Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of ___February___ 2006
(Commission File No. 000-24876)
TELUS Corporation
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal registered offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
X
Form 20-F _____ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
X
Yes _____ No _____
This Form 6-K consists of the following:
Press Release dated February 17, 2006 of the Fourth Quarter Results
______________________________________________________________________________
TELUS Reports Fourth Quarter Results
2005 financial guidance achieved despite impact of labour disruption
in West
VANCOUVER, Feb. 17 - TELUS Corporation (TSX: T and T.NV / NYSE: TU)
today reported for the fourth quarter of 2005 revenues of $2.1 billion that
increased 6% from a year ago due to continued strong wireless performance,
including record wireless net additions. Operating earnings (EBITDA) were down
4% due to higher temporary expenses associated with the extended labour
disruption in Western Canada that ended in late November. Reported earnings
per share (EPS) for the fourth quarter were 22 cents, compared to 38 cents for
the same period a year ago, reflecting primarily the labour disruption, higher
restructuring costs and a non-recurring six cent financing charge for the
early retirement of $1.6 billion of debt. Normalizing for these items and tax
related and other adjustments, EPS would have increased 40% over the same
period last year. Free cash flow remained robust at $110 million during the
quarter, down $12 million or 10% from a year ago.
TELUS has achieved or exceeded its original 2005 consolidated financial
guidance set over a year ago despite the impact of the labour disruption. The
2005 results were also consistent with the latest guidance update made in
December 2005. In 2005, TELUS reported revenue and EBITDA growth of
7 per cent, and a 24 per cent increase in net income. TELUS generated strong
free cash flow of $1.5 billion, which has been used to repurchase $892 million
of TELUS shares in 2005,increase the quarterly dividend level by 38% for the
first two payments in 2006 and to reduce outstanding debt.
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
C$ in millions, except per share amounts 3 months ended
December 31
(unaudited) 2005 2004 % Change
-------------------------------------------------------------------------
Operating revenues 2,086.7 1,964.9 6.2
EBITDA(1) 734.4 766.6 (4.2)
Operating income 321.2 349.1 (8.0)
Net income
78.5 135.6 (42.1)
Earnings per share (EPS), basic(2) 0.22 0.38 (42.1)
Capital expenditures 374.1 343.4 8.9
Cash provided by operating activities 805.0 613.8 31.2
Free cash flow(3) 109.8 121.9 (9.9)
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring and workforce reduction costs. See Section 11.1
of Management's discussion and analysis.
(2) EPS for the three month period in 2005 includes approximate
unfavourable impacts of 10 cents for labour disruption net expenses,
seven cents for restructuring and workforce reduction charges,
six cents for financing loss on redemption of long-term debt and one
cent for tax adjustments.
(3) See Section 11.2 of Management's discussion and analysis.
Darren Entwistle, president and CEO, stated "During the 2005 financial
year, TELUS once again demonstrated the robustness of our business strategy,
focused on national wireless and data growth. TELUS' fourth quarter results
reflect strong growth in wireless and data. TELUS achieved record fourth
quarter and full year wireless subscriber net additions and continued
increases in revenue per unit that resulted in annual wireless revenue and
EBITDA growth of 16% and 14% respectively. A significant milestone was
accomplished in the fourth quarter with a landmark five-year collective
agreement that provides excellent operating flexibility and productivity and
facilitates better service for our customers in an increasingly competitive
marketplace. Moreover, the recent merger of our wireline and wireless
operations into a single operating structure improves our economies of scale
and ability to leverage the ongoing convergence of wireline and wireless
technology for our customers. TELUS is now well positioned to direct our full
energy to satisfying customers, staying ahead of our competition with
differentiated solutions, and achieving our leading financial growth targets
for 2006."
Robert McFarlane, executive vice president and CFO, said "It is a
remarkable achievement that TELUS met or exceeded all of our original
financial targets for 2005, which were considered challenging at the time,
despite the impact from the labour disruption that was not factored into the
targets. As for the fourth quarter, an informed understanding of operational
results should adjust for temporary expenses incurred as a result of the
labour disruption and the one time cost of an early debt redemption, which
together with restructuring costs and tax related adjustments negatively
impacted EPS by 24 cents per share in the quarter. The strength of our
underlying operations in the fourth quarter is reflected by the 40% year over
year increase in net earnings when normalized for these factors. Noteworthy
again this quarter was TELUS' ability to return significant amounts of capital
to our investors. In December we used our strong cash position to early redeem
$1.6 billion of notes, resulting in two more credit rating upgrades in the
fourth quarter. During the quarter we also repurchased 5.1 million shares for
$229 million and in total we have now repurchased 23 million shares for $970
million since commencing our repurchases in December 2004. Finally and as
previously announced, we increased the quarterly dividend by 38% going into
2006. With an expected $1.55 to $1.65 billion of free cash flow in 2006, we
are well positioned to continue returning capital to investors and building
further value."
==========================================================================
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 2006 targets), qualifications and risk factors referred to in the
Management's discussion and analysis - February 15, 2006.
==========================================================================
OPERATING HIGHLIGHTS
TELUS wireless
Strong revenue growth and record subscriber net additions
- Revenues increased by $121 million or 16% to $877 million in the
fourth quarter of 2005, when compared with the same period in 2004
- EBITDA increased by $41 million over the fourth quarter of 2004
representing 14% growth, despite higher cost of acquisition expenses
from record gross additions
- ARPU (average revenue per subscriber unit) improved by $2 to $63 over
the fourth quarter of 2004
- Cost of acquisition ("COA") per gross addition increased 10% in the
quarter to $449 due to increased promotional activity
- Record quarterly net subscriber additions of 235,000, 26% higher than
the fourth quarter of 2004, driven by strong prepaid growth, and
stable postpaid additions of 143,200
- Blended monthly churn improved slightly to 1.42% from 1.45% when
compared to the same quarter a year ago
- Cash flow (EBITDA less capital expenditures) increased by $20 million
or 12% to $182 million in the fourth quarter due to higher EBITDA,
partly offset by higher capital expenditures
TELUS wireline
Stable revenues, but increased temporary expenses from labour disruption
- Revenues were flat in the fourth quarter at $1,210 million despite the
labour disruption in Western Canada when compared to the same quarter
in 2004
- Data revenue increased 7% driven by increased Internet and enhanced
data services revenues
- Long-distance revenue declined 8% to $212 million, reflecting
increased competition and constrained resources during the labour
disruption
- EBITDA declined 15%, as stable revenues were offset by increased
temporary expenses from the labour disruption in Western Canada which
ended in November
- non-incumbent EBITDA was $7.1 million, representing a fifth
consecutive quarter of positive EBITDA and a 92% increase over the
fourth quarter of the previous year
- high-speed Internet net adds were 27,000, down 22% from a year ago but
up strongly from the third quarter as we began recovering from impacts
of the labour disruption. The total Internet subscriber base ended the
year at just under 1.0 million
- network access lines declined by 18,000 in the quarter, down 2.4% from
a year ago reflecting residential line losses caused by competitive
activity, wireless substitution and the impact of the labour
disruption
- cash flow (EBITDA less capital expenditures) was down 32% to
$179 million, compared to the last quarter of 2004, primarily due to
lower EBITDA and higher capital expenditures from deferred spending
into the fourth quarter as a result of the labour disruption
CORPORATE DEVELOPMENTS
TWU members ratify new five-year agreement with TELUS
On November 18, Telecommunications Worker's Union (TWU) members voted to
accept the second memorandum of agreement reached on November 6 between the
Company and the TWU executive council and bargaining committee. The first
memorandum of agreement was narrowly defeated in a vote on October 30. The new
collective agreement covering approximately 14,000 employees is effective from
November 20, 2005 to November 19, 2010. The ratified agreement concludes a
complex five-year process of merging six separate collective agreements,
formerly represented by five different unions, into one. Ratification brought
an end to a labour disruption that began on July 21, 2005 and the staged
recall to work of approximately 8,000 employees, who were substantially all
working by the first week of December.
The new five-year agreement provides increased operating flexibility and
productivity, focuses team members on our core business, and facilitates
better service for customers in an increasingly competitive marketplace. It
fosters a performance culture with universal variable pay, when performance
metrics are met, and career advancement based on performance as well as
seniority. The agreement also establishes a new constructive era. For example,
the Company and TWU have agreed to work together to withdraw various types of
legal proceedings between the parties. As well, a Common Interest Forum has
been established as a mechanism for cooperation and dialogue.
TELUS completes initial normal course issuer bid and announces second
normal course issuer bid for up to 24 million shares
During the fourth quarter, under two separate Normal Course Issuer Bids,
TELUS repurchased a total of 5.1 million shares (evenly split between common
and non-voting shares), for a total outlay of $229 million.
Under its initial Normal Course Issuer Bid completed on December 19,
2005, TELUS repurchased 10.3 million common and 11.5 million non-voting
shares, 85% of the total authorized amount, for $913 million.
TELUS commenced a new Normal Course Issuer Bid program on December 20,
2005 with the intention, if it is considered advisable, to purchase and
cancel, over a 12-month period, up to 12 million of its outstanding common
shares and 12 million of its outstanding non-voting shares on the Toronto
Stock Exchange. This represented 6.5% and 7.2% of the issued and outstanding
shares of each class, respectively. Under this second program in the last
seven trading days of 2005, a total of 1.2 million shares were repurchased,
for a total outlay of $58 million, representing 5% of the 24.0 million shares
authorized under the program.
In total, under both programs in 2005, TELUS repurchased 20.8 million
shares for $892 million, at an average price of $42.89 per share. TELUS
believes that such purchases are in the best interest of TELUS and constitute
an attractive investment opportunity and desirable use of company funds that
should enhance the value of the remaining shares.
TELUS redeems $1.6 billion 7.5% Notes due June 1, 2006 on
December 1, 2005
On December 1, 2005, TELUS redeemed its $1,578 million 7.50%, Series CA,
Notes due June 1, 2006. The redemption price for these Notes, per C$1,000 of
principal amount, was C$1,018.13, based on the yield for a Government of
Canada bond with the equivalent maturity, plus 35 basis points as defined in
the trust Indenture governing the Notes. The Note holders also received the
regularly scheduled semi-annual interest payment on December 1, 2005.
Costs and non-cash write-downs related to this early redemption resulted
in increased financing charges which had an after tax impact on the Company of
6 cents per share in the fourth quarter of 2005. As a result of the
redemption, the company benefits from net interest expense savings beginning
in December 2005.
TELUS financed the redemptions through general corporate funds including
cash balances, proceeds of accounts receivable securitization, and funds
available under its revolving credit facilities.
TELUS integrating TELUS Mobility and TELUS Communications
In November, TELUS Corporation began the integration of the wireless and
wireline business segments - TELUS Mobility and TELUS Communications - into a
single operating structure.
The integration is consistent with TELUS' national growth strategy to
provide integrated solutions that differentiate TELUS from its competitors.
The change positions TELUS to leverage the ongoing convergence between
wireless and wireline technology, and TELUS' continual focus on operational
efficiency and effectiveness. TELUS will continue its past practice of
separate financial reporting of its wireless performance.
TELUS Quebec organizational changes
-----------------------------------
After 31 successful years with Quebec Tel and TELUS Quebec,
Hugues St-Pierre has announced his retirement. As executive vice president and
president of TELUS Quebec, Hugues made significant contributions to TELUS'
success and had an important role in the execution of TELUS' national growth
strategy. Hugues has also made an invaluable contribution to the communities
in Eastern Quebec, including Rimouski. He will continue to be an advisor to
TELUS and will be the chair of the TELUS Rimouski Community Board.
As part of the new integrated operating structure Karen Radford takes on
an expanded role as executive vice president and president, TELUS Quebec and
Partner Solutions. Based in Montreal, Karen will be leading a regional team
serving business, consumer and wireless customers in Quebec. She retains her
role at Partner Solutions, heading a North American team that provides
wholesale and carrier services to telecommunications providers, as well as
operator services for customers.
CONSUMER SOLUTIONS
New wireless high speed network and devices
In November, TELUS launched its national Wireless High Speed network in
five major urban centres - Vancouver, Calgary, Edmonton, Montreal and Toronto
- with more urban centres set to roll out across Canada in 2006. Offering
clients mobile access to the Internet and other data networks at broadband
speeds, TELUS Wireless High Speed is based on the fast-growing CDMA 1xEVDO
standard. Typical download speeds are 400 to 700 kilobits per second - at
least six times faster than previous TELUS mobile data offerings - with a top
speed of more than 2 megabits per second.
High-speed smart phones: TELUS also introduced multiple new phones and
data devices operating on its Wireless High Speed network, including two new
"smart phones" offering high-speed mobile e-mail and Internet access. The
BlackBerry 7130e from Research In Motion (RIM) offers complete BlackBerry
functionality, including support for phone, e-mail, Internet, text messaging,
organizer and data applications, all in a compact wireless phone form factor.
The UTStarcom Pocket PC 6700 operates on Windows Mobile 5.0, offering always-
on access to e-mail with Microsoft Office Outlook Mobile and mobile
application support with Microsoft Office PowerPoint Mobile, Microsoft Office
Excel Mobile, Internet Explorer Mobile and Windows Media Player.
High-speed RAZR: In February, TELUS introduced the Motorola RAZR V3c, the
first version of the sophisticated and ultra-thin wireless phone operating on
a high-speed EVDO network. Boasting a 1.3 megapixel camera, Bluetooth support,
integrated MP3 player and advanced speech recognition, the slick Motorola RAZR
V3c takes full advantage of TELUS Wireless High Speed. It reduces the waiting
from surfing the Internet and downloading large files, including images,
ringtones, games and software applications. Clients can also use the RAZR as a
wireless modem, connecting their laptops to the Internet at broadband speeds
with an optional modem kit.
High-speed data cards: TELUS also offers two new compact PC data cards,
the Kyocera Passport KPC650 and the Sierra Wireless AirCard 580, both of which
allow business and Internet-intensive consumer clients to quickly plug the
cards into their portable PCs for high-speed mobile access to the Internet and
other data networks anywhere in TELUS' Wireless High Speed coverage area.
All of TELUS' Wireless High Speed mobile data devices are also "backward
compatible" with TELUS' national 1X data network. TELUS 1X already covers more
than 90% of the Canadian population, offering fast and dependable mobile data
access in areas where Wireless High Speed coverage is not yet available.
Expanded wireless roaming worldwide
In November, TELUS announced two new global roaming solutions - the
Motorola A840 World Phone and a GSM Global Roaming Card - both of which allow
TELUS PCS clients to roam in more than 120 countries worldwide.
The Motorola A840 World Phone combines access to CDMA and GSM networks,
ensuring clients a wireless signal wherever they may travel. The stylish
clamshell phone features MP3 player, removable Trans-Flash memory, a
1.2-megapixel digital camera with flash, integrated speakerphone and
speaker-independent speech recognition. The Motorola A840 also lets clients
transfer the phone's on-board Subscriber Identity Module (SIM) card to a
separate GSM phone, and accepts a GSM card so clients can have a local phone
number in foreign destinations. For clients who do not need the power of a
full-time World Phone, TELUS also offers a $25 GSM Global Roaming Card. When
inserted into an unlocked GSM phone, the card replicates a client's postpaid
PCS account, meaning all international calls and text messages are recorded on
their regular monthly invoice.
TELUS TV launch begins
As a key element of the TELUS Future Friendly(R) Home suite of services,
high-speed IP service is opening the door to new communications and
entertainment opportunities for consumers, including all digital television
service delivered over the TELUS IP infrastructure.
TELUS TV(R) and its hundreds of digital channels are now available to
certain neighbourhoods in Calgary and Edmonton, with signals delivered by a
state-of-the-art satellite and content distribution centre in Edmonton. TELUS
is constructing a similar $15-million TV centre north of British Columbia's
Fraser Valley in preparation for the launch of TELUS TV in B.C. planned for
2006. The centre, commonly called a "head end," will initially provide TELUS
TV customers with more than 200 video and audio channels when operational, and
expected to grow to over 300 channels within a year. In addition to eight
satellite dishes, with room for three more, TELUS is installing Internet
Protocol-based network and signal transport technology to manage signals and
distribute content to customers. The Alberta and B.C. facilities will provide
back-up to each other, allowing customers to continue receiving service should
one experience an outage.
TELUS also announced a long-term agreement with major Hollywood film
studio Twentieth Century Fox to offer Fox movies on TELUS TV. Current
blockbuster Fox hits - such as Fantastic 4, Kingdom of Heaven,
Mr. & Mrs. Smith and Robots - and the company's vast library of motion
pictures, are offered via TELUS TV Video on Demand.
BUSINESS SOLUTIONS
TELUS signs $137 million deal with Hamilton Health Sciences
In November, TELUS announced a 15-year agreement with Hamilton Health
Sciences to deliver the process and information technology components of its
human resource services. Valued at $137 million, the agreement sees TELUS
implement a technology and an application upgrade to Hamilton Health Sciences'
HR management system, as well as assume the day-to-day management and delivery
of its HR services including payroll, recruitment, compensation, occupational
health and safety and benefits.
The agreement includes the establishment of a new TELUS Centre of
Excellence in Ontario, enabling TELUS in cooperation with Hamilton Health
Sciences to develop, test and evaluate innovative HR system solutions that are
expected to be marketed to other health sector and broader public sector
clients.
Hamilton Health Sciences is a family of five hospitals and a cancer
centre, serving more than 2.3 million residents of Hamilton and central south
Ontario.
TELUS renews contract with Finning International
Finning International, one of the world's largest Caterpillar heavy
equipment dealers, has extended its technology services agreement with TELUS
through to 2011. The six-year contract valued at $39.5 million was announced
in January.
Finning has entrusted TELUS with its IT service and support at both its
Canadian and United Kingdom business operations. The wide range of services
includes all day-to-day IT issues management, desktop and Help Desk support,
network management, application support, back-up and recovery, and WAN and LAN
management.
TELUS International, a division of TELUS that leverages its
telecommunications solutions for businesses in the international market, will
deliver the UK component. TELUS has been providing IT services to Finning in
Canada since 1999 and in the UK since 2003.
TELUS first-to-market with End Point Security Agent service
In October, TELUS announced the launch of TELUS End Point Security
Agent(TM) service, the latest addition to its comprehensive managed security
solutions portfolio. Unlike traditional desktop security solutions, End Point
Security Agent service analyzes suspicious IT behavior rather than relying on
email or file signature matching to identify worms and viruses. Employing
industry-leading technology from Cisco Systems, TELUS is the first-to-market
with this product as a fully managed solution in Canada.
TELUS launches wireless field ticketing for oil and gas industry
TELUS launched a wireless field ticketing solution designed for the oil
and gas industry that allows companies to electronically capture crucial
operational status and billing information from the field. Created in
partnership with Spira Data Corp., this innovative solution provides faster
and more accurate billing and improved operational status information coming
from the field. It was announced in October.
The service is powered by Spira's innovative ticketing software
application, Spira 4, and leverages TELUS' IT management and infrastructure
services and TELUS' wireless network to deliver the first fully managed
end-to-end field ticketing solution for the industry. Calgary-based Tucker
Wireline Services, an oil well logging and perforating company, was
instrumental in the development and is the first to deploy this wireless field
ticketing solution. It allows Tucker Wireline Services to securely and
affordably transmit data back to the office. The benefits include faster
invoicing, fewer errors, real time reporting, reliable connectivity and
security.
TELUS estimates that more than 4,000 companies alone in Western Canada
could benefit from this industry specific solution, which has been developed
based on an intimate understanding of the needs of oil and gas field
operations.
Creating future friendly communities
TELUS continues to make significant investments in the communities where
its team members live, work and serve. TELUS is committed to becoming Canada's
premier corporate citizen and taking a leadership role in supporting Canadians
by leveraging its funding, technology and expertise to help make a difference.
In January, TELUS launched the TELUS Vancouver Community Board as part of
a national philanthropic program. TELUS community boards have been established
in Edmonton, Calgary, Toronto, Ottawa, Montreal and Rimouski to enhance TELUS'
ongoing support of key charitable partners by expanding TELUS' investment in
smaller, grassroots efforts. The TELUS Vancouver Community Board will oversee
$500,000 in annual donations to philanthropic initiatives in the Lower
Mainland.
TELUS committed $2 million to eligible charities across Canada in
November to replace TELUS' Employee Charitable Giving Campaign for 2005, in
which TELUS matches contributions dollar for dollar. As a result of TELUS'
labour disruption, the company deferred the employee campaign for 2005 and
intends to re-establish it in 2006. The campaign supports more than 250
charities across Canada including Kidsport, the Alliance for Arts & Culture
and the Children's Wish Foundation. In addition, a number of environmental
charities were added to this year's program.
TELUS recognized for excellence in corporate governance and reporting
In December, the Canadian Institute of Chartered Accountants (CICA)
recognized TELUS for excellence in corporate governance and reporting. At the
December CICA Corporate Reporting awards, TELUS was presented with the Award
of Excellence for best Corporate Governance Disclosure across all industry
sectors in Canada. The TELUS 2004 Annual Report was also given the Award of
Excellence for Corporate Reporting in the Communications and Media sector.
This is the 11th year in a row that TELUS has been recognized for excellence
in corporate reporting by the CICA.
In January, TELUS received recognition at the IR Magazine Canada Awards
for the best 2004 annual report and the best disclosure policy. These awards
reinforce TELUS' strong record of excellence in corporate governance and
disclosure.
TELUS top executives honored by Women's Executive Network
The Women's Executive Network recognized three senior TELUS executives on
its annual list of Canada's most powerful women in November. Karen Radford,
executive vice president and President, TELUS Quebec and Partner Solutions;
Judy Shuttleworth, executive vice president, Human Resources; and Janet Yale,
executive vice president, Corporate Affairs, were among those on the Top 100
list for 2005. This is the second year the organization has named Karen and
Janet to the list.
The three were chosen for this award for their business prowess,
leadership and community involvement. All three are involved in local
community organizations, and serve as active leaders and role models for women
and men at TELUS.
Dividend declaration
The Board of Directors declared a quarterly dividend of twenty-seven and
one half cents ($0.275) per share on outstanding Common and Non-Voting Shares
payable on April 1, 2006 to shareholders of record on the close of business on
March 10, 2006.
For further information:
External Communications: Investor Relations:
Allison Vale, Robert Mitchell,
(416) 629-6425, (416) 279-3219,
allison.vale(at)telus.com robert.mitchell2(at)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.
TELUS Corporation
consolidated statements of income
Periods ended Three months Twelve months
December 31 (millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
(restated) (restated)
OPERATING REVENUES $ 2,086.7 $ 1,964.9 $ 8,142.7 $ 7,581.2
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,316.8 1,178.5 4,793.5 4,438.0
Restructuring and
workforce reduction
costs 35.5 19.8 53.9 52.6
Depreciation 346.2 338.3 1,342.6 1,307.8
Amortization of
intangible assets 67.0 79.2 281.1 335.3
-------------------------------------------------------------------------
1,765.5 1,615.8 6,471.1 6,133.7
-------------------------------------------------------------------------
OPERATING INCOME 321.2 349.1 1,671.6 1,447.5
Other expense, net 9.3 8.7 18.4 8.7
Financing costs 171.7 152.8 623.1 613.3
-------------------------------------------------------------------------
INCOME BEFORE INCOME
TAXES AND NON-
CONTROLLING INTEREST 140.2 187.6 1,030.1 825.5
Income taxes 58.8 50.4 322.0 255.1
Non-controlling interest 2.9 1.6 7.8 4.6
-------------------------------------------------------------------------
NET INCOME 78.5 135.6 700.3 565.8
Preference and preferred
share dividends - - - 1.8
-------------------------------------------------------------------------
COMMON SHARE AND
NON-VOTING
SHARE INCOME $ 78.5 $ 135.6 $ 700.3 $ 564.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INCOME PER COMMON SHARE
AND NON-VOTING SHARE ($)
- Basic 0.22 0.38 1.96 1.58
- Diluted 0.22 0.37 1.94 1.57
DIVIDENDS DECLARED PER
COMMON SHARE AND NON-
VOTING SHARE ($) 0.275 0.20 0.875 0.65
TOTAL WEIGHTED AVERAGE
COMMON SHARES AND NON-
VOTING SHARES OUTSTANDING
(millions)
- Basic 353.6 358.0 357.1 355.3
- Diluted 358.1 362.1 361.0 357.6
TELUS Corporation
consolidated balance sheets
As at December 31(millions) 2005 2004
-------------------------------------------------------------------------
(restated)
ASSETS
Current Assets
Cash and temporary investments, net $ 8.6 $ 896.5
Accounts receivable 610.3 863.5
Income and other taxes receivable 103.7 132.5
Inventories 138.8 133.3
Prepaid expenses and other 154.7 183.4
Current portion of future income taxes 226.4 438.4
-------------------------------------------------------------------------
1,242.5 2,647.6
-------------------------------------------------------------------------
Capital Assets, Net
Property, plant, equipment and other 7,339.4 7,528.2
Intangible assets subject to amortization 637.5 737.0
Intangible assets with indefinite lives 2,964.6 2,955.8
-------------------------------------------------------------------------
10,941.5 11,221.0
-------------------------------------------------------------------------
Other Assets
Deferred charges 850.2 704.4
Future income taxes - 99.8
Investments 31.2 38.4
Goodwill 3,156.9 3,126.8
-------------------------------------------------------------------------
4,038.3 3,969.4
-------------------------------------------------------------------------
$ 16,222.3 $ 17,838.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued
liabilities $ 1,393.7 $ 1,362.6
Restructuring and workforce
reduction accounts payable
and accrued liabilities 57.1 70.7
Advance billings and customer deposits 571.8 531.5
Current maturities of long-term debt 5.0 4.3
-------------------------------------------------------------------------
2,027.6 1,969.1
-------------------------------------------------------------------------
Long-Term Debt 4,639.9 6,332.2
-------------------------------------------------------------------------
Other Long-Term Liabilities 1,635.3 1,506.1
-------------------------------------------------------------------------
Future Income Taxes 1,023.9 991.9
-------------------------------------------------------------------------
Non-Controlling Interest 25.6 13.1
-------------------------------------------------------------------------
Shareholders' Equity
Convertible debentures conversion option - 8.8
Common equity 6,870.0 7,016.8
-------------------------------------------------------------------------
6,870.0 7,025.6
-------------------------------------------------------------------------
$ 16,222.3 $ 17,838.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
consolidated statements of cash flows
Periods ended Three months Twelve months
December 31 (millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
(restated) (restated)
OPERATING ACTIVITIES
Net income $ 78.5 $ 135.6 $ 700.3 $ 565.8
Adjustments to reconcile
net income to cash
provided by operating
activities:
Depreciation and
amortization 413.2 417.5 1,623.7 1,643.1
Future income taxes 55.8 99.0 340.0 380.9
Share-based compensation 3.1 5.9 24.3 23.8
Net employee defined
benefit plans expense 3.1 3.7 3.9 18.4
Employer contributions
to employee defined
benefit plans (29.0) (24.5) (118.8) (136.8)
Restructuring and
workforce
reduction costs, net
of cash payments 5.4 (15.2) (13.6) (70.3)
Payment received
from Verizon
Communications Inc. - 33.3 - 33.3
Amortization of deferred
gains on sale-leaseback
of buildings,
amortization of
deferred charges and
other, net 5.0 14.2 1.1 27.9
Net change in non-cash
working capital 269.9 (55.7) 353.7 52.0
-------------------------------------------------------------------------
Cash provided by operating
activities 805.0 613.8 2,914.6 2,538.1
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (374.1) (343.4) (1,319.0) (1,319.0)
Acquisition - (12.2) (29.4) (12.2)
Proceeds from the sale
of property and other
assets 1.0 17.7 4.5 35.9
Other (2.6) (4.9) (11.3) (4.2)
-------------------------------------------------------------------------
Cash used by investing
activities (375.7) (342.8) (1,355.2) (1,299.5)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and
Non-Voting Shares issued 19.1 78.0 219.4 148.8
Dividends to shareholders (96.6) (112.6) (312.2) (248.7)
Purchase of Common Shares
and Non-Voting Shares
for cancellation (228.6) (78.0) (892.1) (78.0)
Payment for redemption of
preference and preferred
shares - - - (72.8)
Long-term debt issued 142.7 2.0 147.4 39.8
Redemptions and repayment
of long-term debt (1,579.8) (0.9) (1,601.1) (248.6)
Dividends paid by a
subsidiary to non-
controlling interest - - (7.9) -
Payment received from
Verizon Communications Inc. - 114.8 - 114.8
Other 0.4 - (0.8) (3.6)
-------------------------------------------------------------------------
Cash provided (used) by
financing activities (1,742.8) 3.3 (2,447.3) (348.3)
-------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in
cash and temporary
investments, net (1,313.5) 274.3 (887.9) 890.3
Cash and temporary
investments, net,
beginning of period 1,322.1 622.2 896.5 6.2
-------------------------------------------------------------------------
Cash and temporary
investments, net,
end of period $ 8.6 $ 896.5 $ 8.6 $ 896.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS
Interest (paid) $ (319.2) $ (293.2) $ (638.3) $ (632.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest received $ 12.9 $ 4.0 $ 47.3 $ 27.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income taxes (inclusive
of Investment Tax
Credits received (paid) $ 47.3 $ (2.8) $ 69.5 $ 194.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
Segmented Information
Three months ended
December 31 Wireline Wireless
(millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating revenues
-------------------------------------------------------------------------
External revenue $ 1,209.9 $ 1,209.3 $ 876.8 $ 755.6
Inter-segment revenue 23.0 24.6 6.3 6.3
-------------------------------------------------------------------------
1,232.9 1,233.9 883.1 761.9
-------------------------------------------------------------------------
Operating expenses
Operations expense 788.5 732.2 557.6 477.2
Restructuring and work-
force reduction costs 35.5 19.8 - -
-------------------------------------------------------------------------
824.0 752.0 557.6 477.2
-------------------------------------------------------------------------
EBITDA(1) $ 408.9 $ 481.9 $ 325.5 $ 284.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 230.2 $ 220.8 $ 143.9 $ 122.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 178.7 $ 261.1 $ 181.6 $ 162.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended
December 31 Eliminations Consolidated
(millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating revenues
-------------------------------------------------------------------------
External revenue $ - $ - $ 2,086.7 $ 1,964.9
Inter-segment revenue (29.3) (30.9) - -
-------------------------------------------------------------------------
(29.3) (30.9) 2,086.7 1,964.9
-------------------------------------------------------------------------
Operating expenses
Operations expense (29.3) (30.9) 1,316.8 1,178.5
Restructuring and work-
force reduction costs - - 35.5 19.8
-------------------------------------------------------------------------
(29.3) (30.9) 1,352.3 1,198.3
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 734.4 $ 766.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 374.1 $ 343.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 360.3 $ 423.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Years ended
December 31 Wireline Wireless
(millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating revenues
-------------------------------------------------------------------------
External revenue $ 4,847.2 $ 4,769.3 $ 3,295.5 $ 2,811.9
Inter-segment revenue 90.4 96.6 23.5 21.5
-------------------------------------------------------------------------
4,937.6 4,865.9 3,319.0 2,833.4
-------------------------------------------------------------------------
Operating expenses
Operations expense 3,031.4 2,864.9 1,876.0 1,691.2
Restructuring and work-
force reduction costs 53.9 52.6 - -
-------------------------------------------------------------------------
3,085.3 2,917.5 1,876.0 1,691.2
-------------------------------------------------------------------------
EBITDA(1) $ 1,852.3 $ 1,948.4 $ 1,443.0 $ 1,142.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 914.2 $ 964.3 $ 404.8 $ 354.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 938.1 $ 984.1 $ 1,038.2 $ 787.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Years ended
December 31 Eliminations Consolidated
(millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating revenues
-------------------------------------------------------------------------
External revenue $ - $ - $ 8,142.7 $ 7,581.2
Inter-segment revenue (113.9) (118.1) - -
-------------------------------------------------------------------------
(113.9) (118.1) 8,142.7 7,581.2
-------------------------------------------------------------------------
Operating expenses
Operations expense (113.9) (118.1) 4,793.5 4,438.0
Restructuring and work-
force reduction costs - - 53.9 52.6
-------------------------------------------------------------------------
(113.9) (118.1) 4,847.4 4,490.6
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 3,295.3 $ 3,090.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 1,319.0 $ 1,319.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 1,976.3 $ 1,771.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is defined by the Company as operating revenues less
operations expense and restructuring and workforce reduction costs.
The Company has issued guidance on, and reports, EBITDA because it is
a key measure used by management to evaluate performance of its
business segments and is utilized in measuring compliance with
certain debt covenants.
(2) Total capital expenditures ("CAPEX").
Forward-looking statements
==========================================================================
This report and Management's discussion and analysis contain statements
about expected future events and financial and operating results of TELUS
Corporation (TELUS or the Company) that are forward-looking. By their
nature, forward-looking statements require the Company to make
assumptions and are subject to inherent risks and uncertainties. There is
significant risk that predictions and other forward-looking statements
will not prove to be accurate. Readers are cautioned not to place undue
reliance on forward-looking statements as a number of factors could cause
actual future results, conditions, actions or events to differ materially
from financial and operating targets, expectations, estimates or
intentions expressed in the forward-looking statements.
Assumptions for 2006 target purposes include: economic growth consistent
with recent provincial and national estimates by the Conference Board of
Canada that were available in 2005, including gross domestic product
growth of 3.1% in Canada; increased wireline competition in both business
and consumer markets; a wireless industry market penetration gain similar
to the approximately five percentage point gain in 2005; approximately
$100 million restructuring and workforce reduction expenses; an effective
tax rate of approximately 35%; no prospective significant acquisitions or
divestitures; no change in foreign ownership rules; and maintenance or
improvement of investment-grade credit ratings.
Factors that could cause actual results to differ materially include but
are not limited to: competition; technology (including reliance on
systems and information technology); regulatory developments; human
resources (including possible labour disruptions); business integrations
and internal reorganizations; process risks (including the conversion of
legacy systems and security); financing and debt requirements (including
share repurchases and debt redemptions); tax matters; health, safety and
environment developments; litigation and legal matters; business
continuity events (including man-made and natural threats); economic
growth and fluctuations (including pension performance, funding and
expenses); and other risk factors discussed herein and listed from time
to time in TELUS' reports, public disclosure documents including the
Annual Information Form, and other filings with securities commissions in
Canada (filed on SEDAR at www.sedar.com) and the United States (filed on
EDGAR at www.sec.gov).
For further information, see Section 10: Risks and uncertainties in
TELUS' annual 2004, as well as updates provided in the first, second and
third quarter 2005 interim Management's discussions and analyses and this
report.
==========================================================================
Management's discussion and analysis - February 15, 2006
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month and twelve-
month periods ended December 31, 2005 and 2004. 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.
Management's discussion and analysis was reviewed by TELUS' Audit Committee on
February 14, 2006 and approved by TELUS' Board of Directors on February 15,
2006. All amounts are in Canadian dollars unless otherwise specified.
The Company has issued guidance on and reports on certain non-GAAP
measures that are used by management to evaluate performance of business units
and segments. Non-GAAP measures are used in measuring compliance with debt
covenants. Because non-GAAP measures do not have a standardized meaning,
securities regulations require that non-GAAP measures be clearly defined and
qualified, and reconciled with their nearest GAAP measure. For the readers'
reference, the definition, calculation and reconciliation of consolidated
non-GAAP measures is provided in Section 11: Reconciliation of non-GAAP
measures and definition of key operating indicators.
Management's discussion and analysis contents
-------------------------------------------------------------------------
Section Contents
-------------------------------------------------------------------------
1. Overall performance A summary of consolidated results for
the fourth quarter and full year of
2005
-------------------------------------------------------------------------
2. Core business, vision and A discussion of TELUS' core business,
strategy vision and strategy, including examples
of TELUS' activities in support of its
six strategic imperatives
-------------------------------------------------------------------------
3. Key performance drivers Corporate priorities in place for 2005
and planned for 2006
-------------------------------------------------------------------------
4. Capability to deliver A description of the factors that
results affect the capability to execute
strategies, manage key performance
drivers and deliver results
-------------------------------------------------------------------------
5. Results from operations A detailed discussion of operating
results for 2005
-------------------------------------------------------------------------
6. Financial condition A discussion of significant changes in
the balance sheet at December 31, 2005,
as compared to December 31, 2004
-------------------------------------------------------------------------
7. Liquidity and capital A discussion of cash flow, liquidity,
resources credit facilities, off-balance sheet
arrangements and other disclosures
-------------------------------------------------------------------------
8. Critical accounting A description of accounting estimates,
estimates and accounting which are critical to determining
policy developments financial results, and changes to
accounting policies
-------------------------------------------------------------------------
9. Looking forward to 2006 A discussion of TELUS' 2006 financial
and operational targets, including key
assumptions and financing plans
-------------------------------------------------------------------------
10. Risks and risk management An update of risks and uncertainties
facing TELUS
-------------------------------------------------------------------------
11. Reconciliation of non-GAAP A description, calculation and
measures and definition of reconciliation of certain measures used
key operating indicators by management
-------------------------------------------------------------------------
1. Overall performance
1.1 Materiality for disclosures
Management determines whether or not information is material based on
whether it believes a reasonable investor's decision to buy, sell or hold
securities in the Company would likely be influenced or changed if the
information were omitted or misstated.
1.2 Consolidated highlights
-------------------------------------------------------------------------
($ in millions, Quarters ended Years ended
except margin and December 31 December 31
per share amounts) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Operating revenues 2,086.7 1,964.9 6.2 % 8,142.7 7,581.2 7.4 %
EBITDA(1) 734.4 766.6 (4.2)% 3,295.3 3,090.6 6.6 %
EBITDA margin (%)(2) 35.2 39.0 (3.8)pts 40.5 40.8 (0.3)pts
Operating income 321.2 349.1 (8.0)% 1,671.6 1,447.5 15.5 %
Net income 78.5 135.6 (42.1)% 700.3 565.8 23.8 %
Earnings per share,
basic ($) 0.22 0.38 (42.1)% 1.96 1.58 24.1 %
Earnings per share,
diluted ($) 0.22 0.37 (40.5)% 1.94 1.57 23.6 %
Cash dividends
declared per
share ($) 0.275 0.20 37.5 % 0.875 0.65 34.6 %
Cash provided by
operating
activities 805.0 613.8 31.2 % 2,914.6 2,538.1 14.8 %
Cash used by
investing
activities 375.7 342.8 9.6 % 1,355.2 1,299.5 4.3 %
Capital
expenditures 374.1 343.4 8.9 % 1,319.0 1,319.0 0.0 %
Cash provided (used)
by financing
activities (1,742.8) 3.3 n.m. (2,447.3) (348.3) n.m.
Free cash flow(3) 109.8 121.9 (9.9)% 1,465.5 1,297.3 13.0 %
-------------------------------------------------------------------------
pts - percentage points
n.m. - not meaningful
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) EBITDA margin is EBITDA divided by Operating revenues.
(3) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash
flow.
-------------------------------------------------------------------------
Despite the labour disruption experienced in Western Canada from late
July to late November of 2005, solid growth in consolidated Operating revenues
was achieved, with wireless segment revenues increasing by 16% in the fourth
quarter and 17% for the full year. Wireline segment revenues were flat in the
fourth quarter and increased by 1.5% for the full year, as growing data
revenues more than offset the decline in voice long distance and equipment
revenues. The decrease in consolidated EBITDA and EBITDA margins for the
fourth quarter resulted from a temporary increase in wireline expenses in
order to maintain operations during the labour disruption, as well as
increased restructuring charges partly offset by improved wireless
profitability. The increase in consolidated EBITDA for the full year resulted
from improved wireless profitability, partly offset by the effects of the
labour disruption. Changes in consolidated EBITDA were the primary
contributors to $27.9 million lower Operating income in the fourth quarter and
$224.1 million higher Operating income for the full year of 2005, when
compared with the same periods in 2004. The net effect of the labour
disruption was estimated at approximately $52 million before tax in the fourth
quarter and $133 million for the full year.
Net income and earnings per share decreased in the fourth quarter of
2005, when compared to the same period in 2004 due to lower Operating income,
as described above, as well as increased financing costs arising from the
early redemption of $1.578 billion Canadian dollar Notes on December 1, 2005,
and adjustments to income taxes. Prospective increases in Quebec provincial
income tax rates to be phased-in beginning January 1, 2006, resulted in a
revaluation of future tax liabilities and assets and a corresponding
$7.7 million increase in future income tax expense in the fourth quarter 2005,
compared with net favourable tax adjustments in corresponding period in 2004.
Net income and earnings per share increased for the full year of 2005, when
compared with 2004 due primarily to increased Operating income, partly offset
by one-time financing costs.
Cash provided by operating activities increased by $191.2 million and
$376.5 million, respectively, in the fourth quarter and full year of 2005,
when compared with the same periods in 2004. The increases were primarily from
the receipt of $350 million additional proceeds from securitized accounts
receivable on November 30. Free cash flow decreased by $12.1 million in the
fourth quarter due primarily to higher capital expenditures and cash interest
paid for the early redemption of Notes. Free cash flow increased for the full
year primarily because of improved EBITDA, lower payments under restructuring
programs and higher interest received, partly offset by lower cash tax
recoveries.
Effect of the labour disruption on TELUS operations during 2005
TELUS 2005 results were affected by a labour disruption that commenced on
July 21 and concluded following the ratification of a collective agreement on
November 18 (see Reaching a collective agreement in Section 3.1 Corporate
priorities in 2005). Revenue grew at a slower pace in the second half of the
year due in part to the work stoppage and increased competitive activity;
however, the recent increase in competition for local residential telephony
services by resellers, cable-TV companies, and other competitors offering VoIP
services, makes it difficult to fully separate the competitive effects from
labour disruption impacts on wireline revenues and subscribers. Reduced
availability of field resources resulted in the Company giving priority to
repair activities, and business and data services, which limited installations
of residential access lines.
Significant emergency operations planning costs were incurred in the
second quarter. With the labour disruption beginning in July, emergency
operations procedures were put in place to maintain customer service at the
highest possible level. The labour disruption was most evident in British
Columbia where all unionized employees were not at work for the duration of
the labour disruption. A sizeable number of bargaining unit employees were
working in Alberta. There was no labour disruption in the Ontario and Quebec
operations, but additional costs were incurred for extra workload in areas
such as call centres. Incremental expenses that arose from emergency
operations procedures included management reassignments, paid overtime,
third-party security and contractor costs, travel and accommodation and
reduced capitalization of labour. These incremental expenses exceeded cost
savings, such as those arising from lower compensation expenses for employees
who stayed off work and adjustments to accruals for payroll and other
employee-related expenses, as shown in the table below.
With ratification of the new collective agreement, and the return to work
of TELUS team members by early December, certain capital spending resumed, and
in fact increased, in the fourth quarter of 2005, when compared to the same
period in 2004. For the full year of 2005, capital expenditures were still
lower than originally planned, due to deferral of some construction
activities, while the balance of assets under construction rose due to delays
in completion of in-progress work.
The new five-year agreement provides increased operating flexibility and
productivity, while facilitating better service for customers in an
increasingly competitive marketplace. It fosters a performance culture with
universal variable incentive pay, when performance metrics are met, and
promotions that are based on performance as well as seniority. The agreement
also establishes a new paradigm. For example, the Company and union agreed to
work together to withdraw various types of litigation between the parties. As
well, a Common Interest Forum has been established as a mechanism for
co-operation and dialogue.
-------------------------------------------------------------------------
Estimated impacts of the
work stoppage 2005 Quarterly 2005
-------------------------------- Full
Q2 Q3 Q4 year
-------------------------------------------------------------------------
Net incremental Operations
expenses, pre-tax ($ millions) 16 65 52 133
Approximate earnings per share
impact, after tax ($) (0.03) (0.12) (0.10) (0.25)
-------------------------------------------------------------------------
1.3 Performance scorecard for 2005 results
TELUS' original targets for 2005 did not include the impacts of the
four-month work stoppage. Despite this, the majority of the original targets
were achieved or exceeded as a result of being ahead of plan early in the
year. Guidance was revised for selected items in the interim reports for the
first, second and third quarters (released in May, August and November,
respectively), as well as the December 16, 2005 announcement of 2006 targets.
Generally, guidance revisions were improvements from the original targets or
narrowing of guidance ranges. All of the final guidance items were achieved.
See Section 9 Looking forward to 2006 for the 2006 targets announced on
December 16, 2005.
- The original target for consolidated revenues was exceeded because of
strong wireless average revenue per subscriber unit per month (ARPU)
and subscriber growth, as well as growth in wireline data revenues.
- The original targets for consolidated and wireline EBITDA were
achieved, while the original target for wireless EBITDA was exceeded.
Guidance for wireline segment EBITDA was revised upward in the first
quarter to $1.875 to $1.925 billion based on being ahead of plan at
the time, but this higher range was not achieved as a result of the
work stoppage. Guidance for wireline EBITDA was lowered in the third
quarter to $1.8 to $1.875 billion to reflect the net effects of the
work stoppage somewhat offset by lower restructuring charges, and
updated in December to narrow the expected range to $1.84 to
$1.865 billion.
- Capital expenditures - guidance for consolidated capital expenditures
was revised in May to approximately $1.4 billion due to an expected
increase in the wireline segment. The expectation was subsequently
reduced in November to approximately $1.3 billion as a result of the
work stoppage. Guidance for wireline capital expenditures increased
to the upper end of the target range of approximately $1.0 billion in
May, and was subsequently reduced to approximately $900 million in
November. The original consolidated target was achieved, while the
original wireline target was exceeded.
- The original target for free cash flow was exceeded because of lower
capital expenditures and higher wireless EBITDA.
- The target for high-speed Internet subscriber net additions was not
achieved, as the work stoppage limited gross additions of
subscribers, while competitive activity increased in the second half
of 2005. Guidance was lowered to approximately 65,000 with the third
quarter results in November as the work stoppage significantly
reduced third quarter gross additions. In December, the guidance was
revised to more than 65,000, which was achieved.
- The original target for wireless subscriber net additions was
exceeded due to successful wireless marketing, as well as the fact
that the Canadian wireless industry market penetration increased by
approximately five percentage points rather than the approximately
four percentage points originally anticipated.
-------------------------------------------------------------------------
Performance to 2005 targets and
revised guidance
++ Outperformed
target or
guidance
+ Met target
or guidance
- Approximated Original
target or targets Final
guidance for 2005 guidance
X Missed target 2005 (Dec. 17, (Dec. 16,
or guidance results 2004) Result 2005) Result
-------------------------------------------------------------------------
Consolidated
$7.9 to $8.1 to
Revenues $8.14 billion $8.0 billion ++ $8.15 billion +
$3.2 to $3.275 to
EBITDA(1) $3.295 billion $3.3 billion + $3.325 billion +
Earnings per
share - basic $1.96 $1.65 to $1.85 ++ $1.90 to $2.00 +
Capital $1.3 to Approx.
expenditures $1.32 billion $1.4 billion + $1.3 billion +
Free cash $1.2 to $1.4 to
flow(2) $1.47 billion $1.3 billion ++ $1.5 billion +
-------------------------------------------------------------------------
Wireline segment
Revenue $4.7 to $4.825 to
(external) $4.85 billion $4.75 billion ++ $4.85 billion +
Non-ILEC(3) $600 to $625 to
revenue $632 million $650 million + $635 million +
$1.85 to $1.84 to
EBITDA $1.85 billion $1.9 billion + $1.865 billion +
Non-ILEC $0 to $15 to
EBITDA $21 million $10 million ++ $20 million ++
$950 million
Capital to Approx.
expenditures $914 million $1.0 billion ++ $900 million +
High-speed
Internet
subscriber Approx. More than
net additions 73,400 100,000 X 65,000 +
-------------------------------------------------------------------------
Wireless segment
Revenue $3.2 to $3.275 to
(external) $3.30 billion $3.25 billion ++ $3.3 billion +
$1.35 to $1.425 to
EBITDA $1.44 billion $1.4 billion ++ $1.45 billion +
Capital $350 to Approx.
expenditures $405 million $400 million - $400 million +
Wireless
subscriber 425,000 to More than
net additions 584,300 475,000 ++ 550,000 +
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest, taxes, depreciation and
amortization (EBITDA).
(2) See Section 11.2 Free cash flow.
(3) Non-incumbent local exchange carrier
-------------------------------------------------------------------------
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.
2.1 Core business
TELUS Corporation, as the largest telecommunications company in Western
Canada and the second largest in Canada, provides a wide range of
telecommunications wireline and wireless products and services including data,
Internet, voice, video and entertainment services. TELUS earns the majority of
its revenue from access to, and the use of, the Company's national
telecommunications infrastructure, or from providing products and services
that facilitate access to and usage of this infrastructure.
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. Segmented information is regularly reported to the
Company's chief operating decision maker. Intersegment sales are recorded at
the exchange value.
At December 31, 2005, the Company's principal subsidiary is wholly owned
TELUS Communications Inc. (TCI), including TELE-MOBILE COMPANY partnership.
2.2 Vision and strategy
TELUS' strategic intent, or vision, is to unleash the power of the
Internet to deliver the best solutions to Canadians at home, in the workplace
and on the move. TELUS' strategy for growth is to focus on its core
telecommunications business in Canada. As a result, it has evolved from a
regional telecommunications company in 1999, serving markets with only 28% of
Canada's population, to a strong national facilities-based player in the
growth areas of wireless, data and Internet protocol (IP). The Company
embarked on this strategy in 2000 to take advantage of the significant growth
opportunities the national market offers.
TELUS continues to be guided by its six long-standing strategic
imperatives that guide the Company's actions and are generating the financial
results of the Company. TELUS' activities in support of, and the results from,
these imperatives include the following:
Building national capabilities across data, IP, voice and wireless
In 2005, the Company expanded its suite of advanced IP-based network
applications with the introduction of TELUS IP-One Evolution(R). This new
service enables business customers to migrate from their existing Centrex
system to IP telephony at a pace that best suits their needs. In addition to
utilizing the benefits of Centrex, customers gain the power of IP telephony,
which converges voice, data and Internet and offers productivity-enhancing
applications like integrated messaging and remote activation of services.
Expansion in Central Canada is key to TELUS' business growth strategy. An
example of this is the new five-year contract that TELUS signed with a large
manufacturer to provide and manage Internet-based voice and data services. The
contract will migrate Centrex-based infrastructure to an IP-One Evolution
solution. Another example is the eight-year, $30 million agreement with
Intrawest Corporation to be the exclusive supplier of certain IP and
telecommunications services to all Intrawest resorts across Canada.
Wireless population coverage was extended to 600,000 more Canadians in
2005, ending the year at 30.6 million. Distribution was extended with 19 new
Company-owned wireless stores to approximately 140 corporate stores and a
total of more than 2000 retail locations across Canada. International roaming
for PCS clients was expanded to mainland China, New Zealand and Taiwan,
building on existing roaming capability in, among other countries, Bermuda,
the Dominican Republic, Guam, Hong Kong, Mexico, Puerto Rico, South Korea, the
US Virgin Islands, Venezuela and across the United States. Two new global
communications solutions were introduced in 2005: the Motorola A840
Worldphone, operating on both Code Division Multiple Access (CDMA) and Global
System for Mobile (GSM) networks, and a GSM global roaming card. Both devices
allow wireless clients to roam in more than 120 countries worldwide.
TELUS mobile TV service, launched in August, allows wireless clients to
access unlimited live television on their wireless phones for just $15 per
month. TELUS mobile TV now offers access to ten channels and boasts a high
quality display rate of four to six frames per second. In addition to faster
speeds with EVDO (evolution data optimized), channel and handset selection for
TELUS Mobile TV is being expanded.
In addition, the wireless segment introduced the multi-network data
access (MNDA) solution, a reliable way for public safety and enterprise
clients to access mission critical data wirelessly and pass it between data
networks without losing connections. In late 2005, a new wireless high speed
network (EVDO) was introduced in major centres across Canada, offering
business customers wireless data transfers at typical speeds of 400 to
700 kilobits per second - at least six times faster than previous wireless
data services.
Providing integrated solutions that differentiate TELUS from its
competitors
The Calgary Board of Education (CBE) signed in October a $65 million,
10-year contract with TELUS Sourcing Solutions for the delivery of some of the
district's human resource (HR) services. This groundbreaking collaboration
will allow the school board to benefit from leading-edge HR technology and
expertise without up-front capital investment. The CBE is the first Canadian
school district to enter this type of HR services agreement with a private
sector organization. TELUS Sourcing Solutions will provide a range of HR and
payroll services to the CBE. To support the delivery of these services, TELUS
will implement and manage a new Human Resource Management System (HRMS) for
CBE, delivering services including payroll, benefits, leave administration and
recruitment and administrative activities related to the placement of support
and temporary staff. This will enable the CBE to focus on its business of
providing quality education programs for students. Approximately 50 CBE
employees transferred to TELUS Sourcing Solutions under their existing terms
and conditions of employment.
TELUS Sourcing Solutions signed a 15-year agreement with Hamilton Health
Sciences to deliver the process and information technology components of its
HR services. Valued at $137 million, the agreement will see TELUS implement
technology and application upgrades to Hamilton Health Sciences' HR management
system, as well as assume the day-to-day management and delivery of its HR
services including payroll, recruitment, compensation, occupational health and
safety and benefits. Through the partnership, approximately 70 Hamilton Health
Sciences employees joined TELUS. The agreement will also see the establishment
of a new TELUS Centre of Excellence in Ontario, enabling TELUS in co-operation
with Hamilton Health Sciences to develop, test and evaluate innovative HR
system solutions that will be marketed to other health sector and broader
public sector clients.
TELUS announced the extension of its Future Friendly Home strategy and
the expansion of its suite of services from mobility and security to
entertainment. TELUS began a targeted launch of its innovative all digital
television service, TELUS TV, in Edmonton and Calgary. Further expansion of
TELUS TV is expected to continue on a targeted basis through a phased
neighbourhood roll-out, with TELUS' own skilled team members selling,
installing and supporting TELUS TV. For the associated technology risks, see
Section 10.8 Technology.
Focusing relentlessly on the growth markets of data, IP and wireless
TELUS continued to achieve strong consolidated growth in 2005 based on
record wireless subscriber net additions of 584,300, a 17% increase in
wireless revenue and an 8% increase in wireline data revenue.
While TELUS ranks third in the Canadian wireless industry in terms of
total subscribers, the success of its leadership position is reflected by
TELUS Mobility generating the highest EBITDA and EBITDA less capital
expenditures of the three national Canadian operators. TELUS continues to
focus on profitable wireless growth in the national market, which consists of
three major facilities-based players in most regional markets and niche-market
competitors operating on a resale basis.
Investing in internal capabilities to build a high-performance
culture and efficient operations
As a full-service telecom operator, TELUS should increasingly benefit
from wireless and wireline synergistic bundling opportunities. This is a
differentiating competitive advantage compared to competitors with narrow or
stand-alone service offerings, and is expected to be supported by the
integration of wireline and wireless operations, initiated in late 2005
subject to the risks described in Section 10.3 Business integrations and
internal reorganizations.
Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy and focus TELUS' resources on core business
The acquisition of a 52.5% ownership interest in Ambergris Solutions Inc.
in February 2005, combined with the acquisition of ADCOM, Inc. in November
2004, provided aggregate incremental revenues of approximately $59 million and
incremental EBITDA of approximately $10 million in 2005. The purchase of
Ambergris provides TELUS with international call centre capabilities and
backup capabilities. The international capability also supports TELUS in its
bids to offer competitive call centre services to potential new clients. The
purchase of ADCOM gained TELUS a new customer base, multi-site operations and
state-of-the-art equipment.
In April 2005, TELUS and the B.C. provincial government announced an
initiative, called Connecting Communities, that consolidates some 340 existing
competitive services contracts (covering 10 broader public sector entities
such as Crown corporations and health authorities) into one contract with the
Province of B.C. and is to bring access to high-speed data and voice services
to 119 rural B.C. communities by the end of 2006. TELUS expects to invest an
estimated $110 million over four years to connect the communities to
high-speed Internet and expand broadband services. With the additional
119 communities, a total of 334 communities in B.C. are to be connected by
TELUS.
This agreement helps secure a large share of provincial government
business projected at more than $245 million for the next four years. It also
positions TELUS for new revenue growth opportunities for up to seven years by
enabling the Company to deploy innovative IP-based technology and services.
TELUS will create a $12 million innovation fund to allow the public sector in
B.C. to develop pilot opportunities in strategic areas of future growth,
including health care and education. The fund can be used for future upgrades
and infrastructure enhancements, subject to certain criteria and approval by
TELUS, as set out in the contract.
Going to market as one team, under a common brand, executing a single
strategy
Holiday season promotions in late 2005 using TELUS' nature-based brand
were well received by the public and generated a significant amount of media
attention. The popular and instantly recognized national master brand provides
TELUS with a strong and differentiated marketing edge. For example, TELUS ads
were ranked number one in the National Most Liked and Most Noticed categories
in November as reported by Marketing Magazine.
TELUS is committed to improving the economic, social and environmental
well-being of communities across Canada. With a focus on young Canadians,
TELUS looks for opportunities to use its technology and expertise in ways that
positively influence the communities in which TELUS team members live, work
and serve. To ensure the greatest impact possible, TELUS community investment
efforts are focused in three areas - arts and culture, education and sport,
and health and wellness. In 2005, seven TELUS Community Boards were
established across Canada. Located in Vancouver, Edmonton, Calgary, Toronto,
Ottawa, Montreal and Rimouski, the Boards meet quarterly to discuss local
giving opportunities and strategically allocate approximately $3.5 million
annually to local charities. In doing so, the Boards help TELUS determine
where and how to invest resources to best optimize the benefits that flow to
the community.
In 2005, TELUS formed partnerships with five science centres across
Canada to help promote technological innovation and learning in science and
technology. Over the next 20 years, TELUS expects to invest more than
$43 million in the TELUS World of Science(R) in Vancouver, Calgary and
Edmonton, and the Ontario and Montreal Science Centres. These partnerships
will help to foster educational opportunities for young Canadians through the
innovative use of technology and ensure these facilities remain leading-edge
for future generations.
3. Key performance drivers
To advance our strategy, focus on the near term opportunities and
challenges, and to create value for shareholders, TELUS sets corporate
priorities each year. A report on the progress against 2005 priorities is
described below.
3.1 Corporate priorities for 2005 - reporting back
-------------------------------------------------------------------------
Progress against 2005 corporate priorities
-------------------------------------------------------------------------
Enhancing TELUS' leadership position in wireless
- Generated a record number of subscriber net additions at 584,300
representing 34% of the net additions of the three national
competitors, while obtaining 36% of the EBITDA and 39% of EBITDA less
capital expenditures
- Independently ranked as the best performing wireless operator in
North America for six consecutive quarters ending June 2005, the most
recently publicized rankings by N. Moore Capital
- Introduced real-time access of live television programming to
wireless phones in 2005 with the August launch of TELUS mobile TV
service
- Continued to lead the Canadian industry with the highest average
revenue per subscriber unit per month (ARPU) of $62, while
maintaining one of the lowest churn rates in North America at 1.39%.
With significant EBITDA growth, EBITDA less capital expenditures
increased to a record $1,038.2 million or 33.9% of Network revenue,
as compared with $788 million or 30.3% of 2004 Network revenue.
-------------------------------------------------------------------------
Leveraging investments in high-speed Internet technology through Future
Friendly Home services in B.C., Alberta and Eastern Quebec
- Promoted two additional varieties of high-speed Internet:
- Increased promotion of TELUS High-Speed Enhanced Internet service,
which offers much more speed than TELUS' regular high-speed
Internet service and is ideal for online gaming and downloading
large files
- Starting in May, promoted the new TELUS High-Speed Lite Internet
service, which offers speeds five times faster than dial-up
Internet, but not as fast as TELUS' regular high-speed Internet,
ideal for consumers wanting to surf the Internet and access
e-mail.
- In November, started a phased neighbourhood roll-out in Edmonton and
Calgary of TELUS TV, an innovative all-digital television service.
-------------------------------------------------------------------------
Accelerating wireline performance in Ontario and Quebec business markets
- Non-ILEC revenue of $632 million increased by 12.6% when compared
with 2004
- Full year non-ILEC EBITDA became positive for the first time in 2005
at $21 million
- Gained a number of new large multi-year customers including
Hamilton Health Sciences and the Government of Quebec.
-------------------------------------------------------------------------
Growing brand value by delivering a superior customer experience
- Launched three new TELUS IP security solutions:
- Intrusion Prevention Service (a hardware-based solution, which
continuously monitors customer network traffic for anomalies and
destroys them before they affect legitimate users' services)
- Secure Socket Layer virtual private network (VPN) (a turn-key
solution that insulates a network environment against external
attacks)
- Distributed Denial of Service (eliminates the need for client
software deployment, costly maintenance and desktop support by
utilizing the Internet's capacity for data transportation).
- Launched TELUS Telecommuting, a suite of communications services that
allow business clients to work out of their homes. The services -
high-speed Internet, VPN, a variety of phone options, and
collaboration services such as web, audio and video conferencing -
allow workers to create virtual offices at home
- TELUS and Telephony(at)Work partnered to offer Canada's first fully
integrated on-demand hosted contact centre service,
CallCentreAnywhere(TM).
-------------------------------------------------------------------------
Driving continual improvements in productivity across TELUS
- A number of smaller efficiency initiatives were undertaken in 2005,
facilitated by $54 million in Restructuring and workforce reduction
costs, with many activities delayed by the four-month work stoppage.
-------------------------------------------------------------------------
Reaching a collective agreement that reflects industry dynamics and
embraces the needs of all TELUS stakeholders
- A positive outcome for TELUS and team members was the ratification of
a new five-year collective agreement on November 18, 2005. For a
summary of labour relations activity in 2005 and the new contract,
see Reaching a collective agreement below.
-------------------------------------------------------------------------
Reaching a collective agreement
A labour disruption that began on July 21, 2005 was settled on
November 18, 2005, following the ratification of a new five-year collective
agreement covering approximately 14,000 employees located predominantly in
TELUS' western incumbent region in B.C. and Alberta. The new agreement merges
six previously separate collective agreements into one and applies to all
unionized team members in B.C. and Alberta represented by the
Telecommunications Workers Union (TWU), as well as TELUS Mobility team members
in Central Canada who were included in the scope of the bargaining unit by
Canada Industrial Relations Board (CIRB) Decisions 1088 and 278.
The new agreement provides TELUS and its team members the flexibility to
compete on a level playing field and support TELUS' leadership position in
data, IP and wireless. After ratification, substantially all regular team
members were recalled and working by the first week of December. The terms and
conditions of the new collective agreement are effective from November 20,
2005 to November 19, 2010.
The following are highlights of the new contract:
- One-time lump sum payments in lieu of retroactive wage adjustments
were provided for the period from the expiry of the previous
collective agreements to the effective date of the ratified agreement
(January 1, 2001 to November 20, 2005).
- Total compensation increases, consistent with earlier guidance, for
the majority of employees include base pay increases of a minimum of
2% per year with additional variable pay increasing over the term of
the contract from 3 to 5% per year. Base pay harmonization between
similar jobs in B.C. and Alberta is provided under the terms of the
settlement.
- Terms and conditions related to contracting out, scheduling of hours
of work, paid time off the job, benefits, etc., are in line with
competitive telecom benchmarks and are believed to provide TELUS with
the required flexibility to effectively compete.
- A foundation now exists for a renewed, constructive union-management
relationship. For example, the parties agreed to work together to
withdraw a number of cases currently before the Canada Industrial
Relations Board, Federal Court of Appeal and other courts or
administrative bodies to enable the parties to put an end to previous
disputes. In addition, Common Interest Forums will involve executives
from both the Union and TELUS for ongoing constructive dialogue on
issues.
- The proposed settlement of a long-standing pay equity complaint with
respect to employees in British Columbia, includes the establishment
of a $10 million pay equity fund by TELUS, subject to acceptance by
the Canadian Human Rights Commission.
- By March 2006, team members currently working in TELUS National
Systems (TNS) and TELUS solutions de soutien will be included in the
bargaining unit. In addition, the parties have agreed that team
members employed in TELUS Mobility's directly owned retail store
operations are to remain excluded from the bargaining unit.
- Transition options, including the offer of a voluntary departure
package, are available for approximately 700 team members affected by
three offices that were closed in February 2006 and the outsourcing
of non-core functions. In addition, TELUS made a commitment that
several remaining call centres in B.C. will remain open for the term
of the contract.
3.2 Corporate priorities for 2006
TELUS developed new corporate priorities for 2006 to: advance its
industry-leading strategy; achieve meaningful commercial differentiation in
the markets; capitalize on the technology convergence of wireless and
wireline; and drive continued operating efficiency and effectiveness.
-------------------------------------------------------------------------
2006 corporate priorities across wireline and wireless
-------------------------------------------------------------------------
Advance TELUS' leadership in the consumer market through
- TELUS' Future Friendly(R) suite of data applications for customers at
home and on the move
- Best-in-class customer loyalty through cost-effective customer
experience
- Expanding TELUS' channel partner relationships to strengthen our
distribution.
-------------------------------------------------------------------------
Advance TELUS' position in the business market through
- Innovative solutions that enhance the competitiveness of TELUS'
customers and deepen their loyalty
- Increasing the Company's share in the business market by leveraging
TELUS' mobile solutions such as high-speed data
- Improving delivery of managed solutions to small business customers.
-------------------------------------------------------------------------
Advance TELUS' position in the wholesale market through
- Strengthening the Company's North American reach through innovative
IP solutions
- Establishing creative and preferred partnerships to grow TELUS'
national customer base
- Optimizing the use of partner networks to complement TELUS' network
investments.
-------------------------------------------------------------------------
Drive improvements in productivity and service excellence by
- Realizing efficiencies from the integration of wireline and wireless
operations
- Driving improvements in enterprise-wide productivity and customer
service excellence to increase competitiveness
- Capturing value from TELUS' investments in technology and innovation
to streamline operations.
-------------------------------------------------------------------------
Strengthen the spirit of the TELUS team and brand, and develop the best
talent in the global communications industry by
- Continuing to leverage best practices across the Company
- Cultivating a business ownership that embraces a philosophy of "our
business, our customers, our team, my responsibility"
- Capitalizing on TELUS' reputation as a progressive, high-performance
Company to attract and retain the best team in Canada
- Providing team members innovative opportunities for growth,
development and employment options.
-------------------------------------------------------------------------
4. Capability to deliver results
4.1 Operational capabilities - Wireline
Less than one-third of the Company's revenues are from wireline segment
regulated revenues. Wireline regulated services include residential and
business wireline services in incumbent local exchange carrier (ILEC) regions,
competitor services and payphone services. Services that are forborne from
regulation include non-incumbent local exchange carrier (non-ILEC) services,
long distance services, Internet services, international telecommunications
services, inter-exchange private line services, certain data services, and the
sale of customer premises equipment.
In 2005, ongoing industry-wide trends of increased competition and new
technologies facilitated the decline in network access lines and reduced long
distance prices. With agreements such as those with the Government of B.C. and
the Calgary Board of Education, and growth initiatives in the business markets
in Ontario and Quebec, TELUS endeavours to retain existing customers and
position itself for future revenue growth, particularly in the areas of data
and IP. Measures taken for consumer services include new Future Friendly Home
services introduced in 2004, limited commercial launch of TELUS TV in 2005,
and the introduction of a three-year contract option for consumer optional
features bundles in 2005. This initiative was launched to help retain
customers, lock in revenues over the contract period, and delay or reduce
churn to competitors. In addition, TELUS expects to achieve further
improvements in efficiency and productivity through the recently implemented
five-year collective agreement including office closures, contracting out of
specified non-core functions, as well as integration of operations in the
wireline and wireless segments. See Section 5.4 Wireline segment results -
Restructuring and workforce reduction costs and Section 10.3 Business
integrations and internal reorganizations.
During the fourth quarter, the Company continued to develop a new billing
system in the wireline segment, which will include re-engineering processes
for order entry, pre-qualification, service fulfillment and assurance,
customer care, collections/credit, customer contract and information
management. The expected benefits of this project include streamlined and
standardized processes and the elimination over time of multiple legacy
information systems. The Company plans to implement this project in phases,
beginning with a launch for consumer mass market accounts currently planned in
2006. See Section 10.4 Process risks.
The Company's principal wireline geographic markets and competitors are:
-------------------------------------------------------------------------
Canadian geographic
market TELUS wireline Competition
-------------------------------------------------------------------------
National - business IP-based national BCE and Manitoba Tel
network overlaying (Allstream) competing
extensive switched with their own national
network in incumbent infrastructures, and
territories in Western others such as Navigata
Canada and Eastern (owned by SaskTel).
Quebec.
System integrators of
Rate-regulated in managed solutions, such
incumbent territories as CGI, EDS and IBM.
of B.C., Alberta and
Eastern Quebec for Substitution to
access and certain wireless including to
competitive digital TELUS wireless
network access offerings.
services.
Non-rate regulated
operations in non-
incumbent areas of
Ontario and Quebec.
Focused on managed
data solutions in
the business market.
-------------------------------------------------------------------------
Western Canada Access to virtually Substitution to
(B.C. and Alberta) - every home. Rate wireless including to
consumer regulated for local TELUS wireless
services. offerings.
Significant investment Shaw Cable - access to
in Internet most homes in market.
infrastructure and Provides Internet,
innovative services. entertainment and VoIP-
based telephony
Plans to offer VoIP services. Not rate-
service. regulated by the CRTC.
Has broadcasting Call-Net (owned by
distribution licences Rogers Communications),
to offer digital Navigata, Primus,
television services in Vonage, and various
select communities others - urban focus.
across Alberta and Collectively offer
B.C., as well as local service on a
licences to offer resale basis and with
commercial video- VoIP offerings,
on-demand services. Internet services
Began roll-out of sometimes on a resale
service in Edmonton and basis, and long
Calgary following distance services.
extensive employee
trials.
-------------------------------------------------------------------------
Eastern Quebec - Access to virtually Substitution to
consumer every home. Significant wireless including to
investment in Internet TELUS wireless
infrastructure and offerings.
innovative services.
COGECO (cable-TV) -
Has broadcasting urban focus. Offers
distribution licences entertainment and VoIP-
and video-on-demand based telephony
licences. services.
Sprint, Excel,
Distributel, Sears and
Caztel compete in the
provision of long
distance services.
BCE and Vonage compete
for VoIP-based
services.
-------------------------------------------------------------------------
4.2 Operational capabilities - Wireless
In TELUS' wireless segment, continued delivery of value-added solutions,
excellent network quality, and an exceptional client service experience,
contributed to profitable growth despite new competitive pressures. Future
profitability and cash flow growth are expected to be realized from continued
subscriber growth and operating scale efficiencies through a well managed
client focused organization, as well as integration of operations with the
wireline segment.
Wireless services are not rate-regulated by the CRTC. The Company's
principal wireless markets and competitors are:
-------------------------------------------------------------------------
Canadian geographic
market TELUS wireless Competition
-------------------------------------------------------------------------
National, business and Facilities-based Facilities-based
consumer services with access competitors such as
to 94% of Canadian Rogers Wireless,
population, operating nationally, and
a CDMA (code division wireless offerings by
multiple access) various regional telcos
network with state-of- including Bell
the-art high speed EVDO Mobility, SaskTel, MTS
in major centres, and Mobility and Aliant
iDEN-based push-to-talk Telecom Wireless.
service focused on the
commercial market Resellers of BCE and
place. Rogers networks, such
as the Virgin
MobileGroup, 7-eleven
and certain cable-TV
companies.
-------------------------------------------------------------------------
4.3 Liquidity and capital resources
TELUS generally achieved all of the objectives under its 2005 financing
plan, as illustrated in the following table. With access to undrawn credit
facilities of $1.4 billion at December 31, 2005, and expected cash flow from
operations, the Company believes it has sufficient capability to fund its
requirements in 2006. See Section 9.2 Financing Plan for 2006 and the
associated risks in Section 10.7 Financing and debt requirements.
-------------------------------------------------------------------------
2005 financing plan and results
-------------------------------------------------------------------------
TELUS' 2005 financing plan was to use free cash flow generated by its
business operations to:
-------------------------------------------------------------------------
- Maintain cash-on-hand in anticipation of the maturity of
$1.578 billion of 7.5% TELUS Corporation Notes in June of 2006
The Company exercised its right to early redeem, on December 1, 2005,
the remaining $1.578 billion of 7.50%, Series CA, Notes outstanding.
See Section 7.3 Cash used by financing activities.
-------------------------------------------------------------------------
- Repurchase Common Shares and Non-Voting Shares under the Normal
Course Issuer Bid (NCIB)
Repurchased approximately 20.8 million TELUS shares for
$892.1 million during 2005 under two NCIB programs.
Purchased for cancellation 73% of the maximum 14.0 million Common
Shares and 100% of the maximum 11.5 million Non-Voting Shares
permitted under the first program, which was effective from
December 20, 2004 to December 19, 2005, for a cumulative outlay of
approximately $913 million.
A second program was approved that runs for a twelve-month period
ending December 19, 2006, for potential repurchase and cancellation
of up to 12.0 million Common Shares and 12.0 million Non-Voting
Shares. Approximately 634,000 Common Shares and 608,000 Non-Voting
Shares were repurchased under this NCIB in December 2005 for
$57.5 million. See Section 7.3 Cash used by financing activities.
-------------------------------------------------------------------------
- Pay dividends
Dividends of 20 cents per share were declared for each of the first
three quarters. The declared dividend was increased to 27.5 cents per
share for the fourth quarter dividend, which was paid on January 1,
2006. The target dividend payout ratio guideline continues to be in
the range of 45 to 55% of sustainable earnings.
-------------------------------------------------------------------------
- Give consideration to redeeming or repurchasing debt in the open
market
On May 9, 2005, the Company provided notice of redemption for its
convertible debentures at par, plus accrued and unpaid interest, for
redemption on June 16, 2005. Convertible debenture holders exercised
conversion options resulting in $131.7 million of convertible
debenture principal being converted into approximately 3.3 million
Non-Voting Shares. The conversion option in respect of $17.9 million
of convertible debenture principal was not exercised and this
principal amount was redeemed. See Section 6 Financial Condition -
Shareholder's equity.
-------------------------------------------------------------------------
Other financing objectives included:
-------------------------------------------------------------------------
- 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- in the future
Investment grade credit ratings were maintained and improved ratings
were received from all four rating agencies that cover TELUS. See
Section 7.7 Credit ratings.
- Maintain position of fully hedging foreign exchange exposure for
indebtedness
Maintained as planned.
- Renew the $800 million 364-day revolving credit facility in May 2005
TELUS arranged for new credit facilities in May 2005 to replace
$1.6 billion of prior credit facilities. See Section 7.5 Credit
Facilities.
- Maintain a minimum $1 billion in unutilized liquidity
Maintained as planned throughout the year, with more than
$1.4 billion unused credit facilities at December 31, 2005, as well
as availability under the accounts receivable securitization program
and cash on hand.
-------------------------------------------------------------------------
5. Results from operations
5.1 General
The Company has two reportable segments: wireline (discussed in
Section 5.4) and wireless (discussed in Section 5.5). Segmentation is based on
similarities in technology, the technical expertise required to deliver the
products and services, the distribution channels used and regulatory
treatment. Intersegment sales are recorded at the exchange value. Segmented
information is regularly reported to the Company's chief operating decision
maker.
5.2 Quarterly results summary
-------------------------------------------------------------------------
($ millions, except
per share amounts, $) 2005 Q4 2005 Q3 2005 Q2 2005 Q1
-------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,209.9 1,198.6 1,216.5 1,222.2
Wireless segment 876.8 864.2 802.0 752.5
--------- --------- --------- ---------
Operating revenues
(consolidated) 2,086.7 2,062.8 2,018.5 1,974.7
Net income 78.5 190.1 189.5 242.2
Per weighted average Common
Share and Non-Voting Share
outstanding
- basic 0.22 0.53 0.53 0.67
- diluted 0.22 0.53 0.52 0.66
Dividends declared per Common
Share and Non-Voting Share
outstanding 0.275 0.20 0.20 0.20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ millions, except
per share amounts, $) 2004 Q4 2004 Q3 2004 Q2 2004 Q1
-------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,209.3 1,199.9 1,189.0 1,171.1
Wireless segment 755.6 747.0 676.6 632.7
--------- --------- --------- ---------
Operating revenues
(consolidated) 1,964.9 1,946.9 1,865.6 1,803.8
Net income 135.6 156.6 172.3 101.3
Per weighted average Common
Share and Non-Voting Share
outstanding
- basic 0.38 0.44 0.48 0.28
- diluted 0.37 0.43 0.48 0.28
Dividends declared per Common
Share and Non-Voting Share
outstanding 0.20 0.15 0.15 0.15
-------------------------------------------------------------------------
The trend in consolidated Operating revenues continued to reflect strong
wireless growth resulting from an increased subscriber base and increased
average revenue per subscriber unit (ARPU). TELUS wireline segment revenue
growth slowed in the second half of 2005, due in part to the work stoppage and
increased competitive activity. The wireline revenue growth continues to be
generated from data revenues, partially offset by reduced voice long distance
revenues and voice equipment sales. Wireline segment revenues include the
impacts of regulatory price cap decisions.
Net income and earnings per share for the second, third and fourth
quarters of 2005 were impacted by increased net expenses leading up to and
resulting from a labour disruption, as described earlier. In addition,
financing costs in the fourth quarter of 2005 included a one-time
$33.5 million pre-tax loss on early redemption of debt, while in the second
quarter of 2005, a one-time $17.5 million pre-tax provision was recorded for
estimated damages stemming from an Ontario Appeal Court ruling. See
Section 10.6 Litigation and legal matters. Aside from the effects of the work
stoppage and one-time financing costs, the trend in Net income and earnings
per share reflected improved operating profitability and lower interest on
long-term and short-term debt.
There is significant fourth quarter seasonality in terms of wireless
subscriber gross additions, related acquisition costs and equipment sales, and
to a lesser extent, wireline high-speed Internet subscriber gross additions.
Net income and earnings per share for seven of the quarters included net
favourable impacts for the settlement of prior years' tax matters and
consequential adjustments, as shown in the table below:
-------------------------------------------------------------------------
($ in millions, except
per share amounts) 2005 Q4 2005 Q3 2005 Q2 2005 Q1
-------------------------------------------------------------------------
Approximate Net income impact 4 4 3 54
Approximate earnings per
share impact 0.01 0.01 0.01 0.15
Approximate basic earnings
per share, excluding
favourable tax-related impacts 0.21 0.52 0.52 0.54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in millions, except
per share amounts) 2004 Q4 2004 Q3 2004 Q2 2004 Q1
-------------------------------------------------------------------------
Approximate Net income impact 14 - 45 14
Approximate earnings per
share impact 0.04 - 0.13 0.04
Approximate basic earnings
per share, excluding
favourable tax-related impacts 0.34 0.44 0.35 0.24
-------------------------------------------------------------------------
On February 15, 2006, the Board of Directors of TELUS declared a
quarterly dividend of 27.5 cents per share on outstanding Common and
Non-Voting shares payable on April 1, 2006 to shareholders of record on the
close of business on March 10, 2006.
5.3 Consolidated results from operations
-------------------------------------------------------------------------
($ millions except Quarters ended Years ended
EBITDA margin December 31 December 31
and employees) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Operating
revenues 2,086.7 1,964.9 6.2 % 8,142.7 7,581.2 7.4 %
Operations
expense 1,316.8 1,178.5 11.7 % 4,793.5 4,438.0 8.0 %
Restructuring
and workforce
reduction
costs 35.5 19.8 79.3 % 53.9 52.6 2.5 %
-------------------------------------------------------------------------
EBITDA(1) 734.4 766.6 (4.2)% 3,295.3 3,090.6 6.6 %
-------------------------------------------------------------------------
EBITDA margin
(%)(2) 35.2 39.0 (3.8)pts 40.5 40.8 (0.3)pts
Total
employees,
end of period 29,819 25,798 15.6 %
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) EBITDA margin is EBITDA divided by Operating revenues.
-------------------------------------------------------------------------
Consolidated Operating revenues increased by $121.8 million and
$561.5 million, respectively, in the fourth quarter and full year of 2005,
when compared with the same periods in 2004, primarily as a result of strong
revenue growth in the wireless segment, as well as growth in wireline segment
data revenues. Consolidated EBITDA decreased by $32.2 million in the fourth
quarter and increased by $204.7 million for the full year of 2005, when
compared with the same periods in 2004. EBITDA for the fourth quarter was
affected by the labour disruption and increased restructuring charges, partly
offset by improved wireless profitability. The increase in consolidated EBITDA
for the full year resulted from improved wireless profitability, partly offset
by the effects of the labour disruption. The increase in employees was
primarily from the acquisition of Ambergris in February 2005, which had
approximately 3,200 employees at the end of 2005, as well as growth at TELUS
Mobility to support a larger subscriber base.
For further discussion by segment, see Section 5.4 Wireline segment
results and Section 5.5 Wireless segment results.
-------------------------------------------------------------------------
Depreciation Quarters ended Years ended
and amortization December 31 December 31
($ millions)) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Depreciation 346.2 338.3 2.3 % 1,342.6 1,307.8 2.7 %
Amortization
of intangible
assets 67.0 79.2 (15.4)% 281.1 335.3 (16.2)%
-------------------------------------------------------------------------
413.2 417.5 (1.0)% 1,623.7 1,643.1 (1.2)%
-------------------------------------------------------------------------
Depreciation increased in the fourth quarter and full year of 2005, when
compared with the same periods in 2004, due primarily to growth in shorter
life data and wireless network assets and a reduction in service lives for
ADSL (high-speed Internet) customer equipment, partly offset by lower
depreciation arising from full amortization of older cell sites. Amortization
of intangible assets decreased in the fourth quarter and full year of 2005,
when compared with the same periods in 2004, as a result of several software
assets becoming fully depreciated, partly offset by a $5.0 million write-down
of an intangible right, related to termination of an indefeasible right-of-use
contract for fibre, in the third quarter of 2005.
-------------------------------------------------------------------------
Other expense Quarters ended Years ended
(income), net December 31 December 31
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
9.3 8.7 6.9 % 18.4 8.7 111.5 %
-------------------------------------------------------------------------
Other expense includes charitable donations, accounts receivable
securitization expense (see Section 7.6 Accounts receivable sale), gains and
losses on disposal of property, and income (loss) or impairments in equity or
portfolio investments. Charitable donations were approximately $4.5 million
and $9 million, respectively, for the fourth quarter and full year of 2005, an
increase of approximately $2 million for each period, when compared with 2004.
The accounts receivable securitization expense was $4.2 million and $7.3
million, respectively, in the fourth quarter and full year of 2005, or
approximately $3 million higher in each period when compared with 2004, as a
result of the $350 million increase in proceeds from securitized accounts
receivable on November 30, 2005 (see Section 7.6 Accounts receivable sale).
The balance of other expense in both years included losses and impairments in
equity and portfolio investments, net of gains from the sale of real estate.
Gains on real estate in 2005 included recognition of a portion of gain
deferred under sale and leaseback arrangements for administrative properties
sold in 2002, following the return of some space to the respective landlords.
The balance of other expense in 2004 also included a write-off of
approximately $5 million of accumulated acquisition costs for the expired
offer to purchase Microcell.
-------------------------------------------------------------------------
Quarters ended Years ended
Financing costs December 31 December 31
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Interest on
long-term debt
before unusual
items 146.0 159.5 (8.5)% 618.0 647.0 (4.5)%
Accrual for
settlement of
a lawsuit - - n. m. 17.5 - n. m.
-------------------------------------------------------------------------
Interest on
long-term debt 146.0 159.5 (8.5) % 635.5 647.0 (1.8)%
Interest on
short-term
obligations
and other 3.0 1.4 114.3 % 8.2 8.5 (3.5)%
-------------------------------------------------------------------------
Interest on
long-term debt,
short-term
obligations
and other 149.0 160.9 (7.4)% 643.7 655.5 (1.8)%
Loss on
redemption of
long-term debt 33.5 - n. m. 33.5 - n. m.
Foreign exchange
losses (gains) 1.6 (2.1) n. m. 4.6 (3.1) n. m.
Interest income (12.4) (6.0) (106.7)% (58.7) (39.1) (50.1)%
-------------------------------------------------------------------------
171.7 152.8 12.4 % 623.1 613.3 1.6 %
-------------------------------------------------------------------------
In 2005, Financing costs included two significant one-time items. The
first item was the second quarter accrual for estimated damages stemming from
a June Ontario Appeal Court ruling on litigation affecting TELUS
Communications Inc. (TCI). This ruling related to a BC TEL bond redemption
matter dating back to 1997. See Section 10.6 Litigation and legal matters. The
second one-time item was the loss on redemption of long-term debt recorded
when the Company exercised its right to early redeem, on December 1, 2005, the
remaining $1,578 billion of 7.50%, Series CA, Notes outstanding. The loss on
redemption amount included the loss that arose from the settlement of the
financial instrument that was an interest rate hedge associated with the debt
redeemed on December 1. The loss on redemption was lower than the interest
expense that would have been recorded over the remaining term of the debt.
Aside from these one-time items, interest on long-term debt decreased by
$13.5 million and $29.0 million, respectively, for the fourth quarter and full
year of 2005, when compared with the same periods in 2004. This included
approximately $10 million lower interest expense in December 2005 as a result
of the early redemption. The remaining decrease was primarily due to the
repayment of TCI Debentures and Medium-term Notes in 2004 and
conversion/redemption of convertible debentures in the second quarter of 2005.
TELUS maintains a hedging program using cross currency swaps, and as a result,
long-term financing costs were generally unaffected by fluctuations in the
value of the Canadian dollar against the U.S. dollar. Debt (the sum of Long-
term Debt, Current maturities and the deferred hedging liability) was $5,803.0
million at December 31, 2005, a 21% reduction when compared with $7,374.2
million one year earlier.
Interest income earned in the fourth quarter and full year of 2005
includes $4.5 million and $25.2 million, respectively, for the settlement of
various prior years' tax matters (as compared to $0.2 million and $26.2
million, respectively, for the same periods in 2004). The balance of interest
income earned primarily from cash and temporary investments was $7.9 million
and $33.5 million, respectively, for the fourth quarter and full year of 2005,
as compared with $5.8 million and $12.9 million, respectively, for the same
periods in 2004.
-------------------------------------------------------------------------
Income taxes
($ in millions, Quarters ended Years ended
except tax December 31 December 31
rates) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Blended federal
and provincial
statutory
income tax
based on net
income before
tax 47.5 64.9 (26.8)% 352.3 286.6 22.9 %
Changes in
estimates of
available
deductible
differences in
prior years - (7.6) 100.0 % (37.5) (9.1) n. m.
Tax rate
differential
on, and
consequential
adjustments from,
the reassessment
of prior year
tax issues (1.9) (6.6) 71.2 % (13.9) (41.2) 66.3 %
Revaluation of
future tax assets
and liabilities
for changes in
statutory income
tax rates 7.7 (9.7) n. m. (5.1) (12.9) 60.5 %
Large corporations
tax and other 5.5 9.4 (41.5)% 26.2 31.7 (17.4)%
-------------------------------------------------------------------------
58.8 50.4 16.7 % 322.0 255.1 26.2 %
-------------------------------------------------------------------------
Blended federal
and provincial
statutory tax
rates (%) 33.9 34.6 (0.7)pts 34.2 34.7 (0.5)pts
Effective tax
rates (%) 41.9 26.9 15.0 pts 31.3 30.9 0.4 pts
-------------------------------------------------------------------------
Changes in the blended federal and provincial statutory income tax
expense were due to the 25.3% decrease, and 24.8% increase, respectively, in
income before taxes for the fourth quarter and full year of 2005, when
compared with the same periods in 2004. The blended federal and provincial tax
rate decreased due mainly to changes in the B.C. tax rate. The B.C. provincial
government enacted a reduction to general corporate income tax rates from
13.5% to 12.0% on income taxed in B.C, effective July 1 of 2005. The change in
the B.C. tax rate also required a revaluation of the future tax liability and
the future tax asset, resulting in a further net recovery of $12.8 million,
recorded in the third quarter of 2005. The Quebec provincial government
substantially enacted an increase to general corporate income tax rates from
8.9% to 11.9% to be phased in over four years beginning January 1 of 2006. The
prospective increases in the Quebec tax rate required a revaluation of the
future tax liability and the future tax asset, resulting in a net expense of
$7.7 million in the fourth quarter of 2005. Reductions in tax also included
changes in estimates of available deductible differences in prior years and a
tax rate differential and consequential adjustments from the favourable
reassessment of prior years' tax issues.
Based on the assumption of the continuation of the rate of TELUS
earnings, the current legal entity structure and anticipated reorganizations
of TELUS and no substantive changes to tax regulations, the Company expects to
be able to fully utilize its non-capital losses before the end of 2007. The
Company's assessment is that the risk of expiry of such non-capital losses is
remote. Any material current income taxes recorded in 2006 are not expected to
be paid until 2008.
-------------------------------------------------------------------------
Quarters ended Years ended
December 31 December 31
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Non-controlling
interest 2.9 1.6 81.3 % 7.8 4.6 69.6 %
Preference and
preferred
dividends - - - - 1.8 (100.0)%
-------------------------------------------------------------------------
Non-controlling interest represents minority shareholders' interests in
several small subsidiaries, including minority shareholders' interest in
Ambergris, acquired in February 2005.
Preference and preferred dividends ceased with the redemption of all of
the publicly held TELUS Communications Inc. Preference and Preferred Shares,
completed on August 3, 2004.
5.4 Wireline segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Years ended
wireline segment December 31 December 31
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Voice local 536.7 534.4 0.4 % 2,174.1 2,145.4 1.3 %
Voice long
distance 212.0 229.7 (7.7)% 888.4 921.3 (3.6)%
Data 399.8 372.8 7.2 % 1,533.4 1,416.4 8.3 %
Other 61.4 72.4 (15.2)% 251.3 286.2 (12.2)%
-------------------------------------------------------------------------
External
operating
revenue 1,209.9 1,209.3 0.0 % 4,847.2 4,769.3 1.6 %
Intersegment
revenue 23.0 24.6 (6.5)% 90.4 96.6 (6.4)%
-------------------------------------------------------------------------
Total
operating
revenue 1,232.9 1,233.9 (0.1)% 4,937.6 4,865.9 1.5 %
-------------------------------------------------------------------------
-------------------------------------------
Key operating
indicators -
wireline segment At December 31
(000s) 2005 2004 Change
-------------------------------------------
Residential
network access
lines 2,937 3,047 (3.6)%
Business network
access lines 1,754 1,761 (0.4)%
------- ------- -------
Total network
access
lines(1) 4,691 4,808 (2.4)%
High-speed
Internet
subscribers 763.1 689.7 10.6 %
Dial-up Internet
subscribers 236.1 281.6 (16.2)%
------- ------- -------
Total Internet
subscribers(2) 999.2 971.3 2.9 %
Quarters ended Years ended
December 31 December 31
(000s) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Change in
residential
network access
lines (24) (11) (118.2)% (110) (39) (182.1)%
Change in
business
network access
lines 6 2 200.0 % (7) (23) 69.6 %
-------- --------- --------- --------- --------- ---------
Change in total
network access
lines (18) (9) (100.0)% (117) (62) (88.7)%
High-speed
Internet net
additions 27.0 34.8 (22.4)% 73.4 128.1 (42.7)%
Dial-up Internet
net reductions (13.7) (11.1) (23.4)% (45.5) (38.2) (19.1)%
-------- --------- --------- --------- --------- ---------
Total Internet
subscriber net
additions 13.3 23.7 (43.9)% 27.9 89.9 (69.0)%
-------------------------------------------------------------------------
(1) Network access lines are measured at the end of the reporting period
based on information in billing and other systems.
(2) Internet subscribers are measured at the end of the reporting period
based on Internet access counts from billing and other systems.
-------------------------------------------------------------------------
Wireline revenues decreased by $1.0 million in the fourth quarter and
increased by $71.7 million for the full year of 2005, when compared with the
same periods in 2004. In the fourth quarter, lower long distance and other
revenues were nearly offset by growing data services revenues and higher local
service revenues. For the full year, growth in data services revenue
significantly exceeded long distance revenue erosion and lower voice equipment
sales.
- Voice local revenue increased by $2.3 million and $28.7 million,
respectively, in the fourth quarter and full year of 2005, when
compared with same periods in 2004, as regulatory recoveries and the
effect of business rate increases implemented June 1, 2005 were partly
offset by the effect of continued line losses and a one-time
regulatory recovery recorded for the full year of 2004. Regulatory
recoveries in 2005 included approximately $10 million and $50 million,
respectively, drawn from the price cap deferral account to offset
mandated additional discounts for competitive digital network services
(in basic data services) pursuant to CRTC Decision 2005-6. This
adjustment was required because TELUS used the liability method for
recording price cap deferrals. See the discussion below for data
revenues, which contains the offsetting negative revenue impact for
Decision 2005-6. Another regulatory recovery affecting 2005 results
was a one-time $6.4 million adjustment recorded in the first quarter
of 2005 for CRTC Decision 2005-4 (pertaining to subsidy requirements
for high cost areas in TELUS Quebec ILEC territory for 2003 to 2005).
In 2004, a $10.2 million regulatory recovery was recognized in the
second quarter (in respect of CRTC Decision 2004-42 pertaining to
deferral account recognition items).
The increase in residential line losses in 2005, when compared with
2004, was due to increased competition from resellers, VoIP
competitors (including the introduction of cable telephony in Calgary,
Edmonton, Rimouski and Victoria), technological substitution to
wireless services, lower second lines resulting from migration of
dial-up Internet subscribers to high-speed Internet, and the labour
disruption. The trend of declining residential network access lines
may worsen in the future due to increased competition facilitated by
cable telephony launches in January 2006 into Vancouver and likely
additional regions in the future. Net business line gains in the
fourth quarter of 2005 and net business line losses for the full year
of 2005 were improvements from the same periods in 2004 and included a
temporary increase in lines at the end of 2005 for an in-progress
federal election. For the full year, growth in non-incumbent regions
partly offset competitive losses and migration to more efficient ISDN
(integrated services digital network) services in ILEC regions.
- Voice long distance revenues decreased by $17.7 million and
$32.9 million, respectively, for the fourth quarter and full year of
2005, when compared with the same periods in 2004. The decrease is
consistent with industry-wide trends of strong price competition and
technological substitution. The 3.6% rate of revenue erosion for the
full year of 2005 improved from the 4.1% rate of erosion experienced
in 2004, because of increased minute volumes (including growth in
non-incumbent volumes) as well as an increase in the monthly long
distance administration fee in certain long distance plans. This was
despite continued decreases in average per-minute prices arising from
strong competition as well as reduced call centre winback activity in
the second half of the year because of the labour disruption.
- Wireline segment data revenues increased by $27.0 million and
$117.0 million, respectively, for the fourth quarter and full year of
2005, when compared with the same periods in 2004. This included an
aggregate increase in the fourth quarter and full year of 2005, of
approximately $12 million and $59 million, respectively, due to two
recent acquisitions (Ambergris in February 2005 and ADCOM in late
2004).
Data revenue growth that was not attributable to acquisitions was
approximately $15 million and $58 million, respectively, for the
fourth quarter and full year of 2005. This growth was primarily due
to: (i) increased Internet, enhanced data and hosting service revenues
of approximately $11 million and $79 million, respectively, as a
result of new business contracts, continued growth in high-speed
Internet subscribers and a higher average price; (ii) increased
managed data revenues from the provision of business process
outsourcing services to customers; and (iii) increased data equipment
sales. These increases were partly offset by the additional discounts
for competitive digital network services of approximately $10 million
and $50 million, respectively, mandated by CRTC Decision 2005-6,
recorded in basic data services, as well as migration to enhanced data
services. The increase in data revenues from acquisitions described
above was substantially offset by these additional discounts in the
same periods.
The rate of growth in high-speed Internet subscribers has slowed, as
expected, from that observed in 2004 due to the high existing
household penetration rates for high-speed Internet services in
Western Canada and lower gross additions caused by increased
competitive activity and the labour disruption, mitigated in part by
fewer deactivations of existing customers. In addition, the Company
had experienced high net additions in the first quarter of 2004 due to
a very attractive introductory marketing promotion of limited
duration.
- Other revenue decreased by $11.0 million and $34.9 million,
respectively, for the fourth quarter and full year of 2005, when
compared with the same periods in 2004, due mainly to lower voice
equipment sales. In addition, an increase in the provision for
expected retail and competitive quality of service penalties was made
for lower service levels resulting from the work stoppage. The Company
expects to apply to the CRTC in 2006 for an exemption from quality of
service penalties related to the work stoppage.
- 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 wireless
segment.
Total external operating revenue discussed above included non-ILEC
revenues of $165.2 million and $631.6 million, respectively, for the fourth
quarter and full year of 2005. Non-ILEC revenues increased by $8.8 million or
5.6% and $70.9 million or 12.6%, respectively, for the fourth quarter and full
year of 2005 when compared with 2004. The increase was a result of revenues
from the purchase of ADCOM and growth in data service revenues, partly offset
by competitive pricing pressures on voice services.
-------------------------------------------------------------------------
Operating expenses -
wireline segment Quarters ended Years ended
($ millions except December 31 December 31
employees) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Salaries, benefits
and other
employee-
related
expenses 381.3 429.7 (11.3)% 1,612.8 1,649.4 (2.2)%
Other
operations
expenses 407.2 302.5 34.6 % 1,418.6 1,215.5 16.7 %
-------------------------------------------------------------------------
Total
operations
expense 788.5 732.2 7.7 % 3,031.4 2,864.9 5.8 %
-------------------------------------------------------------------------
Total
employees,
end of period 22,888 19,500 17.4 %
-------------------------------------------------------------------------
Operations expense increased by $56.3 million and $166.5 million,
respectively, in the fourth quarter and full year of 2005, when compared with
the same periods in 2004. The increases were due primarily to activation of
emergency operations procedures to minimize the impact on customer services
during the labour disruption. As a result, customer service was maintained at
higher than anticipated levels. Increased temporary expenses associated with
the labour disruption included: management reassignments, overtime, third-
party security and contractor costs, travel and accommodation, and lower
capitalization of labour, which exceeded savings in compensation for employees
who were not working and a revision to the labour settlement estimate.
Expenses increased by approximately $10 million and $49 million, respectively,
in aggregate due to acquisitions (ADCOM in late 2004 and Ambergris in February
2005). The addition of a contract in late 2004 to provide payroll services to
the B.C. government, as well as two new human resource services contracts in
the fourth quarter of 2005, also contributed to increased expenses. The total
number of employees, aside from those added with the acquisition of Ambergris
and the new payroll and HR services contracts, was not significantly changed
in 2005.
- Salaries, benefits and employee-related expenses decreased by
$48.4 million and $36.6 million, respectively, in the fourth quarter
and full year of 2005, when compared with the same periods in 2004.
The decrease was due primarily to lower compensation expenses for
employees who stayed off work and adjustments to accruals for payroll
and other employee-related expenses, partly offset by increased
expenses due to acquisitions and new contracts for the provision of
payroll and human resources services described above, as well as
increased compensation. The expense for defined benefit pension plans
decreased by approximately $4 million for the quarter and $16 million
for the year due to favourable returns on plan assets more than
offsetting the negative impact of a lower discount rate for 2005, when
compared with 2004.
- Other operations expenses increased by $104.7 million and
$203.1 million, respectively, in 2005, in the fourth quarter and full
year of 2005, when compared with the same periods in 2004. The
increase was due primarily to temporary expenses incurred during the
labour disruption, such as increased third-party security and
contractors. Increased expenses of approximately $33 million for the
quarter and $43 million for the year were recorded due to lower
capitalization of labour resulting from deferral of capital
expenditures and reassignment of staff to operational activities
during the labour disruption. Expenses also increased as a result of
acquisitions and the new contracts for the provision of payroll and
human resources services described above, and increased product and
service cost of sales associated with higher data equipment sales.
Otherwise, expenses decreased as a result of: (i) nominal payments to
Verizon under the renegotiated Software and Related Technology and
Service Agreement, compared with approximately $7 million for the
fourth quarter of 2004 and $33 million for the full year of 2004;
(ii) reduced facilities, transit and termination costs of
approximately $3 million for the quarter and $22 million for the year
due to the movement of traffic on-net and price cap discounts from
competitor ILECs arising from CRTC Decision 2005-6, partly offset by
higher outbound traffic volumes; and (iii) a lower bad debt expense of
approximately $1 million for the quarter and $10 million for the year
due to lower credit risk and continued improvement of collection
practices that have reduced credit loss exposure.
Included in the total segment expenses discussed above are non-ILEC
operations expenses of $158.1 million and $610.4 million, respectively, in the
fourth quarter and full year of 2005. Expenses for the quarter increased by
$5.4 million (3.5%), while expenses for the full year increased by $27.5
million (4.7%), when compared with the same period in 2004. The increase in
operations expense supported growth in non-ILEC revenues for the same period.
-------------------------------------------------------------------------
Restructuring and
workforce reduction
costs - wireline Quarters ended Years ended
segment December 31 December 31
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
35.5 19.8 79.3% 53.9 52.6 2.5 %
-------------------------------------------------------------------------
General
In 2005, the Company undertook a number of smaller initiatives within the
ILEC portion of the wireline segment, such as operational consolidation,
rationalization and integrations. These initiatives are aimed at improving the
Company's operating and capital productivity. As at December 31, 2005, no
future expenses remain to be accrued or recorded under the smaller initiatives
substantially completed in 2005, but variances from estimates currently
recorded may be recorded in subsequent periods. The Company's estimate of
restructuring and workforce reduction costs in 2006, arising from its
competitive efficiency program, which includes the office closures and
contracting out and integration of wireline and wireless operations, does not
currently exceed $100 million. See Forward-looking statements at the beginning
of Managements discussion and analysis.
Office closures and contracting out
In connection with the collective agreement signed in the fourth quarter
of 2005, as further discussed, an accompanying letter of agreement set out the
planned closure, on February 10, 2006, of a number of offices in British
Columbia. This initiative is aimed to improve the Company's operating and
capital productivity and is a component of the Company's competitive
efficiency program. The approximately 250 bargaining unit employees affected
by these office closures were offered the option of redeployment or
participation in a voluntary departure program (either the Early Retirement
Incentive Plan or the Voluntary Departure Incentive Plan).
Similarly, an additional accompanying letter of agreement set out that
the Company intends to contract out specific non-core functions over the term
of the collective agreement. This initiative is aimed at allowing the Company
to focus its resources on those core functions that differentiate the Company
for its customers and is a component of the Company's competitive efficiency
program. The approximately 250 bargaining unit employees currently affected by
contracting out initiatives were offered the option of redeployment or
participation in the voluntary departure program (either the Early Retirement
Incentive Plan or the Voluntary Departure Incentive Plan).
As at December 31, 2005, no future expenses remain to be accrued or
recorded under the letter agreement setting out the planned closure of a
number of offices in British Columbia, but variances from estimates currently
recorded may be recorded in subsequent periods. Other costs, such as other
employee departures and those associated with real estate, will be incurred
and recorded subsequent to December 31, 2005.
As at December 31, 2005, no future expenses remain to be accrued or
recorded under the letter agreement setting out the contracting out of
specific non-core functions, in respect of the approximately 250 bargaining
unit employees currently affected, but variances from estimates currently
recorded may be recorded in subsequent periods. Future costs will be incurred
as the initiative continues.
Integration of wireline and wireless operations
On November 24, 2005, the Company announced the integration of its
wireline and wireless operations, an initiative that will continue into future
years and that is a component of the Company's competitive efficiency program.
During the year ended December 31, 2005, $3.0 million of restructuring and
workforce reduction costs were recorded in respect of this initiative and were
included with general programs initiated in 2005.
-------------------------------------------------------------------------
EBITDA and EBITDA Quarters ended Years ended
margin - wireline December 31 December 31
segment 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 408.9 481.9 (15.1)% 1,852.3 1,948.4 (4.9)%
EBITDA margin (%) 33.2 39.1 (5.9)pts 37.5 40.0 (2.5)pts
-------------------------------------------------------------------------
EBITDA decreased by $73.0 million and $96.1 million, respectively, in the
fourth quarter and full year of 2005, when compared with the same periods in
2004. Temporary expenses associated with maintaining operations during the
labour disruption, emergency operations planning expenses prior to July 21,
increased restructuring charges and flat revenues in the second half of 2005
were the primary causes, despite improved non-ILEC profitability. Included in
these results were net labour disruption related expenses of approximately
$52 million in the fourth quarter and $133 million for the full year. Non-ILEC
EBITDA was $7.1 million and $21.2 million, respectively, for the fourth
quarter and full year of 2005, compared with EBITDA of $3.7 million and
$(22.2) million, respectively, in the same periods of 2004.
Wireline segment capital expenditures are discussed in Section 7.2 Cash
used by investing activities.
5.5 Wireless segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Years ended
wireless segment December 31 December 31
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Network revenue 816.9 696.0 17.4 % 3,064.6 2,599.9 17.9 %
Equipment revenue 59.9 59.6 0.5 % 230.9 212.0 8.9 %
-------------------------------------------------------------------------
External operating
revenue 876.8 755.6 16.0 % 3,295.5 2,811.9 17.2 %
Intersegment revenue 6.3 6.3 0.0 % 23.5 21.5 9.3 %
-------------------------------------------------------------------------
Total operating
revenue 883.1 761.9 15.9 % 3,319.0 2,833.4 17.1 %
-------------------------------------------------------------------------
----------------------------------------------
Key operating indicators - wireless segment
----------------------------------------------
(000s) At December 31
2005 2004 Change
----------------------------------------------
Subscribers -
postpaid 3,666.8 3,240.3 13.2 %
Subscribers -
prepaid 853.9 696.1 22.7 %
-------- -------- --------
Subscribers -
total(1) 4,520.7 3,936.4 14.8 %
Digital POPs(2)
covered including
roaming/resale
(millions)(3) 30.6 30.0 2.0 %
Quarters ended December 31
(000s) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Subscriber net
additions -
postpaid 143.2 144.8 (1.1)% 426.5 428.5 (0.5)%
Subscriber net
additions - prepaid 91.8 41.6 120.7 % 157.8 83.9 88.1 %
-------- -------- -------- -------- -------- --------
Subscriber net
additions - total 235.0 186.4 26.1 % 584.3 512.4 14.0 %
Churn, per month
(%)(4) 1.42 1.45 (0.03)pts 1.39 1.40 (0.01)pts
COA(5) per gross
subscriber
addition ($)(4) 449 410 9.5 % 386 389 (0.8)%
ARPU ($)(4) 63 61 3.3 % 62 60 3.3 %
Average minutes of
use per subscriber
per month (MOU) 410 390 5.1 % 399 384 3.9 %
EBITDA to network
revenue (%) 39.8 40.9 (1.1)pts 47.1 43.9 3.2 pts
Retention spend to
network revenue(4)(%) 7.3 6.2 1.1 pts 6.0 5.1 0.9 pts
EBITDA ($ millions) 325.5 284.7 14.3 % 1,443.0 1,142.2 26.3 %
EBITDA excluding COA
($ millions)(4) 514.2 429.1 19.8 % 1,937.3 1,578.0 22.8 %
-------------------------------------------------------------------------
pts - percentage points
(1) Subscribers are measured at the end of the reporting period based on
information from billing systems.
(2) POPs is an acronym for population. A POP refers to one person living
in a population area, which in whole or substantial part is included
in the coverage areas.
(3) At December 31, 2005, TELUS' wireless PCS digital population coverage
includes expanded coverage of approximately 7.5 million PCS POPs due
to roaming/resale agreements principally with Bell Mobility and
Aliant Telecom Wireless.
(4) See Section 11.3 Definition of key operating indicators. These are
industry measures useful in assessing operating performance of a
wireless company, but are not defined under accounting principles
generally accepted in Canada and the U.S.
(5) Cost of acquisition.
-------------------------------------------------------------------------
- Wireless segment Network revenue increased by $120.9 million for the
fourth quarter of 2005 and $464.7 million for the year ended
December 31, 2005 as compared with the same periods in 2004. Wireless
Network revenues for the fourth quarter and full year of 2005 were
records for TELUS. This growth was a result of 14.8% expansion of the
subscriber base combined with a $2 increase in average revenue per
subscriber unit per month (ARPU). The ARPU increase represented the
twelfth consecutive quarter of year-over-year increases. Similarly,
ARPU for the full year of 2005 was $2 higher than 2004. The ARPU
growth can be attributed to increased data usage including text
messaging, mobile computing and downloads as well as higher voice
revenues related to increased roaming, features and average minutes
of use per subscriber per month (MOU).
At December 31, 2005, postpaid subscribers represented 81.1% of the
total cumulative subscriber base, remaining relatively stable from
one year earlier and contributing to the significant ARPU premium
attained over TELUS' competitors. Despite the commercial launch by
new competitors in the prepaid market, the wireless segment achieved
significant growth in prepaid net subscriber additions primarily as a
result of a successful offering of the talk-away bundle, representing
a third successive quarter of year-over-year increases. Consequently,
total subscriber net additions of 235,000 for the fourth quarter and
584,300 for the full year of 2005 represented a quarterly and annual
record for the wireless segment.
Blended postpaid and prepaid monthly churn rates improved slightly in
the fourth quarter and full year of 2005, as compared with the same
periods in 2004. This is a significant accomplishment in the context
of the challenges from labour disruptions, new competition, and other
aggressive prepaid and push-to-talk offerings. Deactivations were
185,600 and 694,700 for the fourth quarter and full year of 2005,
respectively as compared with 165,700 and 608,300 for the same
periods in 2004. Although the monthly churn rate has improved
steadily during 2005, churn is typically higher in the fourth quarter
due to the significant number of contracts that expired and
seasonally increased marketing promotions by all competitors during
the seasonally high selling period. These churn and deactivation
results reflect a continued focus on customer care including
successful loyalty and retention efforts, enhanced product offerings
and superior network quality.
- Equipment sales, rental and service revenue increased only slightly
in the fourth quarter when compared to the same period in 2004,
despite significantly higher gross additions principally due to
increased promotional, retention, and contracting activity and a
shift in product mix. Handset revenue for the full year of 2005
increased mainly due to continued subscriber growth. Gross subscriber
additions grew to 420,600 for the fourth quarter and 1,279,000 for
the full year of 2005 as compared with 352,100 and 1,120,700 for the
same periods in 2004. Handset revenues associated with gross
subscriber activations are included in COA per gross subscriber
addition.
- Intersegment revenues represent services provided by the wireless
segment to the wireline segment and are eliminated upon consolidation
along with the associated expense in the wireline segment.
-------------------------------------------------------------------------
Operations expense -
wireless segment Quarters ended Years ended
($ millions, December 31 December 31
except employees) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Equipment sales
expenses 150.0 125.2 19.8 % 478.9 424.7 12.8 %
Network operating
expenses 93.4 99.9 (6.5)% 392.2 401.1 (2.2)%
Marketing expenses 150.1 116.0 29.4 % 403.7 329.2 22.6 %
General and
administration
expenses 164.1 136.1 20.6 % 601.2 536.2 12.1 %
-------------------------------------------------------------------------
Total operations
expense 557.6 477.2 16.8 % 1,876.0 1,691.2 10.9 %
-------------------------------------------------------------------------
Total employees,
end of period 6,931 6,298 10.1 %
-------------------------------------------------------------------------
Wireless segment operations expense increased in the fourth quarter and
full year of 2005, when compared with the same periods in 2004, to support
growth in the subscriber base. The wireless segment continued to achieve
economies of scale as total 2005 operations expenses increased by only 10.9%,
while the corresponding Network revenue growth was 17.9% and year-over-year
subscriber growth was 14.8%.
- Expenses related to equipment sales increased in the fourth quarter
and full year of 2005 when compared with the same periods in 2004,
principally due to an increase in gross subscriber activations,
higher handset costs from a shift in product mix and increased
retention activity. Handset costs associated with gross subscriber
activations are included in COA per gross subscriber addition.
- The decreases in network operating expenses in the fourth quarter and
full year of 2005, as compared with the same periods in 2004, were
the result of efforts to improve roaming rates and reduced leased
line costs through microwave build, as well as scale efficiencies,
and the competitive digital network services discounts arising from
CRTC Decision 2005-6. In addition, the fourth quarter of 2005
included a $5.3 million credit related to years 2003 to 2005, which
reflected the December 6, 2005 Federal Court ruling that TELUS not be
required to include wireless revenues in the calculation of
telecommunications fees payable to the CRTC. These decreases were
partly offset by increased transmission and site-related expenses to
support the greater number of cell sites, a larger subscriber base,
and improved network quality and coverage. The digital population
coverage grew to 30.6 million at December 31, 2005, as a result of
continued activation of digital roaming regions and network
expansion.
- Marketing expenses in the fourth quarter and full year of 2005
increased primarily due to higher dealer compensation costs, expenses
associated with the expanded subscriber base, increased advertising
and promotion costs and increased re-contracting activity. COA per
gross subscriber addition increased by $39 in the fourth quarter of
2005 to $449 as compared with the same period in 2004 due to higher
handset subsidy costs related to competitive market offers and
increased advertising spend. COA per gross subscriber addition
improved by $3 to $386 for the full year of 2005, when compared with
the same period in 2004. With the higher ARPU and lower churn rate,
COA per gross subscriber addition expressed as a ratio of the
lifetime revenue of the subscriber improved for the full year of 2005
as compared with the same period in 2004.
- General and administration expenses increased by 20.6% in the fourth
quarter and 12.1% for the full year of 2005, when compared to the
same periods in 2004. The increase in employees to support the
significant growth in the subscriber base and continued expansion of
the Company-owned retail stores, combined with additional labour
disruption-related costs, were partially offset by the payroll
savings from fewer active employees during the labour disruption.
Increased general and administration expenses as a result of the
labour disruption were approximately $3 million in the fourth quarter
of 2005, and no impact for the full year of 2005.
-------------------------------------------------------------------------
EBITDA and EBITDA
margin - Quarters ended Years ended
Wireless segment December 31 December 31
2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 325.5 284.7 14.3 % 1,443.0 1,142.2 26.3 %
EBITDA margin (%) 36.9 37.4 (0.5)pts 43.5 40.3 3.2 pts
-------------------------------------------------------------------------
Wireless segment EBITDA increased by $40.8 million in the fourth quarter
and $300.8 million for the full year of 2005, when compared to the
corresponding periods in 2004. Despite the labour disruption, the improvement
in EBITDA and EBITDA margin for the full year of 2005 was attributed to the
wireless segment's focus on profitable subscriber growth, increased ARPU, a
lower cost of acquisition per gross subscriber addition, excellent monthly
churn rates, and successful cost containment efforts. The EBITDA margin, when
calculated as a percentage of Network revenue, was 39.8% for the fourth
quarter and improved to 47.1% for the full year of 2005. This compares with
40.9% and 43.9%, respectively, for the same periods in 2004, representing a
decrease of 1.1 and an increase of 3.2 percentage points, respectively.
Wireless segment capital expenditures are discussed in Section 7.2 Cash
used by investing activities.
6. Financial condition
The following are the changes in the consolidated balance sheets between
December 31, 2004 and December 31, 2005.
-------------------------------------------------------------------------
Dec. 31, Dec. 31, %
($ millions) 2005 2004 Change Change Explanation
-------------------------------------------------------------------------
CURRENT ASSETS
Cash and Used accumulated
temporary cash to partially
investments, fund debt
net 8.6 896.5 (887.9) (99.0)% redemptions
See Section 7.
Liquidity and
capital resources
-------------------------------------------------------------------------
Accounts Reduced by the
receivable 610.3 863.5 (253.2) (29.3)% $350 million
increase in
proceeds from
securitized
accounts
receivable on
November 30;
partly offset by
higher sales
-------------------------------------------------------------------------
Income and Refunds received
other taxes net of changes in
receivable 103.7 132.5 (28.8) (21.7)% estimates of near-
term recoverable
taxes
-------------------------------------------------------------------------
Inventories 138.8 133.3 5.5 4.1 % Primarily an
increase in
wireless inventory
levels
-------------------------------------------------------------------------
Prepaid Primarily net
expenses amortization of
and other 154.7 183.4 (28.7) (15.6)% maintenance
contracts and a
reduction in
connection and
activation fees
-------------------------------------------------------------------------
Current Decrease in
portion of available tax loss
future pools and non-
income taxes 226.4 438.4 (212.0) (48.4)% deductible
reserves
-------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts Principally an
payable and increase in
accrued payables
liabilities 1,393.7 1,362.6 31.1 2.3 % associated with
higher fourth
quarter capital
expenditures, and
the accrual for
settlement of a
lawsuit, partly
offset by reduced
payroll
liabilities and
lower interest
payable
-------------------------------------------------------------------------
Restructuring
and workforce
reduction
accounts Payments under
payable and previous programs
accrued exceeded new
liabilities 57.1 70.7 (13.6) (19.2)% obligations
-------------------------------------------------------------------------
Advance Primarily an
billings and increase in price
customer cap deferred
deposits 571.8 531.5 40.3 7.6 % revenues and
increased Mobility
billings, partly
offset by lower
activation and
connection fees
-------------------------------------------------------------------------
Current
maturities
of long-term Current maturities
debt 5.0 4.3 0.7 16.3 % of capital leases
-------------------------------------------------------------------------
WORKING Primarily the
CAPITAL(1) (785.1) 678.5 (1,463.6) n. m. reduction of cash
and an increase in
securitized
receivables
associated with
early redemption
of debt, as well
as the decrease in
the current future
income tax asset
-------------------------------------------------------------------------
CAPITAL ASSETS, See Sections 5.3
NET 10,941.5 11,221.0 (279.5) (2.5)% Consolidated
results of
operations -
Depreciation and
amortization and
7.2 Cash used by
investing
activities
-------------------------------------------------------------------------
OTHER ASSETS
Deferred Primarily pension
charges 850.2 704.4 145.8 20.7 % plan contributions
in excess of
charges to income
-------------------------------------------------------------------------
Future income Reflects use of
taxes - 99.8 (99.8) (100.0)% loss carry forward
amounts and
reclassifications
to the long-term
future income tax
liability
-------------------------------------------------------------------------
Investments 31.2 38.4 (7.2) (18.8)% Write down of
certain portfolio
investments, net
of new investments
-------------------------------------------------------------------------
Goodwill 3,156.9 3,126.8 30.1 1.0 % Primarily goodwill
added for
acquisition of
Ambergris, net of
foreign exchange
changes
-------------------------------------------------------------------------
LONG-TERM DEBT 4,639.9 6,332.2 (1,692.3) (26.7)% TELUS Corporation
7.5% Notes
($1,578.0 million)
were redeemed
early on Dec. 1,
2005; the
$141.6 million
Dec. 31, 2004
balance of
Convertible
debentures was
converted to
equity or
redeemed; and the
Canadian dollar
value of U.S.
dollar denominated
Notes decreased by
$120.4 million
because of a
strengthening
Canadian dollar.
Partly offsetting
these items was a
draw of $142
million against
TELUS' three-year
credit facility
outstanding at the
end of 2005
-------------------------------------------------------------------------
OTHER Primarily an
LONG-TERM increase in the
LIABILITIES 1,635.3 1,506.1 129.2 8.6 % deferred hedging
liability for U.S.
dollar denominated
Notes, resulting
from a
strengthening
Canadian dollar
-------------------------------------------------------------------------
FUTURE INCOME Reclassification
TAXES 1,023.9 991.9 32.0 3.2 % from the long-term
future income tax
asset plus the net
increase in
temporary
differences for
long-term assets
and liabilities,
particularly
pension assets
-------------------------------------------------------------------------
NON-CONTROLLING The increase arose
INTEREST 25.6 13.1 12.5 95.4 % from minority
partners' share of
several small
subsidiaries,
including an
acquisition in
2005
-------------------------------------------------------------------------
SHAREHOLDERS'
EQUITY
Convertible $7.8 million was
debentures - 8.8 (8.8) (100.0)% transferred to
share capital (in
Common equity)
when shareholders
exercised their
conversion option
in 2005, while the
balance was
transferred to
contributed
surplus (in Common
equity) with the
redemption of the
remaining
debentures on June
15, 2005
-------------------------------------------------------------------------
Common equity 6,870.0 7,016.8 (146.8) (2.1)% The reduction
during 2005 was
comprised of:
- Normal Course
Issuer Bid
expenditures of
$892.1 million
to repurchase
10.7 million
Non-Voting
shares and
10.1 million
Common Shares;
- Dividends of
$312.2 million;
and
- Other of
$7.1 million;
partly offset by
increases from:
- Net income of
$700.3 million;
- Share options
exercised of
$232.6 million
to issue 7.6
million Non-
Voting Shares
and 1.0 million
Common Shares;
and
- Conversion of
$131.7 million
of Convertible
debentures into
3.3 million Non-
Voting Shares
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
7. Liquidity and capital resources
7.1 Cash provided by operating activities
-------------------------------------------------------------------------
Quarters ended Years ended
($ millions) December 31 December 31
2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
805.0 613.8 31.2 % 2,914.6 2,538.1 14.8 %
-------------------------------------------------------------------------
Cash provided by operating activities increased by $191.2 million and
$376.5 million, respectively, in the fourth quarter and full year of 2005,
when compared with the same periods in 2004. Changes in cash provided by
operating activities were mainly due to the following in the fourth quarter
and full year of 2005, when compared with the same periods in 2004:
- Cash was provided by a $350 million increase in proceeds from
securitized accounts receivable in fourth quarter and full year of
2005, compared to no change in the fourth quarter of 2004, and a
$150 million reduction in full year of 2004
- Income tax recoveries net of installment payments for the fourth
quarter of 2005 increased by 50.1 million
- EBITDA decreased by $32.2 million in the fourth quarter of 2005, but
increased by $204.7 million for the full year of 2005, when compared
with the same periods in 2004
- Restructuring and workforce reduction payments decreased by
$4.9 million and $52.3 million, respectively
- Interest received increased by $8.9 million and $20.0 million,
respectively
- Employer contributions to employee defined benefit plans increased by
$4.5 million in the fourth quarter and decreased by $18.0 million for
the full year. The increase for the quarter was due to earlier timing
of funding in 2004. The decrease for the full year was due to updated
actuarial valuations and net acceleration of funding in 2004. The
Pension Plan for Management and Professional Employees of TELUS
Corporation ceased accepting new participants on January 1, 2006.
Partly offsetting the above were:
- Income tax recoveries net of installment payments for the full year
of 2005 decreased by 125.1 million
- In the fourth quarter of 2004, TELUS received $33.3 million from
Verizon, recorded as a reduction of prepaid and deferred services.
The $33.3 million was part of the $148.1 million (US $125 million)
received when the independent Directors of TELUS agreed to facilitate
the divestiture by Verizon of its entire 20.5% equity interest in
TELUS
- Interest paid increased by $26.0 million and $5.4 million,
respectively, due to the $30.9 million paid in respect of early
redemption of 7.50%, Series CA, Notes on December 1, 2005, partly
offset by lower interest due to conversion and redemption of
Convertible debentures in 2005, and debt repayments in 2004
- Other changes in non-cash working capital in 2005 including an
increase in accruals for capital expenditures, a reduction in payroll
and employee-related liabilities and the payment of lump sum amounts
to bargaining unit employees.
7.2 Cash used by investing activities
-------------------------------------------------------------------------
Quarters ended Years ended
($ millions) December 31 December 31
2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
375.7 342.8 9.6 % 1,355.2 1,299.5 4.3 %
-------------------------------------------------------------------------
Cash used by investing activities increased by $32.9 million and
$55.7 million, respectively, in the fourth quarter and full year of 2005, when
compared with the same periods in 2004. The increase for the fourth quarter
was primarily due to higher capital expenditures. The increase for the full
year was primarily from the $29.4 million investment in Ambergris in the first
quarter of 2005 (compared with the acquisition of ADCOM for $12.2 million in
the fourth quarter of 2004) and lower proceeds from the sale of non-core
assets. Assets under construction increased to $516.4 million at December 31,
2005, compared with $329.6 million at December 31, 2004, due to delays in
completing capital projects caused by the labour disruption, as well as
capitalized costs related to a new billing system in the wireline segment.
-------------------------------------------------------------------------
Capital
expenditures
by segment
($ millions, except Quarters ended Years ended
capital expenditure December 31 December 31
intensity) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Wireline segment 230.2 220.8 4.3 % 914.2 964.3 (5.2)%
Wireless segment 143.9 122.6 17.4 % 404.8 354.7 14.1 %
-------------------------------------------------------------------------
TELUS consolidated 374.1 343.4 8.9 % 1,319.0 1,319.0 0.0 %
-------------------------------------------------------------------------
Capital expenditure
intensity (1)(%) 17.9 17.5 0.4pts 16.2 17.4 (1.2)pts
-------------------------------------------------------------------------
(1) Measured by dividing capital expenditures by operating revenues.
This measure provides a method of comparing the level of capital
expenditures to other companies of varying size within
the same industry.
-------------------------------------------------------------------------
- Wireline segment ILEC capital expenditures decreased by 3.8% to
approximately $194 million in the fourth quarter of 2005, and
decreased by 3.3% to approximately $799 million for the full year of
2005, when compared with the same periods in 2004. The decrease
included some deferral of capital expenditures due to the work
stoppage. Greater investment in internal systems and processes was
more than offset by lower expenditures on network infrastructure and
other projects.
Wireline non-ILEC capital expenditures increased by 88.7% to
approximately $37 million in the fourth quarter of 2005, when
compared with the fourth quarter of 2004, primarily due to different
timing of investments in the IP infrastructure expansion. For the
full year of 2005, non-ILEC capital expenditures decreased by 16.6%
to $115 million, when compared with 2004, as spending in 2004
required up-front investment to support certain major enterprise
customers.
The wireline segment capital expenditure intensity ratios of 18.7%
and 18.5%, respectively, for the fourth quarter and full year of
2005, compared with 17.9% and 19.8%, respectively, in the same
periods in 2004. The work stoppage delayed expenditures into the
fourth quarter of 2005, but were lower than originally planned for
the full year. Cash flow (EBITDA less capital expenditures) decreased
by 4.7% to $938.1 million in 2005, when compared to 2004, due to
lower EBITDA.
- Wireless segment capital expenditures increased by $21.3 million in
the fourth quarter of 2005, when compared with the same period in
2004, as the third quarter of 2005 included a deferral of network
capital expenditures related to the labour disruption. Increased
capital expenditures of $50.1 million for the full year of 2005 were
attributed to strategic investments in next-generation EVDO-capable
wireless network technology and continued enhancement of digital
wireless capacity and coverage.
Capital expenditure intensity for the wireless segment was 16.3% in
the fourth quarter of 2005 and 16.1% in the fourth quarter of 2004
due to high quarterly expenditure levels in both periods. Capital
expenditure intensity for the full year of 2005 was 12.2% as compared
with 12.5% for the same period in 2004 as growth capital expenditures
paralleled growth in revenues. Wireless segment EBITDA generated cash
flows (EBITDA less capital expenditures) were $181.6 million in the
fourth quarter of 2005. Wireless cash flow in 2005 exceeded wireline
cash flow for the first time on a full year basis, increasing by
31.8% over 2004 to a wireless segment record $1,038.2 million.
For the fourth quarter of 2005, TELUS' EBITDA less capital expenditures
(see Section 11.1 EBITDA for the calculation) decreased by 14.9% to
$360.3 million, when compared with 2004 due to increased capital expenditures
and lower EBITDA. For the full year of 2005, TELUS' EBITDA less capital
expenditures increased by 11.6% to $1,976.3 million in 2005, when compared
with 2004, as a result of higher EBITDA.
7.3 Cash provided (used) by financing activities
-------------------------------------------------------------------------
Quarters ended Years ended
($ millions) December 31 December 31
2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
(1,742.8) 3.3 n. m. (2,447.3) (348.3) n. m.
-------------------------------------------------------------------------
Cash used by financing activities increased significantly in the fourth
quarter and full year of 2005, when compared with the same periods in 2004,
primarily due to the early redemption on December 1, 2005, of the remaining
$1.578 billion of 7.50%, Series CA, Notes, as well as purchases of shares
under Normal Course Issuer Bids. Financing activities included:
- Proceeds from Common Shares and Non-Voting Shares issued were
$19.1 million and $219.4 million, respectively for the fourth quarter
and full year of 2005, a decrease of $58.9 million from the fourth
quarter of 2004 and an increase of $70.6 million when compared with
full year of 2004. The decrease for the quarter was mainly due to
lower proceeds from share purchases for employee share plans, as
TELUS now purchases these shares in the market, rather than issue
shares from treasury. The increase for the full year was mainly due
to the exercise of options and warrants in 2005, partly offset by
lower proceeds from share purchases for employee share plans.
In addition, during the second quarter of 2005, convertible
debentures with a principal value of $131.7 million were converted
into approximately 3.3 million Non-Voting Shares. Due to the non-cash
nature of these transactions, the conversions are shown as balance
sheet adjustments and are not included in the financing activities of
the cash flow statements.
- Cash dividends paid to shareholders were $96.6 million and
$312.2 million, respectively, for the fourth quarter and full year of
2005, representing a decrease of $16.1 million from the fourth
quarter of 2004 and an increase of $63.5 million when compared with
the full year of 2004. The primary reason for the decrease in the
quarter was due to the fact that in 2004, both third quarter and
fourth quarter declared dividends were remitted in the fourth quarter
period, while in 2005, only the fourth quarter declared dividend was
remitted in the fourth quarter period. The increase for the full year
arose principally from the declaration of higher per share dividends
in 2005 when compared with 2004, as well as the purchase of dividend
reinvestment plan shares in the market rather than issuing shares
from treasury. Dividends declared were 27.5 cents per share and
87.5 cents per share, respectively, for the fourth quarter and full
year of 2005, compared with 20 cents per share and 65 cents per
share, respectively, in the same periods in 2004.
- Under the first Normal Course Issuer Bid (NCIB) program that was
initiated on December 20, 2004 and expired on December 19, 2005,
TELUS purchased for cancellation approximately 73% of the maximum
14 million Common Shares permitted and 100% of the maximum
11.5 million Non-Voting Shares permitted. The $912.6 million total
outlay under this program was comprised of a $369.5 million reduction
to share capital representing the book value of shares repurchased,
and a $543.1 million reduction to retained earnings representing the
amount in excess of book value. During the fourth quarter 2005 until
expiry of the program, TELUS purchased for cancellation approximately
1.9 million Common Shares and approximately 1.9 million Non-Voting
Shares for an outlay of $171.1 million, which was comprised of a
$65.0 million reduction to share capital and a $106.1 million
reduction to retained earnings.
On December 16, 2005, TELUS announced that a new NCIB program was
accepted by the Toronto Stock Exchange (TSX). Under the new program,
TELUS may purchase for cancellation over a 12-month period up to
12 million of its outstanding Common Shares and up to 12 million of
its outstanding Non-Voting Shares, representing approximately 6.5%
and 7.2%, respectively, of the public float on the date of the
announcement. The new program became effective on December 20, 2005,
and will expire on December 19, 2006. By December 31, 2005, TELUS had
purchased for cancellation under this new program approximately
634,000 Common Shares and 608,000 Non-Voting Shares. The
$57.5 million outlay under the new program was comprised of a
$20.9 million reduction to share capital and a $36.6 million
reduction to retained earnings.
The following tables enumerate the shares repurchased and costs under
these programs for 2005 and cumulatively.
-------------------------------------------------------------------------
Normal Course Issuer Bid Programs - shares
-------------------------------------------------------------------------
Shares First program
repurchased for beginning Dec. 20, 2004 and
cancellation ending Dec. 19, 2005
-------------------------------------------------------------------------
In 2005 Total for Percentage
program of
duration maximum
permitted
-------------------------------------------------------------------------
Common 9,503,300 10,259,011 73.3 %
Non-Voting 10,048,600 11,500,000 100.0 %
-------------------------------------------------------------------------
19,551,900 21,759,011 85.3 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Normal Course Issuer Bid Programs - shares
-------------------------------------------------------------------------
Shares Second program
repurchased for beginning Dec. 20, 2005
cancellation
-------------------------------------------------------------------------
In 2005 Maximum Percentage
shares of
permitted maximum
for permitted
repurchase
-------------------------------------------------------------------------
Common 634,469 12,000,000 5.3 %
Non-Voting 607,700 12,000,000 5.1 %
-------------------------------------------------------------------------
1,242,169 24,000,000 5.2 %
-------------------------------------------------------------------------
-------------------------------------------------------------
Normal Course Issuer Bid Programs - shares
-------------------------------------------------------------
Shares Total of both programs
repurchased for
cancellation
-------------------------------------------------------------
In 2005 Cumulative
(1)
-------------------------------------------------------------
Common 10,137,769 10,893,480
Non-Voting 10,656,300 12,107,700
-------------------------------------------------------------
20,794,069 23,001,180
-------------------------------------------------------------
-------------------------------------------------------------------------
Normal Course Issuer Bid programs - cost
-------------------------------------------------------------------------
Outlay
First program
($ millions) beginning Dec. 20, 2004 and
ending Dec. 19, 2005
-------------------------------------------------------------------------
In 2005 Total for
program
duration
-------------------------------------------------------------------------
Reduction of:
Share capital 330.1 369.5
Retained
earnings 504.5 543.1
------------------------------------------------------------------------
834.6 912.6
------------------------------------------------------------------------
-------------------------------------------------------------------------
Normal Course Issuer Bid programs - cost
-------------------------------------------------------------------------
Outlay
Second program
($ millions) beginning Dec. 20, 2005
------------------------------------------------------------------------
In 2005
------------------------------------------------------------------------
Reduction of:
Share capital 20.9
Retained
earnings 36.6
------------------------------------------------------------------------
57.5
------------------------------------------------------------------------
-------------------------------------------------------------
Normal Course Issuer Bid programs - cost
-------------------------------------------------------------
Outlay
Total of both programs
($ millions)
-------------------------------------------------------------
In 2005 Cumulative
(1)
-------------------------------------------------------------
Reduction of:
Share capital 351.0 390.4
Retained
earnings 541.1 579.7
-------------------------------------------------------------
892.1 970.1
-------------------------------------------------------------
(1) From December 20, 2004 to December 31, 2005
-------------------------------------------------------------
- Long-term debt issued in the fourth quarter of 2005 was comprised of
a draw of $142 million against TELUS' three-year facility. The
balance of long-term debt issued during the year was capital leases.
Repayments consisted of the early redemption of $1.578 billion
Canadian dollar Notes described earlier, and the June 16, 2005
redemption of convertible debentures not converted into Non-Voting
Shares, of $17.9 million.
- In 2004, the redemption of all of the publicly held TELUS
Communications Inc. Preference and Preferred Shares was completed in
the third quarter for an outlay of $72.8 million.
- In 2004, TELUS received $114.8 million from Verizon, part of the
$148.1 million (US $125 million) received when the independent
Directors of TELUS agreed to facilitate the divestiture by Verizon of
its entire 20.5% equity interest in TELUS.
- Long-term debt issues in 2004 were primarily bank facilities that
were repaid. Debt redemptions in 2004 included $189.5 million of
TELUS Communications Inc. Series A Debentures and $20 million of
TELUS Communications Inc. Medium-term Notes.
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
Years ended December 31 2005 2004 Change
-------------------------------------------------------------------------
Components of debt and
coverage ratios (1)
---------------------
Net debt ($ millions) 5,794.4 6,477.7 (683.3)
Total capitalization -
book value ($ millions) 12,690.0 13,516.4 (826.4)
EBITDA excluding
restructuring
($ millions) 3,349.2 3,143.2 206.0
Net interest cost
($ millions) 623.1 613.3 (9.8)
Debt ratios
------------
Fixed rate debt as a
proportion of total
indebtedness (%) 97.6 93.2 4.4
Average term to maturity
of debt (years) 5.4 5.4 -
Net debt to total
capitalization (%)(1) 45.7 47.9 (2.2)
Net debt to EBITDA (1) 1.7 2.1 (0.4)
Coverage ratios (1)
-------------------
Interest coverage on
long-term debt 2.5 2.3 0.2
EBITDA interest coverage 5.4 5.1 0.3
Other measures
--------------
Free cash flow
($ millions)(2) 1,465.5 1,297.3 168.2
Dividend payout ratio
(%)(1) 56 51 5
-------------------------------------------------------------------------
(1) See Section 11.4 Definition of liquidity and capital resource
measures.
(2) See Section 11.2 Free cash flow.
-------------------------------------------------------------------------
Net debt decreased at the end of 2005, when compared to 2004, due to
early redemption of Notes and the conversion and redemption of convertible
debentures in 2005, partly offset by the use of cash and temporary investments
(cash is netted against debt for the purposes of this calculation). The
proportion of fixed-rate debt increased when TELUS terminated swap agreements
concurrent with the early redemption of Notes. Total capitalization also
decreased for these reasons as well as a decrease in common equity due
primarily to share repurchases under normal course issuer bids. The net debt
to EBITDA ratio measured at December 31, 2005 improved significantly, when
compared with one year earlier, as a result of debt reduction and an increase
in 12-month trailing EBITDA excluding restructuring.
Interest coverage on long-term debt improved because of increased income
before interest and taxes, partly offset by higher interest expense. The
EBITDA interest coverage ratio improved by 0.3 as a result of higher EBITDA
excluding restructuring, and decreased by 0.1 due to higher interest. Free
cash flow measure for 2005 increased, when compared with 2004, primarily
because of improved EBITDA, lower payments under restructuring programs and
higher interest received, partly offset by lower cash tax recoveries and
higher interest paid. The dividend payout ratio for 2005 exceeded the target
guideline of 45 to 55% of reported net earnings primarily as a result of the
temporary expenses associated with the work stoppage and the loss on debt
redemption. The dividend payout ratio for 2005, excluding these two items, was
approximately 48%.
Long-term guidelines for certain TELUS' liquidity measures, as defined in
Section 11.4 Definition of liquidity and capital resource measures, are:
- Net debt to total capitalization of 45 to 50%
- Net debt to EBITDA of 1.5:1 to 2.0:1
- Dividend payout ratio of 45 to 55% of sustainable net earnings.
7.5 Credit facilities
TELUS arranged new credit facilities in May 2005 to replace $1.6 billion
of prior credit facilities. The prior 364-day facility, which was due to
expire, and a term facility with three years remaining to maturity were
replaced with a new three-year facility due in May 2008 and a longer maturity
five-year term facility due in May 2010. The new credit facilities have no
substantial changes in terms and conditions, other than reduced pricing and
the extension of term, which reflect favourable market conditions and TELUS'
strong financial position.
TELUS had unutilized available liquidity in excess of $1.4 billion at
December 31, 2005.
-------------------------------------------------------------------------
Credit Facilities Outstanding
At December 31, 2005 undrawn letters
($ in millions) Expiry Size Drawn of credit
-------------------------------------------------------------------------
Five-year revolving
facility(1) May 4, 2010 800.0 - -
Three-year revolving
facility(1) May 7, 2008 800.0 142.0 100.6
Other bank facilities - 74.0 - 7.3
-------------------------------------------------------------------------
Total - 1,674.0 142.0 107.9
-------------------------------------------------------------------------
(1) Canadian dollars or U.S. dollar equivalent.
-------------------------------------------------------------------------
TELUS' credit facilities contain customary covenants including a
requirement that TELUS not permit its consolidated Leverage Ratio (Funded Debt
to trailing 12-month EBITDA) to exceed 4.0:1 (approximately 1.7:1 at
December 31, 2005) 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 5.6:1 at December 31, 2005) 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. The
calculations are not materially different. The covenants are not impacted by
revaluation of capital assets, intangible assets and goodwill for accounting
purposes, and continued access to TELUS' credit facilities is not contingent
on the maintenance by TELUS of a specific credit rating.
7.6 Accounts receivable sale
TELUS Communications Inc., a wholly owned subsidiary of TELUS, is able to
sell an interest in certain of its receivables up to a maximum of $650 million
and is required to maintain at least a BBB (low) credit rating by Dominion
Bond Rating Service (DBRS), or the purchaser may require the sale program to
be wound down. The necessary credit rating was exceeded by three levels at
A (low) as of February 15, 2006. The proceeds of securitized receivables
increased from $150 million to $500 million on November 30, 2005. The balance
of proceeds from securitized receivables was reduced on January 31, 2006 to
$325 million.
7.7 Credit ratings
During 2005, each of the four credit rating agencies that cover TELUS
increased their investment grade ratings for the Company's debt instruments.
On June 27, Moody's Investors Services Inc. increased its rating for TELUS
Corporation Notes from Baa3 with a positive outlook to Baa2 with a stable
outlook. On September 27, Standard and Poors (S&P) raised its ratings for
long-term corporate credit and senior unsecured debt of TELUS Corporation and
TCI from BBB to BBB+, while revising the outlook to stable. On October 18,
Fitch Ratings upgraded its long-term BBB ratings for TELUS and TCI to BBB+
with a stable outlook. On October 24, DBRS upgraded its BBB rating for TELUS
Corporation Notes and its BBB (high) ratings for TCI to BBB (high) and
A (low), respectively, while the trend was revised to stable.
TELUS has an objective to preserve access to capital markets at a
reasonable cost by maintaining and improving investment grade credit ratings
in the range of BBB+ to A-, or the equivalent.
-------------------------------------------------------------------------
Credit rating summary DBRS(1) S&P(1) Moody's(1) Fitch(1)
-------------------------------------------------------------------------
TELUS Corporation
Senior bank debt - - - BBB+
Notes BBB (high) BBB+ Baa2 BBB+
TELUS Communications Inc.
Debentures A (low) BBB+ - BBB+
Medium-term Notes A (low) BBB+ - BBB+
First mortgage bonds A (low) A- - -
-------------------------------------------------------------------------
(1) Outlook or trend stable
-------------------------------------------------------------------------
7.8 Off-balance sheet arrangements, commitments and contingent
liabilities
Financial instruments
The Company's financial instruments consist of cash and temporary
investments, accounts receivable, investments accounted for using the cost
method, accounts payable, restructuring and workforce reduction accounts
payable, dividends payable, short-term obligations, long-term debt, interest
rate swap agreements, restricted stock unit compensation cost hedges, and
foreign exchange hedges.
The Company uses various financial instruments, the fair values of some
which are not reflected on the balance sheets, to reduce or eliminate exposure
to interest rate and foreign currency risks and to reduce or eliminate
exposure to increases in the compensation cost arising from specified grants
of restricted stock units. These instruments are accounted for on the same
basis as the underlying exposure being hedged. The majority of these
instruments, from a notional amount view, which were newly added during 2001,
pertain to TELUS' U.S. dollar borrowing. Use of these instruments is subject
to a policy, which requires that no derivative transaction be effected for the
purpose of establishing a speculative or a levered position, and sets criteria
for the credit worthiness of the transaction counterparties.
Counterparties to the Company's interest rate swap agreements and foreign
exchange hedges are major financial institutions that have all been accorded
investment grade ratings by a primary rating agency. The dollar amount of
credit exposure under contracts with any one financial institution is limited
and counterparties' credit ratings are monitored. The Company does not give or
receive collateral on swap agreements and hedges due to its credit rating and
those of its counterparties. While the Company is exposed to credit losses due
to the nonperformance of its counterparties, the Company considers the risk of
this remote; if all counterparties were not to perform, the pre-tax effect
would be limited to the value of any deferred hedging asset.
Price risk - currency: The Company is exposed to currency risks arising
from fluctuations in foreign exchange rates on its U.S. Dollar denominated
long-term debt. Currency hedging relationships have been established for the
related semi-annual interest payments and principal payments at maturity.
The Company's foreign exchange risk management also includes the use of
foreign currency forward contracts to fix the exchange rates on short-term
foreign currency transactions and commitments. Hedge accounting is applied to
these short-term foreign currency forward contracts on an exception basis
only.
As at December 31, 2005, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rates on
U.S. $47.0 million of fiscal 2006 purchase commitments; hedge accounting has
been applied to these foreign currency forward contracts, all of which relate
to the wireless segment.
Fair value: The carrying value of cash and temporary investments,
accounts receivable, accounts payable, restructuring and workforce reduction
accounts payable, dividends payable and short-term obligations approximates
their fair values due to the immediate or short-term maturity of these
financial instruments. The carrying values of the Company's investments
accounted for using the cost method would not exceed their fair values.
The fair values of the Company's long-term debt are estimated based on
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same maturity as well as the use of
discounted future cash flows using current rates for similar financial
instruments subject to similar risks and maturities. The fair values of the
Company's derivative financial instruments used to manage exposure to interest
rate and currency risks are estimated similarly. The carrying amount and fair
value of long-term debt are as follows:
-------------------------------------------------------------------------
As at As at
December 31, 2005 December 31, 2004
Carrying Fair Carrying Fair
($ millions) amount value amount value
-------------------------------------------------------------------------
Long-term debt
Principal 4,644.9 5,371.6 6,345.3 7,342.3
Derivative financial
instruments used to manage
interest rate and currency
risks associated with U.S.
dollar denominated debt
(Hedging item maximum
maturity date: June 2011) 1,154.3 1,470.5 1,032.6 1,299.5
Derivative financial
instruments used to manage
interest rate risk associated
with Canadian dollar
denominated debt - - - 1.3
-------------------------------------------------------------------------
5,799.2 6,842.1 7,377.9 8,643.1
-------------------------------------------------------------------------
Commitments and contingent liabilities
The Company has $57.1 million in outstanding commitments for its
restructuring programs as at December 31, 2005, of which $15.1 million relates
to programs initiated prior to 2005. In addition, the Company disclosed in its
targets for 2006 that it expected to record approximately $100 million of
restructuring and employee reduction costs in 2006. See Forward-looking
statements at the beginning of Management's discussion and analysis.
In accordance with CRTC Price Cap Decisions 2002-34 and 2002-43, the
Company defers a portion of revenues in a deferral account, which at
December 31, 2005 was $158.7 million. Due to the Company's use of the
liability method of accounting for the deferral account, the CRTC Decision
2005-6, as it relates to the Company's provision of Competitor Digital Network
services, is not expected to affect the Company's revenues. To the extent that
the CRTC Decision 2005-6 requires the Company to provide discounts on
Competitor Digital Network services, both for current and prior periods, the
Company draws down the deferral account by an offsetting amount. For the year
ended December 31, 2005, the Company drew down the deferral account by
$50.5 million in respect of discounts on Competitor Digital Network services.
The Company's known contractual obligations at December 31, 2005, are
quantified in the following table.
-------------------------------------------------------------------------
Long-term debt
maturities
-------------------
Other
All except long-term Purchase
capital Capital liabil- Operating obliga-
($ millions) leases leases ities leases tions Total
-------------------------------------------------------------------------
2006 1.8 3.2 17.9 177.2 380.1 580.2
2007 1,869.9 3.5 28.4 155.7 160.1 2,217.6
2008 144.2 3.3 17.8 139.3 106.1 410.7
2009 0.7 0.8 17.1 126.7 44.9 190.2
2010 80.0 1.7 16.9 112.7 10.1 221.4
Thereafter 3,716.5 - 140.1 476.7 34.6 4,367.9
-------------------------------------------------------------------------
Total 5,813.1 12.5 238.2 1,188.3 735.9 7,988.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Canadian generally accepted accounting principles require the disclosure
of certain types of guarantees and their maximum, undiscounted amounts. The
maximum potential payments represent a "worst-case scenario" and do not
necessarily reflect results expected by the Company. Guarantees requiring
disclosure are those obligations that require payments contingent on specified
types of future events. In the normal course of its operations, the Company
enters into obligations that GAAP may consider to be guarantees. As defined by
Canadian GAAP, guarantees subject to these disclosure guidelines do not
include guarantees that relate to the future performance of the Company. As at
December 31, 2005, the Company has no liability recorded in respect of
performance guarantees, and $0.5 million (December 31, 2004 - $1.0 million)
recorded in respect of lease guarantees. The maximum undiscounted guarantee
amounts as at December 31, 2004, without regard for the likelihood of having
to make such payment, were not significant.
In the normal course of operations, the Company may provide
indemnification in conjunction with certain transactions. The term of these
indemnification obligations range in duration and often are not explicitly
defined. Where appropriate, an indemnification obligation is recorded as a
liability. In many cases, there is no maximum limit on these indemnification
obligations and the overall maximum amount of the obligations under such
indemnification obligations cannot be reasonably estimated. Other than
obligations recorded as liabilities at the time of the transaction,
historically the Company has not made significant payments under these
indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the
Company agreed to bear a proportionate share of the new owner's increased
directory publication costs if the increased costs were to arise from a change
in the applicable CRTC regulatory requirements. The Company's proportionate
share would be 80% through May 2006, declining to 40% in the next five-year
period and then to 15% in the final five years. As well, should the CRTC take
any action that would result in the owner being prevented from carrying on the
directory business as specified in the agreement, TELUS would indemnify the
owner in respect of any losses that the owner incurred. As at December 31,
2005, the Company has no liability recorded in respect of indemnification
obligations.
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 items disclosed
previously.
Pay equity
As a term of the settlement between TELUS Communications Inc. and the
Telecommunications Workers Union (TWU) that resulted in the collective
agreement effective November 20, 2005, and subject to acceptance by the
Canadian Human Rights Commission of the settlement and closure of its file on
this complaint, the parties have agreed to settle this complaint without any
admission of liability, on the basis that the Company will establish a pay
equity fund of $10 million to be paid out during the term of the new
collective agreement and the TWU will withdraw and discontinue this complaint.
On December 21, 2005, the TWU withdrew and discontinued this complaint. On
January 10, 2006, the Canadian Human Rights Commission advised the Company
that its investigator had recommended no further proceedings in this
complaint; however, the Company is awaiting the Canadian Human Rights
Commission's decision in this regard. Should the Canadian Human Rights
Commission refuse consent or the complaint continue for any other reason and
its ultimate resolution differ from management's assessment and assumptions, a
material adjustment to the Company's financial position and the results of its
operations could result.
7.9 Outstanding share information
The following is a summary of the outstanding shares for each class of
equity at December 31, 2005 and at January 31, 2006. In addition, for
January 31, 2006, the total number of outstanding and issuable shares is
presented, assuming full conversion of options. Issuable shares at January 31,
2006 include shares held in reserve, but not issued.
-------------------------------------------------------------------------
Class of equity security Common Non-Voting Total
Shares Shares Shares
(millions of shares) outstanding outstanding outstanding
-------------------------------------------------------------------------
At December 31, 2005
Common equity - Common
Shares outstanding 183.5 - 183.5
Common equity - Non-Voting
Shares outstanding - 166.6 166.6
---------- ---------- ----------
183.5 166.6 350.1(1)
---------- ---------- ----------
At January 31, 2006
Common equity - Common
Shares outstanding 183.5 - 183.5
Common equity - Non-Voting
Shares outstanding - 166.9 166.9
---------- ---------- ----------
183.5 166.9 350.4
---------- ---------- ----------
Outstanding and issuable
shares(2) at January 31, 2006
Common Shares and Non-Voting
Shares outstanding 183.5 166.9 350.4
Options 1.5 21.8 23.3
---------- ---------- ----------
185.0 188.7 373.7
---------- ---------- ----------
---------- ---------- ----------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share for
the fourth quarter of 2005, the number of shares was 358.1 million.
(2) Assuming full conversion and ignoring exercise prices.
-------------------------------------------------------------------------
8. Critical accounting estimates and accounting policy developments
8.1 Critical accounting estimates
TELUS' significant accounting policies are described in Note 1 of its
annual Consolidated financial statements. 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. In 2005, as a result of reaching a new five-year
collective agreement with the TWU, the Company revised estimates that had been
made over a period of years, resulting in a revision of accruals for payroll
and other employee-related liabilities.
8.2 Accounting policy developments
Possibly, commencing with the Company's 2006 fiscal year, proposed
amendments to the recommendations of the Canadian Institute of Chartered
Accountants (CICA) for the calculation and disclosure of earnings per share
(CICA Handbook Section 3500) may apply to the Company. The proposed amendments
are not expected to materially impact the Company.
Commencing with the Company's 2006 fiscal year, the amended
recommendations of the CICA for measurement of non-monetary transactions (CICA
Handbook Section 3830) will apply to the Company. The amended recommendations
will result in non-monetary transactions normally being measured at their fair
values, unless certain criteria are met. The Company's current operations are
not materially affected by the amended recommendations.
In early 2006, Canada's Accounting Standards Board ratified a strategic
plan that will result in Canadian GAAP, as used by public companies, being
converged with International Financial Reporting Standards over a transitional
period. During 2006, the Accounting Standards Board is expected to develop and
publish a detailed implementation plan with a transition period expected to be
approximately five years. As this convergence initiative is very much in its
infancy as of the date of these Consolidated financial statements, it would be
premature to currently assess the impact of the initiative on the Company.
9. Looking forward to 2006
The following discussion is qualified in its entirety by the
Forward-looking statements at the beginning of Management's discussion and
analysis.
9.1 Financial and operating targets for 2006
The following targets for 2006 were announced to the public on
December 16, 2005. The Company has a practice of reaffirming or adjusting
annual guidance on a quarterly basis.
-------------------------------------------------------------------------
Targets for 2006 Results for 2005 Change
-------------------------------------------------------------------------
Consolidated
Revenues $8.6 to $8.7 billion $8.14 billion 6 to 7%
-------------------------------------------------------------------------
EBITDA(1) $3.5 to $3.6 billion $3.30 billion 6 to 9%
-------------------------------------------------------------------------
Earnings per
share - basic $2.40 to $2.60 $1.96 22 to 33%
-------------------------------------------------------------------------
Capital
expenditures $1.5 to $1.55 billion $1.32 billion 14 to 17%
-------------------------------------------------------------------------
Free cash
flow(2) $1.55 to $1.65 billion $1.47 billion 5 to 12%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Wireline segment
Revenue
(external) $4.825 to $4.875 billion $4.85 billion (1) to 1%
-------------------------------------------------------------------------
Non-ILEC
revenue $650 to $700 million $632 million 3 to 11%
-------------------------------------------------------------------------
EBITDA $1.8 to $1.85 billion $1.85 billion (3) to 0%
-------------------------------------------------------------------------
Non-ILEC
EBITDA $25 to $40 million $21 million 18 to 89%
-------------------------------------------------------------------------
Capital
expenditures $1.05 to $1.1 billion $914 million 15 to 20%
-------------------------------------------------------------------------
High-speed
Internet net
additions More than 100,000 73,400 More than 36%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Wireless segment
Revenue
(external) $3.775 to $3.825 billion $3.30 billion 14 to 17%
-------------------------------------------------------------------------
EBITDA $1.7 to $1.75 billion $1.44 billion 18 to 22%
-------------------------------------------------------------------------
Capital
expenditures Approx. $450 million $405 million Approx. 11%
-------------------------------------------------------------------------
Wireless
subscriber net
additions More than 550,000 584,300 (6)% or better
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest, taxes, depreciation and
amortization (EBITDA) for the definition, calculation and
reconciliation of 2004 EBITDA.
(2) See Section 11.2 Free cash flow for the definition, calculation and
reconciliation of 2004 Free cash flow.
-------------------------------------------------------------------------
For the wireline segment, 2006 EBITDA is expected to be flat to a decline
of $50 million, resulting from increased restructuring costs partially offset
by continued operating efficiencies. Wireline revenue growth in the
non-incumbent territory in Central Canada is expected to increase in the range
of $18 million to $68 million in 2006, while targeting another strong increase
in EBITDA.
For the wireless segment, 2006 EBITDA is expected to increase by $260 to
$310 million as a result of a 14 to 17% increase in revenues, continued
economies of scale, cost containment and continued strong growth in wireless
subscribers.
The 22 to 33% growth rate for earnings per share is being generated not
only by higher operating profitability, but also by lower financing costs as a
consequence of reduced debt levels. The significant growth in earnings per
share is despite expectations for higher restructuring costs in 2006. In
addition, the 2005 earnings included 18 cents of positive impacts from the
settlement of prior year tax matters, which are not projected to reoccur in
2006 to the same magnitude.
Key assumptions and sensitivities for 2006 targets
For 2006 target purposes, a number of assumptions were made including:
- Economic growth consistent with recent provincial and national
estimates by the Conference Board of Canada that were available in
2005, including gross domestic product growth of 3.1% in Canada
- Increased wireline competition in both business and consumer markets
- A wireless industry market penetration gain similar to the
approximately five percentage point gain in 2005
- Approximately $100 million restructuring and workforce reduction
expenses ($53.9 million in 2005)
- Effective tax rate of approximately 35%
- No prospective significant acquisitions or divestitures are reflected
- No change in foreign ownership rules
- Maintenance or improvement of investment-grade credit ratings.
Earnings per share, cash balances, net debt and common equity may be
affected by the potential purchases of up to 24 million TELUS shares under the
Normal Course Issuer Bid that was accepted by the Toronto Stock Exchange and
commenced December 20, 2005. There is no assurance that these assumptions or
the 2006 financial and operating targets and projections will turn out to be
accurate.
9.2 Financing plan for 2006
TELUS has no significant amount of debt maturing in 2006. TELUS'
financing plan is to use free cash flow generated by its business operations
in 2006 to: (i) repurchase TELUS Common Shares and Non-Voting Shares under the
Normal Course Issuer Bid; (ii) pay dividends; and (iii) retain cash-on-hand
for corporate purposes. The balance of $142 million of utilized bank
facilities was repaid on January 9, 2006. The balance of proceeds from
securitized receivables was reduced by $175 million on January 31, 2006 to
$325 million. The Company expects to increase and reduce the balance of
proceeds from securitized receivables and use bank facilities, as needed, to
meet any other cash requirements.
TELUS also expects to maintain its current position of fully hedging its
foreign exchange exposure for indebtedness and generally expects to maintain a
minimum of $1 billion in unutilized liquidity. At the end of 2005, almost all
of TELUS' total debt was borrowed on a fixed-rate basis.
TELUS may also consider refinancing all or a portion of its Notes due
June 1, 2007 in advance of the regularly scheduled maturity date. These US
dollar denominated liabilities were fully hedged into Canadian dollar
liabilities at the time of issue and TELUS may also terminate or restructure
these swap arrangements prior to maturity. Potential sources for the
refinancing of these Notes may include retained cash from operations as well
as public long-term debt and short-term debt such as commercial paper. For the
related risk and risk management discussion, see Section 10.7 Financing and
debt requirements.
10. Risks and risk management
The following are significant updates to the risks and uncertainties
described in TELUS' 2004 Annual Report and the first, second and third quarter
interim 2005 Management's discussions and analysis.
10.1 Regulatory
Disposition of funds in the deferral accounts (Telecom Decision
CRTC 2006-9)
On February 16, 2006, the CRTC issued a long-awaited decision on the use
of funds in the deferral account. In its decision, the CRTC determined that
initiatives to expand broadband services to rural and remote communities and
initiatives to improve accessibility to telecommunications services for
individuals with disabilities are an appropriate use of funds for the ILEC
deferral accounts. To the extent that the accumulated deferral account exceeds
approved initiatives, the remaining balance will be distributed in the form of
a one-time rebate to local non-high cost serving area residential customers.
Finally, the CRTC indicated that prospectively no further amounts are to be
added to the deferral account and are to be dealt with via prospective
residential local rate reductions.
Given the complexity of this decision and remaining outstanding issues,
management is currently analyzing the decision to determine what overall
impact it may have to TELUS.
Extension of the price regulation regime (Telecom Decisions
CRTC 2005-69 and CRTC 2005-70)
In Decisions 2005-69 and 2005-70, the Commission extended the current
price cap period, which was scheduled to end in May 2006 (July 2006 for TELUS
Quebec), by one year so that it will now end on May 31, 2007 (July 2007 for
TELUS Quebec). The CRTC intends to undertake a price regulation review in
2006. Leading up to the price regulation review, the CRTC is expected to issue
decisions on local regulatory forbearance and the deferral account, which are
expected to influence the price regulation review. The outcome of any
regulatory reviews, proceedings and other regulatory developments could have a
material impact on TELUS' operating procedures, costs and revenues in the
future.
Implementation of wireless number portability (WNP) - Telecom
Decision CRTC 2005-72
On December 20, 2005, the CRTC issued an implementation timetable for
wireless number portability. The CRTC directed TELUS, Rogers Communications
and Bell Canada to implement full number portability by March 14, 2007, in the
provinces of B.C., Alberta, Ontario and Quebec wherever wireline local number
portability is currently available. In other areas of the country where
wireline number portability is currently available, including the cities of
Regina and Saskatoon, TELUS, Rogers and Bell must implement porting-out by
March 14, 2007, and porting-in no later than September 12, 2007. All other
wireless carriers must implement porting-out where wireline number portability
is currently available by the March 14, 2007 date, and porting-in after
March 14, but before September 12, 2007. The implementation timetable in
Decision 2005-72 is six months earlier than the implementation timetable
proposed in an independent report from PricewaterhouseCoopers LLP. The
PricewaterhouseCoopers report was commissioned by the Canadian Wireless
Telecommunications Association (CWTA), of which TELUS is a member.
TELUS will do its best to meet the required implementation timetable;
however, there can be no guarantee of achieving full implementation by the
dates set out in the CRTC decision, despite the Company's best intention to do
so. Implementation of wireless number portability may result in significant
implementation costs and administration costs, increased migration of network
access lines to wireless services, increased wireless subscriber monthly
churn, and additional wireless customer retention costs. TELUS believes that
such risks will be reduced by the Company's Future Friendly initiatives,
commitment to exceptional client service, a strong brand and superior wireline
and wireless network quality.
10.2 Human Resources
The outcome of outstanding collective bargaining in TELUS Quebec may
result in increased costs, reduced productivity or work disruptions
Two collective agreements in the TELUS Quebec region are open for renewal
negotiations in 2006. On December 31, 2005, the collective agreement between
TELUS Quebec and the Syndicat Quebecois des employees de TELUS, covering
approximately 993 office, clerical and technical and employees, expired. A
second agreement, affecting approximately 523 professional and supervisory
employees, between TELUS Quebec and the Syndicat des agents de maitrise de
TELUS expires on March 31, 2006. There can be no assurance that the negotiated
compensation expenses will be as planned, or that reduced productivity and
work disruptions will not occur as a result of or following these
negotiations.
Reliance on key personnel
The success of TELUS is largely dependent on the abilities and experience
of its key employees. Competition for highly skilled and entrepreneurial
management and other key employees is intense in the communications industry.
There can be no assurance that TELUS can retain its current key employees or
attract and retain additional executive officers or key employees as needed.
The loss of certain key employees, or deterioration in employee morale
resulting from organizational changes, unresolved collective agreements or
ongoing cost reductions could have an adverse impact upon TELUS' growth,
business and profitability.
Compensation at TELUS is designed to support its high performance culture
and is both market driven and performance based. This includes medium and
long-term performance incentives including variable incentive pay based on
performance at an individual, business unit, and organizational level; stock
options, Restricted Share Units (RSUs), and the TELUS Employee Share Plan; as
well as a leading-edge benefits program which allows the tailoring of personal
benefits plans to suit individual needs. Long-term performance incentives for
certain key personnel include three-year vesting periods for options and RSUs.
By ensuring TELUS' compensation remains competitive, TELUS is focusing on
maintaining the ability to attract and retain key personnel.
10.3 Business integration and internal reorganizations
On November 24, 2005 TELUS Corporation announced the integration of the
wireline and wireless segments of the business - formerly the TELUS
Communications and TELUS Mobility segments - into a single operating
structure. This integration incorporates TELUS' customer facing business
units, technology infrastructure and operations and shared services. There is
no assurance that this integration will provide the benefits and efficiencies
that are planned and/or that there will not be significant difficulties in
combining the two structures, which could result in a negative impact on
operating and financial results.
10.4 Process risks
TELUS systems and processes could negatively impact financial
results and customer service - Billing/revenue assurance
TELUS continues to develop a new billing system for the wireline segment
of our business, which includes re-engineering processes for order entry,
pre-qualification, service fulfillment and assurance, customer care,
collections/credit, customer contract and information management. This
customer-focused project requires extensive system development and in itself
presents implementation risks due to the complexity of the implementation task
and resource constraints. TELUS plans to implement this project in phases,
beginning with the implementation of consumer accounts in Alberta, currently
scheduled in the first half of 2006, followed by implementation of consumer
customer accounts in B.C. at a later date. There can be no assurance that this
undertaking will not negatively impact TELUS' customer service levels,
competitive position and financial results.
10.5 Manmade and natural threats
Vandalism
TELUS has a number of publicly situated physical assets ranging from
public payphones to network and telephone switch centres that could be
subjected to vandalism. Using such factors as the importance of the asset, the
exposure risks and the potential costs incurred should the asset be damaged,
TELUS has implemented an array of physical and electronic barriers, and
controls and monitoring systems to protect its assets.
As an additional level of risk management, TELUS has a corporate security
group that continually investigates and evaluates the risks and, in co-
operation with law enforcement and other external agencies, adjusts its
protection to meet changing risks. Although TELUS has thorough physical asset
security planning processes, there can be no assurance that specific events
will not impact TELUS operations and results.
10.6 Litigation and legal matters
TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan
Two statements of claim were filed in the Alberta Court of Queen's Bench
on December 31, 2001, and January 2, 2002, respectively, by plaintiffs
alleging to be either members or business agents of the Telecommunications
Workers Union. In one action, the three plaintiffs alleged to be suing on
behalf of all current or future beneficiaries of the TELUS Corporation Pension
Plan and in the other action, the two plaintiffs allege to be suing on behalf
of all current or future beneficiaries of the TELUS Edmonton Pension Plan. The
statement of claim in the TELUS Corporation Pension Plan related action named
the Company, certain of its affiliates and certain present and former trustees
of the TELUS Corporation Pension Plan as defendants, and claims damages in the
sum of $445 million. The statement of claim in the TELUS Edmonton Pension Plan
related action named the Company, certain of its affiliates and certain
individuals who are alleged to be trustees of the TELUS Edmonton Pension Plan
and claims damages in the sum of $15.5 million. On February 19, 2002, the
Company filed statements of defence to both actions and also filed notices of
motion for certain relief, including an order striking out the actions as
representative or class actions. On May 17, 2002, the statements of claim were
amended by the plaintiffs and include allegations, inter alia, that benefits
provided under the TELUS Corporation Pension Plan and the TELUS Edmonton
Pension Plan are less advantageous than the benefits provided under the
respective former pension plans, contrary to applicable legislation, that
insufficient contributions were made to the plans and contribution holidays
were taken and that the defendants wrongfully used the diverted funds, and
that administration fees and expenses were improperly deducted. The Company
filed statements of defence to the amended statements of claim on June 3,
2002. The Company believes that it has good defences to the actions. As a term
of the settlement reached between TELUS Communications Inc. and the
Telecommunications Workers Union that resulted in a collective agreement
effective November 20, 2005, the Telecommunications Workers Union has agreed
to not provide any direct or indirect financial or other assistance to the
plaintiffs in these actions, and to communicate to the plaintiffs the
Telecommunications Workers Union's desire and recommendation that these
proceedings be dismissed or discontinued. The Company has been advised by the
Telecommunications Workers Union that the plaintiffs have not agreed to
dismiss or discontinue these actions. Should the lawsuits continue because of
the actions of the court, the plaintiffs or for any other reason, and their
ultimate resolution differ from management's assessment and assumptions, a
material adjustment to the Company's financial position and the results of its
operations could result.
Ontario Court of Appeal ruling in 2005
In June 2005, the Ontario Court of Appeal unanimously overturned a 2003
trial court decision and ruled that when TCI's predecessor BC TEL redeemed
$125 million of Series AL Bonds in December 1997, it was in breach of a
covenant contained in the deed of trust and mortgage under which the Bonds
were issued. The Ontario Court of Appeal returned the case to the trial courts
to determine damages and TELUS accrued an estimate of damages, which is
included in financing costs for the second quarter of 2005. Should the
assessed damages be significantly different than management's expectations, a
material adjustment could be recorded in the Company's Statements of income.
The Company sought leave to appeal to the Supreme Court of Canada, which was
dismissed in January 2006. This ruling relates to a matter prior to the 1999
merger of BC TELECOM and TELUS Corporation (Alberta), and does not impact
TELUS' current debt instruments.
Bill 198
On December 31, 2005 provisions announced by the Government of Ontario
came into force, creating liability for misrepresentations by public companies
in written disclosure and oral statements. These amendments also created
liability for fraud and market manipulation.
The amendments create a right of action for damages against TELUS, its
directors and certain of its officers in the event that TELUS or a person with
actual, implied or apparent authority to act or speak on behalf of TELUS
releases a document or makes a public oral statement that contains a
misrepresentation or TELUS fails to make timely disclosure of a material
change.
This new legislation permits action to be taken by any person or company
that acquires or disposes of TELUS securities in the secondary market during
the period of time that the misrepresentation remains uncorrected in the
public or in the case of an omission until such time as the material change
has been disclosed. It is not necessary for the person or company to establish
that they relied on the misrepresentation in making the acquisition or
disposition.
TELUS has conducted a review of its disclosure practices and procedures
and the extent to which they are documented. As part of that review, TELUS
consulted external advisors. This review indicated that TELUS has well-
documented and fulsome processes in place, including a corporate disclosure
policy that restricts spokespersons to specifically designated senior
management, provides a protocol for dealing with analysts and oral
presentations and operates a disclosure committee to review and determine
material facts and changes for disclosure. However, there can be no assurance
that TELUS' processes will be followed by all team members at all times.
In December 2005, the Canadian Institute of Chartered Accountants
recognized TELUS with the Award of Excellence for Best Corporate Governance
Disclosure across all industry sectors. As well, in January 2006, IR Magazine
Canada Awards 2006 recognized TELUS for having the best disclosure policy. The
IR award was based on a survey of more than 550 institutional and retail
investors in North America. TELUS' corporate disclosure policy is publicly
available at telus.com/governance.
10.7 Financing and debt requirements
TELUS' business plans and growth could be negatively affected if
existing financing is not sufficient to cover funding requirements
TELUS may finance future capital requirements with internally generated
funds as well as, from time to time, borrowings under the unutilized portion
of its bank credit facility or through the issuance of debt or equity
securities. Disruptions in the capital markets, increased bank capitalization
regulations, reduced lending to the telecom sector, or a reduced number of
active Canadian chartered banks as a result of reduced activity or
consolidation, could reduce capital available for investment grade corporate
credits such as TELUS.
In May 2005, TELUS entered into C$1.6 billion of new bank credit
facilities, which will partially mitigate this risk. The new credit facilities
consist of a C$800 million (or U.S. dollar equivalent) revolving three-year
credit facility and a C$800 million (or U.S. dollar equivalent) five-year
revolving credit facility.
On July 26, 2002, TELUS Communications Inc. (TCI), a wholly owned
subsidiary of TELUS, entered into an agreement with an arm's-length
securitization trust under which it is able to sell an interest in certain of
its trade receivables up to a maximum of $650 million. As at December 31,
2005, TCI had received aggregate cash proceeds of $500 million. Under the
program, TCI is required to maintain at least a BBB(low) credit rating by
Dominion Bond Rating Service - currently A(low). In the event this rating is
not maintained, the Company may be required to wind down the program prior to
the June 2007 termination date of the agreement.
TELUS' financial policies include a target net debt to EBITDA ratio of
1.5 to 2.0 times (1.7 times as at December 31, 2005) and a target net debt to
total capitalization ratio of approximately 45 to 50% (45.7% as at December
31, 2005). TELUS thereby seeks to achieve, over time, debt credit ratings in
the range of BBB+ to A-, or equivalent. Three of the four credit rating
agencies that rate TELUS now have ratings that are in line with this target. A
reduction in TELUS credit ratings could impact TELUS' cost of and access to
capital. There can be no assurance that TELUS can maintain or improve current
credit ratings.
On December 16, 2005 TELUS announced a new Normal Course Issuer Bid
(NCIB) for 24 million shares. This follows the previous NCIB that expired on
December 19, 2005 under which the Company purchased 21.8 million shares for
$912.6 million. While anticipated cash flow is expected to be more than
sufficient to meet current requirements and remain in compliance with TELUS'
financial policy, these intentions could constrain TELUS' ability to invest in
its operations for future growth or to complete share repurchases.
Quarterly, the TELUS Board reviews its dividend rate based on a number of
factors including a target dividend payout ratio guideline of 45 to 55% of
sustainable net earnings. This review prompted a 37.5% increase in the
quarterly dividend payout rate from 20 cents to 27.5 cents effective with the
dividend paid on January 1, 2006. At the January 1, 2006 level of dividend and
shares outstanding, this would total approximately $387 million in dividends
in 2006.
TELUS expects to generate material free cash flow in 2006, which would be
available to, among other things, repurchase shares and pay dividends to
shareholders. However, if actual results are different from TELUS'
expectations, there can be no assurance that TELUS will not need to change its
financing plans, including its intention to repurchase a significant amount of
shares, or pay dividends according to the target payout guideline.
10.8 Technology
Evolving wired broadband access technology standards may outpace
projected access infrastructure investment lifetimes
The technology standards for broadband access over copper loops to
customer premises are rapidly evolving. This evolution is enabling higher
broadband access speeds and is fuelled by user appetite for faster
connectivity, the threat of increasing competitor capabilities and offerings,
and the desire of service providers like TELUS to offer new services that
require greater bandwidth such as TV services. In general, the evolution to
higher broadband access speeds is achieved by deploying fibre further out from
the central office, thus shortening the copper loop portion of the access, and
using faster modem technologies on the shortened copper loop.
In 2005, TELUS began deploying ADSL2+, a second generation of
asynchronous digital subscriber line (ADSL) technology that enables up to 15
megabits per second (Mbps) to the customer premises, compared with up to six
Mbps for ADSL. ADSL2+ technology is compatible with ADSL and takes advantage
of TELUS' investments in extended reach access (ERA) copper/fibre access
infrastructure improvement programs. Looking forward, the technology for
ADSL2+ bonding (using multiple pairs to multiply the available bandwidth) and
VDSL2 (which can provide up to 45 Mbps on very short copper loops) is
anticipated to be available in the second half of 2006.
It is also anticipated that the first viable fibre to the home (FTTH)
technology will emerge in the form of standards-based gigabit passive optical
network (GPON) and may be available for deployment by the end of 2006,
enabling 80 Mbps to the home. FTTH is one of several competing proposed FTTx
standards (where x stands for home, curb, pedestal, or neighbourhood) in
development that TELUS is actively monitoring. Fibre to the curb (FTTC), with
an Ethernet connection to the premises, of up to 100 Mbps may be a more
practical technology to deploy generally. TELUS will be trialing FTTx
technologies in 2006.
These evolving standards, along with new techniques for quality of
service (QoS) and network traffic engineering, all support the TELUS Future
Friendly Home strategy to deliver IP-based Internet, voice and video services
over a common broadband access system. However, these technologies are
evolving faster than the traditional investment cycle for access
infrastructure. The introduction of these new technologies and the pace of
adoption could result in increased requirements for capital funding not
currently envisaged or planned.
11. Reconciliation of non-GAAP measures and definition of key operating
indicators
11.1 Earnings before interest, taxes, depreciation and amortization
(EBITDA)
The Company has issued guidance on and reports EBITDA because it is a key
measure used by management to evaluate performance of business units and it is
utilized in measuring compliance with debt covenants. The Company also
believes 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 or used as an exclusive measure of cash flow because
it does not consider the impact of working capital growth, capital
expenditures, debt principal reductions and other sources and uses of cash,
which are disclosed in the Consolidated statements of cash flows. Investors
should carefully consider the specific items included in TELUS' computation of
EBITDA. While EBITDA has been disclosed herein to permit a more complete
comparative analysis of the Company's operating performance and debt servicing
ability relative to other companies, investors should be cautioned that EBITDA
as reported by TELUS may not be comparable in all instances to EBITDA as
reported by other companies.
The following is a reconciliation of EBITDA with Net income and Operating
income:
-------------------------------------------------------------------------
Quarters ended Years ended
December 31 December 31
($ millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Net income 78.5 135.6 700.3 565.8
Other expense (income) 9.3 8.7 18.4 8.7
Financing costs 171.7 152.8 623.1 613.3
Income taxes 58.8 50.4 322.0 255.1
Non-controlling interest 2.9 1.6 7.8 4.6
-------------------------------------------------------------------------
Operating income 321.2 349.1 1,671.6 1,447.5
Depreciation 346.2 338.3 1,342.6 1,307.8
Amortization of
intangible assets 67.0 79.2 281.1 335.3
-------------------------------------------------------------------------
EBITDA 734.4 766.6 3,295.3 3,090.6
-------------------------------------------------------------------------
In addition to EBITDA, TELUS calculates EBITDA less capital expenditures
as a simple proxy for cash flow in its two reportable segments, which is used
for comparison to the reported results for other telecommunications companies,
and is subject to the potential comparability issues of EBITDA described
above. EBITDA less capital expenditures is calculated for TELUS as follows:
-------------------------------------------------------------------------
Quarters ended Years ended
December 31 December 31
($ millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
EBITDA 734.4 766.6 3,295.3 3,090.6
Capital expenditures (Capex) (374.1) (343.4) (1,319.0) (1,319.0)
-------------------------------------------------------------------------
EBITDA less capital
expenditures 360.3 423.2 1,976.3 1,771.6
-------------------------------------------------------------------------
11.2 Free cash flow
The Company has issued guidance on and reports free cash flow because it
is a key measure used by management to evaluate performance of the
consolidated operations. 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 relevant because it provides an
indication of how much cash generated by operations is available after capital
expenditures, but before proceeds from divested assets and changes in certain
working capital items (such as trade receivables, which can be significantly
distorted by securitization changes that do not reflect operating results, and
trade payables).
The following reconciles free cash flow with Cash provided by operating
activities less Cash used by investing activities:
-------------------------------------------------------------------------
Quarters ended Years ended
December 31 December 31
($ millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Cash provided by operating
activities 805.0 613.8 2,914.6 2,538.1
Cash (used) by investing
activities (375.7) (342.8) (1,355.2) (1,299.5)
-------------------------------------------------------------------------
429.3 271.0 1,559.4 1,238.6
Net employee defined benefit
plans expense (3.1) (3.7) (3.9) (18.4)
Employer contributions to
employee defined benefit
plans 29.0 24.5 118.8 136.8
Amortization of deferred
gains on sale - leaseback
of buildings, amortization
of deferred charges and
other operating activities,
net 9.2 (41.6) 5.3 (27.9)
Payment received from
Verizon Communications Inc. - (33.3) - (33.3)
Reduction (increase) in
securitized accounts
receivable (350.0) - (350.0) 150.0
Non-cash working capital
changes except changes
in taxes, interest and
securitized accounts
receivable, and other (6.2) (94.4) 99.7 (129.0)
Acquisition - 12.2 29.4 12.2
Proceeds from the sale of
property and other assets (1.0) (17.7) (4.5) (35.9)
Other investing activities 2.6 4.9 11.3 4.2
-------------------------------------------------------------------------
Free cash flow 109.8 121.9 1,465.5 1,297.3
-------------------------------------------------------------------------
The following shows management's calculation of free cash flow.
-------------------------------------------------------------------------
Quarters ended Years ended
December 31 December 31
($ millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
EBITDA 734.4 766.6 3,295.3 3,090.6
Restructuring and workforce
reduction costs,
net of cash payments 5.4 (15.2) (13.6) (70.3)
Share-based compensation 3.1 5.9 24.3 23.8
Cash interest paid (319.2) (293.2) (638.3) (632.9)
Cash interest received 12.9 4.0 47.3 27.3
Income taxes received (paid) 47.3 (2.8) 69.5 194.6
Capital expenditures (Capex) (374.1) (343.4) (1,319.0) (1,319.0)
Investment tax credits
received (reported in
current or prior EBITDA or
Capex, and in Income taxes
received (paid)), and other - - - (16.8)
-------------------------------------------------------------------------
Free cash flow 109.8 121.9 1,465.5 1,297.3
-------------------------------------------------------------------------
11.3 Definition of key operating indicators
These measures are industry metrics and are useful in assessing the
operating performance of a wireless company.
Churn, per month
----------------
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, 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
---------------------------------
COA divided by gross subscriber activations during the period.
Average revenue per subscriber unit, or ARPU
--------------------------------------------
Calculated as Network revenue divided by the average number of subscriber
units on the network during the period, expressed as a rate per month.
Retention spend to Network revenue
----------------------------------
Represents direct costs associated with marketing and promotional efforts
aimed at the retention of the existing subscriber base, divided by Network
revenue.
EBITDA excluding COA
--------------------
A measure of operational profitability, normalized for the period costs
of adding new customers.
11.4 Definition of liquidity and capital resource measures
Net debt
--------
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 used to determine compliance with debt covenants
(refer to the description of Net debt to EBITDA below).
-------------------------------------------------------------------------
At December 31
($ millions) 2005 2004
-------------------------------------------------------------------------
Current maturities of long-term debt 5.0 4.3
Long-term debt 4,639.9 6,332.2
-------------------------------------------------------------------------
4,644.9 6,336.5
Deferred hedging liability 1,158.1 1,037.7
-------------------------------------------------------------------------
Debt 5,803.0 7,374.2
Deduct Cash and temporary investments (8.6) (896.5)
-------------------------------------------------------------------------
Net debt 5,794.4 6,477.7
-------------------------------------------------------------------------
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.
Total capitalization
--------------------
Defined as Net debt plus Non-controlling interest and Shareholders'
equity.
Net debt to total capitalization
--------------------------------
Provides a measure of the proportion of debt used in the Company's
capital structure. The long-term target ratio for Net debt to total
capitalization is 45 to 50%.
EBITDA excluding restructuring
------------------------------
EBITDA excluding restructuring is used for the calculation of Net debt to
EBITDA and EBITDA interest coverage, consistent with the calculation of the
Leverage Ratio and the Coverage Ratio in credit facility covenants.
Restructuring and workforce reduction costs were $53.9 million and
$52.6 million, respectively, for the years ended December 31, 2005 and 2004.
Net debt to EBITDA
------------------
Defined as Net debt as at the end of the period divided by the 12-month
trailing EBITDA excluding restructuring. This measure is substantially the
same as the Leverage Ratio covenant in TELUS' credit facilities. TELUS'
revised guideline range for Net debt to EBITDA is from 1.5:1 to 2.0:1.
Net interest cost
-----------------
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.
Interest coverage on long-term debt
-----------------------------------
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 in 2005 includes losses
on redemption of long-term debt and an accrual for estimated costs to settle a
lawsuit.
EBITDA interest coverage
------------------------
Defined as EBITDA excluding restructuring divided by Net interest cost.
This measure is substantially the same as the Coverage Ratio covenant in
TELUS' credit facilities.
Dividend payout ratio
---------------------
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 is 45 to 55% of sustainable net earnings.
Funded debt
-----------
In general terms, borrowed funds less cash on hand, as defined in the
Company's bank agreements.
______________________________________________________________________________
TELUS Corporation
NOTICE OF CASH DIVIDEND
NOTICE IS HEREBY GIVEN that the Board of Directors has declared a
quarterly dividend of twenty-seven and one half cents ($0.275) Canadian per
share on the issued and outstanding Common shares and twenty-seven and one
half cents ($0.275) Canadian per share on the issued and outstanding Non-
Voting shares of the Company payable on April 1, 2006 to holders of record at
the close of business on March 10, 2006.
By order of the Board
Audrey Ho
Vice President, Legal Services and
General Counsel and Corporate Secretary
Vancouver, British Columbia
February 15, 2006
Contact: Investor Relations, (780) 493-7345, ir(at)telus.com
______________________________________________________________________________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: February 17, 2006
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary
______________________________________________________________________________
For further information:
External Communications: Investor Relations:
Allison Vale, Robert Mitchell,
(416) 629-6425, (416) 279-3219,
allison.vale(at)telus.com robert.mitchell2(at)telus.com