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 ___August___ 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 August 4, 2006 of the Second Quarter Results
_______________________________________________________________________________
Attention Business/Financial Editors:
TELUS Reports Second Quarter Results
Strong wireless and high-speed Internet results
Increasing 2006 guidance for revenue, EPS and capital expenditures
VANCOUVER, Aug. 4 /CNW/ - TELUS Corporation (TSX: T and T.A / NYSE: TU)
today reported for the second quarter of 2006 a six per cent increase in
revenues to $2.1 billion from a year ago due to continued strong wireless
performance and good high-speed Internet and wireless subscriber growth.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased 4% due to strong wireless growth partly offset by increased
restructuring charges this quarter. Earnings per share (EPS) for the second
quarter were $1.03, compared to 53 cents for the same period a year ago. EPS
this quarter included favourable tax related adjustments totaling 34 cents per
share. When normalizing for various items, EPS this quarter increased by
approximately 23% due primarily to underlying EBITDA growth and lower
financing costs from a lower debt level.
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
C$ in millions, except per share amounts 3 months ended
June 30
(unaudited) 2006 2005 % Change
-------------------------------------------------------------------------
Operating revenues 2,135.2 2,018.5 5.8
EBITDA(1) 897.1 865.0 3.7
Operating income 515.0 465.9 10.5
Income before income taxes and
non-controlling interest 377.9 297.2 27.2
Net income(2) 356.6 189.5 88.2
Earnings per share (EPS), basic(2) 1.03 0.53 94.3
Capital expenditures 458.8 408.7 12.3
Cash provided by operating activities 813.0 687.7 18.2
Free cash flow(3) 198.6 207.8 (4.4)
-------------------------------------------------------------------------
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring and workforce reduction costs. See Section 11.1 of
Management's discussion and analysis. Restructuring and workforce
reduction costs were $30.7 million in the second quarter of 2006
compared to $7.4 million in the second quarter of 2005. EBITDA before
restructuring costs in the second quarter of 2006 was up 6.4%
compared to same period a year ago.
(2) Net income and EPS for the three month period in 2006 includes
approximate favourable impacts of $107 million or 32 cents per share
due to the revaluation of net future income tax liabilities due to
lower enacted Federal tax rates for future years and lower enacted
Alberta tax rates, as well as $12 million or two cents per share for
recognition of investment tax credits for assets capitalized in prior
years. Net income and EPS for the three month period in 2005 included
unfavourable impacts of $17.5 million or three cents per share for an
accrual in respect of a court decision in a lawsuit regarding a 1997
BC TEL bond redemption matter.
(3) See Section 11.2 of Management's discussion and analysis.
-------------------------------------------------------------------------
Darren Entwistle, president and CEO, stated "Our national wireless and
data growth strategy continues to generate strong consolidated top and bottom
line growth for TELUS despite the challenging wireline environment. Wireless
revenue, which is now 44% of consolidated revenue, was up 18% in the second
quarter. However, TELUS' wireless operations generated EBITDA growth of 20%
and a one point increase in margin to 46%, supported by a $2 increase in ARPU
to $63 and a churn rate of 1.3%. Notably, wireless data revenue more than
doubled to $63 million this quarter. Wireline data revenue was up 6% due in
part to a 71% increase in high-speed net additions this quarter. Significantly
higher restructuring charges of $30.7 million this quarter indicate the
ongoing focus of the TELUS organization to realize operating cost savings
through successive efficiency programs consistent with prior guidance.
Reflecting our strong mid-year performance, we today announced consolidated
increases in 2006 guidance for revenue, EPS and capital expenditures."
Robert McFarlane, executive vice president and CFO, said "today's strong
increase in earnings per share was due to a number of factors this quarter.
These included EBITDA growth driven by our excellent wireless results, lower
financing charges primarily due to the December 2005 early redemption of $1.6
billion of debt, positive tax adjustments this quarter due to the enactment of
lower Federal and Alberta tax rates and recognition of investment tax credits,
as well as lower shares outstanding. Again this quarter, TELUS returned
significant capital to shareholders with our 27.5 cent quarterly dividend and
the repurchase of 5.6 million shares for $249 million. Successive repurchase
programs have resulted in shares outstanding of 341.3 million at June 30, 2006
being down 4.5% from a year ago. Finally, we have successfully taken initial
steps regarding the refinancing of the 7.5% Notes coming due in June 2007.
Reflecting our strong financial position and superior access to the capital
markets, in May, TELUS publicly issued $300 million of 5.00% seven year Notes
in a very well received transaction. We have also entered into forward
starting interest rate swap agreements that fix the interest rate on an
additional $300 million of future debt issuance as part of the 2007 Note
refinancing."
_________________________________________________________________________
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 guidance), qualifications and risk factors referred to in the
Management's discussion and analysis - August 2, 2006.
_________________________________________________________________________
OPERATING HIGHLIGHTS
TELUS wireless
Profitable subscriber growth continues
- Revenues increased by $143 million or 18% to $945 million in the
second quarter of 2006, when compared with the same period in 2005
- EBITDA increased by $74 million over the second quarter of 2005
representing 20% growth, despite higher gross additions and cost of
acquisition expenses
- ARPU (average revenue per subscriber unit per month) improved by $2
to $63. The data component of ARPU increased by 94% to $4.45
- Cost of acquisition per gross addition increased 15% to $394 due to
increased promotional and competitive activity, but was down $35
from the previous quarter
- Quarterly net subscriber additions were 123,900, down 5.5%, with
stable year over year postpaid additions of 103,300 but lower prepaid
loading
- Blended monthly churn improved to 1.30% from 1.37% a year ago.
Notably, postpaid churn was a record low 0.90% this quarter
- Cash flow (EBITDA less capital expenditures) increased by $42 million
or 17% to $293 million in the second quarter due to higher EBITDA
offset by increased capital expenditures
- Full year 2006 guidance increased by $25 million for wireless
revenues and subscriber net additions range of 560,000 to 590,000
(previous guidance was greater than 550,000)
TELUS wireline
Data revenue growth offset by increased local and long-distance
competition
- Revenues decreased by $27 million or 2.2% when compared to the second
quarter of 2005 due to increased erosion in local and long distance
revenues
- Data revenues increased 6.1% driven by increased Internet and
enhanced data service revenues
- Long-distance revenue declined 10% to $206 million, reflecting
industry wide trends of lower volumes, strong price competition and
technological substitution
- EBITDA declined by $42 million or 8.5%, due primarily to lower
revenues and $22 million of higher restructuring and workforce
reduction costs
- Non-incumbent revenue in Central Canada increased 3.7% over the
second quarter of 2005
- High-speed Internet net adds were 29,200, up 71% from a year ago
bringing TELUS' total Internet subscriber base to 1.05 million
- Network access lines declined by 44,000 in the quarter, down 2.6%
from a year ago reflecting residential line losses as result of
ongoing competitive activity and wireless substitution
- Cash flow (EBITDA less capital expenditures) was down 29% to
$145 million, due to lower EBITDA and higher capital expenditures due
to growth investments including strong housing growth in Western
Canada, broadband build and billing system development
- Full year 2006 guidance adjustments include a narrowed revenue range
by $25 million at high end and an increase in capital expenditures to
approximately $1.15 billion (up $50 to $100 million)
CORPORATE DEVELOPMENTS
TELUS continues share repurchases
During the second quarter, TELUS continued to purchase shares under its
Normal Course Issuer Bid. TELUS repurchased a total of 5.6 million shares
(2.91 million common and 2.64 million non-voting), for a total outlay of
$249 million.
TELUS commenced its most recent Issuer Bid program on December 20, 2005
with the intention, if considered advisable, to purchase and cancel, over a
12-month period, up to 12 million of its common shares and 12 million of its
non-voting shares on the Toronto Stock Exchange, representing approximately 7%
of the issued and outstanding shares of each class.
Since this second program commenced, a total of 11.9 million shares have
been repurchased, for an outlay of $539 million, representing 50% of the
24.0 million shares authorized. Since December 2004, TELUS has repurchased a
total of 33.7 million shares for an outlay of $1.45 billion under two share
repurchase programs. 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.
Successful $300 million debt issue
In May, TELUS successfully issued 5.00% Notes, Series CB, with a seven
year maturity for aggregate gross proceeds of C$300 million. The net proceeds
of the offering were used pay for the early termination of cross-currency swap
agreements related to TELUS' 7.5% US dollar notes that mature in 2007.
In addition, the Company has entered into forward starting interest rate
swap agreements that have the effect of fixing the underlying interest rate on
up to $300 million of future debt issuance.
TELUS has now taken two steps towards refinancing a significant amount of
the 7.5% Notes coming due in June 2007.
Telecom industry regulatory decisions and developments
On June 13, federal Industry Minister Maxime Bernier tabled an
unprecedented policy directive to the Canadian Radio-television and
Telecommunications Commission (CRTC), advising the regulatory body to "rely on
market forces to the maximum extent feasible." The directive followed a
350-page report issued in March by the federal government's Telecom Policy
Review panel that recommended that the CRTC ease restrictions on
telecommunications corporations in the interest of allowing consumers the full
benefits of competition.
Though it does not result in any immediate regulatory changes, the
Minister's directive is good news for TELUS and its customers, as it should
result in TELUS being able in future to offer more flexible pricing, product
bundles, and services.
The CRTC issued two other decisions significant to TELUS in April. In its
'forbearance' decision the Commission set a cumbersome and lengthy process for
the deregulation of local telephony services. This is in sharp contrast to the
recommendations of the telecom policy review. In the same decision, the CRTC
did reduce from one year to 90 days the timeframe, during which TELUS and
other incumbent telcos are prohibited from conducting customer winback
promotions. TELUS, along with a number of other telephone companies has
launched a Cabinet appeal of this decision. TELUS and the other telcos have
requested that the decision be returned to the CRTC for reconsideration.
In a separate and positive decision, the CRTC ruled that mobile
television broadcasting will not be regulated, giving TELUS the flexibility to
continue developing its mobile TV service to meet market demands without
regulatory impediments.
In May, the CRTC initiated its public process for the third price cap
review that was initially scheduled for last year. The CRTC review will
include an October oral public hearing. TELUS is pleased that the CRTC has set
out a narrow and focused scope of issues for the review, and believes that
reduced regulation in the area of local service price caps is essential in
light of increasing competition in all segments of the telecommunications
services industry. Such an approach is consistent with the recent
recommendations of the Telecom Policy Report.
In June, TELUS filed with the CRTC comments on the reconsideration of the
Commission's decision to regulate voice over Internet protocol (VoIP) services
offered by incumbent telcos. This process flows from the successful Cabinet
appeal launched by TELUS and other telcos that resulted in the Government
referring the original decision back to the Commission. TELUS' position is
that with respect to incumbent local exchange carriers, residential and
business access-independent VoIP services should be forborne from regulation
on a service-wide basis. Residential and business access-dependent VoIP
services should be forborne in areas where users have access to competing
services provided over the network of at least one other full facilities-based
provider.
CONSUMER SOLUTIONS
TELUS expands wireless data networks across Canada
In the second quarter, TELUS expanded its Wireless High Speed service to
six more centres: Victoria, Kelowna, Kamloops, Medicine Hat, Lethbridge and
Red Deer. Since launching the service in November 2005, TELUS has launched
Wireless High Speed in 19 centres across Canada, also including Vancouver,
Whistler, Calgary, Edmonton, Fort McMurray, Toronto, Ontario's Golden
Horseshoe and Muskoka regions, Ottawa, Montreal, Mont-Tremblant, St. Jovite
and Quebec City.
TELUS also announced an investment of nearly $10 million to expand its
digital network coverage to additional communities across Quebec. By the Fall
of 2006, TELUS' national 1X digital wireless network is expected to cover
locations in the Mauricie, Chaudiere-Appalaches, Gaspe Peninsula, and Lower
Saint-Lawrence regions. TELUS' CDMA network currently reaches approximately 95
per cent of the Canadian population.
Innovative wireless products
TELUS launched eight exclusive wireless devices in the quarter, including
the Motorola Q, the world's slimmest QWERTY smartphone, in June. In addition
to the MOTOQ, TELUS introduced the Nokia 6265i; the Samsung A950; the Migo
phone for pre-teens; and, on the Mike network, the Motorola i833 by
Pininfarina; the Motorola i650; the Motorola i580; and the BlackBerry 7100i -
all exclusively available in Canada through TELUS.
TELUS mobile entertainment and information services
TELUS continued to build upon and leverage its innovative SPARK(TM)
line-up through three significant announcements this quarter.
TELUS clients across the country now have access to the Canada's first
streaming mobile radio service. TELUS Mobile Radio(TM) - powered by XM Canada,
offers clients commercial-free music and the best in comedy, talk and
entertainment.
In June, TELUS announced it had become the exclusive wireless sponsor of
Canadian Idol, leveraging TELUS' innovative line-up of SPARK services as
viewers can text-in votes for their favourite performers, receive the latest
Idol news and download video footage, ringtones, images and full-track version
of songs performed on the show.
With the recently announced cross-border multimedia messaging service
(MMS), TELUS clients can instantly share video and picture messages with
friends, family and colleagues in the U.S. who subscribe to wireless services
with some of the United States' largest mobile carriers.
BUSINESS SOLUTIONS
TELUS Business Solutions helps customers assess technology investment
This quarter, TELUS Business Solutions embarked on a campaign to help its
customers effectively measure the value of their integrated communications
technology investments. With IDC Canada, TELUS has created a new assessment
tool to help companies evaluate and improve the business value of their
technology investments, enabling them to benchmark their organization's
implementations in comparison to their peers and ensure tighter alignment of
communications and IT investments with overall business strategy and planning.
TELUS supports healthcare providers
Innovative TELUS Healthcare Solutions help healthcare providers improve
the delivery of patient care at the hospital, in the community, at home or on
the move.
In April, TELUS and the Government of British Columbia announced the
expansion of telethoracic services in rural and remote parts of northern
British Columbia. Video-conferencing technology from TELUS allows thoracic
surgeons to assess patients without the inconvenience and expense of extensive
travel by patients or doctors.
In May, TELUS launched mytelus.com/health, a new online service designed
to provide Canadian-specific and up-to-date content about health and wellness.
mytelus.com/health was created in partnership with Capital Health (Edmonton
and area region), Irving K. Barber Learning Centre at the University of
British Columbia, and MediResource Inc. to provide Canadians with trusted and
reliable health information. It also provides TELUS with a gateway to enable
further e-health applications.
TELUS SafetyNet provides tools for disaster response
In May, TELUS launched TELUS SafetyNet(TM) service, a comprehensive set
of mission critical emergency response communications and technology services
that assist government, security personnel and other emergency responders
communicate and co-ordinate their activities during emergencies.
TELUS SATCOLTs (satellite cellsite on light trucks) are a cornerstone of
the TELUS SafetyNet solutions suite. The SATCOLTs can be driven or flown into
a disaster zone and set up in about an hour to provide mobile communications
for up to 1,000 simultaneous users. A TELUS crew can distribute hundreds of
Mike handsets to emergency personnel and government officials at the scene of
a disaster, providing them communication via dedicated satellite links within
the disaster zone and to headquarters and support resources thousands of
kilometers away, even if the area's entire communications infrastructure has
been destroyed.
Expanding Ontario presence
TELUS is putting down deeper roots in both Toronto and the national
capital region with two new office towers.
In July, TELUS announced that it is moving forward on the development of
a landmark building in downtown Toronto. The TELUS tower, situated adjacent to
the Air Canada Centre, is being developed by Menkes Union Tower Ltd., a joint
venture partnership between Menkes Developments Ltd., Hospitals of Ontario
Pension Plan (HOOPP) and Halcyon Partners Fund, an institutional real estate
equity fund. TELUS will be the lead tenant of the building, occupying
approximately 440,000 square feet or 60 per cent of the total rentable area,
and will have prominent roof-top and podium signage rights. Occupancy is
expected in 2009.
In June, TELUS broke ground in Ottawa on a state-of-the-art 'green'
building that will bring together some 300 TELUS employees currently located
in various locations across the city in a building that is environmentally
friendly, celebrates innovation, and inspires business growth in the
community. Occupancy is expected in 2007.
PARTNER SOLUTIONS
Unique approach to telecom service provider market wins award
TELUS Partner Solutions' received industry recognition in the quarter
with TELUS being named Canada's top national directory assistance provider for
the third time in three years. The Paisley Group, a directory
assistance/operator services consulting company, conducted their semi-annual
North American audit, also naming TELUS one of the top three third-party
providers in the United States. TELUS Partner Solutions provides a full-suite
of telecom services to service providers across Canada, U.S. and International
markets. By leveraging Canada's advanced network and recognized quality
leadership, TELUS offers a unique and wide range of differentiated services to
the service provider market.
OTHER DEVELOPMENTS
TELUS teams recognized for excellence in business support, privacy policy
In June, TELUS' 60-member Business Enablement team for National Service
Fulfillment was honoured with the Stevie Award for Best Support Team. The
Stevies are one of the world's premier business award competitions, with more
than 700 companies and individuals around the world nominated this year.
TELUS' team was recognized for their ability to make emerging technologies and
often-complex process changes simple for TELUS customers and employees in more
than 135 initiatives over the last three years.
In May, Nymity recognized TELUS for having the best corporate privacy
policy in the Canadian telecommunications industry and one of the top 10
privacy policies among Canadian companies. Nymity evaluates privacy policies
from hundreds of companies across Canada in eight key business sectors and
awards companies that best provide clear, complete and readily available
notice of their privacy policies and practices. Nymity's policy judging
criteria included consent practices, individual access, accountability and
safeguards.
TELUS executives recognized for excellence in leadership, investor
relations and security
In June, TELUS Corporate Affairs executive vice-president Janet Yale was
honoured with the 2006 Women Leader of the Year Award by the Federated Press.
The award recognized Ms. Yale's leadership of a national team responsible for
the creation, execution and oversight of all aspects of corporate affairs
including public policy, law, regulation, government relations and corporate
communications. The award adds to an impressive list of accolades Ms. Yale has
received in her career, including the Queen's Golden Jubilee Medal, the
Canadian Women in Communications Woman of the Year award, and being listed
among Canada's Top 100 Most Powerful Women by the Women's Executive Network.
In May, TELUS Investor Relations vice-president John Wheeler received the
2006 Canadian Investor Relations Institute (CIRI)'s Award for Excellence in
Investor Relations. CIRI's highest award honours each year an individual who
has made an outstanding contribution to the investor relations profession and
to CIRI. Mr. Wheeler oversees the team responsible for managing TELUS
relationships with the investment community and communicating financial and
other information to its many stakeholders. His team has contributed to TELUS
consistently receiving numerous awards for financial disclosure and
communications over the years.
In June, TELUS vice-president and Chief Security Officer Gene McLean was
named Security Director of the Year by Canadian Security Magazine's editorial
advisory board. Mr. McLean leads a team responsible for all aspects of TELUS'
security, from physical security of buildings and facilities to the security
of sensitive data. Mr. McLean received five nominations for the honour, more
than any other nominee. One nominee noted Mr. McLean's creation of the
Information Protection Centre, which works with TELUS' IT department to help
ensure the company's corporate information assets are protected.
TELUS Community Ambassadors making a difference
TELUS launched its Community Ambassadors program in June. The Ambassadors
are retired and active TELUS team members who have been coming together in
communities across Canada for decades to take on volunteer projects. Examples
include, raising funds to fill backpacks full of school supplies for needy
children and knitting and handing out dolls at hospitals. The program will
build on that legacy by recognizing their work with annual awards, creating a
website and newsletter dedicated to telling the stories of the volunteers'
hard work, helping the Ambassadors coordinate their efforts, and giving them
resources for their work. TELUS will also provide vans to transport volunteers
and supplies, and is helping them expand the program to new communities across
British Columbia, Alberta, Ontario, and Quebec.
Creating future friendly communities
This quarter, TELUS continued rolling out community boards across Canada,
with launches in Montreal and Toronto. Comprised of well-connected members of
the community and local TELUS executives, each of the seven boards is mandated
to seek out grassroots charitable projects for $500,000 in annual donations in
each community.
TELUS supported the BC Children's Hospital and Canucks for Kids telethons
with donations of call centre technology and expertise this quarter. More than
150 TELUS team members volunteered their time to staff the call centres,
helping the telethons raise a total of more than $13 million.
The second TELUS Tour for the Cure set off from Victoria in April. The
tour is visiting 34 communities across B.C., sharing information about the
importance of screening mammographies in the fight against breast cancer. The
tour visited 28 communities in its first year in 2005, and was visited by more
than 200,000 people.
Dividend declaration
The Board of Directors declared a quarterly dividend of twenty-seven and
a half cents ($0.275) per share on outstanding Common and Non-Voting Shares
payable on October 1, 2006 to shareholders of record on the close of business
on September 8, 2006.
For further information:
Media relations: Investor relations:
Julie Smithers, Robert Mitchell,
(416) 684-6817, (416)279-3219,
julie.smithers(at)telus.com; ir(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.
______________________________________________________________________________
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 guidance purposes include: economic growth
consistent with recent provincial and national estimates by the
Conference Board of Canada, 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; up to $100 million
of restructuring and workforce reduction expenses; an effective tax rate
of approximately 26%; no prospective significant acquisitions or
divestitures; no change in foreign ownership rules; and maintenance or
improvement of investment-grade credit ratings.
Factors that could cause actual results to differ materially include but
are not limited to: competition; technology (including reliance on
systems and information technology); regulatory developments (including
wireless number portability and possible future changes to the regulatory
environment); human resources (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 manmade and natural
threats); economic growth and fluctuations (including pension
performance, funding and expenses); and other risk factors discussed
herein and listed from time to time in TELUS' reports, public disclosure
documents including the Annual Information Form, and other filings with
securities commissions in Canada (filed on SEDAR at sedar.com) and the
United States (filed on EDGAR at sec.gov).
For further information, see Section 10: Risks and risk management of
TELUS' annual 2005 Management's discussion and analysis, as well as
updates reported in Section 10 of TELUS' 2006 first quarter Management's
discussion and analysis and this document.
-------------------------------------------------------------------------
Management's discussion and analysis
August 2, 2006
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month and six-month
periods ended June 30, 2006 and 2005, and should be read together with TELUS'
interim consolidated financial statements. This discussion contains
forward-looking information that is qualified by reference to, and should be
read together with, the discussion regarding forward-looking statements above.
TELUS' interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP"),
which differ in certain respects from U.S. GAAP. See Note 18 to the interim
consolidated financial statements for a summary of the principal differences
between Canadian and U.S. GAAP as they relate to TELUS. The interim
consolidated financial statements and Management's discussion and analysis
were reviewed by TELUS' Audit Committee and approved by TELUS' Board of
Directors. All amounts are in Canadian dollars unless otherwise specified.
TELUS has issued guidance on and reports on certain non-GAAP measures
that are used by management to evaluate performance of business units,
segments and the Company. In addition, non-GAAP measures are used in measuring
compliance with debt covenants. Because non-GAAP measures do not have a
standardized meaning, securities regulations require that non-GAAP measures be
clearly defined and qualified, and reconciled with their nearest GAAP measure.
For the readers' reference, the definition, calculation and reconciliation of
consolidated non-GAAP measures is provided in Section 11: Reconciliation of
non-GAAP measures and definition of key operating indicators.
Management's discussion and analysis contents
-------------------------------------------------------------------------
Section Contents
-------------------------------------------------------------------------
1. Overall performance A summary of TELUS' consolidated results
for the second quarter and first half of
2006
-------------------------------------------------------------------------
2. Core business, vision Examples of TELUS' activities in support of
and strategy its six strategic imperatives
-------------------------------------------------------------------------
3. Key performance drivers TELUS' 2006 priorities
-------------------------------------------------------------------------
4. Capability to deliver An update on TELUS' capability to deliver
results results
-------------------------------------------------------------------------
5. Results from operations A detailed discussion of operating results
for the second quarter and first half of
2006
-------------------------------------------------------------------------
6. Financial condition A discussion of significant changes in the
balance sheet at June 30, 2006, as compared
to December 31, 2005
-------------------------------------------------------------------------
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 and
estimates and changes to accounting policies
accounting policy
developments
-------------------------------------------------------------------------
9. Revised annual guidance A discussion of revisions to TELUS' annual
for 2006 guidance for 2006
-------------------------------------------------------------------------
10. Risks and risk An update of risks and uncertainties facing
management TELUS and how it manages these risks
-------------------------------------------------------------------------
11. Reconciliation of A description, calculation and
non-GAAP measures and reconciliation of certain measures used by
definition of key management
operating indicators
-------------------------------------------------------------------------
1. Overall performance
1.1 Materiality for disclosures
Management determines whether or not information is material based on
whether it believes a reasonable investor's decision to buy, sell or hold
securities in the Company would likely be influenced or changed if the
information were omitted or misstated.
1.2 Consolidated highlights
-------------------------------------------------------------------------
($ millions, except
shares, per share Quarters Six-month periods
amounts and ended June 30 ended June 30
subscribers) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Operating revenues 2,135.2 2,018.5 5.8 % 4,215.7 3,993.2 5.6 %
Operating income 515.0 465.9 10.5 % 974.6 919.9 5.9 %
Income before income
taxes and non-
controlling interest 377.9 297.2 27.2 % 706.2 611.3 15.5 %
Income taxes 18.7 106.0 (82.4)% 134.8 176.3 (23.5)%
Net income 356.6 189.5 88.2 % 566.7 431.7 31.3 %
Earnings per share,
basic ($) 1.03 0.53 94.3 % 1.63 1.20 35.8 %
Earnings per share,
diluted ($) 1.02 0.52 96.2 % 1.62 1.19 36.1 %
Cash dividends
declared per
share ($) 0.275 0.20 37.5 % 0.55 0.40 37.5 %
Cash provided by
operating activities 813.0 687.7 18.2 % 1,486.1 1,416.1 4.9 %
Cash used by
investing activities 486.1 410.0 18.6 % 802.2 716.2 12.0 %
Capital
expenditures 458.8 408.7 12.3 % 779.3 681.9 14.3 %
Cash used by
financing activities 344.4 383.9 (10.3)% 711.1 455.3 56.2 %
Subscriber
connections(1)
(thousands) at
June 30 10,404 9,878 5.3 %
EBITDA(2) 897.1 865.0 3.7 % 1,759.8 1,721.2 2.2 %
Free cash flow(3) 198.6 207.8 (4.4)% 838.7 774.4 8.3 %
-------------------------------------------------------------------------
pts - percentage points
(1) The sum of wireless subscribers, network access lines and Internet
subscribers measured at the end of the respective periods.
(2) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(3) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash
flow.
-------------------------------------------------------------------------
Highlights, as discussed in Section 5: Results from operations, include
the following (comparing results for the second quarter and first six months
of 2006 to the respective periods in 2005):
- Subscriber connections increased by 526,000 over the 12-month period
ended June 30, 2006, as the number of wireless subscribers grew by
14% to 4.7 million, the number of Internet subscribers grew by 6% to
1.05 million and the number of network access lines decreased by 2.6%
to 4.6 million.
- Operating revenues increased by $116.7 million and $222.5 million,
respectively, as growth in wireless and data revenues exceeded
erosion in wireline voice local, long distance and other revenues.
- EBITDA for TELUS increased by $32.1 million and $38.6 million,
respectively. Wireless segment margins improved through subscriber
growth and increased ARPU (average revenue per subscriber unit per
month), which exceeded increased wireless operations expenses.
Wireline segment margins decreased due to higher restructuring
charges and non-salary expenses, increased competition for local
services and continued long distance revenue erosion. Wireline non-
salary expenses increased in part because of increased advertising
and promotional activity as well as increased network maintenance
costs including the use of contractors primarily in the first quarter
to help clear backlogs and free up TELUS staff to improve customer
service. This is reflected in improved quality-of-service metrics
defined by the Canadian Radio-telephone and Telecommunications
Commission ("CRTC") to June 2006.
- Operating income increased by $49.1 million and $54.7 million,
respectively, as the growth in Wireless segment EBITDA continued to
outpace the decrease in Wireline segment EBITDA. In addition, a
resolution of prior years' tax matters provided for recognition of
approximately $12 million of investment tax credits for assets
capitalized in prior years that are now fully amortized, resulting in
reduced amortization expenses in the second quarter of 2006.
- Income before income taxes and non-controlling interest increased by
$80.7 million and $94.9 million, respectively, due primarily to lower
interest costs as a result of the early redemption of $1.578 billion
of 7.50%, Series CA, Notes on December 1, 2005 and increased
operating income.
- Income taxes decreased by $87.3 million and $41.5 million,
respectively, due primarily to a reduction recorded in the second
quarter for the revaluation of net future income tax liabilities
following enactment of lower Federal and Alberta tax rates and
elimination of federal large corporations tax. The effective income
tax rate was 4.9% for the second quarter of 2006.
- Net income and earnings per share increased primarily due to reduced
income taxes and financing costs as well as increased operating
income. Earnings per share for the second quarter and first six
months of 2006 were positively impacted by approximately 34 cents for
the revaluation of net future income tax liabilities, elimination of
large corporations tax and recognition of investment tax credits. For
the first six months of 2005, tax adjustments for settlement of prior
years' tax matters had increased earnings per share by about
16 cents. The average number of shares outstanding in 2006 was
approximately 3% lower than in 2005 due to share repurchase programs,
which contributed to increased 2006 earnings per share.
- As a result of federal and provincial income tax changes and
operating performance in the first half of 2006, the Company revised
its annual guidance for 2006, subject to the Forward-looking
statements at the beginning of management's discussion and analysis.
See Section 9: Revised annual guidance for 2006.
Highlights, as discussed in Section 7: Liquidity and capital resources,
include the following (comparing results for the second quarter and first six
month of 2006 to the respective periods in 2005):
- Cash provided by operating activities increased by $125.3 million and
$70.0 million, respectively, due primarily to an increase in proceeds
from securitized accounts receivable.
- Cash used by investing activities increased by $76.1 million and
$86.0 million, respectively, primarily due to greater capital
expenditures for network access growth, broadband build, service
development and billing system development, Wireless High Speed EVDO-
capable network technology and continued enhancement of digital
wireless capacity and coverage.
- Cash used by financing activities decreased by $39.5 million in the
second quarter and increased by $255.8 million in the first six
months, respectively. A number of financing activities took place
during the second quarter of 2006 including the public issue of
$300 million of 5.00%, Series CB Notes, which mature in 2013, and the
partial payment of $309.4 million of the deferred hedging liability
in respect of the Company's U.S. Dollar Notes maturing in June 2007.
The economic effect of the second quarter financing transactions was
to finance early, approximately $300 million of debt and fix lower
interest rates to mid-2013.
- Free cash flow decreased by $9.2 million in the second quarter, but
increased by $64.3 million for the first six months. Free cash flow
benefited in the second quarter from increased EBITDA and lower cash
interest paid, but was more than offset by lower collection of income
tax and interest receivable and higher capital spending. Interest
paid in the second quarter included prepayment of interest for the
early termination of cross currency interest rate swap agreements and
payment of a portion of interest accrued in respect of a court
decision in a lawsuit for a 1997 bond redemption matter. The free
cash flow improvement for the first six months was primarily due to
higher EBITDA and increased collection of income tax and interest
receivable, partly offset by higher capital expenditures.
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, as well as Section 10: Risks and risk management of TELUS' annual
2005 Management's discussion and analysis and significant updates in Section
10: Risks and risk management of this report.
TELUS' core business, vision and strategy were detailed in its 2005
annual Management's discussion and analysis. Recent activities in support of
the Company's six strategic imperatives include the following:
Building national capabilities across data, IP, voice and wireless
TELUS has now rolled-out its Wireless High Speed (EVDO) service to 19
Canadian cities and regions in Quebec, Ontario, Alberta and B.C. this quarter.
The service offers business and consumer clients access to the fastest mobile
data network in Canada (with typical download speeds of 400 to 700 kilobits
per second). The Company expects to extend Wireless High Speed services to
additional communities in the future.
Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy and focus TELUS' resources on core business
Under a previously announced agreement with the Government of B.C., TELUS
has completed construction of fibre to distribution points in 61 remote
communities in British Columbia, which enables future provision of high-speed
Internet service to these communities by regional or community-based Internet
service providers. An additional 58 communities specified in the agreement are
expected to be connected as planned.
In April 2006, TELUS acquired privately-owned FSC Internet Corp.
operating as Assurent Secure Technologies ("Assurent"), a Toronto-based
provider of information technology security services and products. Assurent's
core business includes security software, vulnerability research, and related
engineering and consulting services provided to some 90 customers in Canada,
the U.S., Europe and Asia. This acquisition, with annual revenues of less than
$10 million, is expected to augment TELUS' existing suite of security
solutions and is also consistent with the imperative of "focusing relentlessly
on the growth markets of data, IP and wireless."
Focusing relentlessly on the growth markets of data, IP and wireless
In June 2006, TELUS introduced cross-border multimedia messaging services
("MMS"). TELUS customers who have MMS-capable mobile phones can now instantly
send and receive pictures and video to and from MMS-capable phones of friends,
family and business contacts in the U.S. Customers can obtain MMS messaging
services by subscribing to a SPARK(TM) feature bundle or pay a rate per
picture, sound, voice or video attachment. In July, TELUS introduced TELUS
Mobile Radio(TM), a real-time streaming satellite radio programming service
provided by XM Canada. With this service, TELUS' subscribers are the first in
Canada to have access to commercial-free music, talk and entertainment radio
on their mobile phones.
The TELUS SPARK line of mobile entertainment, information and messaging
services for consumers also includes TELUS Mobile Music(TM), TELUS Mobile
TV(TM), multimedia messaging, downloadable images, ring tones, videos and
games, Web search tools and a broad range of online content.
Going to the market as one team, under a common brand, executing a
single strategy
TELUS continues to take important steps toward merging into a single
customer-oriented organization that's focused on being one team and defined by
one national brand. In the second quarter, the TELUS logo began to replace the
logos of TELUS Mobility(R), TELUS Quebec(R), TELUS Partner Solutions and TELUS
Business Solutions where they appeared in the marketplace and internally
across the company. The adoption of one TELUS logo reinforces the strength of
the TELUS brand and advances the Company's corporate strategy as it pertains
to an integrated and differentiated approach in the market place.
Investing in internal capabilities to build a high performance
culture and efficient operations
In July 2006, the Company initiated a pilot of its new wireline billing
system, which is under development. The pilot consists of the migration of a
small sample set of customers to the new application supported by team members
across TELUS. Key learnings from the pilot will be used in future phases of
the system implementation. See Section 10.4 Process risks.
3. Key performance drivers
The Company set new priorities for 2006 to advance its strategy; achieve
meaningful commercial differentiation in the markets; capitalize on the
technology convergence of wireless and wireline; and drive continued operating
efficiency and effectiveness.
-------------------------------------------------------------------------
2006 corporate priorities across wireline and wireless
-------------------------------------------------------------------------
Advance TELUS' leadership in the consumer market through:
- TELUS' future friendly suite of data applications for customers at
home and on the move
- Best-in-class customer loyalty through cost-effective customer
experience
- Expanding TELUS' channel partner relationships to strengthen its
distribution.
-------------------------------------------------------------------------
Advance TELUS' position in the business market through:
- Innovative solutions that enhance the competitiveness of TELUS'
customers and deepen their loyalty to TELUS
- Increasing the Company's share in the business market by leveraging
TELUS' mobile solutions such as high-speed data
- Improving delivery of managed solutions to small business customers.
-------------------------------------------------------------------------
Advance TELUS' position in the wholesale market through:
- Strengthening the Company's North American reach through innovative
IP solutions
- Establishing creative and preferred partnerships to grow TELUS'
national customer base
- Optimizing the use of partner networks to complement TELUS' network
investments.
-------------------------------------------------------------------------
Drive improvements in productivity and service excellence by:
- Realizing efficiencies from the integration of wireline and wireless
operations
- Driving improvements in enterprise-wide productivity and customer
service excellence to increase competitiveness
- 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 culture 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 across wireline and wireless
Integration of wireline and wireless operations
The integration of wireline and wireless continues. A common branding
approach is being adopted, as described above, and an integrated capital
expenditure management process was implemented. See Section 10.3 Business
integration and internal reorganizations.
Development of a new billing system in the wireline segment
The development of a new wireline billing system continues. The
development includes re-engineering processes for order entry,
pre-qualification, service fulfillment and assurance, customer care,
collections/credit, customer contact, and information management. The expected
customer service and cost benefits of this project include streamlined and
standardized processes and the elimination over time of multiple legacy
information systems. The Company plans to implement this project in phases,
with a pilot and testing planned for the third quarter of 2006. See Section
10.4 Process risks.
New office development and consolidation of office space in Toronto
and Ottawa
TELUS has signed an agreement to become the lead tenant in a new 30-floor
office tower planned for downtown Toronto adjacent to Union Station and the
Air Canada Centre. TELUS expects to occupy 440,000 square feet or 60% of the
rentable area including prominent roof-top and podium signage rights.
Construction on the building is expected to start in the fall of 2006 and be
ready for occupancy in January 2009. The new TELUS tower is expected to become
the central location for 2,000 TELUS team members in the greater Toronto area
and complement TELUS' presence at Consilium Place in Toronto's East End, where
3,000 team members are located.
In June 2006, TELUS signed an agreement for approximately 105,000 square
feet of office space in a new state-of-the-art 'green' building under
construction in downtown Ottawa. Approximately 300 team members from other
locations across the City will be brought together at this location in 2007.
Announcement of a new call centre in Montreal to support TELUS'
small and medium business customers
TELUS and the Government of Quebec announced the Company's plan to open a
new call centre in Montreal by the end of June 2007. The new call centre is
expected to create approximately 150 new jobs eligible for tax credits from
the Government of Quebec, and will provide national support to TELUS' small
and medium size business customers.
4.2 Liquidity and capital resources
The following discussion is qualified in its entirety by the
Forward-looking statements at the beginning of Management's discussion and
analysis, as well as TELUS' annual 2005 Management's discussion and analysis
Section 9.3 Financing plan for 2006 and Section 10.7 Financing and debt
requirements.
At June 30, 2006, TELUS had access to undrawn credit facilities of
approximately $1.5 billion. These, combined with expected cash flow from
operations and availability under the accounts receivable securitization
program, the Company believes it has sufficient capability to fund its
requirements. The following table describes the status of TELUS' financing
plan.
-------------------------------------------------------------------------
2006 financing plan and results
-------------------------------------------------------------------------
TELUS' 2006 financing plan is to use free cash flow generated by its
business operations to:
-------------------------------------------------------------------------
- Repurchase TELUS Common Shares and TELUS Non-Voting Shares under the
Normal Course Issuer Bid ("NCIB")
In the first half of 2006, the Company repurchased approximately
4.7 million Common Shares and 6.0 million Non-Voting Shares for
$481 million. Between December 20, 2004 and June 30, 2006, the
Company repurchased approximately 33.7 million TELUS shares for
$1.45 billion under two NCIB programs. See Section 7.3 Cash used
by financing activities.
-------------------------------------------------------------------------
- Pay dividends
The declared dividend for the second quarter of 2006, payable on
July 1, was 27.5 cents per share, as compared to 20 cents per share
one year earlier. The target dividend payout ratio guideline
continues to be in the range of 45 to 55% of sustainable net
earnings.
-------------------------------------------------------------------------
- Retain cash-on-hand for corporate purposes
During the first half of 2006, drawn bank facilities were reduced by
$68.5 million to $73.5 million. At June 30, 2006, the balance of
cash and short-term investments was not significant.
-------------------------------------------------------------------------
Other financing objectives included:
-------------------------------------------------------------------------
- Maintain a minimum $1 billion in unutilized liquidity
TELUS had available liquidity from unutilized credit facilities of
approximately $1.5 billion at June 30, 2006.
-------------------------------------------------------------------------
- Maintain position of fully hedging foreign exchange exposure for
indebtedness
During the second quarter of 2006, the Company terminated a number of
cross currency interest rate swap agreements and entered into new
cross currency interest rate swap agreements in respect of the
Company's U.S. Dollar Notes maturing in June 2007. The Company
entered into these agreements to reduce exposure to fluctuating
interest rates and foreign currency risk.
-------------------------------------------------------------------------
- Give consideration to refinancing all or a portion of U.S Dollar
denominated Notes due June 1, 2007 in advance of its scheduled
maturity
In contemplation of the planned refinancing of the debt maturing
June 1, 2007, the Company had entered into forward starting interest
rate swap agreements, as at March 31, 2006, that had the effect of
fixing the underlying interest rate on up to $300 million of
replacement debt. During the second quarter 2006, the Company
publicly issued $300 million 5.00%, Series CB Notes, which mature in
2013. In addition, the Company terminated a number of cross currency
interest rate swap agreements and entered into new cross currency
interest rate swap agreements in respect of the Company's U.S. Dollar
Notes maturing in June 2007. The Company entered into these
agreements to reduce exposure to fluctuating interest rates and
foreign currency risk.
-------------------------------------------------------------------------
- Preserve access to the capital markets at a reasonable cost by
maintaining investment grade credit ratings and targeting improved
credit ratings in the range of BBB+ to A-, or the equivalent, in the
future
Investment grade credit ratings from the four rating agencies that
cover TELUS were maintained. In May 2006, Moody's Investors Service
changed the outlook to "positive" for its "Baa2" ratings of TELUS
Corporation. The Baa2 rating is equivalent to "BBB", which is below
TELUS' desired range.
-------------------------------------------------------------------------
5. Results from operations
5.1 General
The Company has two reportable segments: wireline and wireless.
Segmentation is based on similarities in technology, the technical expertise
required to deliver the products and services, the distribution channels used
and regulatory treatment. Intersegment sales are recorded at the exchange
value. Segmented information is regularly reported to the Company's Chief
Executive Officer (the chief operating decision maker).
5.2 Quarterly results summary
-------------------------------------------------------------------------
($ in millions, except
per share amounts) 2006 Q2 2006 Q1 2005 Q4 2005 Q3
-------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,189.9 1,198.6 1,209.9 1,198.6
Wireless segment 945.3 881.9 876.8 864.2
-------------------------------------------------------------------------
Operating revenues (consolidated) 2,135.2 2,080.5 2,086.7 2,062.8
Operations expense 1,207.4 1,201.1 1,316.8 1,221.5
Restructuring and workforce
reduction costs 30.7 16.7 35.5 1.6
Depreciation 335.2 339.2 346.2 335.6
Amortization of intangible
assets 46.9 63.9 67.0 73.6
-------------------------------------------------------------------------
Operating income 515.0 459.6 321.2 430.5
Other expense (income) 9.6 4.3 9.3 7.1
Financing costs 127.5 127.0 171.7 144.8
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interests 377.9 328.3 140.2 278.6
Income taxes 18.7 116.1 58.8 86.9
Non-controlling interests 2.6 2.1 2.9 1.6
-------------------------------------------------------------------------
Net income 356.6 210.1 78.5 190.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per weighted average
Common Share and Non-Voting
Share outstanding
- basic 1.03 0.60 0.22 0.53
- diluted 1.02 0.60 0.22 0.53
Dividends declared per Common
Share and Non-Voting Share
outstanding 0.275 0.275 0.275 0.20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in millions, except
per share amounts) 2005 Q2 2005 Q1 2004 Q4 2004 Q3
-------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,216.5 1,222.2 1,209.3 1,199.9
Wireless segment 802.0 752.5 755.6 747.0
-------------------------------------------------------------------------
Operating revenues (consolidated) 2,018.5 1,974.7 1,964.9 1,946.9
Operations expense 1,146.1 1,109.1 1,178.5 1,112.8
Restructuring and workforce
reduction costs 7.4 9.4 19.8 16.2
Depreciation 330.9 329.9 338.3 327.1
Amortization of intangible
assets 68.2 72.3 79.2 80.5
-------------------------------------------------------------------------
Operating income 465.9 454.0 349.1 410.3
Other expense (income) 0.5 1.5 8.7 (3.2)
Financing costs 168.2 138.4 152.8 158.6
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interests 297.2 314.1 187.6 254.9
Income taxes 106.0 70.3 50.4 97.2
Non-controlling interests 1.7 1.6 1.6 1.1
-------------------------------------------------------------------------
Net income 189.5 242.2 135.6 156.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per weighted average
Common Share and Non-Voting
Share outstanding
- basic 0.53 0.67 0.38 0.44
- diluted 0.52 0.66 0.37 0.43
Dividends declared per Common
Share and Non-Voting Share
outstanding 0.20 0.20 0.20 0.15
-------------------------------------------------------------------------
The trend in consolidated Operating revenues continues to reflect strong
growth in wireless revenue, which arose from the combined effects of increased
average revenue per subscriber unit per month ("ARPU") and a growing
subscriber base. The trend also reflects growth in wireline segment data
revenue, while wireline long distance and other revenues have decreased. For
the first and second quarters of 2006, wireline local revenue decreased when
compared to the same periods in 2005, due to increasing competition for local
services. Wireline revenues include the generally negative effect of
regulatory price cap decisions.
The trend in Operating income was affected by temporary net expenses
leading up to and resulting from an extended labour disruption in 2005; such
temporary expenses included in Operations expense were estimated to be
approximately $16 million, $65 million and $52 million, respectively for the
second, third and fourth quarter. In addition, Restructuring and work force
reduction charges varied significantly by quarter, depending on the progress
of initiatives under way. Quarterly depreciation shows a steady increase, when
compared to the same period in the previous year, due to continued investment
in shorter-life data and wireless equipment. Amortization of intangible assets
is decreasing as several software assets have been fully amortized. In
addition, approximately $12 million of investment tax credits were recorded
against amortization expense in the second quarter of 2006 due to settlement
of outstanding tax matters relating to assets capitalized in prior years that
are now fully amortized.
Within Financing costs, interest expenses trended lower except for two
significant one-time charges: a second quarter 2005 accrual of $17.5 million
in respect of a court decision in a lawsuit related to a 1997 BC TEL bond
redemption matter and a fourth quarter 2005 charge of $33.5 million to early
redeem $1.578 billion of Notes. The early redemption of Notes on December 1,
2005, contributed significantly to lower Financing costs in the first and
second quarters of 2006. Financing costs were also net of varying interest
income in each of the periods shown.
The trend in Net income and earnings per share reflect the items noted
above as well as a second quarter 2006 future income tax reduction arising
from enacted income tax rate reductions and the elimination of federal large
corporations tax. The Net income and earnings trend was also affected by tax
adjustments relating to prior periods, including a first quarter of 2005
income tax recovery and related interest income net of taxes of approximately
$54 million or 15 cents per share.
Historically, there is significant fourth quarter seasonality for
wireless subscriber additions, related acquisition costs and equipment sales,
and to a lesser extent, for wireline high-speed Internet subscriber additions.
In August 2006, the Board of Directors of TELUS declared a quarterly
dividend of 27.5 cents per share on outstanding Common and Non-Voting Shares
payable on October 1, 2006 to shareholders of record on the close of business
on September 8, 2006.
5.3 Consolidated results from operations
-------------------------------------------------------------------------
($ in millions Quarters Six-month periods
except EBITDA margin) ended June 30 ended June 30
2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Operating revenues 2,135.2 2,018.5 5.8 % 4,215.7 3,993.2 5.6 %
Operations expense 1,207.4 1,146.1 5.3 % 2,408.5 2,255.2 6.8 %
Restructuring and
workforce reduction
costs 30.7 7.4 n. m. 47.4 16.8 182.1 %
-------------------------------------------------------------------------
EBITDA(1) 897.1 865.0 3.7 % 1,759.8 1,721.2 2.2 %
Depreciation 335.2 330.9 1.3 % 674.4 660.8 2.1 %
Amortization of
intangible assets 46.9 68.2 (31.2)% 110.8 140.5 (21.1)%
-------------------------------------------------------------------------
Operating income 515.0 465.9 10.5 % 974.6 919.9 5.9 %
-------------------------------------------------------------------------
EBITDA margin (%)(2) 42.0 42.9 (0.9)pts 41.7 43.1 (1.4)pts
Total employees,
end of period 29,974 28,706 4.4 %
-------------------------------------------------------------------------
n. m. - not meaningful
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) EBITDA margin is EBITDA divided by Operating revenues.
-------------------------------------------------------------------------
The following discussion is for the consolidated results of TELUS.
Further detail by segment is provided for Operating revenues, Operations
expense, Restructuring and workforce reduction costs, EBITDA and Capital
expenditures in Section 5.4 Wireline segment results, Section 5.5 Wireless
segment results and Section 7.2 Cash used by investing activities - capital
expenditures.
Operating revenues
Consolidated Operating revenues increased by $116.7 million and
$222.5 million, respectively, in the second quarter and first six months of
2006, when compared with the same periods in 2005. Revenue and subscriber
growth continued in wireless operations as well as wireline data services
including enhanced data, managed workplace and high-speed Internet services.
However, wireline revenues declined overall as long distance and equipment
sales revenues continued to erode, and voice local revenue showed a
year-over-year decrease due to the effects of increased competition and
regulatory recoveries for prior years that were recorded in the first half in
2005.
Operations expense
Consolidated operations expense increased by $61.3 million and
$153.3 million, respectively, in the second quarter and first six months of
2006, when compared with the same periods in 2005. The increases were
primarily in the wireless segment due to higher gross subscriber additions,
higher costs of acquisition ("COA") and increased subscriber retention
activity as well as increased staffing to support the 14% growth in
subscribers over the past twelve months. In addition, increased wireline
segment expenses included increased advertising and promotions costs and
increased network maintenance and support costs. For TELUS, the net expense
for defined benefit pension plans did not change significantly, as favourable
returns on plan assets in 2005 offset the use of a lower discount rate for
2006.
The increase in employees over the last 12 months supported international
call centre operations as well as the provision of human resources outsourcing
services and growth in the Wireless segment.
Restructuring and workforce reduction costs
Restructuring and workforce reduction costs increased by $23.3 million
and $30.6 million, respectively, in the second quarter and first six months of
2006, when compared with the same periods in 2005. The Company's estimate of
restructuring and workforce reduction costs in 2006, arising from its
competitive efficiency program, which includes the office closures and
contracting out, and integration of wireline and wireless operations, is not
currently expected to exceed $100 million.
General
In 2005, the Company undertook a number of smaller initiatives, such as
operational consolidation, rationalization and integrations, aimed to improve
the Company's operating and capital productivity. As at June 30, 2006, no
future expenses remain to be accrued or recorded under these smaller
initiatives that were initiated prior to 2006, but variances from estimates
currently recorded may be recorded in subsequent periods.
On November 24, 2005, the Company announced the integration of its
wireline and wireless operations, an initiative that will continue into future
years and that is a component of the Company's competitive efficiency program.
Continuing with its competitive efficiency program for integration of Wireline
and Wireless operations, for the three-month and six-month periods ended
June 30, 2006, $3.0 million and $6.8 million, respectively, of restructuring
and workforce reduction costs were recorded in respect of this initiative and
were included with general programs initiated in 2006.
In the first quarter of 2006, arising from its competitive efficiency
program, the Company undertook a number of smaller initiatives, such as
operational consolidation, rationalization and integration. These initiatives
are aimed to improve the Company's operating productivity and competitiveness.
Also arising from its competitive efficiency program, the Company
undertook an initiative for a departmental reorganization and reconfiguration,
resulting in integration and consolidation. In the first quarter of 2006,
approximately 600 bargaining unit employees were offered the option of
redeployment or participation in a voluntary departure program (either the
Early Retirement Incentive Plan or the Voluntary Departure Incentive Plan). As
affected employees were not required to select an option until after March 31,
2006, the associated expenses were not eligible for recording prior to the
second quarter of 2006. In the second quarter of 2006, approximately 275
bargaining unit employees accepted either the option of redeployment or
participation in a voluntary departure program. For the three-month and
six-month periods ended June 30, 2006, $17.8 million of restructuring and
workforce reduction costs were recorded in respect of this initiative and were
included with general programs initiated in 2006. As at June 30, 2006, no
future expenses remain to be accrued or recorded under this initiative, but
variances from estimates currently recorded may be recorded in subsequent
periods.
Office closures and contracting out
In connection with the collective agreement signed in the fourth quarter
of 2005, an accompanying letter of agreement set out the planned closure, on
February 10, 2006, of a number of offices in British Columbia. This initiative
is a component of the Company's competitive efficiency program and is aimed at
improving the Company's operating and capital productivity. The approximately
250 bargaining unit employees affected by these office closures were offered
the option of redeployment or participation in a voluntary departure program
(either the Early Retirement Incentive Plan or the Voluntary Departure
Incentive Plan).
As at June 30, 2006, no future expenses remain to be accrued or recorded
under the letter of agreement setting out the planned closure of a number of
offices in British Columbia, but variances from estimates currently recorded
may be recorded in subsequent periods. Other costs, such as other employee
departures and those associated with real estate, are expected to be incurred
and recorded subsequent to June 30, 2006.
Similarly, an additional accompanying letter of agreement set out that
the Company intends to contract out specific non-core functions over the term
of the collective agreement. This initiative is a component of the Company's
competitive efficiency program and is aimed at allowing the Company to focus
its resources on those core functions that differentiate the Company for its
customers. The approximately 250 bargaining unit employees currently affected
by contracting out initiatives were offered the option of redeployment or
participation in the voluntary departure program (either the Early Retirement
Incentive Plan or the Voluntary Departure Incentive Plan).
As at June 30, 2006, no future expenses remain to be accrued or recorded
under the letter agreement setting out the contracting out of specific
non-core functions, in respect of the approximately 250 bargaining unit
employees currently affected, but variances from estimates currently recorded
may be recorded in subsequent periods. Future costs will be incurred as the
initiative continues.
EBITDA
EBITDA increased by $32.1 million and $38.6 million, respectively, in the
second quarter and first six months of 2006, when compared with the same
periods in 2005. The increase in EBITDA was due primarily to wireless segment
subscriber growth and increased ARPU, partly offset by wireless operations
expense growth, leading to increased wireless EBITDA margins. Wireline segment
EBITDA decreased due primarily to increased competition for local services,
continued long distance revenue erosion as well increased in operations
expenses and restructuring charges in 2006.
Depreciation and amortization
Depreciation expense increased by $4.3 million and $13.6 million,
respectively, in the second quarter and first six months of 2006, when
compared with the same periods in 2005. The increases were due primarily to a
reduction in service lives for computer servers and furniture as well as
increased retirements and write-offs of network assets, partly offset by more
assets being fully depreciated. Amortization of intangible assets decreased by
$21.3 million and $29.7 million, respectively, in the second quarter and first
six months of 2006, when compared with the same periods in 2005, as a result
of several software assets becoming fully amortized as well as resolution of
prior years' tax matters, which resulted in recognizing approximately
$12 million of investment tax credits for assets capitalized in prior years
that are now fully amortized.
Operating income
Operating income increased by $49.1 million and $54.7 million,
respectively, in the second quarter and first six months of 2006, when
compared with the same periods in 2005, due primarily to the growth in EBITDA
and reduced amortization expense, as described above.
Other income statement items
-------------------------------------------------------------------------
Quarters Six-month periods
Other expense, net ended June 30 ended June 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
9.6 0.5 n. m. 13.9 2.0 n. m.
-------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense,
charitable donations, gains and losses on disposal of property, and income
(loss) or impairments in equity or portfolio investments. The accounts
receivable securitization expense was $5.5 million and $8.7 million,
respectively, in second quarter and first six months of 2006, as compared to
$1.0 million and $2.0 million, respectively, in the same periods in 2005. The
increase resulted primarily from a higher balance of proceeds from securitized
accounts receivable in 2006 (see Section 7.6 Accounts receivable sale).
Charitable donations expense increased modestly, while smaller gains on the
sale of real estate and smaller losses on investments were recorded in 2006.
-------------------------------------------------------------------------
Quarters Six-month periods
Financing costs ended June 30 ended June 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Interest on long-term
debt, short-term
obligations and
other 125.5 178.5 (29.7)% 252.5 337.5 (25.2)%
Foreign exchange
losses (gains) 3.7 0.6 n. m. 4.8 3.1 54.8 %
Interest income (1.7) (10.9) (84.4)% (2.8) (34.0) (91.8)%
-------------------------------------------------------------------------
127.5 168.2 (24.2)% 254.5 306.6 (17.0)%
-------------------------------------------------------------------------
Interest expenses decreased by $53.0 million and $85.0 million,
respectively, in the second quarter and first six months of 2006, when
compared with same periods in 2005, due primarily to: (i) lower debt levels as
a result of early redemption of $1.578 billion of 7.50%, Series CA, Notes on
December 1, 2005; (ii) the second quarter 2005 accrual of $17.5 million in
respect of a court decision in a lawsuit related to a 1997 BC TEL bond
redemption matter; and (iii) the conversion/redemption of convertible
debentures in the second quarter of 2005. Debt (the sum of Long-term Debt,
Current maturities and the deferred hedging liability) was $5,721 million at
June 30, 2006, a 21% reduction when compared with $7,238 million on June 30,
2005.
Increased interest expense associated with the May 2006 public issue of
$300 million of Notes was offset by a reduction in interest expense resulting
from replacement of certain previous cross currency interest rate swap
agreements associated with 2007 (U.S. Dollar) Notes. The replacement swaps
have a lower effective fixed interest rate as well as a more favourable
effective fixed exchange rate. TELUS' hedging program using cross currency
swaps continues for its 2007 and 2011 U.S. Dollar Notes.
Interest income decreased by $9.2 million and $31.2 million,
respectively, in the second quarter and first six months of 2006, when
compared with the same periods in 2005, due primarily to: (i) lower cash and
temporary investments as available cash balances were used for the December
2005 debt redemption; and (ii) recognition of tax refund interest in the first
quarter 2005.
-------------------------------------------------------------------------
Quarters Six-month periods
Income taxes ended June 30 ended June 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Blended federal and
provincial statutory
income tax based
on net income
before tax 125.8 102.5 22.7 % 237.3 211.2 12.4 %
Revaluation of future
tax liability for
change in statutory
tax rates (107.0) - n. m. (107.0) - n. m.
Changes in estimates
of available
deductible
differences in
prior years - - - - (36.0) n. m.
Tax rate differential
on, and consequential
adjustments from,
the reassessment
of prior year tax
issues 1.3 - n. m. 1.0 (11.3) n. m.
Other (1.4) 3.5 n. m. 3.5 12.4 n. m.
-------------------------------------------------------------------------
18.7 106.0 (82.4)% 134.8 176.3 (23.5)%
-------------------------------------------------------------------------
Blended federal and
provincial statutory
tax rates (%) 33.3 34.5 (1.2)pts 33.6 34.5 (0.9)pts
Effective tax rates (%) 4.9 35.7 (30.8)pts 19.1 28.8 (9.7)pts
-------------------------------------------------------------------------
The increase in the blended federal and provincial statutory income tax
expense was due mainly to increased income before taxes in the second quarter
and first six months of 2006, when compared with the same periods in 2005. The
blended federal and provincial tax rate decreased due to a reduction to
general corporate income tax rates on income taxed in B.C. effective July 1,
2005 and income taxed in Alberta effective April 1, 2006, partly offset by an
increase to general corporate income tax rates in Quebec beginning January 1,
2006.
The revaluation of net future income tax liabilities in the second
quarter of 2006 arose from lower enacted Federal tax rates for future years as
well as lower enacted Alberta tax rates. In addition, the Federal budget
enacted the elimination of the large corporations tax effective January 1,
2006. As a result of these tax changes and management's revised guidance for
2006, the effective income tax rate is expected to be approximately 26% for
the full year of 2006. See Forward-looking statements at the beginning of
Management's discussion and analysis and Section 9: Revised annual guidance
for 2006. For the first six months of 2005, the effective income tax rate was
also lower than the statutory rate due to favourable reassessment of prior
years' tax issues.
Based on the assumption of the continuation of the rate of TELUS
earnings, the legal entity structure, and no substantive changes to tax
regulations, the Company expects to be able to fully utilize its non-capital
losses before the end of 2007. The Company's assessment is that the risk of
expiry of such non-capital losses is remote. In the event that taxable income
in 2007 is not fully sheltered by remaining tax losses, there would be current
income taxes recorded in 2007 that would not be become payable until 2008.
-------------------------------------------------------------------------
Quarters Six-month periods
Non-controlling interest ended June 30 ended June 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
2.6 1.7 52.9 % 4.7 3.3 42.4 %
-------------------------------------------------------------------------
Non-controlling interest represents minority shareholders' interests in
several small subsidiaries.
5.4 Wireline segment results
-------------------------------------------------------------------------
Operating revenues - Quarters Six-month periods
wireline segment ended June 30 ended June 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Voice local 523.3 542.8 (3.6)% 1,058.9 1,095.6 (3.3)%
Voice long distance 205.7 228.5 (10.0)% 413.5 454.9 (9.1)%
Data 403.1 379.8 6.1 % 796.7 757.4 5.2 %
Other 57.8 65.4 (11.6)% 119.4 130.8 (8.7)%
-------------------------------------------------------------------------
External operating
revenue 1,189.9 1,216.5 (2.2)% 2,388.5 2,438.7 (2.1)%
Intersegment revenue 24.8 21.2 17.0 % 48.3 43.8 10.3 %
-------------------------------------------------------------------------
Total operating
revenue 1,214.7 1,237.7 (1.9)% 2,436.8 2,482.5 (1.8)%
-------------------------------------------------------------------------
-----------------------------------------------
Network access lines As at June 30
(000s) 2006 2005 Change
--------------------------
Residential network
access lines 2,848 2,984 (4.6)%
Business network
access lines 1,771 1,757 0.8 %
-------- -------- --------
Total network access
lines(1) 4,619 4,741 (2.6)%
-------------------------
Quarters Six-month periods
ended June 30 ended June 30
2006 2005 Change 2006 2005 Change
----------------------------------------------------
Change in residential
network access lines (52) (40) (30.0)% (80) (54) (48.1)%
Change in business
network access lines 8 (12) n. m. 8 (13) n. m.
-------- -------- -------- -------- -------- -------
Change in total
network access
lines(1) (44) (52) 15.4 % (72) (67) (7.5)%
-------------------------------------------------------------------------
(1) Network access lines are measured at the end of the reporting period
based on information in billing and other systems. Consistent with
the presentation for 2006, network access lines for 2005, and for the
end of 2004, include a reclassification of approximately 9 thousand
from residential to business; no change was recorded in total access
lines.
-------------------------------------------------------------------------
-----------------------------------------------
Internet subscribers As at June 30
(000s) 2006 2005 Change
--------------------------
High-speed Internet
subscribers 830.9 729.0 14.0 %
Dial-up Internet
subscribers 216.8 260.5 (16.8)%
-------- -------- --------
Total Internet
subscribers(2) 1,047.7 989.5 5.9 %
-------------------------
Quarters Six-month periods
ended June 30 ended June 30
2006 2005 Change 2006 2005 Change
----------------------------------------------------
High-speed Internet
net additions 29.2 17.1 70.8 % 67.8 39.3 72.5 %
Dial-up Internet
net reductions (11.0) (9.9) (11.1)% (19.3) (21.1) 8.5 %
-------- -------- -------- -------- -------- -------
Total Internet
subscriber net
additions 18.2 7.2 152.8 % 48.5 18.2 166.5 %
-------------------------------------------------------------------------
(2) Internet subscribers are measured at the end of the reporting period
based on Internet access counts from billing and other systems.
-------------------------------------------------------------------------
Wireline segment revenues decreased by $23.0 million and $45.7 million,
respectively, in the second quarter and first six months of 2006, when
compared with the same periods in 2005, due to the following:
- Voice local revenue decreased by $19.5 million and $36.7 million,
respectively. The decreases were due primarily to residential access
line losses from increased competition as well as the impact of
one-time regulatory recoveries of approximately $13 million recorded
in the first quarter of 2005.
Residential line losses include the effect of increased competition
from resellers, VoIP (voice over Internet protocol) competitors
including cable-TV companies, technological substitution to wireless
services, and lower numbers of second lines resulting from migration
of dial-up Internet subscribers to high-speed Internet. In 2006,
competitors' cable telephony is offered in more places within TELUS'
incumbent regions including Fort McMurray, Rimouski, Vancouver,
Victoria, while in 2005 cable telephony was available only in Calgary
(February 2005) and Edmonton (April 2005). Total business lines
increased during the second quarter and first six months of 2006 as
growth in non-incumbent regions exceeded competitive losses and
migration to more efficient ISDN (integrated services digital network)
services in incumbent local exchange carrier ("ILEC") regions. In the
same periods in 2005, business lines decreased due to the loss of a
large business customer.
- Voice long distance revenues decreased by $22.8 million and
$41.4 million, respectively. The decreases were due primarily to lower
consumer and retail business minute volumes and prices, consistent
with industry wide trends of strong price competition and
technological substitution (to Internet and wireless).
- Wireline segment data revenues increased by $23.3 million and
$39.3 million, respectively. This growth was primarily due to:
(i) increased Internet, enhanced data and hosting service revenues as
a result of traction from new business contracts and continued growth
in high-speed Internet subscribers combined with a $1 per month
increase high-speed Internet rates, partly offset by lower average
pricing for the six-month period; (ii) increased managed data revenues
from the provision of business process outsourcing services to
customers; and (iii) lower discounts in the six-month period for
competitive digital network services. Partially offsetting this growth
were continued migration of basic data services to more efficient
enhanced data services and lower year-to-date data equipment sales.
The improvement in high-speed Internet subscriber net additions during
2006 was due to new promotions, resulting in increased gross
additions, enhanced by lower deactivations of existing customers.
- Other revenue decreased by $7.6 million and $11.4 million,
respectively. The decrease was due mainly to lower voice equipment
sales as well as rate reductions for co-location power and space
services retroactive to November 29, 2000, resulting from Telecom
Decision CRTC 2006-42.
- Intersegment revenue represents services provided by the wireline
segment to the wireless segment. These revenues are eliminated upon
consolidation together with the associated expense in the wireless
segment.
Total external operating revenue included non-ILEC revenues of $161.3
million and $325.4 million, respectively, in the second quarter and first six
months of 2006. This represents increases of $5.8 million or 3.7% and $10.4
million or 3.3%, respectively. Recent contracts contributed to increased
enhanced data and managed workplace service revenues. Voice local and long
distance services revenues increased modestly, while voice and data equipment
sales decreased. Growth in revenues was partly offset by re-pricing of renewal
contracts and competitive pricing affecting new contracts.
-------------------------------------------------------------------------
Operating expenses -
wireline segment Quarters Six-month periods
($ millions, except ended June 30 ended June 30
employees) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Salaries, benefits
and other employee-
related costs 416.9 422.5 (1.3)% 830.1 836.6 (0.8)%
Other operations
expenses 311.7 309.3 0.8 % 638.9 611.8 4.4 %
-------------------------------------------------------------------------
Operations expense 728.6 731.8 (0.4)% 1,469.0 1,448.4 1.4 %
Restructuring and
workforce reduction
costs 29.8 7.4 n. m. 44.7 16.8 166.1 %
-------------------------------------------------------------------------
Total operating
expenses 758.4 739.2 2.6 % 1,513.7 1,465.2 3.3 %
-------------------------------------------------------------------------
Total employees,
end of period 23,025 22,334 3.1 %
-----------------------------------------------
Total operating expenses increased by $19.2 million and $48.5 million,
respectively, in the second quarter and first six months of 2006, when
compared with the same periods in 2005. Total operating expenses increased
primarily due to charges for restructuring initiatives, increased advertising
and promotion activity, as well as the use of contractors for network support
and maintenance activities in the first quarter of 2006, facilitating
clearance of backlogs and freeing up TELUS staff to improve customer service,
as reflected in improved quality-of-service metrics defined by the CRTC. The
691 increase in total employees included approximately 1,065 to support TELUS'
international call centre as well as human resource outsourcing services,
while staffing in other areas decreased by 374.
- Salaries, benefits and employee-related expenses were relatively
unchanged. Increased overtime, travel and training required for new
hires, employee back-to-work sessions and TELUS TV initiatives were
more than offset by a reduction in other salaries and benefits.
- Other operations expenses were relatively unchanged in the second
quarter, but increased by $27.1 million in the first six months.
Increases in other expenses in the quarter and first six months were
mainly the result of: (i) increased consumer promotions expense that
resulted in increased high-speed Internet additions; (ii) increased
network maintenance to support growth in network assets as well as
increased demand for cable locates due to the strong economic growth
in Western Canada and the use of contractors primarily in the first
quarter of 2006 to help clear backlogs and free up staff to improve
customer service; and (iii) increased year-to-date facilities, transit
and termination charges for increased non-ILEC data services and
higher outbound traffic volumes including increased international
traffic. These increases were partly offset by reduced expenses for
one-time emergency operations planning costs of approximately
$16 million recorded second quarter of 2005, as well as increased
capitalization of labour associated with capital program activity and
lower year-to-date cost of goods sold associated with lower voice and
data equipment sales. Bad debt expenses did not change significantly
from the same period one year ago.
- Restructuring and work force reduction costs applicable to the
wireline segment increased by $22.4 million and $27.9 million,
respectively.
Total expenses discussed above included non-ILEC expenses of
$154.9 million and $313.7 million, respectively, in the second quarter and
first six months of 2006, when compared with same periods in 2005. This
represents increases of $2.9 million or 1.9% and $10.1 million or 3.3%,
respectively. Expense increases included higher facilities costs to support
increased data services, increased transit and termination costs from
increased traffic volumes, increased contract and consulting expenses and
higher salaries, benefits and employee-related costs. These increases were
party offset by a lower cost of sales related to lower equipment sales revenue
and credits for retroactive rate reductions on access tandem services.
-------------------------------------------------------------------------
EBITDA and EBITDA margin Quarters Six-month periods
- wireline segment ended June 30 ended June 30
2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 456.3 498.5 (8.5)% 923.1 1,017.3 (9.3)%
EBITDA margin (%) 37.6 40.3 (2.7)pts 37.9 41.0 (3.1)pts
-------------------------------------------------------------------------
Wireline segment EBITDA decreased by $42.2 million and $94.2 million,
respectively, in the second quarter and first six months of 2006, when
compared with the same periods in 2005. The primary causes were lower revenues
from increased competition for local services and continued long distance
revenue erosion as well as 3% increase in operating expenses including
restructuring charges. Non-ILEC EBITDA increased nominally.
5.5 Wireless segment results
-------------------------------------------------------------------------
Operating revenues Quarters Six-month periods
- wireless segment ended June 30 ended June 30
($ millions) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Network revenue 884.0 743.4 18.9 % 1,708.7 1,438.9 18.8 %
Equipment revenue 61.3 58.6 4.6 % 118.5 115.6 2.5 %
-------------------------------------------------------------------------
External operating
revenue 945.3 802.0 17.9 % 1,827.2 1,554.5 17.5 %
Intersegment revenue 5.2 5.7 (8.8)% 11.1 11.5 (3.5)%
-------------------------------------------------------------------------
Total operating
revenue 950.5 807.7 17.7 % 1,838.3 1,566.0 17.4 %
-------------------------------------------------------------------------
-----------------------------------------------
Key operating indicators
- wireless segment
(000s) As at June 30
2006 2005 Change
---------------------------
Subscribers -
postpaid 3,840.5 3,419.0 12.3 %
Subscribers -
prepaid 896.6 728.7 23.0 %
--------- -------- --------
Subscribers -
total(1) 4,737.1 4,147.7 14.2 %
Digital POPs(2)
covered including
roaming/resale
(millions)(3) 31.0 30.2 2.6 %
--------------------------
Quarters Six-month periods
ended June 30 ended June 30
2006 2005 Change 2006 2005 Change
---------------------------------------------------
Subscriber gross
additions - postpaid 205.7 209.9 (2.0)% 385.4 394.8 (2.4)%
Subscriber gross
additions - prepaid 100.9 88.7 13.8 % 196.0 157.0 24.8 %
------- ------- ------- ------- ------- ------
Subscriber gross
additions - total 306.6 298.6 2.7 % 581.4 551.8 5.4 %
Subscriber net
additions - postpaid 103.3 103.9 (0.6)% 173.7 178.7 (2.8)%
Subscriber net
additions - prepaid 20.6 27.2 (24.3)% 42.7 32.6 31.0 %
------- ------- ------- ------- ------- ------
Subscriber net
additions - total 123.9 131.1 (5.5)% 216.4 211.3 2.4 %
Churn, per month
(%)(4)(5) 1.30 1.37 (0.07)pts 1.32 1.41 (0.09)pts
COA(6) per gross
subscriber addition
($)(4) 394 342 15.2 % 411 348 18.1 %
ARPU ($)(4) 63.18 60.84 3.8 % 61.76 59.65 3.5 %
Average minutes of
use per subscriber
per month (MOU) 412 405 1.7 % 399 388 2.8 %
EBITDA to network
revenue (%) 49.9 49.3 0.6 pts 49.0 48.9 0.1 pts
Retention spend to
network revenue(4)(%) 6.2 5.7 0.5 pts 6.2 5.6 0.6 pts
EBITDA ($ millions) 440.8 366.5 20.3 % 836.7 703.9 18.9 %
EBITDA excluding COA
($ millions)(4) 561.7 468.6 19.9 % 1,075.5 895.8 20.1 %
-------------------------------------------------------------------------
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 June 30, 2006, TELUS' wireless PCS digital population coverage
included expanded coverage of approximately 7.5 million PCS POPs due
to roaming/resale agreements principally with Bell Mobility and
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) Due to a change in business policy early in 2006 requiring postpaid
customers to provide 30 days notice prior to deactivation, a one-time
deferral of approximately 4,800 deactivations. Normalized to exclude
this one-time positive impact, the churn rate was 1.34% in the first
half of 2006.
(6) Cost of acquisition.
-------------------------------------------------------------------------
Wireless segment revenues increased by $142.8 million and $272.3 million,
respectively, in the second quarter and first six months of 2006, when
compared with the same periods in 2005, due to the following:
- Network revenue increased by $140.6 million and $269.8 million,
respectively. This growth was a result of the 14.2% expansion of the
subscriber base combined with increased average revenue per subscriber
unit per month ("ARPU"). ARPU increased by more than $2 in both the
second quarter and first six months of 2006, when compared to the same
periods in 2005, principally due to increased data usage as well as
higher average minutes of use per subscriber per month ("MOU").
Data revenues increased to 7.1% of Network revenue, or $62.8 million,
in the second quarter of 2006 as compared with 3.8% of Network
revenues, or $28.4 million, in the second quarter of 2005. Similarly,
data revenues increased to 6.7% of Network revenue, or $114.1 million,
for the first six months of 2006 as compared with 3.6% of Network
revenue, or $52.5 million, for the same period in 2005. Data ARPU
increased by 93% to $4.45 for the second quarter of 2006 and increased
by 90% to $4.09 for the first six months of 2006 as compared with
$2.30 and $2.15, respectively, for the same periods last year. This
growth was principally related to text messaging, PDA (personal
digital assistant) devices, mobile computing, Internet browser
activities and pay-per-use downloads such as ringtones, music, games
and videos.
At June 30, 2006, postpaid subscribers represented 81.1% of the total
cumulative subscriber base, remaining relatively stable from one year
earlier. The 103,300 postpaid subscriber net additions for the second
quarter of 2006 represented 83.4% of all net additions as compared
with 103,900 or 79.3% of all net additions for the same period in
2005. For the first six months of 2006, postpaid subscriber net
additions were 173,700 (80.3% of all net additions), as compared with
178,700 (84.6% of all net additions) for the same period in 2005. The
prepaid Talk Away (TM) bundle offering that ended part-way through the
first quarter of 2006, contributed to the higher proportion of prepaid
net additions and higher total net additions for the first half of
2006.
The blended churn rate for the first six months of 2006 was 1.32% as
compared with 1.41% for the same period last year. The postpaid
monthly churn rate decreased when compared with 2005 and was a record
low for TELUS in the second quarter of 2006, at less than
one per cent. The prepaid churn rate increased in the second quarter
of 2006 when compared to the second quarter of 2005, but was steady in
the first six months of 2006 when compared the same period in 2005.
Deactivations were 182,700 for the second quarter of 2006 and 365,000
for the first six months of 2006 as compared with 167,500 and 340,500
for the same periods last year, which reflects both the growing
subscriber base and lower blended churn.
- Equipment sales, rental and service revenue increased mainly due to
continued subscriber growth. Gross subscriber additions grew to a
second quarter TELUS record of 306,600 and 581,400 for the first
six months of 2006 as compared with 298,600 and 551,800 in the same
quarters last year. Handset revenues associated with gross subscriber
activations are included in COA per gross subscriber addition.
- Intersegment revenues represent services provided by the wireless
segment to the wireline segment and are eliminated upon consolidation
along with the associated expense in the wireline segment.
-------------------------------------------------------------------------
Operating expenses -
wireless segment Quarters Six-month periods
($ millions, except ended June 30 ended June 30
employees) 2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
Equipment sales
expenses 136.9 109.7 24.8 % 263.1 214.2 22.8 %
Network operating
expenses 111.6 98.7 13.1 % 217.5 197.2 10.3 %
Marketing expenses 92.0 87.4 5.3 % 185.8 161.7 14.9 %
General and
administration
expenses 168.3 145.4 15.7 % 332.5 289.0 15.1 %
-------------------------------------------------------------------------
Operations expense 508.8 441.2 15.3 % 998.9 862.1 15.9 %
Restructuring and
workforce reduction
costs 0.9 - n. m. 2.7 - n. m.
-------------------------------------------------------------------------
Total operating
expenses 509.7 441.2 15.5 % 1,001.6 862.1 16.2 %
-------------------------------------------------------------------------
Total employees,
end of period 6,949 6,372 9.1 %
-----------------------------------------------
Wireless segment total operating expenses increased by $68.5 million in
the second quarter and $139.5 million for the first six months of 2006, when
compared with the same periods in 2005, to promote, retain and support the
14.2% growth in the subscriber base and significant increase in Network
revenue.
- Equipment sales expenses increased by $27.2 million in the second
quarter and $48.9 million for the first six months of 2006, when
compared with the same periods in 2005, principally due to an increase
in gross subscriber activations, higher handset costs related to
product mix, and increased retention activity. Handset costs
associated with gross subscriber activations are included in COA per
gross subscriber addition. Handset cost related to retention are
included in the overall retention spend amount.
- Network operating expenses increased by $12.9 million for the second
quarter and $20.3 million for the first six months of 2006, when
compared with the same periods in 2005, principally due to higher
roaming volumes within Canada. In addition, transmission and site-
related expenses increased to support the greater number of cell
sites, a larger subscriber base, larger payments to certain third
party data providers and improved network quality and coverage.
- Marketing expenses increased by $4.6 million in the second quarter and
$24.1 million for the first six months of 2006 primarily due to
increased advertising and promotions costs, higher dealer compensation
costs, and increased re-contracting activity. COA per gross subscriber
addition increased by $52 in the second quarter and $63 for the first
six months of 2006 as compared with for the same periods in 2005. The
increase was related to higher subsidies on certain popular handsets
driven by competitive activity. In addition, the increase during the
first six months was related to advertising and promotion spending
(including the launch in the first quarter of two advertising
campaigns, SPARK and Broadband on the Fly (TM)). COA per gross
subscriber addition decreased by $35 to $394 when compared to the
first quarter of 2006 due to reduced handset subsidies for certain
popular handsets and a decrease in advertising and promotion spend
associated with new product launches. The lower churn and increased
ARPU contributed to improved lifetime revenue per subscriber by
$419 to $4,860 even though COA per gross subscriber addition
increased. COA as a percentage of lifetime revenue was 8.1% in the
second quarter of 2006, a decrease from 9.5% in the first quarter of
2006, and an increase from 7.7% in the second quarter of 2005.
- General and administration expenses increased by $22.9 million in the
second quarter and $43.5 million for the first six months of 2006,
when compared to the same periods in 2005 due to the increase in
employees to support the significant growth in the subscriber base and
continued expansion in the number of Company-owned retail stores.
- Restructuring and workforce reduction expenses were related to staff
reductions associated with the integration of the wireline and
wireless operations.
-------------------------------------------------------------------------
EBITDA and EBITDA margin Quarters Six-month periods
- wireless segment ended June 30 ended June 30
2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 440.8 366.5 20.3 % 836.7 703.9 18.9 %
EBITDA margin (%) 46.4 45.4 1.0 pt 45.5 44.9 0.6 pts
-------------------------------------------------------------------------
Wireless segment EBITDA increased by $74.3 million and $132.8 million,
respectively, in the second quarter and first six months of 2006, when
compared to the same periods in 2005. The improvement in EBITDA was a result
of the strong revenue growth that was only partially offset by the higher COA
per gross subscriber addition and operations costs to support the growth. The
EBITDA margin, when calculated as a percentage of Network revenue, improved to
a second quarter record of 49.9% and 49.0% for the first six months of 2006.
This compares with 49.3% and 48.9% for the same periods last year,
representing positive increases of 0.6 and 0.1 percentage points,
respectively.
6. Financial condition
The following are the significant changes in the consolidated balance
sheets between December 31, 2005 and June 30, 2006.
-------------------------------------------------------------------------
June 30, Dec. 31, Change %Change Explanation of the
($ millions) 2006 2005 change in balance
-------------------------------------------------------------------------
Current Assets
Cash and (18.6) 8.6 (27.2) n. m. The balance of cash and
temporary temporary investments
investments, at June 30, 2006
net represents net cheques
in circulation after
deduction of cash
balances. See
Section 7. Liquidity
and capital resources
-------------------------------------------------------------------------
Accounts 514.1 610.3 (96.2) (15.8)% Decreased by
receivable $35 million for the net
increase in securitized
accounts receivable
(see Section 7.6
Accounts receivable
sale), lower days
outstanding for
customer receivables,
as well as receipts
from large customers in
the first quarter
-------------------------------------------------------------------------
Income and 24.3 103.7 (79.4) (76.6)% Refunds of
other taxes $125.1 million
receivable including interest were
received in the first
quarter of 2006; a
portion of the
remaining net taxes
owing were reclassified
to current Income and
other taxes payable
-------------------------------------------------------------------------
Inventories 115.8 138.8 (23.0) (16.6)% Primarily a decrease in
wireless handset
inventories
-------------------------------------------------------------------------
Prepaid 294.5 154.7 139.8 90.4 % Primarily prepayment of
expenses federal Canada Pension
and other Plan and Employment
Insurance premiums,
property taxes, annual
wireless licence fees,
other licences and
insurance, net of
applicable
amortization, as well
as the deferred loss on
termination and
replacement of cross
currency interest rate
swap associated with
June 1, 2007 (U.S.
Dollar) Notes
-------------------------------------------------------------------------
Current - 226.4 (226.4) (100.0)% Refer to current
portion of liability section below
future
income taxes
-------------------------------------------------------------------------
Current Liabilities
Accounts 1,509.1 1,393.7 115.4 8.3 % Primarily the
payable $195.5 million current
and accrued portion of a deferred
liabilities hedging liability
reclassified from long-
term liabilities for
2007 U.S. Dollar Notes,
net of a reduction in
trade payables
-------------------------------------------------------------------------
Income and 9.7 - 9.7 n. m. Net taxes payable over
other taxes the next 12 months
payable
-------------------------------------------------------------------------
Restructuring 60.5 57.1 3.4 6.0 % New obligations
and workforce exceeded payments under
reduction previous programs
accounts
payable and
accrued
liabilities
-------------------------------------------------------------------------
Advance 582.6 571.8 10.8 1.9 % Includes increases to
billings and the price cap deferral
customer account and deferred
deposits maintenance contract
revenue
-------------------------------------------------------------------------
Current 1,376.4 5.0 1,371.4 n. m. Includes $70.0 million
maturities of 7.1% TELUS
of long- Communications Inc.
term debt (TCI) medium-term
Notes, maturing in
February 2007 and
$1,300.7 million of
7.5% TELUS Corporation
U.S. Dollar Notes due
June 2007
-------------------------------------------------------------------------
Current 43.3 - 43.3 n. m. Due to expected income
portion of subject to tax in the
future upcoming 12 months
income exceeding losses
taxes available for deduction
in the upcoming
12 months
-------------------------------------------------------------------------
Working (2,651.5) (785.1) (1,866.4) n. m.% Includes an increase in
capital(1) the current portions of
long-term debt and
future income taxes
payable
-------------------------------------------------------------------------
Capital 10,926.1 10,941.5 (15.4) (0.1)% See Sections 5.3
Assets, Net Consolidated results
from operations -
Depreciation and
amortization and 7.2
Cash used by investing
activities - capital
expenditures
-------------------------------------------------------------------------
Other Assets
Deferred 925.3 850.2 75.1 8.8 % Primarily pension plan
charges contributions in excess
of charges to income
-------------------------------------------------------------------------
Investments 34.8 31.2 3.6 11.5 % New investments net of
divestitures
-------------------------------------------------------------------------
Goodwill 3,172.3 3,156.9 15.4 0.5 % A new acquisition net
of a divestiture
-------------------------------------------------------------------------
Long-Term 3,354.1 4,639.9 (1,285.8) (27.7)% Reclassification to
Debt current maturities of
TCI medium-term Notes
maturing in February
2007 and TELUS
Corporation U.S. Dollar
Notes due June 2007, a
$162 million decrease
in the Canadian Dollar
value of U.S. Dollar
Notes and repayment of
$68.5 million of TELUS'
three-year credit
facility, partly offset
by the public issue in
May 2006 of
$300 million 5.00%,
Series CB Notes
-------------------------------------------------------------------------
Other 1,310.3 1,635.3 (325.0) (19.9)% Primarily a reduction
Long-Term in the deferred hedging
Liabilities liability through:
- replacement of
previous cross
currency interest
rate swap agreements
associated with 2007
(U.S. Dollar) Notes
with a like amount
of new cross
currency interest
rate swap
agreements, which
have a lower
effective fixed
interest rate and a
lower effective
fixed exchange rate.
See Note 12(b) of
the interim
consolidated
financial
statements;
- reclassification of
$195.5 million to
current liabilities;
and
- partly offset by an
increase of
approximately
$162 million due to
appreciation of the
Canadian dollar
-------------------------------------------------------------------------
Future Income 878.2 1,023.9 (145.7) (14.2)% Decrease in temporary
Taxes differences for long-
term assets and
liabilities as well as
a revaluation of
liabilities at lower
enacted future income
tax rates
-------------------------------------------------------------------------
Non-Controlling 25.3 25.6 (0.3) (1.2)% -
Interests
-------------------------------------------------------------------------
Shareholders' Equity
-------------------------------------------------------------------------
Common
equity 6,839.1 6,870.0 (30.9) (0.4)% Reduced during the
first half of 2006
primarily by:
- Normal Course Issuer
Bid expenditures of
$481.0 million;
- Dividends of
$190.7 million;
partly offset by
increases from:
- Net income of
$566.7 million;
- An increase of
$49.8 million in
Common Share and
Non-Voting Share
capital for the
exercise of options;
and
- Adjustment of tax
treatment of items
charged directly to
retained earnings of
$16.1 million
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
-------------------------------------------------------------------------
7. Liquidity and capital resources
7.1 Cash provided by operating activities
-------------------------------------------------------------------------
($ millions) Quarters Six-month periods
ended June 30 ended June 30
2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
813.0 687.7 18.2 % 1,486.1 1,416.1 4.9 %
-------------------------------------------------------------------------
Cash provided by operating activities increased by $125.3 million and
$70.0 million, respectively, in the second quarter and first six months of
2006, when compared with the same periods in 2005. The increases for the
quarter and first six months were primarily due to the following:
- Proceeds from securitized accounts receivable increased by
$135 million and $35 million, respectively, in the second quarter and
first six months of 2006, compared with no changes to securitized
accounts receivable in the comparable periods of 2005;
- EBITDA increased by $32.1 million and $38.6 million, respectively;
- Interest paid decreased by $22.3 million in the second quarter and
first six months, due mainly to the early redemption of notes on
December 1, 2005. Interest paid in 2006 included a $31.2 million
payment in respect of the termination of cross currency interest rate
swaps, as well as a partial payment of previously accrued interest in
respect of a court decision in a lawsuit over a BC TEL bond redemption
matter dating back to 1997; and
- Income taxes received (paid) net of installment payments increased by
$75.7 million in the first six months of 2006, due to collection of
significant income tax and interest receivable in the first quarter of
2006, as compared to collection of a smaller amount in the second
quarter of 2005.
The above increases for the second quarter and first six months were
partly offset by:
- Employer contributions to employee defined benefits plans increased by
$22.7 million and $15.8 million, respectively, due to the voluntary
net acceleration of funding in 2006. The best estimate of fiscal 2006
employer contributions to the Company's defined benefit pension plans
has been revised to approximately $122 million (the best estimate at
December 31, 2005, was $114 million);
- Restructuring and workforce reduction payments increased by
$3.3 million and $13.9 million, respectively;
- Interest received decreased by $18.0 million and $1.8 million,
respectively;
- Income taxes received (paid) net of installment payments decreased by
$21.1 million in the second quarter;
- Other changes in non-cash working capital.
7.2 Cash used by investing activities
-------------------------------------------------------------------------
($ millions) Quarters Six-month periods
ended June 30 ended June 30
2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
486.1 410.0 18.6 % 802.2 716.2 12.0 %
-------------------------------------------------------------------------
Cash used by investing activities increased by $76.1 million and $86.0
million, respectively, in the second quarter and first six months of 2006,
when compared with the same periods in 2005, due primarily to greater capital
expenditures. Funds used for small acquisitions increased by $17.6 million in
the second quarter of 2006 and decreased by $9.9 million in the first six
months of 2006, when compared to the same periods in 2005. Assets under
construction increased to $758.9 million at June 30, 2006, compared with
$516.4 million at December 31, 2005, due to capitalized costs related to
development of a new wireline billing system as well as in-progress costs for
new service development and network enhancement.
-------------------------------------------------------------------------
Capital expenditures Quarters Six-month periods
by segment ended June 30 ended June 30
($ in millions, 2006 2005 Change 2006 2005 Change
except capital
expenditure intensity)
-------------------------------------------------------------------------
Wireline segment 311.4 293.9 6.0 % 570.4 507.5 12.4 %
Wireless segment 147.4 114.8 28.4 % 208.9 174.4 19.8 %
-------------------------------------------------------------------------
TELUS consolidated 458.8 408.7 12.3 % 779.3 681.9 14.3 %
-------------------------------------------------------------------------
Capital expenditure
intensity(1) (%) 21.5 20.2 1.3 pts 18.5 17.1 1.4 pts
-------------------------------------------------------------------------
(1) Capital expenditure intensity is measured by dividing capital
expenditures by operating revenues. This measure provides a method of
comparing the level of capital expenditures to other companies of
varying size within the same industry.
-------------------------------------------------------------------------
- Wireline segment capital expenditures increased by $17.5 million and
$62.9 million, respectively, in the second quarter and first
six months of 2006, when compared to the same periods in 2005. ILEC
capital expenditures increased by approximately $25 million to
$282 million in the second quarter, and increased by approximately
$66 million to $515 million for the first six months, with the
increased spending primarily for network access growth to serve strong
housing growth in B.C. and Alberta, broadband build, billing system
development and service development. The increase for the first
six months of 2006 included catch-up on activities deferred in 2005
due to the work stoppage. Non-ILEC capital expenditures decreased by
approximately $8 million to $29 million in the second quarter, but
were relatively unchanged at approximately $55 million for the first
six months of 2006.
The wireline segment capital expenditure intensity ratios were 25.6%
and 23.4%, respectively, in the second quarter and first six months of
2006, compared with 23.7% and 20.4%, respectively, in the same periods
of 2005. Wireline cash flow (EBITDA less capital expenditures) for the
second quarter and first six months of 2006 was $144.9 million and
$352.7 million, respectively, a decrease of approximately 30% from the
same periods in 2005.
- Wireless segment capital expenditures increased by $32.6 million in
the second quarter and $34.5 million for the first six months of 2006.
The increases were principally related to strategic investments in
next-generation EVDO-capable higher speed wireless network technology
and continued enhancement of digital wireless capacity and coverage.
Capital expenditure intensity for the wireless segment was 15.5% in
the second quarter and 11.4% in the first six months of 2006, as
compared with 14.2% and 11.1% in the same periods last year. Wireless
cash flow (EBITDA less capital expenditures) set TELUS second quarter
and first half records at $293.4 million and $627.8 million,
respectively, or increases of 16.6% and 18.6%, respectively, over the
same periods in 2005.
TELUS' EBITDA less capital expenditures (see Section 11.1 EBITDA for the
calculation) decreased by 3.9% to $438.3 million and decreased by 5.7% to
$980.5 million, respectively, in the second quarter and first six months of
2006 when compared with the same periods in 2005. The decrease resulted
primarily from higher capital expenditures, partly offset by increased EBITDA.
7.3 Cash used by financing activities
-------------------------------------------------------------------------
($ millions) Quarters Six-month periods
ended June 30 ended June 30
2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
344.4 383.9 (10.3)% 711.1 455.3 56.2 %
-------------------------------------------------------------------------
Cash used by financing activities decreased by $39.5 million and
increased by $255.8 million, respectively, in the second quarter and first six
months of 2006, when compared with the same periods in 2005. Financing
activities included:
- Proceeds from Common Shares and Non-Voting Shares issued were
$12.5 million and $56.1 million, respectively, in the second quarter
and first six months of 2006 - decreases of $43.6 million and
$98.3 million, respectively, when compared with the same periods in
2005, due mainly to the exercise of a smaller number of options in
2006 and implementation of the net equity settlement feature on May 1,
2006.
- Cash dividends paid to shareholders were $94.8 million and
$190.7 million, respectively in the second quarter and first six
months of 2006. In 2005, the $143.9 million cash dividends recorded
for both the second quarter and six month period reflected remittance
of the dividends payable April 1, 2005 and July 1, 2005 during the
second quarter. The increase in cash dividends paid in the first
six months 2006, when compared with the first six months of 2005, was
due to the higher quarterly dividend per share (27.5 cents versus
20 cents), partly offset by lower average shares outstanding.
- The Company's current NCIB program came into effect on December 20,
2005 and is set to expire on December 19, 2006. During the first six
months of 2006, approximately 4.7 million TELUS Common Shares and
6.0 million TELUS Non-Voting Shares were purchased for cancellation
for a total of $481.0 million. The following table outlines the shares
repurchased and costs under the second NCIB program for 2006 and
cumulatively.
Second normal course issuer bid program
-------------------------------------------------------------------------
Shares Purchased for cancellation
------------------------------------------------------
2005 Q4
(from Dec. 20) 2006 Q1 2006 Q2 Cumulative
-------------------------------------------------------------------------
Common Shares 634,469 1,783,300 2,913,600 5,331,369
Non-Voting Shares 607,700 3,334,500 2,643,300 6,585,500
-------------------------------------------------------------------------
Total 1,242,169 5,117,800 5,556,900 11,916,869
-------------------------------------------------------------------------
-------------------------------------------------------------------------
------------------------------------------------
Shares
Maximum Percentage of
permitted for maximum
repurchase repurchased
------------------------------------------------
Common Shares 12,000,000 44.4 %
Non-Voting Shares 12,000,000 54.9 %
------------------------------------------------
Total 24,000,000 49.7 %
------------------------------------------------
------------------------------------------------
-------------------------------------------------------------------------
$ millions Cost of repurchase
------------------------------------------------------
2005 Q4
(from Dec. 20) 2006 Q1 2006 Q2 Cumulative
-------------------------------------------------------------------------
Reduction of:
Share capital 20.9 93.3 93.0 207.2
Retained earnings 36.6 138.3 156.4 331.3
-------------------------------------------------------------------------
Total 57.5 231.6 249.4 538.5
-------------------------------------------------------------------------
During the second quarter of 2005 under the previous NCIB program, the
Company purchased approximately 3.0 million Common Shares and
approximately 3.5 million Non-Voting Shares for total consideration of
$272.1 million. For the first six months of 2005 under a previous NCIB
program, the Company purchased approximately 5.1 million Common Shares
and approximately 5.5 million Non-Voting Shares for total
consideration of $430.4 million.
The total repurchases under two NCIB programs for the period of
December 20, 2004 to June 30, 2006 were approximately 15.6 million
Common Shares and 18.1 million Non-Voting Shares for total
consideration of $1.45 billion.
- Long-term debt issues in 2006 included the May 2006 public issue of
$300 million 5.00%, Series CB Notes at a price of $998.80 per
$1,000.00 of principal, which mature in 2013. See Note 12(b) of the
interim consolidated financial statements. The net proceeds of the
offering were used to terminate cross currency swap agreements. The
remaining debt issues in 2006 were mainly periodic draws on the TELUS
Corporation credit facilities, which were offset by periodic
repayments of the credit facilities. On a net basis, that amount drawn
from credit facilities at June 30, 2006 was not significantly changed
from March 31, 2006, but was reduced by $68.5 million since December
31, 2005.
- The partial payment of deferred hedging liability was $309.4 million
in the second quarter of 2006. In contemplation of the planned
refinancing of the 2007 (U.S. Dollar) Notes, in May 2006, the Company
replaced approximately 63% of the notional value of the existing cross
currency interest rate swap agreements with a like amount of new cross
currency interest rate swap agreements which have a lower effective
fixed interest rate and a lower effective fixed exchange rate. This
replacement happened concurrent with the issuance of the 2013
(Canadian Dollar) Notes; the two transactions had the composite effect
of deferring, from June 2007 to June 2013, the payment of
$300 million, representing a portion of the amount that would have
been due either under the cross currency interest rate swap agreements
or to the 2007 (U.S. Dollar) Note holders (to whom the amounts would
ultimately have been paid would depend upon changes in interest and
foreign exchange rates over the period to maturity of the underlying
debt).
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
As at, or 12-month periods ended,
June 30 2006 2005 Change
-------------------------------------------------------------------------
Components of debt and coverage ratios(1)
-----------------------------------------
($ millions)
Net debt 5,739.6 6,096.4 (356.8)
Total capitalization - book value 12,604.0 13,264.6 (660.6)
EBITDA excluding restructuring 3,418.4 3,358.5 59.9
Net interest cost 571.0 618.0 (47.0)
Debt ratios
-----------
Fixed-rate debt as a proportion of
total indebtedness (%) 98.8 93.1 5.7 pts
Average term to maturity of debt (years) 5.0 4.9 0.1
Net debt to total capitalization (%)(1) 45.5 46.0 (0.5) pts
Net debt to EBITDA(1)(3) 1.7 1.8 (0.1)
Coverage ratios(1)
------------------
Interest coverage on long-term debt 2.9 2.6 0.3
EBITDA(3) interest coverage 6.0 5.4 0.6
Other measures
--------------
Free cash flow ($ millions) -
12-month trailing(2) 1,529.8 1,398.9 130.9
Dividend payout ratio (%)(1) 46 40 6 pts
-------------------------------------------------------------------------
(1) See Section 11.4 Definition of liquidity and capital resource
measures.
(2) See Section 11.2 Free cash flow for the definition.
(3) EBITDA excluding restructuring.
-------------------------------------------------------------------------
Net debt measured at June 30, 2006 decreased when compared to one-year
earlier due to early redemption of $1.578 billion of Notes on December 1,
2005, partly offset by the use of cash and temporary investments (cash is
netted against debt for the purposes of this calculation). Total
capitalization also decreased for these reasons as well as a decrease in
common equity due primarily to share repurchases under NCIB share repurchase
programs. The net debt to EBITDA ratio measured at June 30, 2006 improved
primarily as a result of debt reduction. The proportion of fixed-rate debt
increased mainly due to the termination of fixed to floating interest rate
swap agreements concurrent with the early redemption of notes in December
2005.
Interest coverage on long-term debt improved because of lower interest
expenses. The EBITDA interest coverage ratio improved by 0.5 due to lower net
interest cost and improved by 0.1 due to higher EBITDA (excluding
restructuring). The free cash flow measure for the twelve-month period ended
June 30, 2006 increased when compared with the measure one year earlier,
primarily because of increased collection of income tax and interest
receivable and improved EBITDA, partly offset by higher capital expenditures.
The dividend payout ratio for the twelve-month period ended June 30, 2006 was
within the target guideline of 45 to 55% for net earnings, as the future
income tax reduction that arose from tax rate changes in the second quarter of
2006 was largely offset by temporary expenses associated with the work
stoppage in the second half of 2005. In comparison, the dividend payout ratio
for the twelve-month period ending June 30, 2005 was lower than the target
guideline due primarily to significant one-time tax recoveries included in net
earnings.
Long-term guidelines for certain of TELUS' liquidity measures as defined
in Section 11.4 Definition of liquidity and capital resource measures are:
- Net debt to total capitalization of 45 to 50%
- Net debt to EBITDA of 1.5:1 to 2.0:1
- Dividend payout ratio of 45 to 55% of sustainable net earnings.
7.5 Credit facilities
TELUS had available liquidity from unutilized credit facilities of
approximately $1.5 billion at June 30, 2006.
-------------------------------------------------------------------------
Outstanding
Credit Facilities undrawn
At June 30, 2006 letters
($ in millions) Expiry Size Drawn of credit
-------------------------------------------------------------------------
Five-year revolving
facility(1) May 4, 2010 800.0 - -
Three-year revolving
facility(1) May 7, 2008 800.0 73.5 100.1
Other bank facilities - 74.0 - 2.5
-------------------------------------------------------------------------
Total - 1,674.0 73.5 102.7
-------------------------------------------------------------------------
(1) Canadian dollars or U.S. dollar equivalent.
-------------------------------------------------------------------------
TELUS' credit facilities contain customary covenants including a
requirement that TELUS not permit its consolidated Leverage Ratio (Funded Debt
to trailing 12-month EBITDA) to exceed 4.0:1 (approximately 1.7:1 at June 30,
2006) and not permit its consolidated Coverage Ratio (EBITDA to Interest
Expense on a trailing 12-month basis) to be less than 2.0:1 (approximately
6.0:1 at June 30, 2006) at the end of any financial quarter. There are certain
minor differences in the calculation of the Leverage Ratio and Coverage Ratio
under the credit agreement as compared with the calculation of net debt to
EBITDA and EBITDA interest coverage. Historically, the calculations have not
been materially different. The covenants are not impacted by revaluation of
capital assets, intangible assets and goodwill for accounting purposes 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
On July 26, 2002, TCI, a wholly owned subsidiary of TELUS, entered into
an agreement, which was amended September 30, 2002, and March 1, 2006, with an
arm's-length securitization trust under which TCI is able to sell an interest
in certain of its trade receivables up to a maximum of $650 million. TCI is
required to maintain at least a BBB (low) credit rating by Dominion Bond
Rating Service Limited ("DBRS") or the securitization trust may require the
sale program to be wound down. The necessary credit rating was exceeded by
three levels at A (low) as of August 2, 2006. The balance of proceeds from
securitized receivables was reduced from $500 million to $325 million on
January 31, 2006, increased to $400 million on March 31, 2006, varied between
$350 million and $535 million during the second quarter and closed at
$535 million on June 30, 2006. The balance for the first six months of 2005
was constant at $150 million, which is the minimum necessary to keep this
program active.
7.7 Credit ratings
As of August 2, 2006 TELUS and TCI investment grade credit ratings were
unchanged from those reported in TELUS' annual 2005 Management's discussion
and analysis in Section 7.7. On March 1, 2006, DBRS confirmed its ratings for
TELUS and TCI at BBB(high) and A(low), respectively. In May 2006, Moody's
Investors Service assigned its "Baa2" rating to TELUS' new public debt issue,
and changed the outlook to "positive" for its "Baa2" rating of TELUS
Corporation. 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.
7.8 Off-balance sheet arrangements, commitments and contingent
liabilities
Financial instruments (Note 3 of the interim consolidated financial
statements)
During the first quarter of 2006, the Company entered into a hedging
relationship that fixes the Company's compensation cost arising from a
specific grant of restricted stock units; hedge accounting has been applied to
this relationship.
During the second quarter of 2006, the Company terminated a number of
cross currency interest rate swap agreements and entered into new cross
currency interest rate swap agreements in respect of the Company's U.S. Dollar
Notes maturing in June 2007. The Company entered into these agreements to
reduce or eliminate exposure to interest rate and foreign currency risk. Hedge
accounting has been applied to the new cross currency interest rate swap
agreements.
As at June 30, 2006, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rate on
U.S. $50 million of fiscal 2006 purchase commitments; hedge accounting has
been applied to these foreign currency forward contracts, all of which relate
to the wireless segment.
In contemplation of the planned refinancing of the debt maturing June 1,
2007, the Company has entered into forward starting interest rate swap
agreements, as at June 30, 2006, that have the effect of fixing the underlying
interest rate on up to $300 million of replacement debt. Hedge accounting has
been applied to these forward starting interest rate swap agreements.
The fair values of the Company's long-term debt are estimated based on
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same maturity as well as the use of
discounted future cash flows using current rates for similar financial
instruments subject to similar risks and maturities. The fair values of the
Company's derivative financial instruments used to manage exposure to interest
rate and currency risks are estimated similarly. The carrying amount and fair
value of long-term debt are as follows:
As at June 30, As at December 31,
2006 2005
-------------------------------------------------------------------------
Carrying Fair Carrying Fair
($ millions) amount value amount value
-------------------------------------------------------------------------
Long-term debt
Principal 4,730.5 5,243.0 4,644.9 5,371.6
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) 987.2 1,251.8 1,154.3 1,470.5
-------------------------------------------------------------------------
5,717.7 6,494.8 5,799.2 6,842.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingent liabilities
The Company has a $60.5 million liability recorded for outstanding
commitments under its restructuring programs as at June 30, 2006. The
Company's commitments and contingent liabilities, which are summarized in Note
14 of the interim consolidated financial statements, have not changed
significantly in the six-month period ended June 30, 2006, except for the
following:
Deferral accounts
On February 16, 2006, the CRTC issued Telecom Decision 2006 9,
"Disposition of funds in the deferral account". In its decision the CRTC
determined that the majority of the accumulated liability within the
respective incumbent local exchange carrier's deferral account was to be made
available for initiatives to expand broadband services within their ILEC
operating territories to rural and remote communities where service is
currently not available. In addition, a minimum of five per cent of the
accumulated deferral account balance must be used for initiatives that enhance
accessibility to telecommunication services for individuals with disabilities.
To the extent that the deferral account balance exceeds the approved
initiatives, the remaining balance will be distributed in the form of a one-
time rebate to local residential service customers in non-high cost serving
areas. Finally, the CRTC indicated that subsequent to May 31, 2006, no
additional amounts are to be added to the deferral account and, instead, are
to be dealt with via prospective rate reductions.
Pay equity
On December 16, 1994, the Telecommunications Workers Union ("TWU") filed
a complaint against BC TEL, a predecessor of TELUS Communications Inc. (TCI),
with the Canadian Human Rights Commission ("CHRC"), alleging that wage
differences between unionized male and female employees in British Columbia
were contrary to the equal pay for work of equal value provisions in the
Canadian Human Rights Act. As a term of the negotiated settlement between TCI
and the TWU that resulted in the collective agreement effective November 20,
2005, the parties have agreed to settle this complaint without any admission
of liability, on the basis that the Company will establish a pay equity fund
of $10 million to be paid out during the term of the new five-year collective
agreement; the TWU withdrew and discontinued this complaint on December 21,
2005. During the first quarter of 2006, the CHRC advised the Company that it
accepted this settlement and that it would close its file on the complaint.
Uncertified class action
A class action was brought August 9, 2004, under the Class Actions Act
(Saskatchewan), against a number of past and present wireless service
providers including the Company. The claim alleges that each of the carriers
is in breach of contract and has violated competition, trade practices and
consumer protection legislation across Canada in connection with the
collection of system access fees, and seeks to recover direct and punitive
damages in an unspecified amount. Similar proceedings have also been filed by,
or on behalf of, plaintiffs' counsel in other provincial jurisdictions. On
July 18, 2006, the Saskatchewan court declined to certify the action as a
class action, but granted the plaintiffs leave to renew their application in
order to further address certain statutory requirements respecting class
actions. The Company believes that it has good defences to these actions.
Should the ultimate resolution of these actions differ from management's
assessments and assumptions, a material adjustment to the Company's financial
position and the results of its operations could result.
7.9 Outstanding share information
The following is a summary of the outstanding shares for each class of
equity at June 30, 2006 and at July 21, 2006. In addition, for July 21, 2006
the total number of outstanding and issuable shares is presented assuming full
conversion of options including those shares held in reserve, but not yet
issued.
-------------------------------------------------------------------------
Class of equity security Common Non-Voting Total
Shares Shares Shares
(millions of shares) outstanding outstanding outstanding
-------------------------------------------------------------------------
At June 30, 2006
Common equity - Common Shares
outstanding 179.1 - 179.1
Common equity - Non-Voting
Shares outstanding - 162.2 162.2
------------ ------------ ------------
179.1 162.2 341.3(1)
------------ ------------ ------------
At July 21, 2006
Common equity - Common Shares
outstanding 179.1 - 179.1
Common equity - Non-Voting
Shares outstanding - 162.3 162.3
------------ ------------ ------------
179.1 162.3 341.4
------------ ------------ ------------
Outstanding and issuable shares(2)
at July 21, 2006
Common Shares and Non-Voting
Shares outstanding 179.1 162.3 341.4
Options(3) 1.3 20.3 21.6
------------ ------------ ------------
180.4 182.6 363.0
------------ ------------ ------------
------------ ------------ ------------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share for the
second quarter of 2006, the number of shares was 348.5.
(2) Assuming full conversion and ignoring exercise prices.
(3) Not reduced by any options that may be forfeited or cancelled during
the period July 1 to July 21.
-------------------------------------------------------------------------
8. Critical accounting estimates and accounting policy developments
8.1 Critical accounting estimates
TELUS' critical accounting estimates are described Section 8.1 of its
2005 annual Management's discussion and analysis. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
8.2 Accounting policy developments
Accounting policies are consistent with those described in Note 1 of
TELUS' annual 2005 consolidated financial statements. Commencing with the
Company's 2006 fiscal year, the Company adopted the amended recommendations of
the Canadian Institute of Chartered Accountants ("CICA") for measurement of
non-monetary transactions (CICA Handbook Section 3830). The Company's
operations were not materially affected by the amended recommendations.
Earnings per share; convergence with International Reporting
Standards
Possibly commencing in the Company's 2006 fiscal year, proposed
amendments to the recommendations of the CICA for the calculation and
disclosure of earnings per share (CICA Handbook Section 3500) may have applied
to the Company. In July 2006, the typescript with the current proposed
amendments was withdrawn and an announcement was made indicating that an
International Financial Reporting Standards-based exposure draft would be
issued by the end of 2006.
Convergence with International Reporting Standards:
In early 2006, Canada's Accounting Standards Board ratified a strategic
plan that will result in Canadian GAAP, as used by public companies, being
converged with International Financial Reporting Standards over a transitional
period. During 2006, the Accounting Standards Board is expected to develop and
publish a detailed implementation plan with a transition period expected to be
approximately five years. As this convergence initiative is very much in its
infancy as of the date of these interim consolidated financial statements, it
would be premature to currently assess the impact of the initiative, if any,
on the Company.
Other comprehensive income; Business combinations
Amendments and proposed amendments commencing in the Company's 2007
fiscal year or later are described in Note 2 of the interim consolidated
financial statements.
Other recently issued accounting standards not yet implemented
As described in Note 18(i) of the interim consolidated financial
statements, under U.S. GAAP effective for its 2007 fiscal year, the Company is
expected to be required to comply with accounting for uncertain income tax
positions, as prescribed by Financial Accounting Standards Board Financial
Interpretation No. 48. The Company is currently assessing the provisions of
the interpretation.
9. Revised annual guidance for 2006
The following discussion is qualified in its entirety by the Forward-
looking statements at the beginning of Management's discussion and analysis,
as well as Section 10: Risks and risk management of TELUS' Management's
discussion and analysis for 2005, the first quarter of 2006 and this report.
The Company has a practice of confirming or adjusting annual guidance on
a quarterly basis. There is no assurance that these assumptions or the revised
2006 financial and operating targets and projections will turn out to be
accurate. Revised guidance for 2006 show below reflects the positive impact to
TELUS of Federal and Alberta tax changes enacted in the second quarter as well
as revised expectations for revenues, capital expenditures and wireless
subscriber net additions.
-------------------------------------------------------------------------
Revised guidance Previous guidance
for 2006 from 2006 Q1 Change
-------------------------------------------------------------------------
Consolidated
Revenues $8.625 to $8.6 to increased by
$8.725 billion $8.7 billion $25 million
EBITDA(1) no change $3.5 to no change
$3.6 billion
Earnings per share increased by
- basic $2.90 to $3.10 $2.40 to $2.60 50 cents
Capital expenditures Approx. $1.5 to increased by
$1.6 billion $1.55 billion $50 to $100
million
Free cash flow(2) no change $1.55 to no change
$1.65 billion
-------------------------------------------------------------------------
Wireline segment
Revenue (external) $4.825 to $4.825 to narrowed high
$4.850 billion $4.875 billion end of range
by $25 million
Non-ILEC revenue $650 to $650 to narrowed high
$675 million $700 million end of range
by $25 million
EBITDA no change $1.8 to no change
$1.85 billion
Non-ILEC EBITDA $25 to $25 to narrowed high
$30 million $40 million end of range
by $10 million
Capital expenditures Approx. $1.05 to increased by
$1.15 billion $1.1 billion $50 to $100
million
High-speed Internet More than
net additions no change 125,000 no change
-------------------------------------------------------------------------
Wireless segment
Revenue (external) $3.8 to $3.775 to increased by
$3.875 billion $3.825 billion $25 to $50
million
EBITDA no change $1.7 to no change
$1.75 billion
Capital expenditures no change Approx. no change
$450 million
Wireless subscriber 560,000 to More than range
net additions 590,000 550,000 clarified
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest taxes depreciation and
amortization (EBITDA).
(2) See Section 11.2 Free cash flow.
-------------------------------------------------------------------------
10. Risks and risk management
TELUS' approach to the management of risk has not changed significantly
from that described in Section 10: Risks and risk management of the Company's
2005 annual Management's discussion and analysis. The following are
significant updates to the risks described in Management's discussions and
analyses for the year 2005 and the first quarter 2006.
10.1 Regulatory
The outcome of any existing or future regulatory reviews, proceedings,
court appeals, Federal Cabinet appeals or other regulatory developments could
have a material impact on TELUS' operating procedures, costs and revenues.
Review of price cap framework (Telecom Public Notice CRTC 2006-5)
On May 9, 2006, the Canadian Radio-television and Telecommunications
Commission ("CRTC") initiated a public proceeding to establish the form of
regulation that will go into effect in June 2007 for incumbent local exchange
carriers. TELUS is a party to the proceeding, having filed its price cap
proposals and responses to CRTC questions in July 2006. An oral hearing is
expected in October 2006, followed by a reply-comment period and a decision by
April 2007.
In its filings, TELUS submitted that the CRTC should adopt two key
objectives to guide its overall approach to economic regulation, including its
approach for developing a new price cap regime: (i) market forces should be
relied upon to the maximum extent feasible as the means of achieving the
telecommunications policy objectives set out in the Telecommunications Act;
and (ii) regulatory measures that may still be required, including those
related to price cap regulation, should be efficient and proportionate to
their purpose and interfere to the minimum extent necessary with the operation
of competitive market forces to the minimum extent necessary, while meeting
policy objectives. There can be no assurance that TELUS' proposed changes to
price cap regime beginning in June 2007 will be adopted, or that the new price
cap regime will favourable for TELUS.
Reconsideration of Telecom Decision CRTC 2005-28: Regulatory
framework for voice communication services using Internet Protocol
(Telecom Public Notice CRTC 2006-6)
On May 12, 2005, the CRTC had released its decision regarding regulatory
requirements for the provision of voice communication services using Internet
protocol, also known as VoIP. Decision 2005-28 divided VoIP service providers
into two groups: ILECs who are regulated in a manner similar to existing local
service regulation; and others, including cable-TV companies, who are not be
subject to price regulation. Rules with respect to access to numbers, number
portability, directory listings, equal access, the winback rules, rules on
promotions, bundling and price floors were extended to VoIP services. In 2005,
TELUS and other ILECs jointly petitioned the Federal Cabinet to overturn
Decision 2005-28, and also sought leave to appeal regulation on winbacks with
the Federal Court of Appeal.
On May 4, 2006, the Federal Cabinet issued an Order in Council that
referred Decision 2005-28 back to the CRTC for further consideration and
specified that the CRTC shall complete its reconsideration of the decision
within 120 days (by September 2006). The Order in Council noted that the March
2006 report from the Telecommunications Policy Review Panel included the
recommendation to rely on market forces to the maximum extent feasible. The
Order in Council also noted VoIP technology had transformed the nature and
extent of competition in telecommunications markets and recent Telecom
Decisions CRTC 2005-62 and 2006-11 allowed for greater flexibility in the
pricing of VoIP services provided by one incumbent telephone company.
On May 10, 2006, in accordance with the Order in Council, the CRTC
initiated a public proceeding to reconsider the appropriate regulatory regime
and any other pertinent matters applicable to the provision of VoIP services.
TELUS filed its comments in June 2006, emphasizing the March 2006 Telecom
Review Policy Panel's recommendation that the regulation of local VoIP
telephony services should interfere as little as possible with competitive
market forces in order to encourage innovation and productivity. TELUS
submitted that it has no unique advantages or ability to exclude competition
in the provision of local VoIP telephony services and forbearance would not
unduly impair the continuance of a competitive market. With respect to
incumbent local exchange carriers, TELUS submitted that residential and
business access-independent local VoIP services should be forborne from
regulation, while residential and business access-dependent local VoIP
services should be forborne where customers have access to competing services
provided over the network of at least one full facilities-based provider.
There can be no assurance that reconsideration of this decision will result in
more favourable regulation of VoIP services for TELUS in its incumbent regions
of B.C., Alberta and Eastern Quebec.
Appeal to Federal Cabinet of Telecom Decision CRTC 2006-15:
Forbearance from the regulation of retail local exchange services
On May 12, 2006, TELUS and other ILECS jointly filed a petition to the
Federal Cabinet, requesting that the CRTC be directed to reconsider its April
6, 2006, decision on the regulation of local telephony service, and to do so
in light of the recommendations of the Telecommunications Policy Review Panel.
TELUS believes that the threshold for deregulation is too high and wireless
substitution for local telephony services should be considered in the
forbearance decision. There can be no assurance that the Federal Cabinet will
direct the CRTC to reconsider Decision 2006-15, or if directed to reconsider
the decision, that the CRTC will significantly change the terms and conditions
set for forbearance from regulating local telephony services.
Approval of rates on a final basis for Access Tandem service
(Telecom Decision CRTC 2006-22) and Co-location power service rates
(Telecom Decision CRTC 2006-42)
On April 27, 2006, the CRTC approved rates on a final basis for Access
Tandem service retroactive to June 1, 2002. Access Tandem service provides for
the exchange of originating and terminating long distance traffic of an
alternative provider of long distance service. Based on this decision and
current interconnection arrangements, TELUS estimates that wireline ILEC
annual interconnection revenue will be reduced by approximately $10 million
over the subsequent 12-month period.
On June 30, 2006, the CRTC approved rates for co-location and power
services on a final basis back to November 29, 2000. Based on this decision
and current co-location and power arrangements, TELUS estimates that its
wireline ILEC annual other revenue will be reduced by approximately $2 million
over the subsequent 12-month period.
Although not material in nature, TELUS' prospective wireline non-ILEC
expenses are expected to be favourably impacted by the above noted decisions.
The retroactive impacts of the above noted decisions were either
previously accrued for by the Company or qualified for deferral account
treatment, with adjustments reflected in the Company's second quarter
financial statements. Management expects to finalize the impacts of these
decisions and estimates during the remainder of 2006, but currently does not
expect any possible adjustments to be material to the overall consolidated
financial results.
Filing of TELUS Retail and Competitor Quality of Service Exclusion
Applications
In June 2006, TELUS filed applications for relief from quality of service
penalties for 2005 flooding in southern Alberta and the 2005 work stoppage. It
is expected that a number of third parties will file comments on the Company's
applications and that CRTC may have additional questions or interrogatories.
The CRTC is not expected to make a decision on this matter until late this
year or early 2007. There can be no assurance that TELUS will receive any
relief from qualify of service penalties for the flooding and work stoppage
events.
Implementation of wireless number portability ("WNP") - Telecom
Decision CRTC 2005-72
On December 20, 2005, the CRTC issued Decision 2005-72 and directed Bell
Mobility, Rogers Wireless Inc. and the wireless division of TELUS to implement
wireless number portability in British Columbia, Alberta, Ontario and Quebec
where local exchange carrier-to-local exchange carrier ("LEC-to-LEC") local
number portability is currently in place by March 14, 2007. In other areas and
for other wireless carriers, wireless number portability (where LEC-to-LEC
local number portability is currently in place) for porting-out must be
implemented by March 14, 2007 and for porting-in must be implemented by
September 12, 2007. There is no assurance that TELUS and the other Canadian
wireless carriers will be able to implement wireless number portability in the
required timeframe without incurring significant additional costs and/or
ongoing administration costs. Implementation of wireless number portability
may result in increased migration of network access lines to wireless
services, increased wireless subscriber monthly churn or additional customer
retention costs for TELUS.
WNP, when instituted in the U.S. in 2003, did not cause a large increase
in churn as was initially anticipated. In addition, TELUS believes that WNP
may open up an opportunity to more effectively market into the
business/enterprise market in Central Canada where TELUS has a lower market
share than our wireless competitors and lack of WNP is believed to have
decreased its sales effectiveness. However, there can be no assurance that
this will be the case.
10.2 Human resources
The outcome of outstanding collective bargaining at TELUS Quebec may
result in increased costs, reduced productivity or work disruptions
Negotiations between TELUS Quebec and the Syndicat quebecois des employes
de TELUS continued during the second quarter for the expired collective
agreement covering approximately 1,000 office, clerical and technical
employees. In July 2006, a tentative agreement was signed by Company and the
union, which includes certain lump sum payments, scheduled increases, the
introduction of variable pay based on Company performance, and changes to
other terms and conditions of employment. The tentative agreement was
recommended for acceptance by the union executive, and if ratified by the
union membership over the summer, the new agreement would expire in at the end
of 2009. There can be no assurance that tentative agreement will be ratified,
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
this collective bargaining process.
10.3 Business integration and internal reorganizations
On November 24, 2005, TELUS Corporation announced the integration of the
wireline and wireless operations of the business into a single operating
structure. This integration incorporates TELUS' customer-facing business
units, technology infrastructure, operations and shared services. There is no
assurance that this integration will provide the benefits and efficiencies
that are planned and/or that there will not be significant difficulties in
combining the two structures, which could result in a negative impact on
operating and financial results.
10.4 Process risks
TELUS systems and processes could negatively impact financial
results and customer service - Billing/revenue assurance
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, with a
pilot and testing planned for the third quarter of 2006. There can be no
assurance that this undertaking will not negatively impact TELUS' customer
service levels, competitive position and financial results. As well,
significant time delays in implementing this system could negatively impact
TELUS' competitive ability to quickly and effectively launch new products and
services; achieve and maintain a competitive cost structure; and deliver
better information and analytics to management.
Also, as a result of system changes, staff reduction and training
requirements associated with TELUS' ongoing efficiency improvement efforts,
there is potential for further impact on the operations of TELUS' internal
processes involved with billing that could negatively affect TELUS' earnings.
11. Reconciliation of non-GAAP measures and definition of key operating
indicators
11.1 Earnings before interest taxes depreciation and amortization
(EBITDA)
TELUS has issued guidance on and reports EBITDA because it is a key
measure used by management to evaluate performance of business units, segments
and the Company. EBITDA is also utilized in measuring compliance with debt
covenants. EBITDA is a measure commonly reported and widely used by investors
as an indicator of a company's operating performance and ability to incur and
service debt, and as a valuation metric. The Company believes EBITDA assists
investors in comparing a company's performance on a consistent basis without
regard to depreciation and amortization, which are non-cash in nature and can
vary significantly depending upon accounting methods or non-operating factors
such as historical cost.
EBITDA is not a calculation based on Canadian or U.S. GAAP and should not
be considered an alternative to Operating income or Net income in measuring
the Company's performance, nor should it be used as an exclusive measure of
cash flow, because it does not consider the impact of working capital growth,
capital expenditures, debt principal reductions and other sources and uses of
cash, which are disclosed in the consolidated statements of cash flows.
Investors should carefully consider the specific items included in TELUS'
computation of EBITDA. While EBITDA has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance and debt
servicing ability relative to other companies, investors should be cautioned
that EBITDA as reported by TELUS may not be comparable in all instances to
EBITDA as reported by other companies.
The following is a reconciliation of EBITDA with Net income and Operating
income:
-------------------------------------------------------------------------
Quarters ended Six-month periods
June 30 ended June 30
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Net income 356.6 189.5 566.7 431.7
Other expense (income) 9.6 0.5 13.9 2.0
Financing costs 127.5 168.2 254.5 306.6
Income taxes 18.7 106.0 134.8 176.3
Non-controlling interest 2.6 1.7 4.7 3.3
-------------------------------------------------------------------------
Operating income 515.0 465.9 974.6 919.9
Depreciation 335.2 330.9 674.4 660.8
Amortization of intangible
assets 46.9 68.2 110.8 140.5
-------------------------------------------------------------------------
EBITDA 897.1 865.0 1,759.8 1,721.2
-------------------------------------------------------------------------
In addition to EBITDA, TELUS calculates EBITDA less capital expenditures
as a simple proxy for cash flow in its two reportable segments. EBITDA less
capital expenditures is used for comparison to the reported results for other
telecommunications companies and is subject to the potential comparability
issues of EBITDA described above. EBITDA less capital expenditures is
calculated for TELUS as follows:
-------------------------------------------------------------------------
Quarters ended Six-month periods
June 30 ended June 30
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
EBITDA 897.1 865.0 1,759.8 1,721.2
Capital expenditures ("Capex") (458.8) (408.7) (779.3) (681.9)
-------------------------------------------------------------------------
EBITDA less capital expenditures 438.3 456.3 980.5 1,039.3
-------------------------------------------------------------------------
11.2 Free cash flow
The Company has issued guidance on and reports free cash flow because it
is a key measure used by management to evaluate performance of TELUS
Corporation. Free cash flow excludes certain working capital changes and other
sources and uses of cash, which are disclosed in the consolidated statements
of cash flows. Free cash flow is not a calculation based on Canadian or U.S.
GAAP and should not be considered an alternative to the consolidated
statements of cash flows. Free cash flow is a measure that can be used to
gauge TELUS' performance over time. Investors should be cautioned that free
cash flow as reported by TELUS may not be comparable in all instances to free
cash flow as reported by other companies. While the closest GAAP measure is
Cash provided by operating activities less Cash used by investing activities,
free cash flow is considered relevant because it provides an indication of how
much cash generated by operations is available after capital expenditures, but
before proceeds from divested assets, and changes in certain working capital
items (such as trade receivables, which can be significantly distorted by
securitization changes that do not reflect operating results, and trade
payables).
The following reconciles free cash flow with Cash provided by operating
activities less Cash used by investing activities:
-------------------------------------------------------------------------
Quarters ended Six-month periods
June 30 ended June 30
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Cash provided by operating
activities 813.0 687.7 1,486.1 1,416.1
Cash (used) by investing
activities (486.1) (410.0) (802.2) (716.2)
-------------------------------------------------------------------------
326.9 277.7 683.9 699.9
Net employee defined benefit
plans expense 1.3 0.4 2.9 (1.1)
Employer contributions to
employee defined benefit plans 45.0 22.3 75.5 59.7
Amortization of deferred gains
on sale-leaseback of buildings,
amortization of deferred
charges and other, net 7.3 (4.1) (8.6) 0.3
Reduction (increase) in
securitized accounts
receivable (135.0) - (35.0) -
Non-cash working capital
changes except changes in
taxes, interest, and
securitized accounts
receivable, and other (74.2) (89.8) 97.1 (18.7)
Acquisition 19.5 1.9 19.5 29.4
Proceeds from the sale of
property and other assets (0.6) (2.7) (8.0) (3.4)
Other investing activities 8.4 2.1 11.4 8.3
-------------------------------------------------------------------------
Free cash flow 198.6 207.8 838.7 774.4
-------------------------------------------------------------------------
The following shows management's calculation of free cash flow.
-------------------------------------------------------------------------
Quarters ended Six-month periods
June 30 ended June 30
($ millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
EBITDA 897.1 865.0 1,759.8 1,721.2
Restructuring and workforce
reduction costs net of cash
payments 19.0 (1.0) 3.4 (13.3)
Share-based compensation 12.7 7.1 21.1 10.9
Cash interest paid (271.5) (293.8) (284.6) (306.9)
Cash interest received 0.8 18.8 23.3 25.1
Income taxes received (paid) (0.7) 20.4 95.0 19.3
Capital expenditures (458.8) (408.7) (779.3) (681.9)
-------------------------------------------------------------------------
Free cash flow 198.6 207.8 838.7 774.4
-------------------------------------------------------------------------
11.3 Definition of key operating indicators
These measures are industry metrics and are useful in assessing the
operating performance of a wireless company.
Churn per month is calculated as the number of subscriber units
disconnected during a given period divided by the average number of subscriber
units on the network during the period, and expressed as a rate per month. A
prepaid subscriber is disconnected when the subscriber has no usage for 90
days following expiry of the prepaid card.
Cost of acquisition ("COA") consists of the total of handset subsidies,
commissions, and advertising and promotion expenses related to the initial
subscriber acquisition during a given period. As defined, COA excludes costs
to retain existing subscribers (retention spend). COA for the second quarter
and first six months of 2006 was $120.9 million and $238.8 million,
respectively. COA for the same periods in 2005 was $102.1 million and
$191.9 million, respectively.
COA per gross subscriber addition is calculated as cost of acquisition
divided by gross subscriber activations during the period.
Average revenue per subscriber unit ("ARPU") is calculated as Network
revenue divided by the average number of subscriber units on the network
during the period and expressed as a rate per month. Data ARPU is a component
of ARPU, calculated on the same basis for revenues derived from services such
text messaging, mobile computing, personal digital assistance devices,
Internet browser activity and pay-per-use downloads.
Retention spend to Network revenue represents direct costs associated
with marketing and promotional efforts aimed at the retention of the existing
subscriber base divided by Network revenue.
EBITDA excluding COA is a measure of operational profitability normalized
for the period costs of adding new customers. See the definition for cost of
acquisition, above.
11.4 Definition of liquidity and capital resource measures
The following definitions are presented in the order that they appear in
Section 7.4 Liquidity and capital resource measures.
Net debt is a non-GAAP measure whose nearest GAAP measure is the sum of
Long-term debt and Current maturities of long-term debt, as reconciled below.
Net debt is one component of a ratio used to determine compliance with debt
covenants (refer to the description of Net debt to EBITDA below).
-------------------------------------------------------------------------
At June 30
($ millions) 2006 2005
-------------------------------------------------------------------------
Current maturities of long-term debt 1,376.4 1,581.0
Long-term debt 3,354.1 4,691.1
-------------------------------------------------------------------------
4,730.5 6,272.1
Deferred hedging liability 990.5 965.4
-------------------------------------------------------------------------
Debt 5,721.0 7,237.5
Cash and temporary investments 18.6 (1,141.1)
-------------------------------------------------------------------------
Net debt 5,739.6 6,096.4
-------------------------------------------------------------------------
The deferred hedging liability in the table above relates to cross
currency interest rate swaps that effectively convert principal
repayments and interest obligations to Canadian dollar obligations in
respect of the U.S. $1,166.5 million debenture maturing June 1, 2007 and
the U.S. $1,925.0 million debenture maturing June 1, 2011. Management
believes that Net debt is a useful measure because it incorporates the
exchange rate impact of cross currency swaps put into place that fix the
value of U.S. dollar-denominated debt, and because it represents the
amount of long-term debt obligations that are not covered by available
cash and temporary investments.
Total capitalization is defined as Net debt plus Non-controlling interest
and Shareholders' equity.
Net debt to total capitalization provides a measure of the proportion of
debt used in the Company's capital structure. The long-term target ratio for
Net debt to total capitalization is 45 to 50%.
EBITDA excluding restructuring is used for the calculation of Net debt to
EBITDA and EBITDA interest coverage, consistent with the calculation of the
Leverage Ratio and the Coverage Ratio in credit facility covenants.
Restructuring and workforce reduction costs were $84.5 million and
$52.8 million respectively for the 12-month periods ended June 30, 2006 and
2005.
Net debt to EBITDA is defined as Net debt as at the end of the period
divided by the 12-month trailing EBITDA excluding restructuring. This measure
is substantially the same as the Leverage Ratio covenant in TELUS' credit
facilities. TELUS' revised guideline range for Net debt to EBITDA is from
1.5:1 to 2.0:1.
Net interest cost is defined as Financing costs before gains on
redemption and repayment of debt, calculated on a 12-month trailing basis. No
gains on redemption and repayment of debt were recorded in the respective
periods. Losses recorded on the redemption of long-term debt are included in
net interest cost. Net interest costs for the 12-months ending June 30, 2006
and 2005 are equivalent to reported quarterly financing costs over those
periods.
Interest coverage on long-term debt is calculated on a 12-month trailing
basis as Net income before interest expense on long-term debt and income tax
expense divided by interest expense on long-term debt. Interest expense on
long-term debt for the 12-month trailing period ending June 30, 2006 includes
losses on redemption of long-term debt, while for the 12-month period ended
June 30, 2005, it includes a significant accrual for estimated costs to settle
a lawsuit.
EBITDA interest coverage is defined as EBITDA excluding restructuring
divided by Net interest cost. This measure is substantially the same as the
Coverage Ratio covenant in TELUS' credit facilities.
Dividend payout ratio is defined as the most recent quarterly dividend
declared per share multiplied by four and divided by basic earnings per share
for the 12-month trailing period. The target guideline for the annual dividend
payout ratio on a prospective basis, rather than on a trailing basis, is 45 to
55% of sustainable net earnings.
Funded debt, in general terms, is borrowed funds less cash on hand as
defined in the Company's bank agreements.
TELUS Corporation
consolidated statements of income
__________________________________
Periods ended June 30 Three months Six months
(millions except per
share amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------
OPERATING REVENUES $ 2,135.2 $ 2,018.5 $ 4,215.7 $ 3,993.2
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,207.4 1,146.1 2,408.5 2,255.2
Restructuring and
workforce reduction costs 30.7 7.4 47.4 16.8
Depreciation 335.2 330.9 674.4 660.8
Amortization of
intangible assets 46.9 68.2 110.8 140.5
-------------------------------------------------------------------------
1,620.2 1,552.6 3,241.1 3,073.3
-------------------------------------------------------------------------
OPERATING INCOME 515.0 465.9 974.6 919.9
Other expense, net 9.6 0.5 13.9 2.0
Financing costs 127.5 168.2 254.5 306.6
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES
AND NON-CONTROLLING
INTEREST 377.9 297.2 706.2 611.3
Income taxes 18.7 106.0 134.8 176.3
Non-controlling interests 2.6 1.7 4.7 3.3
-------------------------------------------------------------------------
NET INCOME AND COMMON
SHARE AND NON-VOTING
SHARE INCOME $ 356.6 $ 189.5 $ 566.7 $ 431.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INCOME PER COMMON SHARE
AND NON-VOTING SHARE
- Basic $ 1.03 $ 0.53 $ 1.63 $ 1.20
- Diluted $ 1.02 $ 0.52 $ 1.62 $ 1.19
DIVIDENDS DECLARED PER
COMMON SHARE AND
NON-VOTING SHARE $ 0.275 $ 0.20 $ 0.55 $ 0.40
TOTAL WEIGHTED AVERAGE
COMMON SHARES AND NON-
VOTING SHARES OUTSTANDING
- Basic 344.9 358.1 347.1 359.1
- Diluted 348.5 362.4 350.6 362.9
TELUS Corporation
consolidated balance sheets
___________________________
June 30, December
As at (millions) 2006 31, 2005
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ - $ 8.6
Accounts receivable 514.1 610.3
Income and other taxes receivable 24.3 103.7
Inventories 115.8 138.8
Prepaid expenses and other 294.5 154.7
Current portion of future income taxes - 226.4
-------------------------------------------------------------------------
948.7 1,242.5
-------------------------------------------------------------------------
Capital Assets, Net
Property, plant, equipment and other 7,383.8 7,339.4
Intangible assets subject to amortization 576.0 637.5
Intangible assets with indefinite lives 2,966.3 2,964.6
-------------------------------------------------------------------------
10,926.1 10,941.5
-------------------------------------------------------------------------
Other Assets
Deferred charges 925.3 850.2
Investments 34.8 31.2
Goodwill 3,172.3 3,156.9
-------------------------------------------------------------------------
4,132.4 4,038.3
-------------------------------------------------------------------------
$16,007.2 $16,222.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ 18.6 $ -
Accounts payable and accrued liabilities 1,509.1 1,393.7
Income and other taxes payable 9.7 -
Restructuring and workforce reduction accounts
payable and accrued liabilities 60.5 57.1
Advance billings and customer deposits 582.6 571.8
Current maturities of long-term debt 1,376.4 5.0
Current portion of future income taxes 43.3 -
-------------------------------------------------------------------------
3,600.2 2,027.6
-------------------------------------------------------------------------
Long-Term Debt 3,354.1 4,639.9
-------------------------------------------------------------------------
Other Long-Term Liabilities 1,310.3 1,635.3
-------------------------------------------------------------------------
Future Income Taxes 878.2 1,023.9
-------------------------------------------------------------------------
Non-Controlling Interests 25.3 25.6
-------------------------------------------------------------------------
Shareholders' Equity 6,839.1 6,870.0
-------------------------------------------------------------------------
$16,007.2 $16,222.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
consolidated statements of cash flows
_____________________________________
Three months Six months
Periods ended June 30
(millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 356.6 $ 189.5 $ 566.7 $ 431.7
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and
amortization 382.1 399.1 785.2 801.3
Future income taxes 25.4 103.3 138.5 195.0
Share-based compensation 12.7 7.1 21.1 10.9
Net employee defined
benefit plans expense (1.3) (0.4) (2.9) 1.1
Employer contributions
to employee defined
benefit plans (45.0) (22.3) (75.5) (59.7)
Restructuring and
workforce reduction costs,
net of cash payments 19.0 (1.0) 3.4 (13.3)
Amortization of deferred
gains on sale-leaseback
of buildings, amortization
of deferred charges and
other, net (7.3) 4.1 8.6 (0.3)
Net change in non-cash
working capital 70.8 8.3 41.0 49.4
-------------------------------------------------------------------------
Cash provided by operating
activities 813.0 687.7 1,486.1 1,416.1
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (458.8) (408.7) (779.3) (681.9)
Acquisitions (19.5) (1.9) (19.5) (29.4)
Proceeds from the sale of
property and other assets 0.6 2.7 8.0 3.4
Change in non-current
materials and supplies,
purchase of investments
and other (8.4) (2.1) (11.4) (8.3)
-------------------------------------------------------------------------
Cash used by investing
activities (486.1) (410.0) (802.2) (716.2)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-
Voting Shares issued 12.5 56.1 45.7 144.0
Dividends to shareholders (94.8) (143.9) (190.7) (143.9)
Purchase of Common Shares
and Non-Voting Shares
for cancellation (249.4) (272.1) (481.0) (430.4)
Long-term debt issued 662.2 4.4 842.8 4.4
Redemptions and repayment
of long-term debt (362.5) (19.3) (615.5) (20.3)
Partial payment of deferred
hedging liability (309.4) - (309.4) -
Dividends paid by a
subsidiary to non-
controlling interests (3.0) (7.9) (3.0) (7.9)
Other - (1.2) - (1.2)
-------------------------------------------------------------------------
Cash used by financing
activities (344.4) (383.9) (711.1) (455.3)
-------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in
cash and temporary
investments, net (17.5) (106.2) (27.2) 244.6
Cash and temporary
investments, net,
beginning of period (1.1) 1,247.3 8.6 896.5
-------------------------------------------------------------------------
Cash and temporary
investments, net,
end of period $ (18.6) $ 1,141.1 $ (18.6) $ 1,141.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS
Interest (paid) $ (271.5) $ (293.8) $ (284.6) $ (306.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest received $ 0.8 $ 18.8 $ 23.3 $ 25.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income taxes received
(paid), net $ (0.7) $ 20.4 $ 95.0 $ 19.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
segmented information
_____________________
Three-month periods
ended June 30 Wireline Wireless
(millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating revenues
External revenue $ 1,189.9 $ 1,216.5 $ 945.3 $ 802.0
Intersegment revenue 24.8 21.2 5.2 5.7
-------------------------------------------------------------------------
1,214.7 1,237.7 950.5 807.7
-------------------------------------------------------------------------
Operating expenses
Operations expense 728.6 731.8 508.8 441.2
Restructuring and work-
force reduction costs 29.8 7.4 0.9 -
-------------------------------------------------------------------------
758.4 739.2 509.7 441.2
-------------------------------------------------------------------------
EBITDA(1) $ 456.3 $ 498.5 $ 440.8 $ 366.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 311.4 $ 293.9 $ 147.4 $ 114.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 144.9 $ 204.6 $ 293.4 $ 251.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three-month periods
ended June 30 Eliminations Consolidated
(millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 2,135.2 $ 2,018.5
Intersegment revenue (30.0) (26.9) - -
-------------------------------------------------------------------------
(30.0) (26.9) 2,135.2 2,018.5
-------------------------------------------------------------------------
Operating expenses
Operations expense (30.0) (26.9) 1,207.4 1,146.1
Restructuring and work-
force reduction costs - - 30.7 7.4
-------------------------------------------------------------------------
(30.0) (26.9) 1,238.1 1,153.5
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 897.1 $ 865.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 458.8 $ 408.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 438.3 $ 456.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six-month periods
ended June 30 Wireline Wireless
(millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating revenues
External revenue $ 2,388.5 $ 2,438.7 $ 1,827.2 $ 1,554.5
Intersegment revenue 48.3 43.8 11.1 11.5
-------------------------------------------------------------------------
2,436.8 2,482.5 1,838.3 1,566.0
-------------------------------------------------------------------------
Operating expenses
Operations expense 1,469.0 1,448.4 998.9 862.1
Restructuring and work-
force reduction costs 44.7 16.8 2.7 -
-------------------------------------------------------------------------
1,513.7 1,465.2 1,001.6 862.1
-------------------------------------------------------------------------
EBITDA(1) $ 923.1 $ 1,017.3 $ 836.7 $ 703.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 570.4 $ 507.5 $ 208.9 $ 174.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 352.7 $ 509.8 $ 627.8 $ 529.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six-month periods
ended June 30 Eliminations Consolidated
(millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 4,215.7 $ 3,993.2
Intersegment revenue (59.4) (55.3) - -
-------------------------------------------------------------------------
(59.4) (55.3) 4,215.7 3,993.2
-------------------------------------------------------------------------
Operating expenses
Operations expense (59.4) (55.3) 2,408.5 2,255.2
Restructuring and work-
force reduction costs - - 47.4 16.8
-------------------------------------------------------------------------
(59.4) (55.3) 2,455.9 2,272.0
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 1,759.8 $ 1,721.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 779.3 $ 681.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 980.5 $ 1,039.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is a non-GAAP measure and is defined by the Company as
operating revenues less operations expense and restructuring and
workforce reduction costs. The Company has issued guidance on, and
reports, EBITDA because it is a key measure used by management to
evaluate performance of its business segments and is utilized in
measuring compliance with certain debt covenants.
(2) Total capital expenditures ("CAPEX").
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 4, 2006
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary