------------------------------------
Subscribers - postpaid (1) 4,136.8 3,737.2 10.7%
Subscribers - prepaid 1,007.0 876.0 15.0%
------- ------- -------
Subscribers - total(2) 5,143.8 4,613.2 11.5%
Digital POPs(3) covered including
roaming/resale (millions)(4) 31.0 30.6 1.3%
QUARTERS ENDED MARCH 31
2007 2006 Change
---------------------------------------
Subscriber gross additions - postpaid 173.3 179.7 (3.6)%
Subscriber gross additions - prepaid 122.7 95.1 29.0 %
------- ------- -------
Subscriber gross additions - total 296.0 274.8 7.7 %
Subscriber net additions - postpaid 60.8 70.4 (13.6)%
Subscriber net additions - prepaid 29.7 22.1 34.4 %
------- ------- -------
Subscriber net additions - total 90.5 92.5 (2.2)%
ARPU ($)(5) 62.03 60.31 2.9%
Churn, per month(%)(5) 1.35 1.33 0.2 pts
Lifetime revenue per subscriber($)(5) 4,595 4,535 1.3%
COA (6) per gross subscriber
addition ($)(5) 438 429 2.1%
COA per gross subscriber addition
to lifetime revenue (%)(5) 9.5 9.5 --
Average minutes of use
per subscriber per month (MOU) 382 386 (1.0)%
EBITDA ($ millions) 443.4 395.9 12.0%
EBITDA (as adjusted) (7) ($ millions) 463.8 395.9 17.2%
EBITDA to network revenue (%) 46.9 48.0 (1.1)pts
EBITDA (as adjusted) to network
revenue (%) 49.1 48.0 1.1 pts
Retention spend to network
revenue (5)(%) 7.3 6.2 1.1 pts
EBITDA excluding COA ($ millions) (5) 572.9 513.8 11.5%
EBITDA (as adjusted) excluding COA
($ millions) 593.3 513.8 15.5%
-----------------------------------------------------------------------------
pts - percentage points
(1) A one-time adjustment was made to the postpaid subscriber base.
Cumulative subscribers were reduced by approximately 2,600 in the period
to reflect the discontinuation of network service to its cellular
digital packet data (CDPD) subscribers effective January 31, 2007.
(2) Subscribers are measured at the end of the reporting period based on
information from billing systems.
(3) POPs is an abbreviation 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.
(4) At March 31, 2007, 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 (Bell Canada).
(5) 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.
(6) Cost of acquisition.
(7) Excludes a non-cash charge of $20.4 million in 2007 for introducing a
net-cash settlement feature for share option awards granted prior to
2005. EBITDA (as adjusted) is regularly reported to the chief operating
decision-maker and corresponds to the definition used in setting TELUS'
2007 Wireless EBITDA target and revised guidance.
----------------------------------------------------------------------------
Wireless segment revenues increased by $118.5 million in the first quarter of
2007 when compared with the same period in 2006, due to the following:
o Network revenue increased by $119.8 million over in the first quarter of
2007 when compared to the same period in 2006. The increase was a result of
the 11.5% expansion of the subscriber base combined with increased average
revenue per subscriber unit per month. ARPU increased by $1.72 in the first
quarter of 2007, when compared to the same period in 2006, representing the
17th successive quarter of year-over-year growth, as increased data usage
more than offset declining voice ARPU. Voice ARPU was $55.76 in the first
quarter of 2007, a decrease of $0.84 or 1.5% from the same period in 2006,
caused mainly by lower voice minutes of use per subscriber per month (MOU)
and lower pricing.
Data revenues increased to 10.2% of Network revenue, or $96.2 million, in
the first quarter of 2007 as compared with 6.2% of Network revenues, or
$51.3 million, in the first quarter of 2006 - reflecting a growth rate of
87.5%. Data ARPU increased by 69.0% to $6.27 for the first quarter of 2007
as compared with $3.71 for the same period in 2006. This growth was
principally related to text messaging, mobile computing, personal digital
assistant (PDA) devices, Internet browser activities and pay-per-use
downloads such as ringtones, music, games and videos.
At March 31, 2007, postpaid subscribers represented 80.4% of the total
cumulative subscriber base, remaining relatively stable from one year
earlier. The 60,800 postpaid subscriber net additions for the first quarter
of 2007 represented 67.2% of all net additions as compared with 70,400 or
76.1% of all net additions for the same period in
Page 13 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
2006. Total net subscriber additions remained relatively stable in the
first quarter of 2007 as compared with the same period in 2006 as a result
of the growth in prepaid net subscriber additions.
The blended churn rate increased slightly in the first quarter of 2007 when
compared with the respective period in 2006. The postpaid monthly churn
rate for the first quarter of 2007 was less than one per cent, remaining
consistent with the same period last year. The prepaid churn rate increased
slightly in the first quarter when compared with the same period in 2006.
Total deactivations were 205,500 for the first quarter of 2007 as compared
with 182,300 for the same period last year, which primarily reflects the
growing subscriber base. The churn and deactivation results reflect the
continued focus on profitable subscriber growth and retention. Wireless
number portability was implemented in late-March 2007. The impact on first
quarter churn rates is believed to be minor.
o Equipment sales, rental and service revenue decreased by $1.7 million for
the first quarter of 2007, when compared to the same period in 2006 despite
continued subscriber growth and increased retention activity. Gross
subscriber additions were 296,000 in the first quarter of 2007 as compared
with 274,800 for the same period last year driven by a higher mix of
prepaid gross additions. Handset revenues associated with gross subscriber
activations are included in COA per gross subscriber addition, while
handset revenues associated with retention efforts are included in the
overall retention spend amount.
o Intersegment revenues represent services provided by the wireless segment
to the wireline segment and are eliminated upon consolidation along with
the associated expense in the wireline segment.
-----------------------------------------------------------------------------
OPERATING EXPENSES - WIRELESS SEGMENT QUARTERS ENDED MARCH 31
($ millions, except employees) 2007 2006 Change
-----------------------------------------------------------------------------
Equipment sales expenses 145.4 126.2 15.2 %
Network operating expenses 114.6 105.9 8.2 %
Marketing expenses 100.8 93.8 7.5 %
General and administration expenses 201.8 164.2 22.9 %
-----------------------------------------------------------------------------
Operations expense 562.6 490.1 14.8 %
Restructuring costs 0.3 1.8 (83.3)%
-----------------------------------------------------------------------------
Total operating expenses 562.9 491.9 14.4 %
=============================================================================
Operations expense (as adjusted) (1) 542.2 490.1 10.6 %
Total operating expenses (as adjusted) (1) 542.5 491.9 10.3 %
=============================================================================
Full-time equivalent employees
at end of period 7,298 6,472 12.8%
=============================================================================
(1) Excludes a non-cash charge of $20.4 million in 2007 for introducing a
net-cash settlement feature for share option awards granted prior to
2005. Operations expense (as adjusted) and total operating expenses (as
adjusted) are regularly reported to the chief operating decision-maker.
-----------------------------------------------------------------------------
Wireless segment total operating expenses increased by $71.0 million in the
first quarter of 2007 when compared with the same period in 2006. Total
operating expenses as adjusted to exclude the non-cash charge for share option
awards expense in 2007 increased by $50.6 million to promote, acquire, retain
and support the 11.5% growth in the subscriber base and the 14.5% increase in
Network revenue.
o Equipment sales expenses increased by $19.2 million in the first quarter of
2007, when compared to the same period in 2006, due principally to an
increase in gross subscriber activations, higher handset costs related to
product mix, and increased retention activity. Handset costs including data
equipment associated with gross subscriber activations are included in COA
per gross subscriber addition. Handset cost related to retention efforts
are included in the overall retention spend amount.
o Network operating expenses increased by $8.7 million in the first quarter
of 2007 when compared with the same period in 2006. The increase was
principally due to higher transmission and site-related expenses to support
the greater number of cell sites, a larger subscriber base, third party
data content providers, and improved network quality and coverage, net of a
reduction arising from CRTC Decision 2007-6 related to retail network
access link charges.
o Marketing expenses increased by $7.0 million in the first quarter of 2007
when compared with the same period in 2006, primarily due to higher
advertising and promotions costs and increased dealer compensation costs
related to the higher gross subscriber additions and increased
re-contracting activity. COA per gross subscriber addition increased by $9
or 2.1% in the first quarter as compared with the same period last year.
The increase was principally related to higher subsidies on certain popular
handsets driven by competitive activity, increased dealer compensation
costs related to the higher gross subscriber additions, and higher
advertising and promotion spending related to wireless number portability
and new product launches. With higher ARPU in the first quarter, despite a
slightly higher churn rate, the lifetime revenue per subscriber improved by
$60 to $4,595. COA as a percentage of lifetime revenue was 9.5% in the
first quarter of 2007 unchanged from the same period in 2006 reflecting
continued execution of TELUS' profitable growth strategy.
Page 14 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
o General and administration expenses increased by $37.6 million in the first
quarter of 2007, when compared to the same period last year, due
principally to the $20.4 million non-cash charge for share option awards
granted prior to 2005. Excluding this charge, general and administration
expenses grew by $17.2 million mainly due to the increase in employees. The
12.8% increase in employees, which was lower than the growth in Network
revenue, supported the significant growth in the subscriber base and
continued expansion of the client care team and company-owned retail
stores. Moreover, occupancy and client-related costs were higher.
o Restructuring costs were in respect of the Company's operational efficiency
program.
-----------------------------------------------------------------------------
EBITDA ($ MILLIONS) AND EBITDA MARGIN (%) QUARTERS ENDED MARCH 31
WIRELESS SEGMENT 2007 2006 Change
-----------------------------------------------------------------------------
EBITDA 443.4 395.9 12.0%
EBITDA (as adjusted) (1) 463.8 395.9 17.2%
EBITDA margin 44.1 44.6 (0.5)pts
EBITDA margin (as adjusted) (1) 46.1 44.6 1.5 pts
-----------------------------------------------------------------------------
(1) Excludes a non-cash charge of $20.4 million in 2007 for introducing a
net-cash settlement feature for share option awards granted prior to
2005. EBITDA (as adjusted) is regularly reported to the chief operating
decision-maker and corresponds to the definition used in setting TELUS'
2007 Wireless EBITDA target and revised guidance.
-----------------------------------------------------------------------------
Wireless segment EBITDA increased by $47.5 million in the first quarter of 2007,
when compared to the same period in 2006. When adjusted to exclude the non-cash
charge for options expense in 2007, EBITDA increased by $67.9 million due to
strong revenue growth partially offset by the higher COA per gross subscriber
addition, increased retention spend prior to the implementation of wireless
number portability in mid-March 2007, and higher operations costs to support
growth in the total subscriber base.
Page 15 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
6. FINANCIAL CONDITION
The following are changes in the Consolidated balance sheets in the three month
period ended March 31, 2007.
------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Change % Change Explanation of the change in balance
2007 2006
($ millions) (adjusted)
------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary 534.0 (11.5) 545.5 n.m. See Section 7. Liquidity and capital
investments, net resources
Short-term investments 110.7 110.2 0.5 0.5% Investments of surplus cash
Accounts receivable 959.3 707.2 252.1 35.6% Increased by $350 million for the
reduction in proceeds from
securitized accounts
receivable, net of the receipt
of inducements for
renegotiated leases, lower
days outstanding on wireline
receivables and a decrease in
wireless postpaid airtime and
receivables from dealers
Income and other 94.2 95.4 (1.2) (1.3)% --
taxes receivable
Inventories 159.4 196.4 (37.0) (18.8)% Primarily a reduction in wireless
inventories following expansion
of new handset inventories in the
fourth quarter of 2006
Prepaid expenses 255.8 195.3 60.5 31.0% Primarily prepayment of annual
and other wireless licence fees as well as
accrued and prepaid employee
benefits net of amortization
Derivative assets 62.6 40.4 22.2 55.0% Includes fair value adjustments
for share-based compensation
------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and 1,585.1 1,363.6 221.5 16.2% Primarily an increase in net-cash
accrued liabilities settled share options liability and
a seasonal increase in accrued
interest payable
Income and other 8.9 10.3 (1.4) (13.6)% --
taxes payable
Restructuring accounts 36.1 53.1 (17.0) (32.0)% Payments under previous and current
payable and programs exceeded new obligations
accrued liabilities
Advance billings and 609.7 606.3 3.4 0.6% Primarily increased billings net of
customer deposits lower price cap deferred revenue
Current maturities 1,351.6 1,433.5 (81.9) (5.7)% Primarily reflects repayment of $70
of long-term debt million ofmedium-term TCI notes that
matured in February and a decrease
in the Canadian dollar value of U.S.
dollar notes due June 1
Current portion of 172.4 165.8 6.6 4.0% Primarily foreign exchange rate
derivative liabilities changes and fair value adjustments to
the deferred hedging liability
associated with U.S. dollar notes
due June 1
Current portion of 238.7 250.9 (12.2) (4.9)% A decrease in temporary differences
future income taxes for current assets and
liabilities. The December 31, 2006
balance includes a
reclassification of $157.7 million
from long-term future income
taxes. See Section 8.2 Accounting
policy developments - Income taxes
arising from partnership income
and Note 2(c) of the interim
Consolidated financial statements
------------------------------------------------------------------------------------------------------------------------------
WORKING CAPITAL (1) (1,826.5) (2,550.1) 723.6 28.4% Includes an increase in cash and
temporary investments ahead of the
June 1, 2007 debt maturity. See
Section 7.3 Cash provided (used) by
financing activities
------------------------------------------------------------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they fall due.
------------------------------------------------------------------------------------------------------------------------------
Page 16 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
Table continued from the previous page.
------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Change % Change Explanation of the change in balance
2007 2006
($ millions) (adjusted)
------------------------------------------------------------------------------------------------------------------------------
CAPITAL ASSETS, NET 10,994.3 10,982.1 12.2 0.1 % See Sections 5.3 Consolidated results
from operations - Depreciation and
amortization and 7.2 Cash used by
investing activities
------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Deferred charges 1,022.0 956.6 65.4 6.8% Primarily pension plan contributions
and pension recoveries resulting from
favourable returns on plan assets
Investments 41.5 35.2 6.3 17.9% New investments net of divestitures
Goodwill 3,169.6 3,169.5 0.1 0.0% --
------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 4,312.5 3,474.7 837.8 24.1% Includes notes issued in March totalling
$1 billion net of the repayment of
bank facilities and a reduction in
the Canadian dollar value of 2011 U.S.
dollar notes
------------------------------------------------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES 1,498.4 1,257.3 241.1 19.2% Primarily foreign exchange rate
changes and a fair value adjustment
of the deferred hedging liability
associated with 2011 U.S. dollar notes
------------------------------------------------------------------------------------------------------------------------------
FUTURE INCOME TAXES 934.5 909.6 24.9 2.7% An increase in temporary differences
for long-term assets and liabilities
------------------------------------------------------------------------------------------------------------------------------
NON-CONTROLLING INTERESTS 25.1 23.6 1.5 6.4% --
------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common equity 6,630.4 6,928.1 (297.7) (4.3)% Decreased primarily from:
o Normal course issuer bid
expenditures of $200.7 million;
o Dividends of $125.9 million; and
o Transitional amounts for
accumulated other comprehensive
income of $176.2 million;
Partly offset by:
o Net income of $194.8 million; and
o Other comprehensive income of
$30.3 million.
------------------------------------------------------------------------------------------------------------------------------
7. LIQUIDITY AND CAPITAL RESOURCES
7.1 CASH PROVIDED BY OPERATING ACTIVITIES
-----------------------------------------------------------------------------
($ millions) QUARTERS ENDED MARCH 31
2007 2006 Change
-----------------------------------------------------------------------------
460.6 673.1 (31.6)%
-----------------------------------------------------------------------------
Cash provided by operating activities decreased by $212.5 million in the first
quarter of 2007, when compared with the same period in 2006, due primarily to
the following:
o Proceeds from securitized accounts receivable were reduced by a net $350
million during the first quarter of 2007, compared with a net reduction of
$100 million in first quarter of 2006;
o Income taxes received net of installment payments decreased by $89.5
million in the first quarter of 2007 when compared to the same period in
2006, due mainly to collection of income taxes receivable during first
quarter of 2006;
o Interest received decreased by $20.6 million in the first quarter of 2007
when compared to the same period in 2006 primarily due to the receipt of
interest on tax refunds in the prior year; and
o Interest paid increased by $10.5 million in the first quarter of 2007 when
compared to the same period in 2006 due mainly to payment of forward
starting interest rate swaps in 2007.
The above decreases were partly offset by the following:
Page 17 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
o Share-based compensation (share options awards expense in excess of
payments) increased by $130.2 million in the first quarter of 2007, when
compared with the same period in 2006, primarily as a result of introducing
a net-cash settlement feature for share option awards prior to 2005. When
share-based compensation is added back to EBITDA, the net increase was
$31.8 million in the first quarter of 2007 when compared to the same period
in 2006;
o Restructuring payments decreased by $10.6 million in the first quarter of
2007 when compared to the same period in 2006; and
o Changes to non-cash working capital including reduced inventory in the
first quarter of 2007 as well as an increase in accounts payable in the
first quarter of 2007 versus a comparative decrease in accounts payable in
the first quarter of 2006.
7.2 CASH USED BY INVESTING ACTIVITIES
--------------------------------------------------------------------------
($ millions) QUARTERS ENDED MARCH 31
2007 2006 Change
--------------------------------------------------------------------------
392.3 316.1 24.1 %
--------------------------------------------------------------------------
Cash used by investing activities increased by $76.2 million in the first
quarter of 2007, when compared with the same period in 2006, due primarily to
greater capital expenditures.
Assets under construction were $494.7 million at March 31, 2007, a decrease from
$725.4 million at December 31, 2006, which primarily reflects a transfer of
$342.1 million to intangible assets subject to amortization. This transfer was
mainly for activation of certain phases of the new consolidated wireline billing
system.
-----------------------------------------------------------------------------
CAPITAL EXPENDITURES QUARTERS ENDED MARCH 31
($ in millions, except 2007 2006 Change
capital expenditure intensity in %)
-----------------------------------------------------------------------------
Wireline segment 270.7 259.0 4.5%
Wireless segment 111.2 61.5 80.8%
-----------------------------------------------------------------------------
TELUS consolidated capital expenditures 381.9 320.5 19.2%
=============================================================================
Capital expenditure intensity (1) 17.3 15.4 1.9 pts
-----------------------------------------------------------------------------
(1) Capital expenditure intensity is measured by dividing capital
expenditures by operating revenues. This measure provides a method of
comparing the level of capital expenditures to other companies of varying
size within the same industry.
-----------------------------------------------------------------------------
TELUS' capital intensity ratio in the first quarter of 2007 was slightly less
than the intensity ratio implied by the Company's annual guidance for
consolidated revenues and capital expenditures. See Section 9: Annual guidance
for 2007. TELUS' EBITDA less capital expenditures was $382.4 million in the
first quarter of 2007, a decrease of 29.5% from the same period in 2006
primarily due to the $173.5 million charge in 2007 for introducing a net-cash
settlement feature for options granted prior to 2005. TELUS' EBITDA (as
adjusted) less capital expenditures was $555.9 million in the first quarter of
2007, an increase of 2.5% from the same period in 2006.
o Wireline segment capital expenditures increased by $11.7 million in the
first quarter of 2007 when compared to the same period in 2006. The
increase was primarily due to up-front capital investment to support new
enterprise customers in Central Canada as well as increased investment in
broadband site expansion, net of lower expenditures for billing system
development. Capital expenditure intensity for the wireline segment was
22.0% in the first quarter of 2007, as compared with 21.2% in the same
period of 2006. Wireline cash flow (EBITDA less capital expenditures) was
$50.2 million in the first quarter of 2007, a decrease of 75.8% from the
same period in 2006. Wireline cash flow based on EBITDA (as adjusted) was
$203.3 million in the first quarter of 2007, a decrease of 2.2% from the
same period in 2006.
o Wireless segment capital expenditures increased by $49.7 million in the
first quarter of 2007 when compared to the same period in 2006. The
increase was principally related to continued enhancement of digital
wireless capacity and coverage, strategic investments in higher-speed
(EVDO) wireless network technology, and enablement of wireless number
portability. Capital expenditure intensity for the wireless segment was
11.1% in the first quarter of 2007, as compared with 6.9% in the same
period of 2006. Wireless cash flow (EBITDA less capital expenditures) was
$332.2 million in the first quarter of 2007, a decrease of 0.7% from the
same period in 2006. However, wireless cash flow based on EBITDA (as
adjusted) was $352.6 million in the first quarter of 2007, an increase of
5.4% from the same period in 2006.
Page 18 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
7.3 CASH PROVIDED (USED) BY FINANCING ACTIVITIES
-----------------------------------------------------------------------------
($ millions) QUARTERS ENDED MARCH 31
2007 2006 Change
-----------------------------------------------------------------------------
477.2 (366.7) n.m.
-----------------------------------------------------------------------------
Cash provided by financing activities increased by $843.9 million in the first
quarter of 2007, when compared with cash used by financing activities in the
same period of 2006. Financing activities included:
o Proceeds from Common Shares and Non-Voting Shares issued were $0.4 million
in the first quarter of 2007, a decrease of $32.8 million when compared to
the same period in 2006. The decrease was due mainly to implementation of
the net-cash settlement feature for share option awards granted prior to
2005 as well as introduction of the net equity settlement feature on May 1,
2006 and fewer exercised options in the first quarter of 2007 compared to
the same period in 2006.
o Cash dividends paid to shareholders were $125.9 million in the first
quarters of 2007, an increase of $30.0 million due to the higher quarterly
dividend paid per share, partly offset by lower average shares outstanding.
o The Company's renewed NCIB program (Program 3) came into effect on December
20, 2006 and is set to expire on December 19, 2007. At March 31, 2007, the
Company has purchased 16.5% of the maximum 12 million Common shares and
14.3% of the maximum 12 million Non-Voting Shares under this program. From
December 20, 2004 to March 31, 2007, TELUS has repurchased approximately
18.4 million Common Shares and 24.5 million Non-Voting Shares for $1.97
billion under three NCIB programs.
The following table shows purchases under NCIB programs in the first
quarters of 2007 and 2006.
NORMAL COURSE ISSUER BID PROGRAMS
----------------------------------------------------------------------------------------------------------------------------
SHARES REPURCHASED PURCHASE COST ($ MILLIONS)
--------------------------------------------- -----------------------------------------
Charged to Charged to
Common Non-Voting Share Retained
BY PROGRAM Shares Shares Total capital (1) earnings(2) Paid
----------------------------------------------------------------------------- -----------------------------------------
Program 2
First quarter of 2006 1,783,300 3,334,500 5,117,800 93.3 138.3 231.6
------------------------------------------------------------------------------ -----------------------------------------
Program 3
FIRST QUARTER OF 2007 1,975,000 1,530,000 3,505,000 57.8 142.9 200.7
============================================================================================================================
(1) Represents the book value of shares repurchased
(2) Represents the cost in excess of the book value of shares repurchased
----------------------------------------------------------------------------------------------------------------------------
o A major debt issue was completed in March 2007 with five-year and 10-year
maturities:
2012 Canadian dollar notes: the Company publicly issued $300 million 4.50%,
Series CC, Notes at a price of $999.91 per $1,000.00 of principal.
2017 Canadian dollar notes: the Company publicly issued $700 million 4.95%,
Series CD, Notes at a price of $999.53 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 15 basis points for the 2012 notes and 24 basis points for the 2017
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.
o The remaining debt issues were mainly periodic draws on the bank facility.
o Debt repayments in the first quarter of 2007 included periodic repayments
of the Company's bank facilities, such that the balance at March 31 was
fully repaid. In addition, $70 million of TELUS Communications Inc. 7.10%
Medium-Term Notes that matured in February were repaid.
Page 19 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
Proceeds from the March 2007 debt issue, combined with a possible issue of
commercial paper and a possible increase in securitized accounts receivable, are
expected to be used for general corporate purposes, including repayment of U.S.
$1,166.5 million principal for the June 2007 7.50% U.S. dollar notes
(approximately $1,500 million). Anticipated requirements to meet long-term debt
repayments, including related hedge amounts and calculated upon such long-term
debts owing as at March 31, 2007, during each of the five years ending December
31 are as follows:
LONG-TERM DEBT MATURITIES
-----------------------------------------------------------------------------
($ millions) Principal(1) Deferred hedging Total
liability, net
-----------------------------------------------------------------------------
2007 (balance of year) 1,348.3 139.6 1,487.9
2008 4.8 -- 4.8
2009 1.5 -- 1.5
2010 81.7 -- 81.7
2011 2,003.1 947.5 2,950.6
-----------------------------------------------------------------------------
(1) Where applicable, principal repayments reflect foreign exchange rates at
March 31, 2007.
-----------------------------------------------------------------------------
7.4 LIQUIDITY AND CAPITAL RESOURCE MEASURES
-------------------------------------------------------------------------------------------------------------
As at, or 12-month periods ended, March 31 2007 2006 Change
-------------------------------------------------------------------------------------------------------------
COMPONENTS OF DEBT AND COVERAGE RATIOS (1) ($ MILLIONS)
-------------------------------------------------------
Net debt (including securitized accounts receivables) 6,178.6 6,132.7 45.9
Total capitalization 12,981.5 12,954.7 26.8
EBITDA - excluding restructuring costs 3,547.7 3,363.0 184.7
Net interest cost 495.3 611.7 (116.4)
DEBT RATIOS
-----------
Fixed-rate debt as a proportion of
total indebtedness (%) 98.9 92.3 6.6 pts
Average term to maturity of debt (years) 5.0 5.2 (0.2)
Net debt to total capitalization (%) (1) 47.6 47.3 0.3 pts
Net debt to EBITDA - excluding restructuring costs(1) 1.7 1.8 (0.1)
COVERAGE RATIOS (1)
-------------------
Interest coverage on long-term debt 3.8 2.6 1.2
EBITDA - excluding restructuring costs interest coverage 7.2 5.5 1.7
OTHER MEASURES
--------------
Free cash flow ($ millions) (2) - 12-month trailing 1,416.5 1,521.6 (105.1)
Dividend payout ratio (%) (1) 46 59 (13) pts
-------------------------------------------------------------------------------------------------------------
(1) See Section 11.4 Definition of liquidity and capital resource measures.
(2) See Section 11.2 Free cash flow for the definition.
-------------------------------------------------------------------------------------------------------------
Net debt and total capitalization are calculated on a basis generally consistent
with the Company's credit agreements. Net debt excludes accumulated
comprehensive income amounts arising from financial instruments used to manage
interest rate and currency risks associated with U.S. dollar denominated debt.
Total capitalization also excludes accumulated other comprehensive income. See
Section 11.4.
Total capitalization increased from higher retained earnings net of lower share
capital. The net debt to EBITDA ratio measured at March 31, 2007 improved
primarily as a result of higher EBITDA excluding restructuring costs. The
average term to maturity of debt of 5 years at March 31, 2007 represents an
increase from 4.5 years at December 31, 2006 due to the debt issue and repayment
of bank facilities in the first quarter of 2007. Substantially all debt is on a
fixed-rate basis.
Interest coverage on long-term debt improved by 0.6 because of lower interest
expenses, and improved by 0.6 because of increased income before taxes and
interest expense. The EBITDA interest coverage ratio improved by 0.3 due to
lower net interest cost and improved by 1.4 due to higher EBITDA (excluding
restructuring costs). The decrease in 12-month trailing free cash flow resulted
from higher capital expenditures and lower recoveries of income tax and related
interest, net of improved EBITDA before share-based compensation and lower
interest paid. The dividend payout ratio at March 31, 2007 was within the target
guideline of 45 to 55% for sustainable net earnings as the charge for adding the
net-cash settlement feature for option awards granted prior to 2005 in the first
quarter of 2007 was generally offset by positive tax impacts in the last nine
months of 2006. The dividend payout ratio at March 31, 2006 was above the
guideline because income for the 12-month trailing period included after-tax
costs for the 2005 labour disruption.
Page 20 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
The Company's strategy is to maintain the financial policies and guidelines set
out below. The Company believes that these measures are currently at the optimal
level and provide access to capital at a reasonable cost by maintaining credit
ratings in the range of BBB+ to A-, or the equivalent.
TELUS' long-term financial policies and guidelines are:
o Net debt to total capitalization of 45 to 50%;
o Net debt to EBITDA of 1.5 to 2.0 times; and
o Dividend payout ratio of 45 to 55% of sustainable net earnings.
7.5 CREDIT FACILITIES
On March 2, 2007, the Company closed a new five-year $2 billion credit facility
with a syndicate of 18 financial institutions. The new facility replaced $1.6
billion of existing credit facilities, of which $800 million would have expired
in 2008 and $800 million would have expired in 2010. The new facility may be
used for general corporate purposes including the backstop of commercial paper,
which could be part of the refinancing of the $1.5 billion of TELUS notes coming
due in June 2007. The new facility has no substantial changes in terms and
conditions other than reduced pricing and extended term, which reflects
favourable market conditions and TELUS' financial position. Notably, the May
2012 maturity date of the new credit facility extends beyond the maturity date
of TELUS' June 2011 Notes.
TELUS had available liquidity from unutilized credit facilities of nearly $2
billion at March 31, 2007.
TELUS CREDIT FACILITIES AT MARCH 31, 2007
------------------------------------------------------------------------------------------------------------------
($ in millions) Outstanding
undrawn letters
Expiry Size Drawn of credit Available
------------------------------------------------------------------------------------------------------------------
Five-year revolving facility (1) May 1, 2012 2,000.0 -- 100.1 1,899.9
Other bank facilities -- 77.5 -- 3.0 74.5
------------------------------------------------------------------------------------------------------------------
Total -- 2,077.5 -- 103.1 1,974.4
==================================================================================================================
(1) Canadian dollars or U.S. dollar equivalent.
------------------------------------------------------------------------------------------------------------------
TELUS' revolving credit facility contains customary covenants including a
requirement that TELUS not permit its consolidated Leverage Ratio (Funded Debt
to trailing 12-month EBITDA) to exceed 4.0:1 (approximately 1.7:1 at March 31,
2007) and not permit its consolidated Coverage Ratio (EBITDA to Interest Expense
on a trailing 12-month basis) to be less than 2.0:1 (approximately 7.2:1 at
March 31, 2007) 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 facility 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, and November
30, 2006, with an arm's-length securitization trust under which TCI is able to
sell an interest in certain of its trade receivables up to a maximum of $650
million. As a result of selling the interest in certain of the trade receivables
on a fully serviced basis, a servicing liability is recognized on the date of
sale and is, in turn, amortized to earnings over the expected life of the trade
receivables. This revolving-period securitization agreement had an initial term
ending July 18, 2007; the November 30, 2006 amendment resulted in the term being
extended to July 18, 2008.
TCI is required to maintain at least a BBB (low) credit rating by 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 May [1],
2007. The balance of proceeds from securitized receivables was $150 million on
March 31, 2007, a decrease of $350 million from December 31, 2006. In
comparison, the balance of proceeds from securitized receivables on March 31,
2006 was $400 million.
7.7 CREDIT RATINGS
In the first quarter of 2007, two credit rating agencies upgraded their ratings
for TELUS. On February 26, 2007, Moody's Investors Services upgraded its rating
for TELUS by one level to Baa1 (equivalent to BBB+) and assigned an outlook of
stable. On March 5, 2007, DBRS upgraded the rating of TELUS notes to A (low)
from BBB (high) and confirmed its A (low) ratings for TCI, all with a stable
trend. In addition, DBRS confirmed its preliminary rating of R-1 (low) for
TELUS' planned commercial paper program.
Page 21 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
----------------------------------------------------------------------------
CREDIT RATING SUMMARY DBRS(1) S&P(1) MOODY'S((1)) FITCH(1)
----------------------------------------------------------------------------
TELUS CORPORATION
Senior bank debt -- -- -- BBB+
Notes A (low) BBB+ Baa1 BBB+
Commercial paper R-1 (low) -- -- --
TELUS COMMUNICATIONS INC.
Debentures A (low) BBB+ -- BBB+
Medium-term notes A (low) BBB+ -- BBB+
First mortgage bonds A (low) A- -- --
----------------------------------------------------------------------------
(1) Outlook or trend stable.
----------------------------------------------------------------------------
7.8 FINANCIAL INSTRUMENTS; COMMITMENTS AND CONTINGENT LIABILITIES
Financial instruments (Note 4 of the interim Consolidated financial
statements)
The Company's financial instruments consist of cash and temporary investments,
accounts receivable, investments accounted for using the cost method, accounts
payable, restructuring accounts payable, short-term obligations, long-term debt,
interest rate swap agreements, share-based compensation cost hedges, as further
discussed in Note 10(b)-(c) of the interim Consolidated financial statements,
and foreign exchange hedges.
Fair value: The carrying value of cash and temporary investments, accounts
receivable, accounts payable, restructuring accounts payable and short-term
obligations approximates their fair values due to the immediate or short-term
maturity of these financial instruments. The carrying values of the Company's
investments accounted for using the cost method would not exceed their fair
values.
The carrying value of short-term investments equals their fair value as they are
classified as held for trading. The fair value is determined directly by
reference to quoted market prices.
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 fair values of the Company's derivative financial instruments used to manage
exposure to increases in compensation costs arising from certain forms of
share-based compensation are estimated based upon fair value estimates of the
related cash-settled equity forward agreements provided by the counterparty to
the transactions.
The effect of the adoption of comprehensive income on the Company's derivatives
was to record them at their fair values rather than at their carrying amounts.
The primary change was in derivatives classified as held for hedging and used to
manage interest rate and currency risks associated with U.S. dollar denominated
debt, as shown in the table below.
Page 22 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
---------------------------------------------------------------------------------------------------------------------
As at MARCH 31, 2007 December 31, 2006
---------------------------------------------------------------------------------------------------------------------
($ millions) Hedging item
maximum Carrying Carrying
maturity date amount Fair value amount Fair value
---------------------------------------------------------------------------------------------------------------------
(adjusted -
Note 2(b))
---------------------------------------------------------------------------------------------------------------------
LIABILITIES
Long-term debt
Principal (Note 15) 5,664.1 6,283.0 4,908.2 5,535.9
Derivatives(1)(2) classified as held
for hedging and used to manage
interest rate and currency risks
associated with U.S. Dollar
denominated debt (Note 15(b))
- Derivative asset June 2007 (32.3) (40.4)
- Derivative liability
- Current June 2007 171.9 165.8
- Non-current June 2011 947.5 710.3
----------- ----------
1,087.1 835.7
- Interest payable 26.2 6.3
----------- ----------
Net 1,113.3 1,113.3 842.0 1,090.6
Derivatives(1)(2) used to manage
interest rate risk associated with
planned refinancing of debt maturing
June 1, 2007 June 2007 -- -- -- 6.5
---------------------------------------------------------------------------------------------------------------------
6,777.4 7,396.3 5,750.2 6,633.0
---------------------------------------------------------------------------------------------------------------------
(1) Notional amount of all derivative financial instruments outstanding is $5,030.9 (December 31, 2006 - $5,138.6).
(2) Designated as cash flow hedging items.
---------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 17 of the interim
Consolidated financial statements)
The Company has a $36.1 million liability recorded for outstanding commitments
under its restructuring programs as at March 31, 2007. The Company's commitments
and contingent liabilities have not changed significantly in the three-month
period ended March 31, 2007. Changes to maturities of long-term debt as a result
of financing activities in the first quarter of 2007 were described in Section
7.3 above.
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 in Note 17(c) of
the interim Consolidated financial statements.
Page 23 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
7.9 OUTSTANDING SHARE INFORMATION
The following is a summary of the outstanding shares for each class of equity at
March 31, 2007 and at April 20, 2007. In addition, for April 20, 2007 the total
number of outstanding and issuable shares is presented assuming full conversion
of outstanding options as well as options not yet granted, but for which shares
have been reserved.
-------------------------------------------------------------------------------
Class of equity security Common Non-Voting Total
(millions of shares) Shares Shares shares
-------------------------------------------------------------------------------
Common equity
Outstanding shares at March 31
and April 20, 2007 176.7 157.7 334.4 (1)
Options outstanding and
issuable(2)(3) at April 20, 2007 0.6 16.8 17.4
-------------------------------------------------------------------------------
Outstanding and issuable
shares at April 20, 2007 177.3 174.5 351.8
===============================================================================
(1) For the purposes of calculating diluted earnings per share, the number
of shares for the first quarter of 2007 was 340.5.
(2) Assuming full conversion and ignoring exercise prices.
(3) Not reduced for any options that may have been forfeited or expired in
the period April 1 to April 20, 2007.
-------------------------------------------------------------------------------
8. CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICY DEVELOPMENTS
8.1 CRITICAL ACCOUNTING ESTIMATES
TELUS' critical accounting estimates are described Section 8.1 of its 2006
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 (Note 2 of the interim Consolidated
financial statements)
Accounting policies are consistent with those described in Note 1 of TELUS' 2006
Consolidated financial statements other than as set out below.
Convergence with International Financial Reporting Standards
In 2006, Canada's Accounting Standards Board ratified a strategic plan that will
result in Canadian GAAP, as used by public companies, being converged with
International Financial Reporting Standards over a transitional period currently
expected to be approximately five years. The precise timing of convergence will
depend on an Accounting Standards Board progress review to be undertaken by
early 2008.
Canadian GAAP will be converged with International Financial Reporting Standards
through a combination of two methods: as current joint-convergence projects of
the United States' Financial Accounting Standards Board and the International
Accounting Standards Board are agreed upon, they will be adopted by Canada's
Accounting Standards Board and may be introduced in Canada before the complete
changeover to International Financial Reporting Standards; and standards not
subject to a joint-convergence project will be exposed in an omnibus manner.
As this convergence initiative is very much in its infancy as of the date of
these Consolidated financial statements, it would be premature to currently
assess the impact of the initiative, if any, on the Company.
Comprehensive income
Overview: Commencing with the Company's 2007 fiscal year, the 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) apply to the Company.
Currently, the concept of comprehensive income for purposes of Canadian GAAP, in
the Company's specific instance, is primarily to include changes in
shareholders' equity arising from unrealized changes in the fair values of
financial instruments.
The majority of the impact on the Company of adopting the other comprehensive
income and related standards currently arises from the Company's cross currency
interest rate swap agreements, as discussed further in Note 15(b) of the interim
Consolidated financial statements, and, to a lesser extent, the cash-settled
equity forward agreements that the Company entered into in respect of
share-based compensation, as discussed further in Note 10(c) of the interim
Consolidated financial statements.
In the application of hedge accounting to U.S. Dollar denominated long-term debt
future cash outflows, an amount (the hedge value) is recorded in the
Consolidated Balance Sheets in respect of the value of the hedging items. The
difference between the hedge value that would be recorded on the consolidated
balance sheet subsequent to, and prior to, the adoption of the newly applied
CICA recommendations, in respect of the U.S. Dollar denominated long-term debt
Page 24 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
future cash flows, is the difference between the fair value of the hedging items
and the hedging asset or liability necessary to recognize the Canadian dollar
equivalent of the value of the hedged items at the rate of exchange in the
hedging items. This is illustrated in the following table:
------------------------------------------------------------------------------------------------------------------------
As at ($ millions) March 31, 2007 December 31, 2006
------------------------------------------------------------------------------------ -----------------------------------
2007 Notes 2011 Notes Total 2007 Notes 2011 Notes Total
------------------------------------------------------------------------------------------------------------------------
Canadian dollar equivalent of principal at
rates of exchange in hedging items 1,483.3 2,950.5 4,433.8 1,483.3 2,950.5 4,433.8
Canadian dollar equivalent of principal at
balance sheet date rate of exchange 1,348.9 2,219.8 3,568.7 1,357.9 2,240.2 3,598.1
------------------------------------------------------------------------------------------------------------------------
Hedge value necessary to reflect rates of
exchange in hedging items 134.4 730.7 865.1 125.4 710.3 835.7
Difference arising from newly applied CICA
recommendations(1) 5.2 216.8 222.0 14.2 250.8 265.0
------------------------------------------------------------------------------------------------------------------------
Fair value of hedging items 139.6 947.5 1,087.1 139.6 961.1 1,100.7
------------------------------------------------------------------------------------------------------------------------
(1) The amounts as at December 31, 2006, are included in the transitional adjustments set out in Note 16(d).
------------------------------------------------------------------------------------------------------------------------
Comprehensive income as prescribed by U.S. GAAP, and which is disclosed in Note
19(g) of the interim Consolidated financial statements is largely aligned with
comprehensive income as prescribed by Canadian GAAP, other than for pension
accounting impacts. In the Company's specific instance, U.S. GAAP includes, in
respect of pension and other defined benefit plans, the difference between the
net funded status of the plans and the net accrued benefit asset or liability;
Canadian GAAP does not include this currently, but an exposure draft from
Canada's Accounting Standards Board issued in March 2007 proposes changes that
would eliminate this difference no later than December 31, 2007.
Implementation and application: In the Company's specific instance, the
transitional rules for these sections generally require prospective
implementation at the beginning of a fiscal year (the exception being in respect
of the cumulative foreign currency translation adjustment, which is
retrospectively adjusted for at the beginning of the fiscal year of adoption).
Costs of issuing debt securities, less amortization, are now netted against the
debt security from which they arose. This resulted in a consolidated balance
sheet reclassification from deferred charges to long-term debt of $19.9 million
as at December 31, 2006. Prior to 2007, costs of issuing debt securities were
amortized on a straight-line basis, such costs are now required to be amortized
using the effective interest method; the Company was not materially affected by
the change in amortization method, which was prospectively applied.
In the further implementation of these recommendations, the Company has chosen
to recognize as an asset or liability all embedded derivative instruments that
exist as at January 1, 2007, and that are required to be separated from their
host contract. The Company has selected this method so that there is no
unnecessary difference from the application of U.S. GAAP.
In the ongoing application of these recommendations, the Company was required to
select from a number of pertinent alternative acceptable accounting principles
and methods and the Company has made the following selections:
-------------------------------------------------------------------------------------------------------------------------------
Financial instrument Classified as
available for
sale or held as Classified as
part of a hedging held for
relationship(1) trading(1)(2) Company's reason for classification selection
-------------------------------------------------------------------------------------------------------------------------------
Short-term marketable security X The Company has selected this
investments(3) held as method as it better reflects
at January 1, 2007 management's investment intentions
-----------------------------------------------------------------------------------------------------------------------------
Long-term investments(3) held X The Company has selected classification
as at January 1, 2007 as available for sale as it better
reflects management's investment intentions
-------------------------------------------------------------------------------------------------------------------------------
Stand-alone derivatives which X The Company believes that classification
are a part of an established as held for hedging results in a better
and documented hedging relationship matching of the change in the fair value
with the risk exposure being hedged
-------------------------------------------------------------------------------------------------------------------------------
(1) The distinction between classification as available for sale (or held as part of a hedging
relationship) or held for trading is that unrealized changes in the fair values of
financial instruments classified as available for sale, or held for hedging, are included
in other comprehensive income and unrealized changes in the fair values of financial
instruments classified as held for trading are included in net income.
(2) Certain financial instruments that are not required to be classified as held for trading,
may be classified as held for trading if the Company so chooses.
(3) In respect of investments in securities for which the fair values can be reliably measured,
the Company determines the classification on an instrument-by-instrument basis at time of
initial recognition.
-------------------------------------------------------------------------------------------------------------------------------
Page 25 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
o Accounts receivable available for sale to an arm's-length securitization
trust are accounted for as loans and receivables. The Company has selected
this method for accounting efficiency.
o Regular-way purchases or sales, which are those that are not net-settled,
of financial assets or financial liabilities are recognized on the trade
date. The Company has selected this method as it is consistent with the
mandatory trade-date accounting required for derivative instruments.
o Transaction costs, other than in respect of held for trading items, are
added to the initial fair value of the acquired financial asset or
financial liability. The Company has selected this method as it believes
that this results in a better matching of the transaction costs with the
periods benefiting from the transaction costs.
o In respect of hedges of anticipated transactions, which in the Company's
specific instance currently relates to inventory purchase commitments,
hedge gains/losses which will be included in the cost of the inventory and
will be expensed when the inventory is sold. The Company has selected this
method as it believes that a better matching with the risk exposure being
hedged is achieved.
Effects disclosure: The effects of the application of Handbook Sections 1530,
3855 and 3865 on the Company's results of operations and retained earnings for
the three-month period ended March 31, 2007 and financial position at March 31,
2007 are enumerated in Note 2(b) of the interim Consolidated financial
statements.
Income taxes arising from partnership income
In mid-2006, Canada's Accounting Standards Board's Emerging Issues Committee
issued a Draft Abstract regarding the accounting for income taxes related to
entities that consolidate partnership interests that have a different year end
than the consolidating entity. The Company has applied the guidance therein
contained through its 2006 year end. In March 2007, the Emerging Issues
Committee issued a revised Draft Abstract (RD59) which changed the approach to
determination of the classification of future income taxes between current and
non-current and the Company has retrospectively applied the guidance therein
contained, which has, in the Company's specific current instance, the net effect
of increasing the current portion of future income tax liabilities. The
consolidated balance sheet reclassification is as set out in Note 2(c) of the
interim Consolidated financial statements.
Financial instruments - disclosure and presentation
Commencing with the Company's 2008 fiscal year, the new recommendations of the
CICA for financial instrument disclosures and presentation (CICA Handbook
Section 3862) will apply to the Company. The new recommendations will result in
incremental disclosures, relative to those currently, with an emphasis on risks
associated with both recognized and unrecognized financial instruments to which
an entity is exposed during the period and at the balance sheet date, and how an
entity manages those risks. The Company is assessing how it will be affected by
these new recommendations.
9. ANNUAL GUIDANCE FOR 2007
Guidance confirms annual financial and operating targets for 2007
The following discussion is qualified in its entirety by the Forward-looking
statements at the beginning of Management's discussion and analysis, as well as
Section 10: Risks and risk management of TELUS' 2006 Management's discussion and
analysis and this report.
Page 26 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
Management has confirmed the 12 financial and operating targets set out in its
2006 annual Management's discussion and analysis. In addition, clarification has
been provided for the impacts of introducing a net-cash settlement feature for
share option awards granted prior to 2005, which were specifically excluded from
the EBITDA and earnings per share guidance and targets.
--------------------------------------------------------------------------------
Confirmed guidance and
original targets for 2007
--------------------------------------------------------------------------------
CONSOLIDATED
Revenues $9.175 to $9.275 billion
EBITDA (1) (as adjusted) (2) $3.725 to $3.825 billion
Earnings per share - basic (as adjusted) (3) $3.25 to $3.45
Capital expenditures Approx. $1.75 billion
--------------------------------------------------------------------------------
WIRELINE SEGMENT
Revenue (external) $4.85 to $4.9 billion
EBITDA (as adjusted) (2) $1.775 to $1.825 billion
Capital expenditures Approx. $1.2 billion
High-speed Internet net additions More than 135,000
--------------------------------------------------------------------------------
WIRELESS SEGMENT
Revenue (external) $4.325 to $4.375 billion
EBITDA (as adjusted) (2) $1.95 to $2.0 billion
Capital expenditures Approx. $550 million
Wireless subscriber net additions More than 550,000
--------------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest taxes depreciation and
amortization (EBITDA), alternatively calculated as Operating revenues
less Operations expense less Restructuring costs.
(2) Excluding a cash-settled share option expense of approximately $180
million in 2007 for introducing the net-cash settlement feature, of
which, approximately $155 million is in wireline and approximately $25
million is in wireless.
(3) Excluding an after-tax charge per share of approximately $0.33 for
introducing the net-cash settlement feature.
------------------------------------------------------------------------------
The following key assumptions were made at the time the original targets for
2007 were announced in December 2006. Management believes the assumptions remain
reasonable.
-----------------------------------------------------------------------------------------------------------------------------
KEY ASSUMPTION FOR 2007 TARGETS ACTUAL RESULT FOR THE YEAR TO-DATE
-----------------------------------------------------------------------------------------------------------------------------
Canadian real GDP growth of 2.7% (revised to 2.8%) The Conference Board of Canada recently issued a
revised estimate of 2.8% for 2007
Increased wireline competition in both business and consumer Cable-TV competitors have begun to market VoIP services
markets, particularly from cable-TV and VoIP companies to home office type business in some communities
Forbearance for local retail wireline services in major Assumption unchanged with the recent Federal Cabinet
urban markets by the second half of 2007 Order-in-Council that simplified the conditions for
regulatory forbearance. See Section 10.1 Regulatory
No further price cap mandated consumer price reductions The CRTC's decision on the parameters for the next
price cap period was announced on April 30,
2007. See Section 10.1 Regulatory
Canadian wireless industry market penetration gain TELUS' gross additions and net additions in the
of 4.5 to five percentage points first quarter of 2007 were consistent with this assumption
TELUS would record approximately $50 million of Updated. Restructuring costs are currently not
restructuring expenses expected to exceed $50 million in 2007
TELUS' statutory income tax rate is expected to Assumption unchanged. See Section 5: Consolidated
be 33 to 34% and minimal cash tax payments in 2007 results from operations - Income taxes
A discount rate of 5.0% and expected long-term average Assumptions unchanged
return of 7.25% for pension accounting
Average shares outstanding of 330 to 335 million Average shares outstanding were 337.1 million in the
shares for the full year first quarter of 2007, a decrease of about 3.5%
from the same period in 2006 that is in range of
the 2.5 to 4% reduction implied by thekey assumption
for the full year
-----------------------------------------------------------------------------------------------------------------------------
TELUS continues to have long-term policy guidelines for Net debt to total
capitalization, Net debt to EBITDA and dividend payout, described in Section
7.4. The 2007 confirmed guidance is in compliance with these policy guidelines.
Page 27 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
10. RISKS AND RISK MANAGEMENT
The following are significant updates to the risks described in Section 10 of
TELUS' 2006 Management's discussions and analyses.
10.1 REGULATORY
The outcome of any existing or future regulatory reviews, proceedings, court
appeals, Federal Cabinet appeals or other regulatory developments could have a
material impact on TELUS' operating procedures, costs and revenues.
Local forbearance
In March 2007, the CRTC issued Decision 2007-18 approving forbearance from
regulation of local residential services in Fort McMurray, Alberta, subject to
TELUS demonstrating that it has met 14 competitor quality-of-service criteria.
On April 4, 2007, the Federal Government issued an Order-in-Council that varied
the conditions for forbearance in CRTC's Decision 2006-15 Forbearance from
regulation of retail local exchange services. Among other provisions, the
Order-in-Council abolished the 25% market share loss threshold, but retained the
requirement for incumbent local exchange carriers (ILECs) to meet each of nine
competitor quality-of-service standards averaged over six months for all
competitors (compared with the previous requirement to meet each of 14
quality-of-service standards for six consecutive months). The Order-in-Council
also eliminated restrictions on winback activities and changed the definition of
a local market from a broader local forbearance region to a local exchange.
For business services, application for forbearance can now be made where there
is a choice of facilities-based phone providers. For consumer services,
application for forbearance can now be made in any retail local exchange market
that has at least three competitors with their own infrastructure - typically
the ILEC, a wireless carrier not affiliated with the ILEC and a cable-TV company
offering VoIP services.
The CRTC will have up to 120 days to issue a decision on a forbearance
application and will give precedence initially to applications for the largest
Canadian metropolitan areas, which for TELUS are Vancouver, Calgary and
Edmonton. The Company expects to demonstrate that the conditions for forbearance
have been met in many of the large centres in its incumbent territories and has
filed forbearance applications for Victoria, Vancouver, Calgary, Edmonton and
Rimouski. TELUS expects to have more flexibility in the marketing of products
and services in forborne markets as a result these changes.
Price cap regulation
On March 14, 2007, the CRTC issued Telecom Decision CRTC 2007-15 denying Barrett
Xplore Inc.'s application to review and vary the Commission's 2006 deferral
account ruling that allowed TELUS to use deferral accounts funds for the
expansion of broadband services for rural and remote areas. In February, the
Federal Cabinet denied a related appeal by Barrett.
The CRTC is expected move ahead with the examination of TELUS' broadband
expansion proposal. However, the deferral account ruling continues to be subject
to challenges in the Federal Court of Appeal by consumer groups and Bell Canada.
The Company expects the Federal Court to hear the deferral account appeals
launched by these parties (now unified into one proceeding) later this year.
TELUS is intervening in the court appeal process to preserve its discretion to
spend the deferral account funds on broadband expansion plans.
On April 30, 2007, the CRTC issued its decision on the parameters in effect for
the next price cap period beginning June 2007. The decision confirmed the
Company's assumption of no further residential non-high cost serving area
mandated price reductions. The Company continues to assess the overall impact of
the Price Cap decision.
Wireless number portability (WNP)
Phase one of WNP (sometimes referred to as local number portability, or LNP) was
implemented successfully on March 14, 2007 in the majority of populated centres
in Canada by Canadian wireless carriers, including TELUS. Implementation of WNP
in remaining areas is mandated for September 2007. With the implementation of
WNP in 2007, Canada is the second country in the world after the United States
to offer complete number portability: wireless-to-wireless, wireless-to-wireline
and wireline-to-wireless. WNP could lead to an increase in migration of network
access lines to wireless services, increased wireless subscriber churn and/or
additional customer retention costs for the Company, as well as present
opportunities to TELUS to market more effectively in the business/enterprise
market in Central Canada where TELUS has a lower market share than its
competitors. There can be no assurance that this will be the case.
Review of certain Phase II costing issues
The CRTC initiated a proceeding (Public Notice 2007-4) in March 2007 to review
cost calculation methods, referred to as Phase II costs, for regulated
telecommunications services provided by ILECs and cable companies. The
proceeding is expected to last until the fourth quarter of 2007, with a decision
not expected until the first quarter of 2008. TELUS has
Page 28 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
proposed that Phase II costs continue to follow general principles of causality,
that all forward looking costs need to be categorized appropriately, and that
costs should based on individual company measurements. Unless the CRTC
determines otherwise on all these proposals, the outcome of this proceeding
would not be expected to have a material adverse impact on TELUS in the near
term.
Regulation of telecommunications wholesale services
The CRTC initiated a proceeding (Public Notice 2006-14) in November 2006 to
review the regulatory framework for telecommunications wholesale services. This
proceeding is expected to last until the fourth quarter of 2007, with a decision
not expected until the second quarter of 2008. TELUS has proposed that the
regulatory framework for wholesale services should be revamped in order to align
with the Governor in Council's Policy Direction to the CRTC. Unless the CRTC
determines otherwise, the outcome of this proceeding would not be expected to
have a material adverse impact on TELUS in the near-term.
10.2 HUMAN RESOURCES
Collective bargaining at TELUS Quebec
Two collective agreements between TELUS Quebec and the Syndicat des agents de
maitrise de TELUS covering professional and supervisory team members in Quebec
expired on March 31, 2007. The parties continue to negotiate to achieve a new
collective agreement.
10.3 PROCESS RISKS
TELUS systems and processes could negatively impact financial results
and customer service - Billing/revenue assurance and efficiency programs
TELUS converted a large number of wireline consumer customers in Alberta to new
billing system in late-March 2007. Additional phases of development and
conversion are planned over the next several years. The new system included
re-engineered processes for order entry, pre-qualification, service fulfillment
and assurance, customer care, collections/credit, customer contract and
information management. This customer-focused project requires extensive system
development and, in itself, presents implementation risks due to the complexity
of the implementation task and resource constraints, as well as reliance on
newly developed third party software code. There can be no assurance that this
undertaking will not negatively impact, on a temporary or extended basis, TELUS'
customer service levels, competitive position and financial results. As well,
significant time delays in implementing this system, or system instability,
could negatively impact TELUS' competitive ability to quickly and effectively
launch new products, services and promotions; achieve and maintain a competitive
cost structure; and deliver better information and analytics to management.
11. RECONCILIATION OF NON-GAAP MEASURES AND DEFINITION OF KEY OPERATING
INDICATORS
11.1 EARNINGS BEFORE INTEREST TAXES DEPRECIATION AND AMORTIZATION (EBITDA)
TELUS has issued guidance on and reports EBITDA because it is a key measure used
by management to evaluate performance of business units, segments and the
Company. EBITDA is also utilized in measuring compliance with debt covenants -
see Section 11.4 EBITDA excluding restructuring costs. EBITDA is a measure
commonly reported and widely used by investors as an indicator of a company's
operating performance and ability to incur and service debt, and as a valuation
metric. The Company believes EBITDA assists investors in comparing a company's
performance on a consistent basis without regard to depreciation and
amortization, which are non-cash in nature and can vary significantly depending
upon accounting methods or non-operating factors such as historical cost.
EBITDA is not a calculation based on Canadian or U.S. GAAP and should not be
considered an alternative to Operating income or Net income in measuring the
Company's performance, nor should it be used as an exclusive measure of cash
flow, because it does not consider the impact of working capital growth, capital
expenditures, debt principal reductions and other sources and uses of cash,
which are disclosed in the Consolidated statements of cash flows. Investors
should carefully consider the specific items included in TELUS' computation of
EBITDA. While EBITDA has been disclosed herein to permit a more complete
comparative analysis of the Company's operating performance and debt servicing
ability relative to other companies, investors should be cautioned that EBITDA
as reported by TELUS may not be comparable in all instances to EBITDA as
reported by other companies.
Page 29 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
The following is a reconciliation of EBITDA with Net income and Operating
income. EBITDA (as adjusted) excludes a non-cash charge for introducing a
net-cash settlement feature for share option awards granted prior to January 1,
2005. EBITDA (as adjusted) is regularly reported to the chief operating
decision-maker and corresponds to the definition used in setting TELUS' 2007
EBITDA targets and revised guidance (see Section 9).
-----------------------------------------------------------------------------
QUARTERS ENDED MARCH 31
($ millions) 2007 2006
-----------------------------------------------------------------------------
NET INCOME 194.8 210.1
Other expense (income) 3.8 4.3
Financing costs 117.6 127.0
Income taxes 79.3 116.1
Non-controlling interest 1.5 2.1
-----------------------------------------------------------------------------
OPERATING INCOME 397.0 459.6
Depreciation 317.7 339.2
Amortization of intangible assets 49.6 63.9
-----------------------------------------------------------------------------
EBITDA 764.3 862.7
Add back: Non-cash charge in 2007 for
introducing a net-cash settlement
feature for options granted prior to 2005 173.5 --
=============================================================================
EBITDA (AS ADJUSTED) 937.8 862.7
=============================================================================
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 may be used for comparison to the reported results for other
telecommunications companies and is subject to the potential comparability
issues of EBITDA described above. EBITDA (as adjusted) less capital expenditures
provides a basis for comparing the 2007 measure to 2006.
-----------------------------------------------------------------------------
QUARTERS ENDED MARCH 31
($ millions) 2007 2006
-----------------------------------------------------------------------------
EBITDA 764.3 862.7
Capital expenditures (Capex) (381.9) (320.5)
-----------------------------------------------------------------------------
EBITDA LESS CAPITAL EXPENDITURES 382.4 542.2
Add back: Non-cash charge in 2007 for
introducing a net-cash settlement
feature for options granted prior to 2005 173.5 --
-----------------------------------------------------------------------------
EBITDA (AS ADJUSTED) LESS CAPITAL EXPENDITURES 555.9 542.2
=============================================================================
11.2 FREE CASH FLOW
The Company reports free cash flow because it is a key measure used by
management to evaluate its performance. Free cash flow excludes certain working
capital changes and other sources and uses of cash, which are disclosed in the
Consolidated statements of cash flows. Free cash flow is not a calculation based
on Canadian or U.S. GAAP and should not be considered an alternative to the
Consolidated statements of cash flows. Free cash flow is a measure that can be
used to gauge TELUS' performance over time. Investors should be cautioned that
free cash flow as reported by TELUS may not be comparable in all instances to
free cash flow as reported by other companies. While the closest GAAP measure is
Cash provided by operating activities less Cash used by investing activities,
free cash flow is considered relevant because it provides an indication of how
much cash generated by operations is available after capital expenditures, but
before proceeds from divested assets, and changes in certain working capital
items (such as trade receivables, which can be significantly distorted by
securitization changes that do not reflect operating results, and trade
payables).
Page 30 of 33
TELUS Corporation - Management's discussion and analysis - 2007 Q1
The following reconciles free cash flow with Cash provided by operating
activities less Cash used by investing activities:
-----------------------------------------------------------------------------
QUARTERS ENDED MARCH 31
($ millions) 2007 2006
-----------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 460.6 673.1
CASH (USED) BY INVESTING ACTIVITIES (392.3) (316.1)
-----------------------------------------------------------------------------
68.3 357.0
Net employee defined benefit plans expense 24.0 1.6
Employer contributions to employee
defined benefit plans 33.9 30.5
Amortization of deferred gains on sale-leaseback
of buildings, amortization of deferred charges
and other, net 9.1 (15.9)
Reduction (increase) in securitized
accounts receivable 350.0 100.0
Non-cash working capital changes except changes
in taxes, interest, and securitized
accounts receivable, and other (14.9) 166.8
Proceeds from the sale of property
and other assets -- (7.4)
Other investing activities 10.4 3.0
-----------------------------------------------------------------------------
FREE CASH FLOW 480.8 635.6
=============================================================================
The following shows management's calculation of free cash flow.
-----------------------------------------------------------------------------
QUARTERS ENDED MARCH 31
($ millions) 2007 2006
-----------------------------------------------------------------------------
EBITDA 764.3 862.7
Donations and securitization fees included in
Other expense (9.3) (4.5)
Restructuring costs net of cash payments (17.0) (15.6)
Share-based compensation 138.6 8.4
Cash interest paid (23.6) (13.1)
Cash interest received 1.9 22.5
Income taxes received (paid), less investment
tax credits received that were previously
recognized in either EBITDA or capital
expenditures, and other 7.8 95.7
Capital expenditures (381.9) (320.5)
-----------------------------------------------------------------------------
FREE CASH FLOW 480.8 635.6
=============================================================================
11.3 DEFINITION OF KEY OPERATING INDICATORS
These measures are industry metrics and are useful in assessing the operating
performance of a wireless company.
AVERAGE REVENUE PER SUBSCRIBER UNIT PER MONTH (ARPU) is calculated as Network
revenue divided by the average number of subscriber units on the network during
the period and expressed as a rate per month. Data ARPU is a component of ARPU,
calculated on the same basis for revenues derived from services such text
messaging, mobile computing, personal digital assistance devices, Internet
browser activity and pay-per-use downloads.
CHURN PER MONTH is calculated as the number of subscriber units disconnected
during a given period divided by the average number of subscriber units on the
network during the period, and expressed as a rate per month. A prepaid
subscriber is disconnected when the subscriber has no usage for 90 days
following expiry of the prepaid card.
COST OF ACQUISITION (COA) consists of the total of handset subsidies,
commissions, and advertising and promotion expenses related to the initial
subscriber acquisition during a given period. As defined, COA excludes costs to
retain existing subscribers (retention spend).
COA PER GROSS SUBSCRIBER ADDITION is calculated as cost of acquisition divided
by gross subscriber activations during the period.
COA PER GROSS SUBSCRIBER ADDITION TO LIFETIME REVENUE is calculated as cost of
acquisition for new subscribers divided by expected lifetime revenue of the
subscriber base, expressed as a percentage.
EBITDA EXCLUDING COA is a measure of operational profitability normalized for
the period costs of adding new customers. COA was $129.5 million and $117.9
million, respectively, for the first quarter of 2007 and 2006.
LIFETIME REVENUE PER SUBSCRIBER is calculated as ARPU divided by the churn per
month. The metric provides a means of estimating the average total revenue
expected from the subscriber base.
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TELUS Corporation - Management's discussion and analysis - 2007 Q1
RETENTION SPEND TO NETWORK REVENUE represents direct costs associated with
marketing and promotional efforts aimed at the retention of the existing
subscriber base divided by Network revenue.
11.4 DEFINITION OF LIQUIDITY AND CAPITAL RESOURCE MEASURES
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.
EBITDA - EXCLUDING RESTRUCTURING COSTS is used in 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 costs were $55.8 million and $61.2 million, respectively, for the
twelve-month periods ended March 31, 2007 and 2006.
EBITDA - EXCLUDING RESTRUCTURING COSTS INTEREST COVERAGE is defined as EBITDA
excluding restructuring costs divided by Net interest cost. This measure is
substantially the same as the Coverage Ratio covenant in TELUS' credit
facilities.
FUNDED DEBT, in general terms, is borrowed funds less cash on hand as defined in
the Company's bank agreements.
INTEREST COVERAGE ON LONG-TERM DEBT is calculated on a 12-month trailing basis
as Net income before interest expense on long-term debt and income tax expense
divided by interest expense on long-term debt. Interest expense on long-term
debt for the 12-month trailing period ending March 31, 2006 includes losses on
redemption of long-term debt. The 12-month periods ended March 31, 2007 and 2006
also include accruals for estimated costs to settle a lawsuit.
NET DEBT is a non-GAAP measure whose nearest GAAP measure is the sum of
Long-term debt and Current maturities of long-term debt, as reconciled below.
Net debt is one component of a ratio used to determine compliance with debt
covenants (refer to the description of Net debt to EBITDA below).
---------------------------------------------------------------------------------------------
As at As at As at
March 31 Dec. 31 March 31
($ millions) 2007 2006 2006
---------------------------------------------------------------------------------------------
Long-term debt 5,664.1 4,908.2 4,566.8
Debt issuance costs netted against long-term debt 33.4 19.9 22.1
Deferred hedging liability, net 1,087.1 838.5 1,142.7
Accumulated other comprehensive income amounts
arising from financial instruments used to manage
interest rate and currency risks associated
with U.S. Dollar denominated debt (222.0) -- --
---------------------------------------------------------------------------------------------
DEBT 6,562.6 5,766.6 5,731.6
Cash and temporary investments (534.0) 11.5 1.1
Securitized accounts receivable 150.0 500.0 400.0
---------------------------------------------------------------------------------------------
NET DEBT 6,178.6 6,278.1 6,132.7
=============================================================================================
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. $1,925.0 million debenture
maturing June 1, 2011. Management believes that Net debt is a useful measure
because it incorporates the exchange rate impact of cross currency swaps put
into place that fix the value of U.S. dollar-denominated debt, and because it
represents the amount of long-term debt obligations that are not covered by
available cash and temporary investments.
NET DEBT TO EBITDA - EXCLUDING RESTRUCTURING COSTS is defined as Net debt as at
the end of the period divided by the 12-month trailing EBITDA excluding
restructuring costs. TELUS' guideline range for Net debt to EBITDA is from 1.5
to 2.0 times. Historically, Net debt to EBITDA is substantially the same as the
Leverage Ratio covenant in TELUS' new credit facilities.
NET DEBT TO TOTAL CAPITALIZATION provides a measure of the proportion of debt
used in the Company's capital structure. The long-term target ratio for Net debt
to total capitalization is 45 to 50%.
NET INTEREST COST is defined as Financing costs before gains on redemption and
repayment of debt, calculated on a 12-month trailing basis. No gains on
redemption and repayment of debt were recorded in the respective periods. Losses
recorded on the redemption of long-term debt are included in net interest cost.
Net interest costs for the 12-months ending March 31, 2007 and 2006 are
equivalent to reported quarterly financing costs over those periods.
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TELUS Corporation - Management's discussion and analysis - 2007 Q1
TOTAL CAPITALIZATION excludes Accumulated other comprehensive income, consistent
with definitions in the Company's credit facilities.
-------------------------------------------------------------------------------
As at As at As at
March 31 Dec. 31 March 31
($ millions) 2007 2006 2006
-------------------------------------------------------------------------------
Net debt 6,178.6 6,278.1 6,132.7
Non-controlling interests 25.1 23.6 27.7
Shareholders equity 6,630.4 6,928.1 6,794.3
Accumulated other comprehensive income 147.4 -- --
-------------------------------------------------------------------------------
Total capitalization 12,981.5 13,229.8 12,954.7
================================================================================
Page 33 of 33
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: May 8, 2007
TELUS CORPORATION
By: /s/ Audrey Ho
---------------------------
Name: Audrey Ho
Title: Vice President, Legal Services
and General Counsel and Corporate
Secretary