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___ 2007
(Commission File No. 000-24876)
TELUS Corporation
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal registered offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
X
Form 20-F _____ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
X
Yes _____ No _____
This Form 6-K consists of the following:
Second Quarter Results
dated August 3, 2007
CONSOLIDATED FINANCIAL STATEMENTS
and
MANAGEMENT'S DISCUSSION AND ANALYSIS
______________________________________________________________________________
TELUS CORPORATION
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2007
______________________________________________________________________________
---------------------------------------------------------------------------------------------------------------------
interim consolidated statements of income (unaudited)
---------------------------------------------------------------------------------------------------------------------
Three months Six months
Periods ended June 30 (millions except per share amounts) 2007 2006 2007 2006
--------------------------------------------------------- ------------- ------------- ------------- -------------
(restated - (restated -
Note 2(b)) Note 2(b))
OPERATING REVENUES $ 2,228.1 $ 2,135.2 $ 4,433.7 $ 4,215.7
--------------------------------------------------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES
Operations 1,340.3 1,207.4 2,776.9 2,408.5
Restructuring costs (Note 6) 3.2 30.7 7.9 47.4
Depreciation 318.3 335.2 636.0 674.4
Amortization of intangible assets 72.5 46.9 122.1 110.8
--------------------------------------------------------- ------------- ------------- ------------- -------------
1,734.3 1,620.2 3,542.9 3,241.1
--------------------------------------------------------- ------------- ------------- ------------- -------------
OPERATING INCOME 493.8 515.0 890.8 974.6
Other expense, net 18.5 9.6 22.3 13.9
Financing costs (Note 7) 127.2 127.5 244.8 254.5
--------------------------------------------------------- ------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND NON-CONTROLLING
INTEREST 348.1 377.9 623.7 706.2
Income taxes (Note 8) 93.7 18.7 173.0 134.8
Non-controlling interests 1.3 2.6 2.8 4.7
--------------------------------------------------------- ------------- ------------- ------------- -------------
NET INCOME AND COMMON SHARE AND NON-VOTING
SHARE INCOME 253.1 356.6 447.9 566.7
OTHER COMPREHENSIVE INCOME (Note 16(d))
Change in unrealized fair value of derivatives
designated as cash flow hedges 27.9 -- 55.8 --
Foreign currency translation adjustment arising
from translating financial statements of
self-sustaining foreign operations (6.2) 0.1 (3.8) 0.8
Change in unrealized fair value of
available-for-sale financial assets (0.1) -- (0.1) --
--------------------------------------------------------- ------------- ------------- ------------- -------------
21.6 0.1 51.9 0.8
--------------------------------------------------------- ------------- ------------- ------------- -------------
COMPREHENSIVE INCOME $ 274.7 $ 356.7 $ 499.8 $ 567.5
========================================================= ============= ============= ============= =============
NET INCOME PER COMMON SHARE AND NON-VOTING SHARE
(Note 9)
- Basic $ 0.76 $ 1.03 $ 1.34 $ 1.63
- Diluted $ 0.75 $ 1.02 $ 1.32 $ 1.62
DIVIDENDS DECLARED PER COMMON SHARE AND
NON-VOTING SHARE $ 0.375 $ 0.275 $ 0.75 $ 0.55
TOTAL WEIGHTED AVERAGE COMMON SHARES AND
NON-VOTING SHARES OUTSTANDING
- Basic 333.5 344.9 335.3 347.1
- Diluted 336.9 348.5 338.3 350.6
The accompanying notes are an integral part of these interim consolidated financial statements
TELUS(R) 2
---------------------------------------------------------------------------------------------------------------------------------
interim consolidated statements of retained earnings and
accumulated other comprehensive income (loss) (unaudited)
---------------------------------------------------------------------------------------------------------------------------------
Six-month periods ended June 30 2007 2006
--------------------------------------- ------------------------------------------ ---------------------------------------------
(millions) Accumulated Accumulated
other other
Retained comprehensive Retained comprehensive
earnings income (loss) Total earnings income (loss) Total
--------------------------------------- ------------ --------------- ----------- ------------ ---------------- -------------
(Note 2(b)) (Note 2(b))
BALANCE AT BEGINNING OF PERIOD $ 1,080.1 $ (1.5) $ 1,078.6 $ 849.7 $ (7.3) $ 842.4
Accumulated other comprehensive income
transitional amounts (Notes 2(b),
16(d)) -- (176.2) (176.2) -- -- --
--------------------------------------- ------------ --------------- ----------- ------------ ---------------- -------------
1,080.1 (177.7) 902.4 849.7 (7.3) 842.4
Income 447.9 51.9 499.8 566.7 0.8 567.5
--------------------------------------- ------------ --------------- ----------- ------------ ---------------- -------------
1,528.0 (125.8) 1,402.2 1,416.4 (6.5) 1,409.9
Common Share and Non-Voting Share
dividends paid, or payable, in cash (250.9) -- (250.9) (190.7) -- (190.7)
Purchase of Common Shares and
Non-Voting Shares in excess of
stated capital (Note 16(g)) (257.4) -- (257.4) (294.7) -- (294.7)
Adjustment of tax treatment of items
charged directly to retained earnings -- -- -- 16.1 -- 16.1
Other 3.7 -- 3.7 2.1 -- 2.1
--------------------------------------- ------------ --------------- ----------- ------------ ---------------- -------------
BALANCE AT END OF PERIOD (Note 16) $ 1,023.4 $ (125.8) $ 897.6 $ 949.2 $ (6.5) $ 942.7
======================================= ============ =============== =========== ============ ================ =============
The accompanying notes are an integral part of these interim consolidated financial statements
TELUS(R) 3
---------------------------------------------------------------------------------------------------------------------------
interim consolidated balance sheets (unaudited)
---------------------------------------------------------------------------------------------------------------------------
As at (millions) June 30, 2007 December 31, 2006
-------------------------------------------------------------------------------- -------------------- --------------------
(adjusted -
Notes 2(b)-(c))
ASSETS
Current Assets
Cash and temporary investments, net $ 2.2 $ --
Short-term investments 54.8 110.2
Accounts receivable (Notes 12,18(b)) 571.8 707.2
Income and other taxes receivable 99.2 95.4
Inventories 158.8 196.4
Prepaid expenses and other (Note 18(b)) 291.7 195.3
Current portion of derivative assets 48.7 40.4
-------------------------------------------------------------------------------- -------------------- --------------------
1,227.2 1,344.9
-------------------------------------------------------------------------------- -------------------- --------------------
Capital Assets, Net (Note 13)
Property, plant, equipment and other 7,296.7 7,466.5
Intangible assets subject to amortization 813.4 549.2
Intangible assets with indefinite lives 2,966.5 2,966.4
-------------------------------------------------------------------------------- -------------------- --------------------
11,076.6 10,982.1
-------------------------------------------------------------------------------- -------------------- --------------------
Other Assets
Deferred charges (Note 18(b)) 1,064.6 956.6
Investments 30.6 35.2
Goodwill (Note 14) 3,168.8 3,169.5
-------------------------------------------------------------------------------- -------------------- --------------------
4,264.0 4,161.3
-------------------------------------------------------------------------------- -------------------- --------------------
$ 16,567.8 $ 16,488.3
================================================================================ ==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ -- $ 11.5
Accounts payable and accrued liabilities (Note 18(b)) 1,547.9 1,363.6
Income and other taxes payable 6.7 10.3
Restructuring accounts payable and accrued liabilities (Note 6) 28.8 53.1
Advance billings and customer deposits (Note 18(b)) 609.4 606.3
Current maturities of long-term debt (Note 15) 6.4 1,433.5
Current portion of derivative liabilities 10.1 165.8
Current portion of future income taxes 258.1 137.2
-------------------------------------------------------------------------------- -------------------- --------------------
2,467.4 3,781.3
-------------------------------------------------------------------------------- -------------------- --------------------
Long-Term Debt (Note 15) 4,800.5 3,474.7
-------------------------------------------------------------------------------- -------------------- --------------------
Other Long-Term Liabilities (Note 18(b)) 1,644.4 1,257.3
-------------------------------------------------------------------------------- -------------------- --------------------
Future Income Taxes 1,018.6 1,023.3
-------------------------------------------------------------------------------- -------------------- --------------------
Non-Controlling Interests 22.1 23.6
-------------------------------------------------------------------------------- -------------------- --------------------
Shareholders' Equity (Note 16) 6,614.8 6,928.1
-------------------------------------------------------------------------------- -------------------- --------------------
$ 16,567.8 $ 16,488.3
================================================================================ ==================== ====================
Commitments and Contingent Liabilities (Note 17)
The accompanying notes are an integral part of these interim consolidated financial statements
TELUS(R) 4
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interim consolidated statements of cash flows (unaudited)
----------------------------------------------------------------------------------------------------------------------------
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
--------------------------------------------------------------- ------------- -------------- ------------- -------------
OPERATING ACTIVITIES
Net income $ 253.1 $ 356.6 $ 447.9 $ 566.7
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 390.8 382.1 758.1 785.2
Future income taxes 92.5 25.4 170.7 138.5
Share-based compensation (Note 10(a)) (8.9) 12.7 129.7 21.1
Net employee defined benefit plans expense (21.0) (1.3) (45.0) (2.9)
Employer contributions to employee defined benefit plans (14.7) (45.0) (48.6) (75.5)
Restructuring costs, net of cash payments (Note 6) (7.3) 19.0 (24.3) 3.4
Amortization of deferred gains on sale-leaseback of
buildings, amortization of deferred charges and
other, net 4.3 (7.3) (4.8) 8.6
Net change in non-cash working capital (Note 18(c)) 373.1 70.8 138.8 41.0
--------------------------------------------------------------- ------------- -------------- ------------- -------------
Cash provided by operating activities 1,061.9 813.0 1,522.5 1,486.1
--------------------------------------------------------------- ------------- -------------- ------------- -------------
INVESTING ACTIVITIES
Capital expenditures (Notes 5, 13) (481.8) (458.8) (863.7) (779.3)
Acquisitions -- (19.5) -- (19.5)
Proceeds from the sale of property and other assets 1.3 0.6 1.3 8.0
Change in non-current materials and supplies, purchase of
investments and other 2.7 (8.4) (7.7) (11.4)
--------------------------------------------------------------- ------------- -------------- ------------- -------------
Cash used by investing activities (477.8) (486.1) (870.1) (802.2)
--------------------------------------------------------------- ------------- -------------- ------------- -------------
FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 0.2 12.5 0.6 45.7
Dividends to shareholders (125.0) (94.8) (250.9) (190.7)
Purchase of Common Shares and Non-Voting Shares for
cancellation (Note 16(g)) (169.5) (249.4) (370.2) (481.0)
Long-term debt issued (Note 15) 993.8 662.2 2,091.6 842.8
Redemptions and repayment of long-term debt (Note 15) (1,811.1) (362.5) (2,104.6) (615.5)
Partial repayment of deferred hedging liability -- (309.4) -- (309.4)
Dividends paid by a subsidiary to non-controlling interests (4.3) (3.0) (4.3) (3.0)
Other -- -- (0.9) --
--------------------------------------------------------------- ------------- -------------- ------------- -------------
Cash used by financing activities (1,115.9) (344.4) (638.7) (711.1)
--------------------------------------------------------------- ------------- -------------- ------------- -------------
CASH POSITION
Increase (decrease) in cash and temporary investments, net (531.8) (17.5) 13.7 (27.2)
Cash and temporary investments, net, beginning of period 534.0 (1.1) (11.5) 8.6
--------------------------------------------------------------- ------------- -------------- ------------- -------------
Cash and temporary investments, net, end of period $ 2.2 $ (18.6) $ 2.2 $ (18.6)
============================================================== ============= ============== ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Interest (paid) (Note 18(c)) $ (218.5) $ (271.5) $ (242.1) $ (284.6)
============================================================== ============= ============== ============= =============
Interest received $ 5.6 $ 0.8 $ 7.5 $ 23.3
============================================================== ============= ============== ============= =============
Income taxes (inclusive of Investment Tax Credits (Note 8))
(paid) received, net $ (3.6) $ (0.7) $ 2.6 $ 95.0
============================================================== ============= ============== ============= =============
The accompanying notes are an integral part of these interim consolidated financial statements
TELUS(R) 5
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
JUNE 30, 2007
TELUS Corporation is one of Canada's largest telecommunications companies,
providing a full range of telecommunications products and services. The Company
is the largest incumbent telecommunications service provider in Western Canada
and provides data, Internet protocol, voice and wireless services to Central and
Eastern Canada.
Notes to interim consolidated financial statements Page Description
----------------------------------------------------- -------- ----------------------------------------------------------------
General application
----------------------------------------------------- -------- ----------------------------------------------------------------
1. Interim financial statements 7 Summary explanation of basis of presentation of interim
consolidated financial statements
----------------------------------------------------- -------- ----------------------------------------------------------------
2. Accounting policy developments 7 Summary review of generally accepted accounting principle
developments that do, will, or may, affect the Company
----------------------------------------------------- -------- ----------------------------------------------------------------
3. Capital structure financial policies 11 Summary review of the Company's objectives, policies and
processes for managing its capital structure
----------------------------------------------------- -------- ----------------------------------------------------------------
4. Financial instruments 13 Summary schedule and review of financial instruments,
including fair values thereof
----------------------------------------------------- -------- ----------------------------------------------------------------
Consolidated statements of income focused
----------------------------------------------------- -------- ----------------------------------------------------------------
5. Segmented information 15 Summary disclosure of segmented information regularly reported
to the Company's chief operating decision maker
----------------------------------------------------- -------- ----------------------------------------------------------------
6. Restructuring costs 17 Summary continuity schedule and review of restructuring costs
----------------------------------------------------- -------- ----------------------------------------------------------------
7. Financing costs 17 Summary schedule of items comprising financing costs by nature
----------------------------------------------------- -------- ----------------------------------------------------------------
8. Income taxes 17 Summary reconciliations of statutory rate income tax expense
to provision for income taxes
----------------------------------------------------- -------- ----------------------------------------------------------------
9. Per share amounts 18 Summary schedule and review of numerators and denominators
used in calculating per share amounts and related disclosures
----------------------------------------------------- -------- ----------------------------------------------------------------
10. Share-based compensation 19 Summary schedules and review of compensation arising from
share option awards, restricted stock units and employee share
purchase plan
----------------------------------------------------- -------- ----------------------------------------------------------------
11. Employee future benefits 21 Summary and review of employee future benefits and related
disclosures
----------------------------------------------------- -------- ----------------------------------------------------------------
Consolidated balance sheets focused
----------------------------------------------------- -------- ----------------------------------------------------------------
12. Accounts receivable 23 Summary schedule and review of arm's-length securitization
trust transactions and related disclosures
----------------------------------------------------- -------- ----------------------------------------------------------------
13. Capital assets 24 Summary schedule of items comprising capital assets
----------------------------------------------------- -------- ----------------------------------------------------------------
14. Goodwill 25 Summary schedule of goodwill
----------------------------------------------------- -------- ----------------------------------------------------------------
15. Long-term debt 25 Summary schedule of long-term debt and related disclosures
----------------------------------------------------- -------- ----------------------------------------------------------------
16. Shareholders' equity 28 Summary schedules and review of shareholders' equity and
changes therein including details of other comprehensive
income, accumulated other comprehensive income, share option
price stratification and normal course issuer bid summaries
----------------------------------------------------- -------- ----------------------------------------------------------------
17. Commitments and contingent liabilities 33 Summary review of contingent liabilities, guarantees, claims
and lawsuits
----------------------------------------------------- -------- ----------------------------------------------------------------
Other
----------------------------------------------------- -------- ----------------------------------------------------------------
18. Additional financial information 35 Summary schedules of items comprising certain primary financial
statement line items
----------------------------------------------------- -------- ----------------------------------------------------------------
19. Differences between Canadian and United States 37 Summary schedules and review of differences between Canadian
generally accepted accounting principles and United States generally accepted accounting principles as
they apply to the Company
----------------------------------------------------- -------- ----------------------------------------------------------------
TELUS(R) 6
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
1 interim financial statements
The notes presented in these interim consolidated financial statements include
only significant events and transactions and are not fully inclusive of all
matters normally disclosed in TELUS Corporation's annual audited financial
statements. As a result, these interim consolidated financial statements should
be read in conjunction with the TELUS Corporation audited consolidated financial
statements for the year ended December 31, 2006. These interim consolidated
financial statements follow the same accounting policies and methods of their
application as set out in the TELUS Corporation consolidated financial
statements for the year ended December 31, 2006, other than as set out in Note
2, including that certain of the comparative amounts have been reclassified to
conform with the presentation adopted currently. Accordingly, these interim
consolidated financial statements reflect all adjustments (which are of a normal
recurring nature) that are, in the opinion of the Company, necessary for a fair
statement of the results for the interim periods presented.
The terms "TELUS" or "Company" are used to mean TELUS Corporation and,
where the context of the narrative permits, or requires, its subsidiaries.
2 accounting policy developments
(a) Convergence with International Financial Reporting Standards
In 2006, Canada's Accounting Standards Board ratified a strategic plan that will
result in Canadian generally accepted accounting principles (Canadian "GAAP"),
as used by public companies, being converged with International Financial
Reporting Standards over a transitional period currently expected to be complete
by 2011. The precise timing of convergence will depend on an Accounting
Standards Board "progress review" to be undertaken and released by March 31,
2008.
Canadian GAAP will be converged with International Financial Reporting
Standards through a combination of two methods: as current joint-convergence
projects of the United States' Financial Accounting Standards Board and the
International Accounting Standards Board are agreed upon, they will be adopted
by Canada's Accounting Standards Board and may be introduced in Canada before
the complete changeover to International Financial Reporting Standards; and
standards not subject to a joint-convergence project will be exposed in an
omnibus manner.
As this convergence initiative is very much in its infancy as of the date
of these consolidated financial statements, it is premature to currently assess
the impact of the initiative, if any, on the Company.
(b) Comprehensive income; recognition and measurement of financial instruments
Overview: Commencing with the Company's 2007 fiscal year, the recommendations of
the Canadian Institute of Chartered Accountants ("CICA") for accounting for
comprehensive income (CICA Handbook Section 1530), for the recognition and
measurement of financial instruments (CICA Handbook Section 3855) and for hedges
(CICA Handbook Section 3865) apply to the Company. Currently, the concept of
comprehensive income for purposes of Canadian GAAP, in the Company's specific
instance, is primarily to include changes in shareholders' equity arising from
unrealized changes in the fair values of certain financial instruments.
The majority of the impact on the Company of adopting the other
comprehensive income and related standards currently arises from the Company's
cross currency interest rate swap agreements, as discussed further in Note 15(b)
and, to a lesser extent, the cash-settled equity forward agreements that the
Company entered into in respect of share-based compensation, as discussed
further in Note 10(c).
In the application of hedge accounting to U.S. Dollar denominated long-term
debt future cash outflows, an amount (the "hedge value") is recorded in the
Consolidated Balance Sheets in respect of the value of the hedging items. The
difference between the hedge value that would be recorded on the consolidated
balance sheet subsequent to, and prior to, the adoption of the newly applied
CICA recommendations, in respect of the U.S. Dollar denominated long-term debt
future cash flows, is the difference between the fair value of the hedging items
and the hedging asset or liability necessary to recognize the Canadian dollar
equivalent of the value of the hedged items at the rate of exchange in the
hedging items. This is illustrated in the following table:
TELUS(R) 7
--------------------------------------------------------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------------------------------------------------------
As at (millions) June 30, 2007 December 31, 2006
----------------------------------------------------- ----------------- -------------------------------------------------------
2011 Notes 2007 Notes 2011 Notes Total
----------------------------------------------------- ----------------- ----------------- ----------------- -----------------
Canadian dollar equivalent of principal at rates of
exchange in hedging items $ 2,950.5 $ 1,483.3 $ 2,950.5 $ 4,433.8
Canadian dollar equivalent of principal at balance
sheet date rate of exchange 2,047.0 1,357.9 2,240.2 3,598.1
----------------------------------------------------- ----------------- ----------------- ----------------- -----------------
Hedge value necessary to reflect rates of exchange
in hedging items 903.5 125.4 710.3 835.7
Difference arising from newly applied CICA
recommendations(1) 178.3 14.2 250.8 265.0
----------------------------------------------------- ----------------- ----------------- ----------------- -----------------
Fair value of hedging items $ 1,081.8 $ 139.6 $ 961.1 $ 1,100.7
==================================================== ================= ================= ================= =================
(1) The amounts as at December 31, 2006, are included in the transitional adjustments set out in Note 16(d).
Comprehensive income as prescribed by U.S. GAAP, and which is disclosed in
Note 19(g), is largely aligned with comprehensive income as prescribed by
Canadian GAAP, other than for pension accounting impacts. In the Company's
specific instance, U.S. GAAP includes, in respect of pension and other defined
benefit plans, the difference between the net funded states of the plans and the
net accrued benefit asset or liability.
Implementation and application: In the Company's specific instance, the
transitional rules for these sections generally require prospective
implementation at the beginning of a fiscal year (the exception being in respect
of the cumulative foreign currency translation adjustment, which is
retrospectively adjusted for at the beginning of the fiscal year of adoption).
Costs of issuing debt securities, less amortization, are now netted against
the debt security from which they arose. This resulted in a consolidated balance
sheet reclassification from deferred charges to long-term debt of $19.9 million
as at December 31, 2006. Prior to 2007, costs of issuing debt securities were
amortized on a straight-line basis, such costs are now required to be amortized
using the effective interest method; the Company was not materially affected by
the change in amortization method, which was prospectively applied.
In the further implementation of these recommendations, the Company has
chosen to recognize as an asset or liability all embedded derivative instruments
that exist as at January 1, 2007, and that are required to be separated from
their host contract. The Company has selected this method so that there is no
unnecessary difference from the application of U.S. GAAP.
In the ongoing application of these recommendations, the Company was
required to select from a number of pertinent alternative acceptable accounting
principles and methods and the Company has made the following selections:
Classified as
available-for-sale Classified
or held as part as held for
of a hedging trading
Financial instrument relationship(1) (1) (2) Company's reason for classification selection
-------------------------------------------------- ------------------ ------------- ---------------------------------------------
o Short-term marketable security investments(3) X o The Company has selected this method as it
held as at January 1, 2007 better reflects management's investment
intentions
-------------------------------------------------- ------------------ ------------- ---------------------------------------------
o Long-term investments(3) held as at January X o The Company has selected classification as
1, 2007 available-for-sale as it better reflects
management's investment intentions
-------------------------------------------------- ------------------ ------------- ---------------------------------------------
o Stand-alone derivatives which are a part of an X o The Company believes that classification
established and documented hedging relationship as held for hedging results in a better
matching of the change in the fair value
with the risk exposure being hedged
-------------------------------------------------- ------------------ ------------- ---------------------------------------------
(1) The distinction between classification as available-for-sale (or held as part of a hedging
relationship) or held for trading is that unrealized changes in the fair values of financial
instruments classified as available-for-sale, or held for hedging, are included in other
comprehensive income and unrealized changes in the fair values of financial instruments
classified as held for trading are included in net income.
(2) Certain financial instruments that are not required to be classified as held for trading, may
be classified as held for trading if the Company so chooses.
(3) In respect of investments in securities for which the fair values can be reliably measured, the
Company determines the classification on an instrument-by-instrument basis at time of initial
recognition.
o Accounts receivable available-for-sale to an arm's-length securitization
trust are accounted for as loans and receivables. The Company has selected
this method for accounting efficiency.
o Regular-way purchases or sales, which are those that are not net-settled,
of financial assets or financial liabilities are recognized on the trade
date. The Company has selected this method as it is consistent with the
mandatory trade-date accounting required for derivative instruments.
TELUS(R) 8
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
o Transaction costs, other than in respect of held for trading items, are
added to the initial fair value of the acquired financial asset or
financial liability. The Company has selected this method as it believes
that this results in a better matching of the transaction costs with the
periods benefiting from the transaction costs.
o In respect of hedges of anticipated transactions, which in the Company's
specific instance currently relates to inventory purchase commitments,
hedge gains/losses which will be included in the cost of the inventory and
will be expensed when the inventory is sold. The Company has selected this
method as it believes that a better matching with the risk exposure being
hedged is achieved.
Effects disclosure: The effects of the application of HB 1530, HB 3855 and
HB 3865, on the Company's results of operations for the three-month and
six-month periods ended June 30, 2007, are as set out in the following table:
Periods ended June 30, 2007
(millions except per share amounts) Three months Six months
----------------------------------- --------------------------------------------- ----------------------------------------------
Excluding Excluding
effect of Incremental effect of Incremental
application effect of application effect of
of HB 1530, application of of HB 1530, application of
HB 3855 HB 1530, HB 3855 As currently HB 3855 HB 1530, HB 3855 As currently
and HB 3865 and HB 3865 reported and HB 3865 and HB 3865 reported
----------------------------------- ------------- ---------------- ------------ ------------- ---------------- -------------
Operating revenues $ 2,228.1 $ -- $ 2,228.1 $ 4,433.7 $ -- $ 4,433.7
----------------------------------- ------------- ---------------- ------------ ------------- ---------------- -------------
Operating expenses 1,734.3 -- 1,734.3 3,542.9 -- 3,542.9
----------------------------------- ------------- ---------------- ------------ ------------- ---------------- -------------
Operating income 493.8 -- 493.8 890.8 -- 890.8
Other expenses, net 17.9 0.6 18.5 22.2 0.1 22.3
Financing costs 127.7 (0.5) 127.2 249.8 (5.0) 244.8
----------------------------------- ------------- ---------------- ------------ ------------- ---------------- -------------
Income before income taxes and
non-controlling interest 348.2 (0.1) 348.1 618.8 4.9 623.7
Income taxes 93.7 -- 93.7 171.3 1.7 173.0
Non-controlling interests 1.3 -- 1.3 2.8 -- 2.8
----------------------------------- ------------- ---------------- ------------ ------------- ---------------- -------------
Net income and Common Share and
Non-Voting Share income 253.2 (0.1) 253.1 444.7 3.2 447.9
Other comprehensive income
Change in unrealized fair value
of derivatives designated as
cash flow hedges -- 27.9 27.9 -- 55.8 55.8
Foreign currency translation
adjustment arising from
translating financial statements
of self-sustaining foreign
operations -- (6.2) (6.2) -- (3.8) (3.8)
Change in unrealized fair value
of available-for-sale financial
assets -- (0.1) (0.1) -- (0.1) (0.1)
----------------------------------- ------------- ---------------- ------------ ------------- ---------------- -------------
-- 21.6 21.6 -- 51.9 51.9
----------------------------------- ------------- ---------------- ------------ ------------- ---------------- -------------
Comprehensive income $ 253.2 $ 21.5 $ 274.7 $ 444.7 $ 55.1 $ 499.8
=================================== ============= ================ ============ ============= ================ =============
Net income per Common Share and
Non-Voting Share
- Basic $ 0.76 $ -- $ 0.76 $ 1.33 $ 0.01 $ 1.34
- Diluted $ 0.75 $ -- $ 0.75 $ 1.31 $ 0.01 $ 1.32
The effects of the application of HB 1530, HB 3855 and HB 3865, on the
Company's retained earnings for the six-month period ended June 30, 2007, are as
set out in the following table:
Excluding effect Incremental effect
of application of of application of
HB 1530, HB 3855 HB 1530, HB 3855 and As currently
Six-month period ended June 30, 2007 (millions) and HB 3865 HB 3865 reported
----------------------------------------------------- -------------------- -------------------- ------------------
Balance at beginning of period $ 1,080.1 $ -- $ 1,080.1
Income 444.7 3.2 447.9
---------------------------------------------------- -------------------- -------------------- ------------------
1,524.8 3.2 1,528.0
Common Share and Non-Voting Share dividends paid,
or payable, in cash (250.9) -- (250.9)
Purchase of Common Shares and Non-Voting Shares in
excess of stated capital (257.4) -- (257.4)
Other 3.7 -- 3.7
---------------------------------------------------- -------------------- -------------------- ------------------
Balance at end of period $ 1,020.2 $ 3.2 $ 1,023.4
==================================================== ==================== ==================== ==================
TELUS(R) 9
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
The effects of the application of HB 1530, HB 3855 and HB 3865, on the
Company's financial position as at June 30, 2007, are as set out in the
following table:
Incremental effect
Excluding effect of of application of
application of HB 1530, HB 1530, HB 3855 As currently
As at June 30, 2007 (millions) HB 3855 and HB 3865 and HB 3865 reported
---------------------------------------------------------------- ---------------------- --------------------- ------------------
Assets
Current assets
Cash and temporary investments, net $ 2.2 $ -- $ 2.2
Short-term investments 54.9 (0.1) 54.8
Accounts receivable 571.8 -- 571.8
Income and other taxes receivable 99.2 -- 99.2
Inventories 158.8 -- 158.8
Prepaid expenses and other 291.7 -- 291.7
Derivative assets 48.0 0.7 48.7
---------------------------------------------------------------- -------------------- -------------------- ------------------
1,226.6 0.6 1,227.2
---------------------------------------------------------------- -------------------- -------------------- ------------------
Capital assets, net 11,076.6 -- 11,076.6
---------------------------------------------------------------- -------------------- -------------------- ------------------
Other assets
Deferred charges 1,086.3 (21.7) 1,064.6
Investments 29.0 1.6 30.6
Goodwill 3,168.8 -- 3,168.8
---------------------------------------------------------------- -------------------- -------------------- ------------------
4,284.1 (20.1) 4,264.0
---------------------------------------------------------------- -------------------- -------------------- ------------------
$ 16,587.3 $ (19.5) $ 16,567.8
================================================================ ==================== ==================== ==================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 1,547.9 $ -- $ 1,547.9
Income and other taxes payable 6.7 -- 6.7
Restructuring accounts payable and accrued liabilities 28.8 -- 28.8
Advance billings and customer deposits 609.4 -- 609.4
Current maturities of long-term debt 6.4 -- 6.4
Current portion of derivative liabilities 4.8 5.3 10.1
Current portion of future income taxes 258.1 -- 258.1
---------------------------------------------------------------- -------------------- -------------------- ------------------
2,462.1 5.3 2,467.4
---------------------------------------------------------------- -------------------- -------------------- ------------------
Long-term debt 4,833.0 (32.5) 4,800.5
---------------------------------------------------------------- -------------------- -------------------- ------------------
Other long-term liabilities 1,465.2 179.2 1,644.4
---------------------------------------------------------------- -------------------- -------------------- ------------------
Future income taxes 1,072.8 (54.2) 1,018.6
---------------------------------------------------------------- -------------------- -------------------- ------------------
Non-controlling interests 22.1 -- 22.1
---------------------------------------------------------------- -------------------- -------------------- ------------------
Shareholders' equity
Common Shares 2,235.3 -- 2,235.3
Non-Voting Shares 3,337.9 -- 3,337.9
---------------------------------------------------------------- -------------------- -------------------- ------------------
5,573.2 -- 5,573.2
---------------------------------------------------------------- -------------------- -------------------- ------------------
Cumulative foreign currency translation adjustment (5.3) 5.3 --
---------------------------------------------------------------- -------------------- -------------------- ------------------
Retained earnings and accumulated other comprehensive income
Retained earnings 1,020.2 3.2 1,023.4
Accumulated other comprehensive income (loss) -- (125.8) (125.8)
---------------------------------------------------------------- -------------------- -------------------- ------------------
1,020.2 (122.6) 897.6
---------------------------------------------------------------- -------------------- -------------------- ------------------
Contributed surplus 144.0 -- 144.0
---------------------------------------------------------------- -------------------- -------------------- ------------------
6,732.1 (117.3) 6,614.8
---------------------------------------------------------------- -------------------- -------------------- ------------------
$ 16,587.3 $ (19.5) $ 16,567.8
================================================================ ==================== ==================== ==================
(c) Income taxes arising from partnership income
In mid-2006, Canada's Accounting Standards Board's Emerging Issues Committee
issued a Draft Abstract ("D59") regarding the accounting for income taxes
related to entities that consolidate partnership interests that have a different
year end than the consolidating entity. The Company has applied the guidance
therein contained through its 2006 year end. In March 2007, the Emerging Issues
Committee issued a revised Draft Abstract ("RD59") which changed the
TELUS(R) 10
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
approach to determination of the classification of future income taxes between
"current" and "non-current". In May 2007, the Emerging Issues Committee removed
this issue from its agenda.
Given the absence of specific guidance on the issue, the Company has
adopted the policy of accounting for the current portion of the future income
tax liability for partnerships to include the tax effect of differences between
the accounting and tax bases of current assets and current liabilities and the
tax on partnership income to be allocated during the next twelve months. The
Company has retrospectively applied this policy, which has, in the Company's
specific current instance, the net effect of increasing the current portion of
future income tax liabilities. The consolidated balance sheet reclassification
is as set out in the following table:
As at (millions) June 30, 2007 December 31, 2006
----------------------------------------- ------------------------------------------ ------------------------------------------
Pro forma, Incremental As previously Incremental
reflecting effect of reported, effect of
D59 application of As currently reflecting D59 application As currently
application policy reported application of policy reported
----------------------------------------- ------------ -------------- ------------ -------------- ------------ ------------
Current liabilities
Current portion of future income taxes $ 223.1 $ 35.0 $ 258.1 $ 93.2 $ 44.0 $ 137.2
Future Income Taxes $ 1,053.6 $ (35.0) $ 1,018.6 $ 1,067.3 $ (44.0) $ 1,023.3
----------------------------------------- ------------ -------------- ------------ -------------- ------------ ------------
(d) Financial instruments - disclosure
Commencing with the Company's 2008 fiscal year, the new recommendations of the
CICA for financial instrument disclosures (CICA Handbook Section 3862) will
apply to the Company. The new recommendations will result in incremental
disclosures, relative to those currently, with an emphasis on risks associated
with both recognized and unrecognized financial instruments to which an entity
is exposed during the period and at the balance sheet date, and how an entity
manages those risks. The Company is assessing how it will be affected by these
new recommendations.
3 capital structure financial policies
The Company's objectives when managing capital are: (i) to maintain a flexible
capital structure which optimizes the cost of capital at acceptable risk; and
(ii) to manage capital in a manner which balances the interests of equity and
debt holders.
In the management of capital, the Company includes shareholders' equity
(excluding accumulated other comprehensive income), long-term debt (including
any associated hedging assets or liabilities, net of amounts recognized in
accumulated other comprehensive income), cash and temporary investments and
securitized accounts receivable in the definition of capital.
The Company manages the capital structure and makes adjustments to it in
the light of changes in economic conditions and the risk characteristics of the
underlying assets. In order to maintain or adjust the capital structure, the
Company may adjust the amount of dividends paid to shareholders, purchase shares
for cancellation pursuant to normal course issuer bids, issue new shares, issue
new debt, issue new debt to replace existing debt with different characteristics
and/or increase or decrease the amount of sales of trade receivables to an
arm's-length securitization trust.
The Company monitors capital using a number of metrics, including: net debt
to total capitalization; net debt to Earnings Before Interest, Taxes,
Depreciation and Amortization - excluding restructuring costs ("EBITDA -
excluding restructuring costs"); and dividend payout ratio of sustainable net
earnings.
Net debt to total capitalization is calculated as net debt divided by total
capitalization. Net debt is a non-GAAP measure, whose nearest GAAP measure is
long-term debt; the calculation of net debt is as set out in the following
schedule. Net debt is one component of a ratio used to determine compliance with
debt covenants. Total capitalization is defined as the sum of net debt,
non-controlling interest and shareholders' equity (excluding accumulated other
comprehensive income).
Net debt to EBITDA - excluding restructuring costs is calculated as net
debt at the end of the period divided by twelve-month trailing EBITDA -
excluding restructuring costs. The calculation of EBITDA - excluding
restructuring costs is a non-GAAP measure whose nearest GAAP measure is net
income; the calculation of EBITDA - excluding restructuring costs is as set out
in the following schedule. This measure, historically, is substantially the same
as the leverage ratio covenant in the Company's credit facilities.
Dividend payout ratio of sustainable net earnings is calculated as the most
recent quarterly dividend declared per share multiplied by four and divided by
basic earnings per share for the twelve-month trailing period.
During 2007, the Company's strategy, which was unchanged from 2006, was to
maintain the financial policies and guidelines set out in the following
schedule. The Company believes that these financial policies and guidelines,
which are
TELUS(R) 11
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
reviewed annually, are currently at the optimal level and provide access to
capital at a reasonable cost by maintaining credit ratings in the range of BBB+
to A-, or the equivalent.
As at, or twelve-month periods ended, June 30 ($ in millions) Metrics 2007 2006
-------------------------------------------------------------------------------------- -------------------- ------------------
Components of debt and coverage ratios
Net debt (including securitized accounts receivable)(1) $ 6,239.7 $ 6,274.6
Total capitalization - book value $ 13,002.4 $ 13,139.0
EBITDA - excluding restructuring costs(2) $ 3,507.7 $ 3,418.4
Net interest cost(3) $ 495.0 $ 571.0
Debt ratios
Net debt to total capitalization 45 - 50% 48.0% 47.8%
Net debt to EBITDA - excluding restructuring costs 1.5:1 - 2.0:1 1.8 1.8
Coverage ratios
Interest coverage on long-term debt(4) 3.8 2.9
EBITDA - excluding restructuring costs interest coverage(5) 7.1. 6.0
Other measures
Dividend payout ratio of sustainable net earnings 45 - 55% 50% 46%
-------------------------------------------------------------------------------------- -------------------- ------------------
(1) Net debt is calculated as follows:
As at June 30 2007 2006
----------------------------------------------------------------------------------- -------------------- ------------------
Long-term debt (Note 15) $ 4,806.9 $ 4,708.3
Debt issuance costs netted against long-term debt 32.5 22.2
Derivative liabilities, net 1,081.8 990.5
Accumulated other comprehensive income amounts arising from
financial instruments used to manage interest rate and
currency risks associated with U.S. Dollar denominated debt (179.3) --
Cash and temporary investments, net (2.2) 18.6
Securitized accounts receivable (Note 12) 500.0 535.0
----------------------------------------------------------------------------------- -------------------- ------------------
Net debt $ 6,239.7 $ 6,274.6
=================================================================================== ==================== ==================
(2) EBITDA - excluding restructuring costs is calculated as follows:
Twelve-month periods ended June 30 2007 2006
---------------------------------- ------------------------------------------- ----------------------------------------------
Period-to-date: add (deduct) Period-to-date: add (deduct)
--------------------------------- -----------------------------------
Comparative Prior Current Comparative Prior Current
quarter fiscal year quarter Total quarter fiscal year quarter Total
---------------------------------- ----------- ----------- --------- --------- ----------- ----------- ---------- ----------
EBITDA (Note 5) $(1,759.8) $3,590.3 $1,648.9 $3,479.4 $(1,721.2) $3,295.3 $1,759.8 $3,333.9
Restructuring costs (Note 6) (47.4) 67.8 7.9 28.3 (16.8) 53.9 47.4 84.5
---------------------------------- ----------- ----------- --------- --------- ----------- ----------- ---------- ----------
EBITDA - excluding restructuring
costs $(1,807.2) $3,658.1 $1,656.8 $3,507.7 $(1,738.0) $3,349.2 $1,807.2 $3,418.4
================================== =========== =========== ========= ========= =========== =========== ========== ==========
(3) Net interest cost is defined as financing costs before gains on redemption
and repayment of debt, calculated on a twelve-month trailing basis (losses
recorded on the redemption of long-term debt are included in net interest
cost).
(4) Interest coverage on long-term debt is defined as net income before
interest expense on long-term debt and income tax expense, divided by
interest expense on long-term debt (including losses recorded on the
redemption of long-term debt).
(5) EBITDA - excluding restructuring costs interest coverage is defined as
EBITDA - excluding restructuring costs divided by net interest cost. This
measure is substantially the same as the coverage ratio covenant in the
Company's credit facilities.
Total capitalization decreased because of lower net debt and share capital,
partly offset by higher retained earnings.
Net debt and twelve-month trailing EBITDA - excluding restructuring costs
did not have a significant impact on the net debt to EBITDA - excluding
restructuring costs ratio measured at June 30, 2007, when compared to one year
earlier.
Interest coverage on long-term debt improved by 0.4 because of lower
interest expenses and improved by 0.5 because of increased income before taxes
and interest expense. The EBITDA - excluding restructuring costs interest
coverage ratio improved by 0.9 due to lower net interest cost and improved by
0.2 due to higher EBITDA - excluding restructuring costs.
The dividend payout ratio for the twelve-month period ended June 30, 2007,
was at the midpoint of the target guideline (45 to 55% for sustainable net
earnings). The dividend payout ratio was 48% when the impacts of tax-related
adjustments and the charge for adding the net-cash settlement feature for share
options granted prior to 2005 in the first quarter of 2007 are excluded from
earnings.
TELUS(R) 12
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
4 financial instruments
The Company's financial instruments consist of cash and temporary investments,
accounts receivable, investments accounted for using the cost method, accounts
payable, restructuring accounts payable, short-term obligations, long-term debt,
interest rate swap agreements, share-based compensation cost hedges, as further
discussed in Note 10(b)-(c), and foreign exchange hedges.
Fair value: The carrying value of cash and temporary investments, accounts
receivable, accounts payable, restructuring accounts payable and short-term
obligations approximates their fair values due to the immediate or short-term
maturity of these financial instruments. The carrying values of the Company's
investments accounted for using the cost method would not exceed their fair
values.
The carrying value of short-term investments equals their fair value as
they are classified as held for trading. The fair value is determined directly
by reference to quoted market prices.
The fair values of the Company's long-term debt are estimated based on
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same maturity as well as the use of
discounted future cash flows using current rates for similar financial
instruments subject to similar risks and maturities. The fair values of the
Company's derivative financial instruments used to manage exposure to interest
rate and currency risks are estimated similarly.
The fair values of the Company's derivative financial instruments used to
manage exposure to increases in compensation costs arising from certain forms of
share-based compensation are estimated based upon fair value estimates of the
related cash-settled equity forward agreements provided by the counterparty to
the transactions.
As at (millions) June 30, 2007 December 31, 2006
------------------------------------------------- -------- --------------------------------- -----------------------------------
Hedging
item
maximum
maturity Notional Carrying Notional Carrying
date amount amount Fair value amount amount Fair value
------------------------------------------------- -------- --------- ---------- ---------- ---------- ---------- -----------
Assets
Financial assets designated as held for trading
upon initial recognition
- Short-term investments $ 54.8 $ 54.8 $ 110.2 $ 110.2
- Derivatives used to manage currency risks
arising from U.S. Dollar denominated revenues
to which hedge accounting is not applied 2007 $ 3.2 -- -- $ -- -- --
------------------------------------------------- -------- --------- ---------- ---------- ---------- ---------- -----------
$ 54.8 $ 54.8 $ 110.2 $ 110.2
================================================= ======== ========= ========== ========== ========== ========== ===========
Derivatives used to manage changes in share-based
compensation costs and classified as held for
- Trading (Note 10(b)) 2012 $ 258.6 $ 35.4 $ -- $ -- $ --
- Net amounts due from counterparties 0.2
----------
35.6 $ 35.6
----------
- Hedging(1) (Note 10(c)) 2009 $ 71.3 25.2 $ 48.7 6.0 11.4
- Net amounts due from counterparties 0.6
----------
25.8 25.8
------------------------------------------------- -------- ---------- ---------- ----------- ----------- ----------- ------------
$ 61.4 $ 61.4 $ 6.0 $ 11.4
================================================= ======== ========= ========== ========== ========== ========== ===========
Long-term investments designated as available-
for-sale upon initial recognition $ 30.6 $ 30.6 $ 35.2 $ 36.9
================================================= ======== ========= ========== ========== ========== ========== ===========
TELUS(R) 13
---------------------------------------------------------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
---------------------------------------------------------------------------------------------------------------------------------
As at (millions) June 30, 2007 December 31, 2006
------------------------------------------------- -------- --------------------------------- ------------------------------------
Hedging
item
maximum
maturity Notional Carrying Notional Carrying
date amount amount Fair value amount amount Fair value
------------------------------------------------- -------- ---------- ---------- ----------- ----------- ----------- -----------
Liabilities
Long-term debt
Principal (Note 15) $4,806.9 $5,154.4 $4,908.2 $5,535.9
Derivatives(1) classified as held for hedging
and used to manage interest rate and currency
risks associated with U.S. Dollar denominated
debt (Note 15(b))
- Derivative asset 2007 $ -- -- $ 809.9 (40.4)
- Derivative liability - Current 2007 $ -- -- $ 673.4 165.8
- Non-current 2011 $2,950.5 1,081.8 $2,950.5 710.3
---------- -----------
1,081.8 835.7
- Interest payable 7.3 6.3
---------- -----------
Net 1,089.1 1,089.1 842.0 1,090.6
Derivatives(1) used to manage interest rate
risk associated with planned refinancing of
debt maturing June 1, 2007 2007 $ -- -- -- $ 500.0 -- 6.5
------------------------------------------------- -------- --------- ---------- ---------- ---------- ---------- ----------
$5,896.0 $6,243.5 $5,750.2 $6,633.0
================================================= ======== ========= ========== ========== ========== ========== ==========
Derivatives(1) classified as held for hedging
and used to manage currency risks arising
from U.S. Dollar denominated purchases to
which hedge accounting is applied 2007 $ 115.9 $ 5.3 $ 5.3 $ 14.7 $ -- $ (0.5)
================================================= ======== ========= ========== ========== ========== ========== ==========
Financial liabilities designated as held for
trading upon initial recognition
- Derivatives used to manage currency risks
arising from U.S. Dollar denominated
purchases to which hedge accounting is not
applied 2007 $ 105.8 $ 4.8 $ 4.8 $ 141.5 $ -- $ (5.6)
================================================= ======== ========= ========== ========== ========== ========== ==========
(1) Designated as cash flow hedging items.
TELUS(R) 14
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
5 segmented information
The Company's reportable segments are Wireline and Wireless. The Wireline
segment includes voice local, voice long distance, data and other
telecommunications services excluding wireless. The Wireless segment includes
digital personal communications services, equipment sales and wireless Internet
services. Segmentation is based on similarities in technology, the technical
expertise required to deliver the products and services, the distribution
channels used and regulatory treatment. Intersegment sales are recorded at the
exchange value, which is the amount agreed to by the parties. The following
segmented information is regularly reported to the Company's Chief Executive
Officer (the Company's chief operating decision maker).
Three-month periods ended Wireline Wireless Eliminations Consolidated
June 30 (millions) 2007 2006 2007 2006 2007 2006 2007 2006
--------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating revenues
External revenue $1,180.1 $1,189.9 $1,048.0 $ 945.3 $ -- $ -- $2,228.1 $2,135.2
Intersegment revenue 28.7 24.8 6.7 5.2 (35.4) (30.0) -- --
--------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
1,208.8 1,214.7 1,054.7 950.5 (35.4) (30.0) 2,228.1 2,135.2
--------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses
Operations expense 772.1 728.6 603.6 508.8 (35.4) (30.0) 1,340.3 1,207.4
Restructuring costs 2.8 29.8 0.4 0.9 -- -- 3.2 30.7
--------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
774.9 758.4 604.0 509.7 (35.4) (30.0) 1,343.5 1,238.1
--------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
EBITDA(1) $ 433.9 $ 456.3 $ 450.7 $ 440.8 $ -- $ -- $ 884.6 $ 897.1
=========================== ========== ========== ========== ========== ========== ========== ========== ==========
CAPEX(2) $ 308.7 $ 311.4 $ 173.1 $ 147.4 $ -- $ -- $ 481.8 $ 458.8
=========================== ========== ========== ========== ========== ========== ========== ========== ==========
EBITDA less CAPEX $ 125.2 $ 144.9 $ 277.6 $ 293.4 $ -- $ -- $ 402.8 $ 438.3
=========================== ========== ========== ========== ========== ========== ========== ========== ==========
Operating expenses
(as adjusted)(3)
Operations expense
(as adjusted)(3) 772.1 728.6 601.8 508.8 (35.4) (30.0) 1,338.5 1,207.4
Restructuring costs 2.8 29.8 0.4 0.9 -- -- 3.2 30.7
--------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
774.9 758.4 602.2 509.7 (35.4) (30.0) 1,341.7 1,238.1
--------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
EBITDA
(as adjusted)(3) $ 433.9 $ 456.3 $ 452.5 $ 440.8 $ -- $ -- $ 886.4 $ 897.1
=========================== ========== ========== ========== ========== ========== ========== ========== ==========
CAPEX(2) $ 308.7 $ 311.4 $ 173.1 $ 147.4 $ -- $ -- $ 481.8 $ 458.8
=========================== ========== ========== ========== ========== ========== ========== ========== ==========
EBITDA (as adjusted)
less CAPEX $ 125.2 $ 144.9 $ 279.4 $ 293.4 $ -- $ -- $ 404.6 $ 438.3
=========================== ========== ========== ========== ========== ========== ========== ========== ==========
EBITDA (as adjusted)
(from above) $ 886.4 $ 897.1
Incremental charge(3) 1.8 --
----------------------- ---------- ----------
EBITDA (from above) 884.6 897.1
Depreciation 318.3 335.2
Amortization 72.5 46.9
----------------------- ---------- ----------
Operating income 493.8 515.0
Other expense, net 18.5 9.6
Financing costs 127.2 127.5
----------------------- ---------- ----------
Income before income
taxes and non-
controlling interests 348.1 377.9
Income taxes 93.7 18.7
Non-controlling
interests 1.3 2.6
----------------------- ---------- ----------
Net income $ 253.1 $ 356.6
======================= ========== ==========
(1) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") is a measure that does not have
any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar
measures presented by other issuers; EBITDA is defined by the Company as operating revenues less
operations expense and restructuring costs. The Company has issued guidance on, and reports, EBITDA
because it is a key measure used by management to evaluate performance of its business segments and is
utilized in measuring compliance with certain debt covenants.
(2) Total capital expenditures ("CAPEX").
(3) Substantially all of the Company's share option awards that were granted prior to January 1, 2005, and
which were outstanding on January 1, 2007, were amended by adding a net-cash settlement feature; such
amendment resulted in an incremental charge to operations of $1.8 and did not result in an immediate cash
outflow. In respect of 2007 results provided to the Company's chief operating decision maker, operations
expense and EBITDA are being presented both with, and without, the impact of such amendment.
TELUS(R) 15
---------------------------------------------------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
---------------------------------------------------------------------------------------------------------------------------
Six-month periods ended Wireline Wireless Eliminations Consolidated
June 30 (millions) 2007 2006 2007 2006 2007 2006 2007 2006
-------------------------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating revenues
External revenue $2,385.7 $2,388.5 $2,048.0 $1,827.2 $ -- $ -- $4,433.7 $4,215.7
Intersegment revenue 53.8 48.3 13.0 11.1 (66.8) (59.4) -- --
-------------------------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
2,439.5 2,436.8 2,061.0 1,838.3 (66.8) (59.4) 4,433.7 4,215.7
-------------------------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses
Operations expense 1,677.5 1,469.0 1,166.2 998.9 (66.8) (59.4) 2,776.9 2,408.5
Restructuring costs 7.2 44.7 0.7 2.7 -- -- 7.9 47.4
-------------------------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
1,684.7 1,513.7 1,166.9 1,001.6 (66.8) (59.4) 2,784.8 2,455.9
-------------------------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
EBITDA(1) $ 754.8 $ 923.1 $ 894.1 $ 836.7 $ -- $ -- $1,648.9 $1,759.8
========================== =========== ========== ========== ========== ========== ========== ========== ==========
CAPEX(2) $ 579.4 $ 570.4 $ 284.3 $ 208.9 $ -- $ -- $ 863.7 $ 779.3
========================== =========== ========== ========== ========== ========== ========== ========== ==========
EBITDA less CAPEX $ 175.4 $ 352.7 $ 609.8 $ 627.8 $ -- $ -- $ 785.2 $ 980.5
========================== =========== ========== ========== ========== ========== ========== ========== ==========
Operating expenses
(as adjusted)(3)
Operations expense
(as adjusted)(3) 1,524.4 1,469.0 1,144.0 998.9 (66.8) (59.4) 2,601.6 2,408.5
Restructuring costs 7.2 44.7 0.7 2.7 -- -- 7.9 47.4
-------------------------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
1,531.6 1,513.7 1,144.7 1,001.6 (66.8) (59.4) 2,609.5 2,455.9
-------------------------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
EBITDA
(as adjusted)(3) $ 907.9 $ 923.1 $ 916.3 $ 836.7 $ -- $ -- $1,824.2 $1,759.8
========================== =========== ========== ========== ========== ========== ========== ========== ==========
CAPEX(2) $ 579.4 $ 570.4 $ 284.3 $ 208.9 $ -- $ -- $ 863.7 $ 779.3
========================== =========== ========== ========== ========== ========== ========== ========== ==========
EBITDA (as adjusted)
less CAPEX $ 328.5 $ 352.7 $ 632.0 $ 627.8 $ -- $ -- $ 960.5 $ 980.5
========================== =========== ========== ========== ========== ========== ========== ========== ==========
EBITDA (as adjusted)
(from above) $1,824.2 $1,759.8
Incremental charge(3) 175.3 --
----------------------- ---------- ----------
EBITDA (from above) 1,648.9 1,759.8
Depreciation 636.0 674.4
Amortization 122.1 110.8
----------------------- ---------- ----------
Operating income 890.8 974.6
Other expense, net 22.3 13.9
Financing costs 244.8 254.5
----------------------- ---------- ----------
Income before income
taxes and non-
controlling interests 623.7 706.2
Income taxes
Non-controlling 173.0 134.8
interests 2.8 4.7
----------------------- ---------- ----------
Net income $ 447.9 $ 566.7
======================= ========== ==========
(1) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") is a measure that does not have
any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar
measures presented by other issuers; EBITDA is defined by the Company as operating revenues less
operations expense and restructuring costs. The Company has issued guidance on, and reports, EBITDA
because it is a key measure used by management to evaluate performance of its business segments and is
utilized in measuring compliance with certain debt covenants.
(2) Total capital expenditures ("CAPEX").
(3) Substantially all of the Company's share option awards that were granted prior to January 1, 2005, and
which were outstanding on January 1, 2007, were amended by adding a net-cash settlement feature; such
amendment resulted in an incremental charge to operations of $175.3 and did not result in an immediate
cash outflow. In respect of 2007 results provided to the Company's chief operating decision maker,
operations expense and EBITDA are being presented both with, and without, the impact of such amendment.
TELUS(R) 16
------------------------------------------------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
------------------------------------------------------------------------------------------------------------------------
6 restructuring costs
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
-------------------------------------------------------- -------------- -------------- ------------- --------------
Restructuring costs
Workforce
Voluntary $ 0.6 $ 21.5 $ 1.1 $ 21.8
Involuntary 1.7 8.1 5.7 23.9
Other 0.9 1.1 1.1 1.7
-------------------------------------------------------- -------------- -------------- ------------- --------------
3.2 30.7 7.9 47.4
-------------------------------------------------------- -------------- -------------- ------------- --------------
Disbursements
Workforce
Voluntary 4.9 0.3 14.1 15.7
Involuntary and other 4.7 10.2 16.8 26.2
Other 0.9 1.2 1.3 2.1
-------------------------------------------------------- -------------- -------------- ------------- --------------
10.5 11.7 32.2 44.0
-------------------------------------------------------- -------------- -------------- ------------- --------------
Expenses greater than (less than) disbursements (7.3) 19.0 (24.3) 3.4
Restructuring accounts payable and accrued liabilities
Balance, beginning of period 36.1 41.5 53.1 57.1
-------------------------------------------------------- -------------- -------------- ------------- --------------
Balance, end of period $ 28.8 $ 60.5 $ 28.8 $ 60.5
======================================================== ============== ============== ============= ==============
In the first half of 2007, 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. The Company's
estimate of restructuring costs in 2007 is not currently expected to exceed $35
million.
7 financing costs
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
-------------------------------------------------------- -------------- -------------- ------------- --------------
Interest on long-term debt $ 126.5 $ 124.5 $ 245.7 $ 249.9
Interest on short-term obligations and other 0.3 1.0 0.4 2.6
Foreign exchange(1) 5.7 3.7 7.6 4.8
-------------------------------------------------------- -------------- -------------- ------------- --------------
132.5 129.2 253.7 257.3
Interest income
Interest on tax refunds -- (1.3) (0.2) (1.3)
Other interest income (5.3) (0.4) (8.7) (1.5)
-------------------------------------------------------- -------------- -------------- ------------- --------------
(5.3) (1.7) (8.9) (2.8)
-------------------------------------------------------- -------------- -------------- ------------- --------------
$ 127.2 $ 127.5 $ 244.8 $ 254.5
======================================================== ============== ============== ============= ==============
(1) For the three-month and six-month periods ended June 30, 2007, these amounts include gains of $0.3 (2006
- $0.1) and $0.3 (2006 - $0.1), respectively, in respect of cash flow hedge ineffectiveness.
8 income taxes
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
-------------------------------------------------------- -------------- -------------- ------------- --------------
Current $ 1.2 $ (6.7) $ 2.3 $ (3.7)
Future 92.5 25.4 170.7 138.5
-------------------------------------------------------- -------------- -------------- ------------- --------------
$ 93.7 $ 18.7 $ 173.0 $ 134.8
======================================================== ============== ============== ============= ==============
TELUS(R) 17
------------------------------------------------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
------------------------------------------------------------------------------------------------------------------------
The Company's income tax expense differs from that calculated by applying
statutory rates for the following reasons:
Three-month periods ended June 30 ($ in millions) 2007 2006
------------------------------------------------------------------------------- ------------------- --------------------
Basic blended federal and provincial tax at statutory income tax rates $ 116.9 33.6% $ 125.8 33.3%
Revaluation of future income tax liability to reflect future statutory
income tax rates (24.2) (107.0)
Share option award compensation 1.2 1.6
Tax rate differential on, and consequential adjustments from, reassessment of
prior year tax issues -- 1.3
Other (0.2) (0.1)
------------------------------------------------------------------------------- ---------- ------- ---------- --------
93.7 26.9% 21.6 5.7%
Large corporations tax -- (2.9)
------------------------------------------------------------------------------- ---------- ------- ---------- --------
Income tax expense per Consolidated Statements of Income $ 93.7 26.9% $ 18.7 4.9%
=============================================================================== ========== ======= ========== ========
Six-month periods ended June 30 ($ in millions) 2007 2006
------------------------------------------------------------------------------- ------------------- --------------------
Basic blended federal and provincial tax at statutory income tax rates $ 209.2 33.5% $ 237.3 33.6%
Revaluation of future income tax liability to reflect future statutory
income tax rates (27.9) (107.0)
Share option award compensation (6.5) 3.1
Tax rate differential on, and consequential adjustments from, reassessment
of prior year tax issues -- 1.0
Other (1.8) 0.4
------------------------------------------------------------------------------- ---------- ------- ---------- --------
Income tax expense per Consolidated Statements of Income $ 173.0 27.7% $ 134.8 19.1%
=============================================================================== ========== ======= ========== ========
The Company conducts research and development activities, which are eligible to
earn Investment Tax Credits. During the three-month and six-month periods ended
June 30, 2007, the Company recorded Investment Tax Credits of $1.1 million (2006
- $12.6 million) and $10.6 million (2006 - $12.6 million), respectively, $1.1
million (2006 - $12.6 million) and $9.2 million (2006 - $12.6 million) of which
was recorded as a reduction of capital and the balance of which was recorded as
a reduction of Operations expense.
9 per share amounts
Basic net income per Common Share and Non-Voting Share is calculated by dividing
Common Share and Non-Voting Share income by the total weighted average Common
Shares and Non-Voting Shares outstanding during the period. Diluted income per
Common Share and Non-Voting Share is calculated to give effect to share option
awards.
The following table presents the reconciliations of the denominators of the
basic and diluted per share computations. Net income equaled diluted Common
Share and Non-Voting Share income for all periods presented.
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
-------------------------------------------------------------------------------- --------- --------- --------- ---------
Basic total weighted average Common Shares and Non-Voting Shares outstanding 333.5 344.9 335.3 347.1
Effect of dilutive securities
Exercise of share option awards 3.4 3.6 3.0 3.5
-------------------------------------------------------------------------------- --------- --------- --------- ---------
Diluted total weighted average Common Shares and Non-Voting Shares outstanding 336.9 348.5 338.3 350.6
================================================================================ ========= ========= ========= =========
For the three-month and six-month periods ended June 30, 2007, certain
outstanding share option awards, in the amount of 0.1 million (2006 - 0.3
million) and 0.4 million (2006 - 0.7 million), respectively, were not included
in the computation of diluted income per Common Share and Non-Voting Share
because the share option awards' exercise prices were greater than the average
market price of the Common Shares and Non-Voting Shares during the reported
periods.
TELUS(R) 18
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
10 share-based compensation
(a) Details of share-based compensation expense
Reflected in the Consolidated Statements of Income as "Operations expense" and
the Consolidated Statements of Cash Flows are the following share-based
compensation amounts:
Three-month periods ended June 30 2007 2006
---------------------------------- ---------------------------------------------- ----------------------------------------------
Associated Statement of Associated Statement of
Operations operating cash cash flows Operations operating cash flows
(millions) expense outflows adjustment expense cash outflows adjustment
---------------------------------- ------------- --------------- -------------- -------------- -------------- --------------
Share option awards(1) $ 5.9 $ (24.3) $ (18.4) $ 4.8 $ -- $ 4.8
Restricted stock units 9.6 (0.1) 9.5 8.1 (0.2) 7.9
Employee share purchase plan 7.1 (7.1) -- 6.7 (6.7) --
---------------------------------- ------------- --------------- -------------- -------------- -------------- --------------
$ 22.6 $ (31.5) $ (8.9) $ 19.6 $ (6.9) $ 12.7
================================== ============= =============== ============== ============== ============== ==============
(1) For the three-month period ended June 30, 2007, the expense arising from share options with the net-cash
settlement feature, net of hedging effects, was $1.9 (2006 - NIL).
Six-month periods ended June 30 2007 2006
---------------------------------- ---------------------------------------------- ----------------------------------------------
Associated Statement of Associated Statement of
Operations operating cash cash flows Operations operating cash flows
(millions) expense outflows adjustment expense cash outflows adjustment
---------------------------------- ------------- --------------- -------------- -------------- -------------- --------------
Share option awards(1) $ 183.2 $ (67.3) $ 115.9 $ 9.3 $ -- $ 9.3
Restricted stock units 15.9 (2.1) 13.8 14.3 (2.5) 11.8
Employee share purchase plan 17.7 (17.7) -- 16.4 (16.4) --
---------------------------------- ------------- --------------- -------------- -------------- -------------- --------------
$ 216.8 $ (87.1) $ 129.7 $ 40.0 $ (18.9) $ 21.1
================================== ============= =============== ============== ============== ============== ==============
(1) For the six-month period ended June 30, 2007, the expense arisng from share options with the net-cash
settlement feature, net of hedging effects, was $175.6 (2006 - NIL).
For the three-month and six-month periods ended June 30, 2007, the
associated operating cash outflows in respect of share option awards are net of
cash inflows from the cash-settled equity swap agreements of $8.3 million (2006
- NIL) and $8.9 million (2006 - NIL), respectively. For the three-month and
six-month periods ended June 30, 2007, the income tax benefit arising from
share-based compensation was $6.2 million (2006 - $5.0 million) and $77.7
million (2006 - $10.4 million), respectively; as disclosed in Note 8, not all
share-based compensation amounts are deductible for income tax purposes.
(b) Share option awards
The Company applies the fair value based method of accounting for share-based
compensation awards granted to employees. Share option awards typically vest
over a three-year period (the requisite service period), but may vest over
periods of up to five years. The vesting method of share option awards, which is
determined on or before the date of grant, may be either cliff or graded; all
share option awards granted subsequent to 2004 have been cliff-vesting awards.
The weighted average fair value of share option awards granted, and the
weighted average assumptions used in the fair value estimation at the time of
grant, using the Black-Scholes model (a closed-form option pricing model), are
as follows:
Three months Six months
Periods ended June 30 2007 2006 2007 2006
--------------------------------- ---------- ---------- ----------- ---------
Share option award
fair value (per share option) $ 15.06 $ 12.41 $ 12.50 $ 12.36
Risk free interest rate 4.5% 4.3% 4.1% 4.0%
Expected lives(1) (years) 4.7 4.5 4.5 4.6
Expected volatility 26.1% 32.0% 26.5% 36.0%
Dividend yield 2.3% 2.4% 2.6% 2.6%
--------------------------------- ---------- ---------- ----------- ---------
(1) The maximum contractual term of the share option awards granted in 2007 and
2006 was seven years.
Other
option awards is based on a Government of Canada yield curve that is current at
the time of grant. The expected lives of the share option awards are based on
historical share option award exercise data of the Company. Similarly, expected
volatility considers the historical volatility of the Company's Non-Voting
Shares. The dividend yield is the annualized dividend current at the date of
grant
TELUS(R) 19
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
divided by the share option award exercise price. Dividends are not paid on
unexercised share option awards and are not subject to vesting.
Some share option awards have a net-equity settlement feature. As discussed
further in Note 16(f), it is at the Company's option whether the exercise of a
share option is settled as a share option or using the net-equity settlement
feature. So as to align with the accounting treatment that is afforded to the
associated share options, the Company has selected the equity instrument fair
value method of accounting for the net-equity settlement feature.
In 2007, the Company amended substantially all of its share option awards
that were granted prior to January 1, 2005, and which were outstanding on
January 1, 2007, by adding a net-cash settlement feature; the optionee has the
choice of exercising the net-cash settlement feature. The result of such
amendment is that the affected outstanding share option awards largely take on
the characteristics of liability instruments rather than equity instruments. For
the outstanding share option awards that were amended and which were granted
subsequent to 2001, the minimum expense recognized for them will be their
grant-date fair values.
In conjunction with the amendment, the Company entered into a cash-settled
equity swap agreement that establishes a cap on the Company's cost associated
with the affected outstanding share option awards.
As at June 30, 2007 ($ per affected
outstanding share option award) Affected share option awards granted for
------------------------------------------- ----------------------------------------------- ----------------
Common Shares Non-Voting Shares Total
-------------- ------------------------------ ----------------
prior to 2002 after 2001
------------------------------- --------------
Weighted average exercise price $ 36.10 $ 30.39 $ 21.94 $ 26.81
Weighted average grant date fair value -- -- 6.74 3.38
------------------------------------------- -------------- --------------- --------------- ---------------
36.10 30.39 28.68 30.19
Weighted average incremental share-based
compensation award expense arising from
net-cash settlement feature 18.16 24.76 26.47 24.86
------------------------------------------- -------------- --------------- --------------- ---------------
Exercise date fair value capped by cash-
settled equity swap agreement $ 54.26 $ 55.15 $ 55.15 $ 55.05
=========================================== ============== =============== =============== ===============
Affected share option awards outstanding 539,155 1,805,769 2,353,520 4,698,444
=========================================== ============== =============== =============== ===============
(c) Restricted stock units
The Company uses restricted stock units as a form of incentive compensation.
Each restricted stock unit is equal in value to one Non-Voting Share and the
dividends that would have arisen thereon had it been an issued and outstanding
Non-Voting Share; the notional dividends are recorded as additional issuances of
restricted stock units during the life of the restricted stock unit. The
restricted stock units become payable as they vest over their lives. Typically,
the restricted stock units vest over a period of 33 months. The vesting method,
which is determined on or before the date of grant, may be either cliff or
graded.
The following table presents a summary of the activity related to the
Company's restricted stock units.
Periods ended June 30, 2007 Three months Six months
---------------------------------- --------------------------------------------- ---------------------------------------------
Number of restricted Weighted Number of restricted Weighted
stock units average grant stock units average grant
------------------------------ date fair ------------------------------ date fair
Non-vested Vested value Non-vested Vested value
---------------------------------- ---------------------------- ------------- ---------------- ------------ -------------
Outstanding, beginning of period
Non-vested 2,010,875 -- $ 44.85 1,518,613 -- $ 40.99
Vested -- 3,389 39.48 -- 37,251 38.85
Issued
Initial allocation 19,204 -- 63.11 520,561 -- 56.62
In lieu of dividends 12,185 -- 62.31 25,201 -- 59.91
Vested (2,995) 2,995 40.73 (4,829) 4,829 39.92
Settled in cash -- (2,995) 40.73 -- (38,691) 38.93
Forfeited and cancelled (5,622) -- 43.18 (25,899) -- 40.55
---------------------------------- --------------- ------------- ------------- ---------------- ------------ -------------
Outstanding, end of period
Non-vested 2,033,647 -- 44.99 2,033,647 -- 44.99
Vested -- 3,389 $ 39.48 -- 3,389 $ 39.48
================================== =============== ============= ============= ================ ============ =============
TELUS(R) 20
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
With respect to certain issuances of restricted stock units, the Company
entered into cash-settled equity forward agreements that fix the cost to the
Company; that information, as well as a schedule of the Company's non-vested
restricted stock units outstanding as at June 30, 2007, is set out in the
following table.
Number of Cost fixed to the Number of Total number of
fixed-cost Company per variable-cost non-vested
restricted stock restricted stock restricted stock restricted stock
units unit units units
-------------------------------------- ------------------- -------------------- -------------------- --------------------
Vesting in years ending December 31:
2007 600,000 $ 40.91 69,725 669,725
2008 160,000 $ 50.91
440,000 $ 50.02
-------------------
600,000 263,675 863,675
-------------------
2009 400,000 $ 64.26 100,247 500,247
-------------------------------------- ------------------- -------------------- -------------------- --------------------
1,600,000 433,647 2,033,647
====================================== =================== ==================== ==================== ====================
(d) Employee share purchase plan
The Company has an employee share purchase plan under which eligible employees
can purchase Common Shares through regular payroll deductions by contributing
between 1% and 10% of their pay. The Company contributes 45%, for the employee
population up to a certain job classification, for every dollar contributed by
an employee, to a maximum of 6% of employee pay; for more highly compensated job
classifications, the Company contributes 40%. There are no vesting requirements
and the Company records its contributions as a component of operating expenses.
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
-------------------------------------- ------------------- -------------------- -------------------- --------------------
Employee contributions $ 16.8 $ 15.9 $ 42.0 $ 38.8
Company contributions 7.1 6.7 17.7 16.4
-------------------------------------- ------------------- -------------------- -------------------- --------------------
$ 23.9 $ 22.6 $ 59.7 $ 55.2
====================================== =================== ==================== ==================== ====================
Under this plan, the Company has the option of offering shares from
Treasury or having the trustee acquire shares in the stock market. For the
six-month periods ended June 30, 2007 and 2006, all Common Shares issued to
employees under the plan were purchased on the market at normal trading prices.
11 employee future benefits
(a) Defined benefit plans - cost (recovery)
The Company's net defined benefit plan costs (recoveries) were as follows:
Three-month periods ended June 30 2007 2006
------------------------------------------- ---------------------------------------- --------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
(millions) period adjustments(1) period period adjustments(1) period
------------------------------------------- ----------- -------------- ------------- -------------- -------------- --------------
Pension benefit plans
Current service cost (employer portion) $ 24.9 $ -- $ 24.9 $ 24.3 $ -- $ 24.3
Interest cost 81.7 -- 81.7 79.0 -- 79.0
Return on plan assets (128.8) 6.4 (122.4) 195.0 (306.3) (111.3)
Past service costs -- 0.2 0.2 -- 0.1 0.1
Actuarial loss (gain) 2.7 -- 2.7 10.5 -- 10.5
Valuation allowance provided against
accrued benefit asset -- -- -- -- 6.5 6.5
Amortization of transitional asset -- (11.1) (11.1) -- (11.2) (11.2)
------------------------------------------- ----------- -------------- ------------ -------------- -------------- --------------
$ (19.5) $ (4.5) $ (24.0) $ 308.8 $ (310.9) $ (2.1)
=========================================== =========== ============== ============ ============== ============== ==============
(1) Accounting adjustments to allocate costs to different periods so as to recognize the long-term nature of
employee future benefits.
TELUS(R) 21
--------------------------------------------------------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------------------------------------------------------
Six-month periods ended June 30 2007 2006
------------------------------------------- ---------------------------------------- --------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
(millions) period adjustments(1) period period adjustments(1) period
------------------------------------------- ----------- -------------- ------------- -------------- -------------- --------------
Pension benefit plans
Current service cost (employer portion) $ 49.8 $ -- $ 49.8 $ 48.6 $ -- $ 48.6
Interest cost 163.2 -- 163.2 157.9 -- 157.9
Return on plan assets (237.5) (7.2) (244.7) (72.1) (150.5) (222.6)
Past service costs -- 0.4 0.4 -- 0.3 0.3
Actuarial loss (gain) 5.4 -- 5.4 21.0 -- 21.0
Valuation allowance provided against
accrued benefit asset -- -- -- -- 13.0 13.0
Amortization of transitional asset -- (22.1) (22.1) -- (22.4) (22.4)
------------------------------------------- ----------- -------------- ------------- -------------- -------------- --------------
$ (19.1) $ (28.9) $ (48.0) $ 155.4 $ (159.6) $ (4.2)
=========================================== =========== ============== ============= ============== ============== ==============
(1) Accounting adjustments to allocate costs to different periods so as to recognize the long-term nature of
employee future benefits.
Three-month periods ended June 30 2007 2006
------------------------------------------- ---------------------------------------- --------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
(millions) period adjustments(1) period period adjustments(1) period
------------------------------------------- ----------- -------------- ------------- -------------- -------------- --------------
Other benefit plans
Current service cost (employer portion) $ -- $ -- $ -- $ 0.9 $ -- $ 0.9
Interest cost 0.7 -- 0.7 0.4 -- 0.4
Return on plan assets (0.3) -- (0.3) (0.6) (0.1) (0.7)
Actuarial loss (gain) (0.5) -- (0.5) (0.4) -- (0.4)
Amortization of transitional obligation -- 0.2 0.2 -- 0.2 0.2
------------------------------------------- ----------- -------------- ------------- -------------- -------------- --------------
$ (0.1) $ 0.2 $ 0.1 $ 0.3 $ 0.1 $ 0.4
=========================================== =========== ============== ============= ============== ============== ==============
(1) Accounting adjustments to allocate costs to different periods so as to recognize the long-term nature of
employee future benefits.
Six-month periods ended June 30 2007 2006
------------------------------------------- ---------------------------------------- --------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
(millions) period adjustments(1) period period adjustments(1) period
------------------------------------------- ----------- -------------- ------------- -------------- -------------- --------------
Other benefit plans
Current service cost (employer portion) $ -- $ -- $ -- $ 1.8 $ -- $ 1.8
Interest cost 1.3 -- 1.3 0.9 -- 0.9
Return on plan assets (0.6) -- (0.6) (1.2) (0.1) (1.3)
Actuarial loss (gain) (1.2) -- (1.2) (0.9) -- (0.9)
Amortization of transitional obligation -- 0.4 0.4 -- 0.4 0.4
------------------------------------------- ----------- -------------- ------------- -------------- -------------- --------------
$ (0.5) $ 0.4 $ (0.1) $ 0.6 $ 0.3 $ 0.9
=========================================== =========== ============== ============= ============== ============== ==============
(1) Accounting adjustments to allocate costs to different periods so as to recognize the long-term nature of
employee future benefits.
(b) Employer contributions
The best estimate of fiscal 2007 employer contributions to the Company's defined
benefit pension plans has been revised to approximately $92 million (the best
estimate at December 31, 2006 was $111 million).
(c) Defined contribution plans
The Company's total defined contribution pension plan costs recognized were as
follows:
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
------------------------------------------------------------------- ------------- ------------- ------------- -------------
Union pension plan and public service pension plan contributions $ 7.2 $ 7.4 $ 16.0 $ 16.1
Other defined contribution pension plans 5.5 3.8 13.4 8.7
------------------------------------------------------------------- ------------- ------------- ------------- -------------
$ 12.7 $ 11.2 $ 29.4 $ 24.8
=================================================================== ============= ============= ============= =============
TELUS(R) 22
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
12 accounts receivable
On July 26, 2002, TELUS Communications Inc., a wholly-owned subsidiary of TELUS,
entered into an agreement, which was amended September 30, 2002, March 1, 2006,
and November 30, 2006, with an arm's-length securitization trust under which
TELUS Communications Inc. is able to sell an interest in certain of its trade
receivables up to a maximum of $650 million. As a result of selling the interest
in certain of the trade receivables on a fully-serviced basis, a servicing
liability is recognized on the date of sale and is, in turn, amortized to
earnings over the expected life of the trade receivables. This
"revolving-period" securitization agreement had an initial term ending July 18,
2007; the November 30, 2006, amendment resulted in the term being extended to
July 18, 2008. TELUS Communications Inc. is required to maintain at least a BBB
(low) credit rating by Dominion Bond Rating Service or the securitization trust
may require the sale program to be wound down prior to the end of the term; at
June 30, 2007, the rating was A (low).
As at (millions) June 30, 2007 December 31, 2006
----------------------------------------------------------------------------------- ------------------ ------------------
Total managed portfolio $ 1,080.3 $ 1,216.1
Securitized receivables (567.2) (567.3)
Retained interest in receivables sold 58.7 58.4
----------------------------------------------------------------------------------- ------------------ ------------------
Receivables held $ 571.8 $ 707.2
=================================================================================== ================== ==================
For the three-month and six-month periods ended June 30, 2007, the Company
recognized composite losses of $4.9 million (2006 - $5.6 million) and $8.1
million (2006 - $8.7 million), respectively, on the sale of receivables arising
from the securitization.
Cash flows from the securitization are as follows:
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
---------------------------------------------- ------------------ ------------------ ------------------ ------------------
Cumulative proceeds from securitization,
beginning of period $ 150.0 $ 400.0 $ 500.0 $ 500.0
Proceeds from new securitizations 400.0 185.0 400.0 260.0
Securitization reduction payments (50.0) (50.0) (400.0) (225.0)
---------------------------------------------- ------------------ ------------------ ------------------ ------------------
Cumulative proceeds from securitization,
end of period $ 500.0 $ 535.0 $ 500.0 $ 535.0
============================================== ================== ================== ================== ==================
Proceeds from collections reinvested in
revolving-period securitizations $ 672.6 $ 940.6 $ 1,774.8 $ 1,830.6
============================================== ================== ================== ================== ==================
Proceeds from collections pertaining to
retained interest $ 78.7 $ 119.4 $ 208.3 $ 246.1
============================================== ================== ================== ================== ==================
TELUS(R) 23
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
13 capital assets
(a) Capital assets, net
As at (millions) June 30, 2007 December 31, 2006
------------------------------------------- ----------------------------------------- ------------------------------------------
Accumulated Accumulated
depreciation depreciation
and Net book and Net book
Cost amortization value Cost amortization value
------------------------------------------- ----------- -------------- ------------ ------------ --------------- -----------
Property, plant, equipment and other
Telecommunications assets $18,499.9 $13,197.3 $ 5,302.6 $18,061.8 $12,755.3 $ 5,306.5
Assets leased to customers 725.6 580.9 144.7 693.3 550.9 142.4
Buildings and leasehold improvements 1,881.9 1,059.1 822.8 1,852.5 1,002.7 849.8
Office equipment and furniture 1,133.3 877.7 255.6 1,110.6 840.8 269.8
Assets under capital lease 18.5 11.1 7.4 18.5 9.4 9.1
Other 340.2 264.3 75.9 340.6 259.6 81.0
Land 48.8 -- 48.8 48.9 -- 48.9
Assets under construction 603.8 -- 603.8 725.4 -- 725.4
Materials and supplies 35.1 -- 35.1 33.6 -- 33.6
------------------------------------------- ----------- -------------- ------------ ------------ --------------- -----------
23,287.1 15,990.4 7,296.7 22,885.2 15,418.7 7,466.5
------------------------------------------- ----------- -------------- ------------ ------------ --------------- -----------
Intangible assets subject to amortization
Subscriber base 362.9 149.1 213.8 362.9 138.3 224.6
Software 1,655.4 1,127.3 528.1 1,306.0 1,043.4 262.6
Access to rights-of-way and other 136.8 65.3 71.5 122.3 60.3 62.0
------------------------------------------- ----------- -------------- ------------ ------------ --------------- -----------
2,155.1 1,341.7 813.4 1,791.2 1,242.0 549.2
------------------------------------------- ----------- -------------- ------------ ------------ --------------- -----------
Intangible assets with indefinite lives
Spectrum licences(1) 3,985.0 1,018.5 2,966.5 3,984.9 1,018.5 2,966.4
------------------------------------------- ----------- -------------- ------------ ------------ --------------- -----------
$29,427.2 $18,350.6 $11,076.6 $28,661.3 $17,679.2 $10,982.1
=========================================== =========== ============== ============ ============ =============== ===========
(1) Accumulated amortization of spectrum licences is amortization recorded prior to 2002.
The following table presents items included in capital expenditures. Additions
of intangible assets subject to amortization include amounts reclassified from
assets under construction.
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
------------------------------------ -------------------- -------------------- -------------------- ------------------
Additions of intangible assets
- Subject to amortization $ 52.0 $ 31.4 $ 394.1 $ 49.0
- With indefinite lives -- 0.5 0.1 1.7
------------------------------------ -------------------- -------------------- -------------------- ------------------
$ 52.0 $ 31.9 $ 394.2 $ 50.7
==================================== ==================== ==================== ==================== ==================
The following table presents items included in capital expenditures.
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
------------------------------------ -------------------- -------------------- -------------------- ------------------
Capitalized internal labour costs $ 82.3 $ 82.7 $ 161.8 $ 151.5
==================================== ==================== ==================== ==================== ==================
(b) Intangible assets subject to amortization
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at June 30, 2007, for each of
the next five fiscal years is as follows:
Years ending December 31 (millions)
----------------------------------------------------------------- --------------
2007 (balance of year) $ 132.5
2008 193.1
2009 136.6
2010 68.0
2011 49.6
----------------------------------------------------------------- --------------
TELUS(R) 24
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
14 goodwill
Periods ended June 30, 2007 (millions) Three months Six months
-------------------------------------------------------------------------------- -------------------- --------------------
Balance, beginning of period $ 3,169.6 $ 3,169.5
Foreign exchange on goodwill of self-sustaining foreign operations (0.8) (0.7)
-------------------------------------------------------------------------------- -------------------- --------------------
Balance, end of period $ 3,168.8 $ 3,168.8
================================================================================ ==================== ====================
15 long-term debt
(a) Details of long-term debt
As at ($ in millions) June 30, December 31,
Series Rate of interest Maturity 2007 2006
------------------------------------ ----------------------- --------------------- -------------------- -------------------
(adjusted -
Note 2(b))
TELUS Corporation Notes
U.S. (2) 7.50%(1) June 2007 $ -- $ 1,357.9
U.S. (3) 8.00%(1) June 2011 2,032.7 2,227.1
CB 5.00%(1) June 2013 298.0 298.0
CC 4.50%(1) March 2012 298.7 --
CD 4.95%(1) March 2017 686.5 --
------------------------------------ ----------------------- --------------------- -------------------- -------------------
3,315.9 3,883.0
------------------------------------ ----------------------- --------------------- -------------------- -------------------
TELUS Corporation Commercial Paper 4.48% Through October 2007 660.9 --
------------------------------------ ----------------------- --------------------- -------------------- -------------------
TELUS Corporation Credit Facility --% May 2012 -- 120.0
------------------------------------ ----------------------- --------------------- -------------------- -------------------
TELUS Communications Inc. Debentures
1 12.00%(1) May 2010 49.7 49.8
2 11.90%(1) November 2015 124.0 124.5
3 10.65%(1) June 2021 173.3 174.0
5 9.65%(1) April 2022 244.5 246.1
B 8.80%(1) September 2025 197.4 198.1
------------------------------------ ----------------------- --------------------- -------------------- -------------------
788.9 792.5
------------------------------------ ----------------------- --------------------- -------------------- -------------------
TELUS Communications Inc. First Mortgage Bonds
U 11.50%(1) July 2010 29.9 30.0
------------------------------------ ----------------------- --------------------- -------------------- -------------------
TELUS Communications Inc. Medium Term Notes
1 7.10%(1) February 2007 -- 70.0
------------------------------------ ----------------------- --------------------- -------------------- -------------------
Capital leases issued at varying rates of
interest from 4.1% to 16.0% and maturing on
various dates up to 2013 7.6 9.2
------------------------------------------------------------------------------------ -------------------- -------------------
Other 3.7 3.5
----------------------------------------------------------------------------------- -------------------- -------------------
Long-Term Debt 4,806.9 4,908.2
Less: Current maturities 6.4 1,433.5
------------------------------------------------------------ --------------------- -------------------- -------------------
Long-Term Debt - non-current $ 4,800.5 $ 3,474.7
=================================================================================== ==================== ===================
(1) Interest is payable semi-annually.
(2) Principal face value of notes at December 31, 2006 - U.S.$1,166.5 million.
(3) Principal face value of notes is U.S.$1,925.0 million (December 31, 2006 - U.S.$1,925.0 million).
(b) TELUS Corporation notes
The notes are senior, unsecured and unsubordinated obligations of the Company
and rank equally in right of payment with all existing and future unsecured,
unsubordinated obligations of the Company, are senior in right of payment to all
existing and future subordinated indebtedness of the Company, and are
effectively subordinated to all existing and future obligations of, or
guaranteed by, the Company's subsidiaries.
The indentures governing the notes contain certain covenants which, among
other things, place limitations on the ability of TELUS and certain of its
subsidiaries to: grant security in respect of indebtedness, enter into sale and
lease-back transactions and incur new indebtedness.
TELUS(R) 25
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
Principal face amount Redemption present
-------------------------------------- value spread
Series Issued Issue price Originally issued Outstanding (basis points)(1)
----------------------------------- ------------ -------------- ------------------- ------------------ --------------------
7.50% (U.S. Dollar) Notes due 2007 May 2001 U.S.$995.06 U.S.$1.3 billion -- --
8.00% (U.S. Dollar) Notes due 2011 May 2001 U.S.$994.78 U.S.$2.0 billion U.S.$1.9 billion 30
5.00% Notes, Series CB May 2006 $998.80 $300 million $300 million 16
4.50% Notes, Series CC March 2007 $999.91 $300 million $300 million 15
4.95% Notes, Series CD March 2007 $999.53 $700 million $700 million 24
----------------------------------- ------------ -------------- ------------------- ------------------ --------------------
(1) The notes are redeemable at the option of the Company, in whole at any time, or in part from time to
time, on not fewer than 30 and not more than 60 days' prior notice. The redemption price is equal to the
greater of (i) the present value of the notes discounted at the Adjusted Treasury Rate (in respect of the
U.S. Dollar denominated notes) or the Government of Canada yield (in respect of the Canadian dollar
denominated notes) plus the redemption present value spread, or (ii) 100% of the principal amount
thereof. In addition, accrued and unpaid interest, if any, will be paid to the date fixed for redemption.
2007 and 2011 Cross Currency Interest Rate Swap Agreements: With respect to
the 2011 (U.S. Dollar) Notes, U.S.$1.9 billion (with respect to the 2007 and
2011 (U.S. Dollar) Notes, December 31, 2006 - U.S.$3.1 billion) in aggregate,
the Company entered into cross currency interest rate swap agreements which
effectively convert the principal repayments and interest obligations to
Canadian dollar obligations with effective fixed interest rates and fixed
economic exchange rates.
The cross currency interest rate swap agreements contain an optional early
termination provision which states that either party could elect to terminate
these swap agreements on May 30, 2006, if (i) the highest of the long-term
unsecured unsubordinated debt ratings of the Company falls below BBB as
determined by Standard & Poor's Rating Services or Baa2 as determined by Moody's
Investors Service or (ii) in the case of these two ratings having a difference
of two or more rating increments, the lower of the two ratings is below BBB- or
Baa3 or (iii) the rating for the Company's counterparties fall below A or A2.
In contemplation of the planned refinancing of the 2007 (U.S. Dollar)
Notes, in May 2006 the Company replaced approximately 63% of the notional value
of the existing cross currency interest rate swap agreements with a like amount
of new cross currency interest rate swap agreements which have a lower effective
fixed interest rate and a lower effective fixed exchange rate. This replacement
happened concurrent with the issuance of the 5.00% Notes, Series CB; the two
transactions had the composite effect of deferring, from June 2007 to June 2013,
the payment of $300 million, representing a portion of the amount that would
have been due either under the cross currency interest rate swap agreements or
to the 2007 (U.S. Dollar) Note holders (to whom the amounts would ultimately
have been paid would depend upon changes in interest and foreign exchange rates
over the period to maturity of the underlying debt).
To terminate the previous cross currency interest rate swap agreements, the
Company made a payment of $354.6 million, including $14.0 million in respect of
hedging of then-current period interest payments, to the counterparties. The
remaining $340.6 million portion of the payment made to the counterparties of
the previous cross currency interest rate swap agreements exceeded the
associated amount of the derivative liability, such excess being $25.8 million
and which was deferred and amortized over the remainder of the life of the 2007
(U.S. Dollar) Notes.
The weighted average effective fixed interest rates and effective fixed
exchange rates arising from the cross currency interest rate swap agreements are
summarized in the following table:
As at June 30, 2007 December 31, 2006
------------------------------ -------------------------------------- --------------------------------------
Effective fixed Effective fixed
Effective fixed exchange rate Effective fixed exchange rate
interest rate ($: U.S.$1.00) interest rate ($: U.S.$1.00)
------------------------------ -------------------- ---------------- ----------------- -------------------
2007 (U.S. Dollar) Notes -- $ -- 7.046% $ 1.2716
2011 (U.S. Dollar) Notes 8.493% $ 1.5327 8.493% $ 1.5327
------------------------------ -------------------- ---------------- ----------------- -------------------
The counterparties of the swap agreements are highly rated financial
institutions and the Company does not anticipate any non-performance. TELUS has
not required collateral or other security from the counterparties due to its
assessment of their creditworthiness.
The Company translates items such as the U.S. Dollar notes into equivalent
Canadian dollars at the rate of exchange in effect at the balance sheet date.
The swap agreements at June 30, 2007, comprised a net derivative liability of
$1,081.8 million, as set out in Note 4 (December 31, 2006 - $835.7 million). The
asset value of the swap agreements increases (decreases) when the balance sheet
date exchange rate increases (decreases) the Canadian dollar equivalent of the
U.S. Dollar notes.
TELUS(R) 26
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
(c) TELUS Corporation commercial paper
On May 15, 2007, TELUS Corporation entered into an unsecured commercial paper
program, which is backstopped by a portion of its credit facility, enabling it
to issue commercial paper up to a maximum aggregate of $800 million (or U.S.
Dollar equivalent), to be used for general corporate purposes, including capital
expenditures and investments. Commercial paper debt is due within one year but
is classified as long-term debt as the amounts are fully supported, and the
Company expects that they will continue to be supported, by the revolving credit
facility which has no repayment requirements within the next year.
(d) TELUS Corporation credit facility
On March 2, 2007, TELUS Corporation entered into a new $2.0 billion bank credit
facility with a syndicate of financial institutions. The new credit facility
consists of a $2.0 billion (or U.S. Dollar equivalent) revolving credit facility
expiring on May 1, 2012, to be used for general corporate purposes including the
backstop of commercial paper. This new facility replaced the Company's
pre-existing committed credit facilities prior to the availability termination
dates of such facilities.
TELUS Corporation's credit facility is unsecured and bears interest at
prime rate, U.S. Dollar Base Rate, a bankers' acceptance rate or London
interbank offered rate ("LIBOR") (all such terms as used or defined in the
credit facility), plus applicable margins. The credit facility contains
customary representations, warranties and covenants including two financial
quarter end financial ratio tests. The financial ratio tests are that the
Company may not permit its net debt to operating cash flow ratio to exceed 4.0:1
and may not permit its operating cash flow to interest expense ratio to be less
than 2.0:1, each as defined under the credit facility.
Continued access to TELUS Corporation's credit facility is not contingent
on the maintenance by TELUS Corporation of a specific credit rating.
As at (millions) June 30, 2007 December 31, 2006
--------------------------------------- ------------------ -----------------------------------------------------
Revolving credit facility expiring May 1, 2012 May 7, 2008 May 4, 2010 Total
--------------------------------------- ------------------ ----------------- ----------------- -----------------
Net available $ 1,232.8 $ 579.9 $ 800.0 $ 1,379.9
Drawn -- 120.0 -- 120.0
Outstanding, undrawn letters of credit 103.7 100.1 -- 100.1
Backstop of commercial paper 663.5 -- -- --
--------------------------------------- ------------------ ----------------- ----------------- -----------------
Gross available $ 2,000.0 $ 800.0 $ 800.0 $ 1,600.0
======================================= ================== ================= ================= =================
(e) Long-term debt maturities
Anticipated requirements to meet long-term debt repayments, including related
hedge amounts and calculated upon such long-term debts owing as at June 30,
2007, during each of the five years ending December 31 are as follows:
(millions) Principal Derivative liability Total(1)
---------------------------- ------------- -------------------- --------------
2007 (balance of year) $ 2.3 $ -- $ 2.3
2008 5.6 -- 5.6
2009 1.5 -- 1.5
2010 80.8 -- 80.8
2011 2,048.1 903.5 2,951.6
---------------------------- ------------- -------------------- --------------
(1) Where applicable, principal repayments reflect foreign exchange rates at
June 30, 2007.
TELUS(R) 27
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
16 shareholders' equity
(a) Details of shareholders' equity
As at ($ in millions) June 30, December 31,
2007 2006
-------------------------------------------------------------------------------------------- ---------------- ----------------
(restated -
Note 2(b))
Preferred equity
Authorized Amount
First Preferred Shares 1,000,000,000
Second Preferred Shares 1,000,000,000
Common equity
Share capital
Shares
Authorized Amount
Common Shares 1,000,000,000
Non-Voting Shares 1,000,000,000
Issued
Common Shares (b) $ 2,235.3 $ 2,264.4
Non-Voting Shares (b) 3,337.9 3,420.8
------------------------------------------------------------------------------------------- --------------- ----------------
5,573.2 5,685.2
------------------------------------------------------------------------------------------- --------------- ----------------
Options (c) -- 0.8
------------------------------------------------------------------------------------------- --------------- ----------------
Retained earnings and accumulated other comprehensive income
Retained earnings 1,023.4 1,080.1
Accumulated other comprehensive income (loss) (d) (125.8) (1.5)
------------------------------------------------------------------------------------------- --------------- ----------------
Total 897.6 1,078.6
------------------------------------------------------------------------------------------- --------------- ----------------
Contributed surplus (e) 144.0 163.5
------------------------------------------------------------------------------------------- --------------- ----------------
Total Shareholders' Equity $ 6,614.8 $ 6,928.1
=========================================================================================== =============== ================
(b) Changes in Common Shares and Non-Voting Shares
Periods ended June 30, 2007 ($ in millions) Three months Six months
---------------------------------------------------- ------------------------------------- -------------------------------------
Number of shares Share capital Number of shares Share capital
---------------------------------------------------- ------------------ ----------------- ------------------ -----------------
Common Shares
Beginning of period 176,696,014 $ 2,239.5 178,667,834 $ 2,264.4
Common Shares issued pursuant to exercise
of share options (f) -- -- 3,180 0.1
Purchase of shares for cancellation pursuant
to normal course issuer bid (g) (330,000) (4.2) (2,305,000) (29.2)
---------------------------------------------------- ------------------ ----------------- ------------------ -----------------
End of period 176,366,014 $ 2,235.3 176,366,014 $ 2,235.3
==================================================== ================== ================= ================== =================
Non-Voting Shares
Beginning of period 157,731,460 $ 3,388.5 159,240,734 $ 3,420.8
Non-Voting Shares issued pursuant to exercise
of share options (f) 6,200 0.2 18,717 0.6
Non-Voting Shares issued pursuant to use of share
option award net-equity settlement feature (f) 3,880 -- 12,089 0.1
Purchase of shares for cancellation pursuant to
normal course issuer bid (g) (2,367,300) (50.8) (3,897,300) (83.6)
---------------------------------------------------- ------------------ ----------------- ------------------ -----------------
End of period 155,374,240 $ 3,337.9 155,374,240 $ 3,337.9
==================================================== ================== ================= ================== =================
Amounts credited to the Common Share capital account upon exercise of share
options are cash received. Amounts credited to the Non-Voting Share capital
account are comprised as follows:
Periods ended June 30, 2007 (millions) Three months Six months
----------------------------------------------------------------------------------- -------------------- --------------------
Non-Voting Shares issued pursuant to exercise of share options
Cash received from exercise of share options $ 0.2 $ 0.5
Share option award expense reclassified from contributed surplus upon
exercise of share options (e) -- 0.1
----------------------------------------------------------------------------------- -------------------- --------------------
$ 0.2 $ 0.6
=================================================================================== ==================== ====================
TELUS(R) 28
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
(c) Options
Upon its acquisition of Clearnet Communications Inc. in 2000, the Company was
required to record the intrinsic value of Clearnet Communications Inc. options
outstanding at that time. As these options are exercised, the corresponding
intrinsic values are reclassified to share capital. As these options are
forfeited, or as they expire, the corresponding intrinsic value is reclassified
to contributed surplus. Proceeds arising from the exercise of these options are
credited to share capital.
(d) Accumulated other comprehensive income (loss)
Other comprehensive Accumulated other
income comprehensive
(loss) income (loss)
--------------------------------------- -------------------------------
Three-month period ended June 30, 2007 Amount Income Beginning of End of
(millions) arising taxes Net period period
---------------------------------------------------------- -------------- ------------ ---------- -------------------------------
Change in unrealized fair value of derivatives
designated as cash flow hedges
Gains (losses) on derivatives designated as cash flow
hedges $ (242.3) $ (29.8) $ (212.5)
Gains and losses on derivatives designated as cash flow
hedges in prior periods transferred to net income in
the current period 281.5 41.1 240.4
---------------------------------------------------------- -------------- ----------- ---------------- ------------- -----------
39.2 11.3 27.9 $ (150.0) $ (122.1)
---------------------------------------------------------- -------------- ----------- ---------------- ------------- -----------
Cumulative foreign currency translation adjustment (6.2) -- (6.2) 0.9 (5.3)
---------------------------------------------------------- -------------- ----------- ---------------- ------------- -----------
Change in unrealized fair value of available-for-sale
financial assets (0.1) -- (0.1) 1.7 1.6
---------------------------------------------------------- -------------- ----------- ---------------- ------------- -----------
$ 32.9 $ 11.3 $ 21.6 $ (147.4) $ (125.8)
========================================================== ============== =========== ================ ============= ===========
Accumulated other
Other comprehensive income (loss) comprehensive income (loss)
-------------------------------------------------------------------------------
Opening balance
------------------------------------
Six-month period ended June 30, 2007 Amount Income Beginning Transitional As End of
(millions) arising taxes Net of period adjustments(1) adjusted period
------------------------------------------------------------------------------------------------------------------------------------
Change in unrealized fair value of
derivatives designated as cash
flow hedges
Gains (losses) on derivatives designated
as cash flow hedges $ (247.1) $ (30.9) $ (216.2)
Gains and losses on derivatives designated
as cash flow hedges in prior periods
transferred to net income in the
current period 328.6 56.6 272.0
--------------------------------------------------- --------- ----------- ---------- ---------- ---------- ----------- -----------
81.5 25.7 55.8 $ -- $ (177.9) $ (177.9) $ (122.1)
--------------------------------------------------- --------- ----------- ---------- ---------- ---------- ----------- -----------
Cumulative foreign currency translation
adjustment (3.8) -- (3.8) (1.5) -- (1.5) (5.3)
--------------------------------------------------- --------- ----------- ---------- ---------- ---------- ----------- -----------
Change in unrealized fair value of
available-for-sale financial assets (0.1) -- (0.1) -- 1.7 1.7 1.6
--------------------------------------------------- --------- ----------- ---------- ---------- ---------- ----------- -----------
$ 77.6 $ 25.7 $ 51.9 $ (1.5) $ (176.2) $ (177.7) $ (125.8)
=================================================== ========= =========== ========== ========== ========== =========== ===========
(1) The transitional adjustments arise primarily from the 2007 and 2011 cross currency interest rate swap
agreements (Notes 2(b), 15(b)) and are net of income taxes on the cash flow hedges of $81.7.
The net amount of the existing gains (losses) arising from the unrealized fair
value of the 2011 cross currency interest rate swap agreements, which are
derivatives that are designated as cash flow hedges, and which are reported in
accumulated other comprehensive income, would be reclassified to net income if
the agreements (see Note 15(b)) were early terminated; the amount of such
reclassification would be dependent upon fair values and amounts of the
agreements terminated. As at June 30, 2007, the Company's estimate of the net
amount of existing gains (losses) arising from the unrealized fair value of
derivatives designated as cash flow hedges, other than in respect of the 2011
cross currency interest rate swap agreements, which are reported in accumulated
other comprehensive income and which are expected to be reclassified to net
income in the next twelve months is $2.9 million.
TELUS(R) 29
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
(e) Contributed surplus
Periods ended June 30, 2007 (millions) Three months Six months
------------------------------------------------------------------------------- ----------------- -----------------
Balance, beginning of period $ 140.0 $ 163.5
Share option award expense
- Recognized in period(1) (Note 10(a)) 4.0 7.6
- Reclassified to Non-Voting Share capital account
- Upon exercise of share options -- (0.1)
- Upon use of share option award net-equity settlement feature -- (0.1)
- Reclassified to current liabilities upon addition of net-cash settlement
feature (Note 10(b)), net of eligible
awards settled other than through use of net-cash settlement feature -- (26.9)
------------------------------------------------------------------------------- ----------------- -----------------
Balance, end of period $ 144.0 $ 144.0
=============================================================================== ================= =================
(1) This amount represents the expense for share option awards accounted for as equity instruments; the
difference between this amount and the amount disclosed in Note 10(a) is the net expense for share
option awards accounted for as liability instruments.
(f) Share option plans
The Company has a number of share option plans under which officers and other
employees may receive options to purchase Non-Voting Shares at a price equal to
the fair market value at the time of grant; prior to 2001, options were also
similarly awarded in respect of Common Shares. Prior to 2002, directors were
also awarded options to purchase Non-Voting Shares and Common Shares at a price
equal to the fair market value at the time of grant. Option awards currently
granted under the plans may be exercised over specific periods not to exceed
seven years from the time of grant; prior to 2003, share option awards were
granted with exercise periods not to exceed ten years.
The following table presents a summary of the activity related to the
Company's share option plans for the three-month and six-month periods ended
June 30.
Periods ended June 30, 2007 Three months Six months
-------------------------------------------------------------------------------------------------------------------------------
Number of share Weighted average Number of share Weighted average
options share option price options share option price
-------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 10,204,913 $ 35.15 10,569,462 $ 31.46
Granted 51,365 63.90 1,269,573 56.90
Exercised(1) (927,690) 26.88 (2,453,090) 26.86
Forfeited and other 13,330 37.57 (44,027) 31.17
-------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 9,341,918 $ 36.13 9,341,918 $ 36.13
===============================================================================================================================
(1) The total intrinsic value of share option awards exercised for the three-month and six-month periods
ended June 30, 2007, was $33.0 million and $77.5 million, respectively.
In 2006, certain outstanding grants of share option awards, which were made
after 2001, had a net-equity settlement feature applied to them. This event did
not result in the optionees receiving incremental value and therefore
modification accounting was not required for it. The optionee does not have the
choice of exercising the net-equity settlement feature. It is at the Company's
discretion whether an exercise of the share option award is settled as a share
option or using the net-equity settlement feature. In 2007, certain outstanding
grants of share option awards had a net-cash settlement feature applied to them,
as further discussed in Note 10(b); the optionee has the choice of exercising
the net-cash settlement feature.
TELUS(R) 30
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
The following table reconciles the number of share options exercised and
the associated number of Common Shares and Non-Voting Shares issued.
Periods ended June 30, 2007 Three months Six months
----------------------------------------- -------------------------------------------- ----------------------------------------
Common Non-Voting Common Non-Voting
Shares Shares Total Shares Shares Total
----------------------------------------- -------------------------------------------- ----------------------------------------
Shares issued pursuant to exercise
of share options -- 6,200 6,200 3,180 18,717 21,897
Impact of optionee choosing to
settle share option award
exercises using net-cash settlement
feature 97,133 818,782 915,915 308,119 2,105,907 2,414,026
Shares issued pursuant to use of share
option award net-equity settlement
feature N/A(1) 3,880 3,880 N/A(1) 12,089 12,089
Impact of Company choosing to settle
share option award exercises using
net-equity settlement feature N/A(1) 1,695 1,695 N/A(1) 5,078 5,078
----------------------------------------- -------------------------------------------- ----------------------------------------
Share options exercised 97,133 830,557 927,690 311,299 2,141,791 2,453,090
========================================= ============================================ ========================================
(1) Share option awards for Common Shares do not have a net-equity settlement feature.
The following is a life and exercise price stratification of the Company's
share options outstanding as at June 30, 2007.
Options outstanding(1) Options exercisable
--------------------------------------------------------------------------------------------------------------- -------------------
Range of option prices Total
-------------------------------------------------------------------------------------------------------------- Weighted
Low $ 5.95 $ 9.14 $ 14.63 $ 21.99 $ 34.88 $ 54.45 $ 5.95 Number of average
High $ 8.43 $ 10.75 $ 19.92 $ 32.83 $ 47.22 $ 64.64 $ 64.64 shares price
---------------------
Year of expiry and number of shares
---------------------------------------------------------------------------------------------------------------
2007 -- 2,454 -- -- -- -- 2,454 2,454 $ 9.14
2008 3,272 -- -- 27,119 48,500 -- 78,891 78,891 $ 39.52
2009 -- 2,944 386,969 105,960 76,825 -- 572,698 572,698 $ 21.28
2010 -- -- 101,471 803,265 273,146 -- 1,177,882 1,177,882 $ 26.65
2011 -- -- 5,166 1,598,744 1,020,309 -- 2,624,219 2,534,669 $ 28.63
2012 5,666 6,167 165,467 65,000 1,771,732 -- 2,014,032 242,300 $ 17.93
2013 -- -- -- -- 1,531,635 66,707 1,598,342 -- $ --
2014 -- -- -- -- -- 1,273,400 1,273,400 -- $ --
----------------------------------------------------------------------------------------------------------------------------
8,938 11,565 659,073 2,600,088 4,722,147 1,340,107 9,341,918 4,608,894
============================================================================================================================
Weighted average
remaining life
(years) 3.7 3.4 3.2 3.7 4.7 6.7 4.6
Weighted average price $ 7.52 $ 10.36 $ 16.02 $ 24.64 $ 39.51 $ 56.83 $ 36.13
Aggregate intrinsic
value(2)(millions) $ 0.5 $ 0.6 $ 30.8 $ 99.2 $ 110.2 $ 8.0 $ 249.3
Options exercisable
----------------------------------------------------------------------------------------------------------------
Number of shares 8,938 11,565 659,073 2,510,538 1,418,780 -- 4,608,894
Weighted average
remaining contractual
life (years) 3.7 3.4 3.2 3.7 3.3 -- 3.5
Weighted average price $ 7.52 $ 10.36 $ 16.02 $ 24.59 $ 36.06 $ -- $ 26.83
Aggregate intrinsic
value(2) (millions) $ 0.5 $ 0.6 $ 30.8 $ 96.0 $ 38.2 $ -- $ 166.1
(1) As at June 30, 2007, 8,958,160 share options, with a weighted average remaining contractual life of 3.7
years, a weighted average price of $35.59 and an aggregate intrinsic value of $243.9 million, are vested
or were expected to vest.
(2) The aggregate intrinsic value is calculated upon June 30, 2007, per share prices of $63.77 for Common
Shares and $62.75 for Non-Voting Shares.
As at June 30, 2007, 0.5 million Common Shares and 16.4 million Non-Voting
Shares were reserved for issuance, from Treasury, under the share option plans.
(g) Purchase of shares for cancellation pursuant to normal course issuer bid
The Company purchased, for cancellation, through the facilities of the Toronto
Stock Exchange, Common Shares and Non-Voting Shares pursuant to successive
normal course issuer bids; the Company's most current normal course issuer bid
runs for a twelve-month period ending December 19, 2007, for up to 12.0 million
Common Shares and 12.0 million Non-Voting Shares. The excess of the purchase
price over the average stated value of shares purchased for cancellation was
charged to retained earnings. The Company ceases to consider shares outstanding
on the date of the Company's purchase of its shares although the actual
cancellation of the shares by the transfer agent and registrar occurs on a
timely basis on a date shortly thereafter. As at June 30, 2007, 330,000 Common
Shares and 327,300 Non-Voting Shares had been purchased and not yet cancelled.
TELUS(R) 31
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
Three-month period ended June 30, 2007 ($ in millions)
-----------------------------------------------------------------------------------------------------------------------------------
Purchase price
---------------------------------------------------------
Number of Charged to Charged to
shares Paid share capital retained earnings
-----------------------------------------------------------------------------------------------------------------------------------
Common Shares purchased for cancellation
Prior to beginning of period 1,975,000 $ 114.1 $ 25.0 $ 89.1
During period 330,000 20.9 4.2 16.7
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative total 2,305,000 $ 135.0 $ 29.2 $ 105.8
===================================================================================================================================
Non-Voting Shares purchased for cancellation
Prior to beginning of period 1,716,723 $ 96.4 $ 36.8 $ 59.6
During period 2,367,300 148.6 50.8 97.8
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative total 4,084,023 $ 245.0 $ 87.6 $ 157.4
===================================================================================================================================
Common Shares and Non-Voting Shares purchased
for cancellation
Prior to beginning of period 3,691,723 $ 210.5 $ 61.8 $ 148.7
During period 2,697,300 169.5 55.0 114.5
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative total 6,389,023 $ 380.0 $ 116.8 $ 263.2
===================================================================================================================================
Six-month period ended June 30, 2007 ($ in millions)
------------------------------------------------------------------------------------------------------------------------------------
Purchase price
----------------------------------------------------------
Number of Charged to Charged to
shares Paid share capital retained earnings
------------------------------------------------------------------------------------------------------------------------------------
Common Shares purchased for cancellation
Prior to beginning of period -- $ -- $ -- $ --
During period 2,305,000 135.0 29.2 105.8
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative total 2,305,000 $ 135.0 $ 29.2 $ 105.8
===================================================================================================================================
Non-Voting Shares purchased for cancellation
Prior to beginning of period 186,723 $ 9.8 $ 4.0 $ 5.8
During period 3,897,300 235.2 83.6 151.6
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative total 4,084,023 $ 245.0 $ 87.6 $ 157.4
===================================================================================================================================
Common Shares and Non-Voting Shares purchased
for cancellation
Prior to beginning of period 186,723 $ 9.8 $ 4.0 $ 5.8
During period 6,202,300 370.2 112.8 257.4
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative total 6,389,023 $ 380.0 $ 116.8 $ 263.2
===================================================================================================================================
(h) Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase Plan under which
eligible shareholders may acquire Non-Voting Shares through the reinvestment of
dividends and additional optional cash payments. Excluding Non-Voting Shares
purchased by way of additional optional cash payments, the Company, at its
discretion, may offer the Non-Voting Shares at up to a 5% discount from the
market price. During the three-month and six-month periods ended June 30, 2007,
the Company did not offer Non-Voting Shares at a discount. Shares purchased
through optional cash payments are subject to a minimum investment of $100 per
transaction and a maximum investment of $20,000 per calendar year.
Under this Plan, the Company has the option of offering shares from
Treasury or having the trustee acquire shares in the stock market. Prior to July
1, 2001, when the acquisition of shares from Treasury commenced, all Non-Voting
Shares were acquired in the market at normal trading prices; acquisition in the
market at normal trading prices recommenced on January 1, 2005.
In respect of Common Share and Non-Voting Share dividends declared during
the three-month and six-month periods ended June 30, 2007, $4.5 million (2006 -
$2.3 million) and $7.7 million (2006 - $4.5 million), respectively, was to be
reinvested in Non-Voting Shares.
TELUS(R) 32
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
17 commitments and contingent liabilities
(a) Canadian Radio-television and Telecommunications Commission Decisions
2002-34, 2002-43 and 2006-9 deferral accounts
On May 30, 2002, and on July 31, 2002, the CRTC issued Decisions 2002-34 and
2002-43, respectively, and introduced the concept of a deferral account. The
Company must make significant estimates and assumptions in respect of the
deferral accounts given the complexity and interpretation required of Decisions
2002-34 and 2002-43. Accordingly, the Company estimates, and records, an
aggregate liability of $148.9 million as at June 30, 2007 (December 31, 2006 -
$164.8 million), to the extent that activities it has undertaken, other
qualifying events and realized rate reductions for Competitor Services do not
extinguish it; management is required to make estimates and assumptions in
respect of the offsetting nature of these items. If the CRTC, upon its periodic
review of the Company's deferral account, disagrees with management's estimates
and assumptions, the CRTC may adjust the deferral account balance and such
adjustment may be material. Ultimately, this process results in the CRTC
determining if, and when, the deferral account liability is settled.
On March 24, 2004, the CRTC issued Telecom Public Notice CRTC 2004-1
"Review and disposition of the deferral accounts for the second price cap
period", which initiated a public proceeding inviting proposals on the
disposition of the amounts accumulated in the incumbent local exchange carriers'
deferral accounts during the first two years of the second price cap period.
On February 16, 2006, the CRTC issued Decision CRTC 2006-9, "Disposition of
funds in the deferral account". In its decision the CRTC determined that the
majority of the accumulated liability within the respective incumbent local
exchange carrier's deferral account was to be made available for initiatives to
expand broadband services within their incumbent local exchange carrier
operating territories to rural and remote communities where service is currently
not available. In addition, a minimum of five per cent of the accumulated
deferral account balance must be used for initiatives that enhance accessibility
to telecommunications services for individuals with disabilities. To the extent
that the deferral account balance exceeds the approved initiatives, the
remaining balance will be distributed in the form of a one-time rebate to local
residential service customers in non-high cost serving areas. Finally, the CRTC
indicated that subsequent to May 31, 2006, no additional amounts are to be added
to the deferral account and, instead, are to be dealt with via prospective rate
reductions.
In September 2006, the Federal Court of Appeal granted the Consumers
Association of Canada, the National Anti-Poverty Organization and also Bell
Canada leave to appeal CRTC Telecom Decision 2006-9. The consumer groups have
filed their appeal asking the Court to direct rebates to local telephone
subscribers, rather than have the accumulated deferral account funds used for
purposes determined by the CRTC, as noted above. Bell Canada has also filed its
appeal of Decision 2006-9 on the grounds that the CRTC exceeded its jurisdiction
to the extent it approves rebates from the deferral account. These two appeals
have been consolidated and are expected to be heard by the Federal Court of
Appeal in the fourth quarter of 2007 with a judgement expected to be issued by
the Federal Court of Appeal in the second quarter of 2008.
In the event that Bell Canada is successful in its appeal, the Company may
realize additional revenue equal to the amount of the deferral account that
would otherwise have been rebated by the CRTC. Should the consumer groups be
successful in their appeals, the Company may be required to remit a one-time
refund of an amount up to, but not exceeding, the aggregate liability of
approximately $149 million in individually small amounts to its entire local
residential subscriber base. As the deferral account balance was fully provided
for in previous financial statements, the potential refund will not impact the
Company's subsequent income from operations. In addition, subject to the
potential outcome of this leave to appeal, the Company may need to re-address
its intent to extend broadband services to uneconomic remote and rural
communities. The Company supports Decision 2006-9 and its designated uses of the
deferral account in order to extend high-speed broadband internet service to
rural and remote communities and improve telecommunications services for people
with disabilities.
Due to the Company's use of the liability method of accounting for the
deferral account, the CRTC Decision 2005-6, as it relates to the Company's
provision of Competitor Digital Network services, is not expected to affect the
Company's consolidated revenues. Specifically, to the extent that the CRTC
Decision 2005-6 requires the Company to provide discounts on Competitor Digital
Network services, through May 31, 2006, the Company drew down the deferral
account by an offsetting amount; subsequent to May 31, 2006, the income
statement effects did not change and the Company no longer needed to account for
these amounts through the deferral account. For the three-month and six-month
periods ended June 30, 2007, the Company drew down the deferral account by $NIL
(2006 - $7.0 million) and $15.9 million (2006 - $19.9 million), respectively, in
respect of discounts on Competitor Digital Network services and other qualifying
expenditures.
TELUS(R) 33
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
On November 30, 2006, the CRTC issued Telecom Public Notice CRTC 2006-15,
"Review of proposals to dispose of the funds accumulated in the deferral
accounts", which initiated a public proceeding to consider the proposals
submitted by the incumbent local exchange carriers to dispose of the funds
accumulated in their respective deferral accounts. The Company expects the CRTC
to render its decision in this matter in the latter part of 2007.
On July 6, 2007, the CRTC issued decision CRTC 2007-50, "Use of deferral
account to expand broadband services to certain rural and remote communities" In
this decision the CRTC approved the use of the deferral account for the purpose
of expanding broadband services in a limited number of communities in British
Columbia and Quebec. The Company is currently reviewing the implications of this
decision in conjunction with its previously filed submission for use of the
deferral account funds and, as directed by the CRTC, will file an update to the
previously filed submission in September 2007.
(b) Guarantees
Guarantees: Canadian generally accepted accounting principles require the
disclosure of certain types of guarantees and their maximum, undiscounted
amounts. The maximum potential payments represent a "worst-case scenario" and do
not necessarily reflect results expected by the Company. Guarantees requiring
disclosure are those obligations that require payments contingent on specified
types of future events. In the normal course of its operations, the Company
enters into obligations that GAAP may consider to be guarantees. As defined by
Canadian GAAP, guarantees subject to these disclosure guidelines do not include
guarantees that relate to the future performance of the Company. As at June 30,
2007, the Company's maximum undiscounted guarantee amounts, without regard for
the likelihood of having to make such payment, were not material.
Indemnification obligations: In the normal course of operations, the
Company may provide indemnification in conjunction with certain transactions.
The term of these indemnification obligations range in duration and often are
not explicitly defined. Where appropriate, an indemnification obligation is
recorded as a liability. In many cases, there is no maximum limit on these
indemnification obligations and the overall maximum amount of the obligations
under such indemnification obligations cannot be reasonably estimated. Other
than obligations recorded as liabilities at the time of the transaction,
historically the Company has not made significant payments under these
indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the
Company agreed to bear a proportionate share of the new owner's increased
directory publication costs if the increased costs were to arise from a change
in the applicable CRTC regulatory requirements. The Company's proportionate
share would have been 80% through May 2006, declining to 40% in the next
five-year period and then to 15% in the final five years. As well, should the
CRTC take any action which would result in the owner being prevented from
carrying on the directory business as specified in the agreement, TELUS would
indemnify the owner in respect of any losses that the owner incurred.
As at June 30, 2007, the Company has no liability recorded in respect of
indemnification obligations.
(c) Claims and lawsuits
General: A number of claims and lawsuits seeking damages and other relief are
pending against the Company. It is impossible at this time for the Company to
predict with any certainty the outcome of such litigation. However, management
is of the opinion, based upon legal assessment and information presently
available, that it is unlikely that any liability, to the extent not provided
for through insurance or otherwise, would be material in relation to the
Company's consolidated financial position, excepting the items enumerated
following.
TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan: Two
statements of claim were filed in the Alberta Court of Queen's Bench on December
31, 2001, and January 2, 2002, respectively, by plaintiffs alleging to be either
members or business agents of the Telecommunications Workers Union. In one
action, the three plaintiffs alleged to be suing on behalf of all current or
future beneficiaries of the TELUS Corporation Pension Plan and in the other
action, the two plaintiffs alleged to be suing on behalf of all current or
future beneficiaries of the TELUS Edmonton Pension Plan. The statement of claim
in the TELUS Corporation Pension Plan related action named the Company, certain
of its affiliates and certain present and former trustees of the TELUS
Corporation Pension Plan as defendants, and claims damages in the sum of $445
million. The statement of claim in the TELUS Edmonton Pension Plan related
action named the Company, certain of its affiliates and certain individuals who
are alleged to be trustees of the TELUS Edmonton Pension Plan and claims damages
in the sum of $15.5 million. On February 19, 2002, the Company filed statements
of defence to both actions and also filed notices of motion for certain relief,
including an order striking out the actions as representative or class actions.
On May 17, 2002, the statements of claim were amended by the plaintiffs and
include allegations, inter alia, that benefits provided under the TELUS
Corporation Pension Plan and the TELUS Edmonton Pension Plan are less
advantageous than the benefits provided under the respective former pension
plans, contrary to applicable legislation, that insufficient contributions were
made to the plans and contribution holidays were taken and that the defendants
wrongfully used the diverted funds, and that administration fees and expenses
were improperly deducted. The Company filed statements of defence to the amended
statements of claim on June 3, 2002. The Company believes that it has good
TELUS(R) 34
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
defences to the actions. As a term of the settlement reached between TELUS
Communications Inc. and the Telecommunications Workers Union that resulted in a
collective agreement effective November 20, 2005, the Telecommunications Workers
Union has agreed to not provide any direct or indirect financial or other
assistance to the plaintiffs in these actions, and to communicate to the
plaintiffs the Telecommunications Workers Union's desire and recommendation that
these proceedings be dismissed or discontinued. The Company has been advised by
the Telecommunications Workers Union that the plaintiffs have not agreed to
dismiss or discontinue these actions. Should the lawsuits continue because of
the actions of the court, the plaintiffs or for any other reason, and their
ultimate resolution differ from management's assessment and assumptions, a
material adjustment to the Company's financial position and the results of its
operations could result.
Uncertified class action: A class action was brought August 9, 2004, under
the Class Actions Act (Saskatchewan), against a number of past and present
wireless service providers including the Company. The claim alleges that each of
the carriers is in breach of contract and has violated competition, trade
practices and consumer protection legislation across Canada in connection with
the collection of system access fees, and seeks to recover direct and punitive
damages in an unspecified amount. Similar proceedings have also been filed by,
or on behalf of, plaintiffs' counsel in other provincial jurisdictions. On July
18, 2006, the Saskatchewan court declined to certify the action as a class
action, but granted the plaintiffs leave to renew their application in order to
further address certain statutory requirements respecting class actions. The
renewed application was heard on June 18 and 19, 2007. The Company believes that
it has good defences to the action. Should the ultimate resolution of this
action differ from management's assessments and assumptions, a material
adjustment to the Company's financial position and the results of its operations
could result.
18 additional financial information
(a) Income statement
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
------------------------------------------ --------------- --------------- -------------- ---------------
Operations expense(1):
Cost of sales and service $ 753.7 $ 668.2 $ 1,477.3 $ 1,328.6
Selling, general and administrative 586.6 539.2 1,299.6 1,079.9
------------------------------------------ --------------- --------------- -------------- ---------------
$ 1,340.3 $ 1,207.4 $ 2,776.9 $ 2,408.5
========================================== =============== =============== ============== ===============
Advertising expense $ 74.6 $ 56.1 $ 140.0 $ 110.1
========================================== =============== =============== ============== ===============
(1) Cost of sales and service includes cost of goods sold and costs to operate and maintain access
to and usage of the Company's telecommunications infrastructure. Selling, general and
administrative costs include sales and marketing costs (including commissions), customer care,
bad debt expense, real estate costs and corporate overhead costs such as information
technology, finance (including billing services, credit and collection), legal, human resources
and external affairs.
Employee salaries, benefits and related costs are included in one of the two components of
operations expense to the extent that the costs are related to the component functions.
(b) Balance sheet
As at (millions) June 30, 2007 December 31, 2006
------------------------------------------------------------- -------------------- -----------------
Accounts receivable
Customer accounts receivable $ 419.3 $ 545.6
Accrued receivables - customer 113.2 83.2
Allowance for doubtful accounts (61.3) (54.8)
------------------------------------------------------------- -------------------- -----------------
471.2 574.0
Accrued receivables - other 95.5 125.4
Other 5.1 7.8
------------------------------------------------------------- -------------------- -----------------
$ 571.8 $ 707.2
============================================================= ==================== =================
Prepaid expense and other
Prepaid expenses $ 180.6 $ 109.9
Deferred customer activation and connection costs 69.6 69.5
Other 41.5 15.9
------------------------------------------------------------- -------------------- -----------------
$ 291.7 $ 195.3
============================================================= ==================== =================
TELUS(R) 35
--------------------------------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------------------------------
June 30, December 31,
As at (millions) 2007 2006
--------------------------------------------------------------------------------------------------------
Deferred charges (adjusted - Note 2(b))
Recognized transitional pension assets and
pension plan contributions in excess of
charges to income $ 925.7 $ 826.2
Deferred customer activation and connection costs 114.9 115.4
Other 24.0 15.0
----------------------------------------------------------------- -------------------- -----------------
$ 1,064.6 $ 956.6
================================================================= ==================== =================
Accounts payable and accrued liabilities
Accrued liabilities $ 471.0 $ 449.7
Payroll and other employee-related liabilities 394.2 383.8
Accrual for net-cash settlement feature for
share option awards (Note 10(b)) 172.1 --
Asset retirement obligations 4.1 4.1
----------------------------------------------------------------- -------------------- -----------------
1,041.4 837.6
Trade accounts payable 375.6 427.3
Interest payable 50.9 47.7
Other 80.0 51.0
----------------------------------------------------------------- -------------------- -----------------
$ 1,547.9 $ 1,363.6
================================================================= ==================== =================
Advance billings and customer deposits
Advance billings $ 360.3 $ 348.8
Regulatory deferral accounts (Note 17(a)) 148.9 164.8
Deferred customer activation and connection fees 67.0 72.3
Customer deposits 33.2 20.4
----------------------------------------------------------------- -------------------- -----------------
$ 609.4 $ 606.3
================================================================= ==================== =================
Other long-term liabilities
Derivative liabilities (Note 4) $ 1,081.8 $ 710.3
Pension and other post-retirement liabilities 204.6 198.7
Other 143.3 128.2
----------------------------------------------------------------- -------------------- -----------------
1,429.7 1,037.2
Deferred customer activation and connection fees 114.9 115.4
Deferred gain on sale-leaseback of buildings 66.7 71.6
Asset retirement obligations 33.1 33.1
----------------------------------------------------------------- -------------------- -----------------
$ 1,644.4 $ 1,257.3
================================================================= ==================== =================
(c) Supplementary cash flow information
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
-------------------------------------------------------------------------------------------------------------------
Net change in non-cash working capital
Short-term investments $ 55.4 $ -- $ 55.4 $ --
Accounts receivable 387.5 97.5 135.4 97.5
Inventories 0.6 35.2 37.6 23.0
Prepaid expenses and other (29.7) (28.6) (100.5) (117.1)
Accounts payable and accrued liabilities (34.3) (29.4) 6.0 (74.5)
Income and other taxes receivable and payable, net (6.1) (11.1) 1.8 101.3
Advance billings and customer deposits (0.3) 7.2 3.1 10.8
-------------------------------------------------------------------------------------------------------------------
$ 373.1 $ 70.8 $ 138.8 $ 41.0
===================================================================================================================
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
-------------------------------------------------------------------------------------------------------------------
Interest (paid)
Amount paid in respect of interest expense $ (218.5) $ (240.3) $ (231.7) $ (253.4)
Forward starting interest rate swap agreement
termination payments -- -- (10.4) --
Interest related portion of cross currency
interest rate swap agreement termination
payments -- (31.2) -- (31.2)
-------------------------------------------------------------------------------------------------------------------
$ (218.5) $ (271.5) $ (242.1) $ (284.6)
===================================================================================================================
TELUS(R) 36
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
19 differences between Canadian and United States generally accepted accounting
principles
The consolidated financial statements have been prepared in
accordance with Canadian GAAP. The principles adopted in these financial
statements conform in all material respects to those generally accepted in the
United States except as summarized below. Significant differences between
Canadian GAAP and U.S. GAAP would have the following effect on reported net
income of the Company:
Three months Six months
Periods ended June 30 (millions except per share amounts) 2007 2006 2007 2006
--------------------------------------------------------------------------------------- -- ------------ ------------
Net income in accordance with Canadian GAAP $ 253.1 $ 356.6 $ 447.9 $ 566.7
Adjustments:
Operating expenses
Operations (b) (4.1) (4.3) 18.3 (8.5)
Amortization of intangible assets (c) (12.6) (12.6) (25.1) (25.7)
Accounting for derivatives (e) -- (2.4) -- (0.6)
Taxes on the above adjustments and tax rate changes (f) 12.8 62.2 18.4 67.5
-------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP 249.2 399.5 459.5 599.4
Other comprehensive income (loss), net of taxes (g)
In accordance with Canadian GAAP 21.6 0.1 51.9 0.8
Change in pension related other comprehensive
income accounts 6.1 (1.5) 12.1 (2.9)
Change in unrealized fair value of derivatives
designated as cash flow hedges -- 59.2 -- 36.1
--------------------------------------------------------------------------------------------------------------------
In accordance with U.S. GAAP 27.7 57.8 64.0 34.0
--------------------------------------------------------------------------------------------------------------------
Comprehensive income in accordance with U.S. GAAP $ 276.9 $ 457.3 $ 523.5 $ 633.4
====================================================================================================================
Net income in accordance with U.S. GAAP per Common
Share and Non-Voting Share
- Basic $ 0.75 $ 1.16 $ 1.37 $ 1.73
- Diluted $ 0.74 $ 1.15 $ 1.36 $ 1.71
The following is an analysis of retained earnings
(deficit) reflecting the application of U.S. GAAP:
Six-month periods ended June 30 (millions) 2007 2006
--------------------------------------------------------------------------------------------------------------------
Schedule of retained earnings (deficit) under U.S. GAAP
Balance at beginning of period $ (419.5) $ (785.5)
Net income in accordance with U.S. GAAP 459.5 599.4
--------------------------------------------------------------------------------------------------------------------
40.0 (186.1)
Common Share and Non-Voting Share dividends
paid, or payable, in cash (250.9) (190.7)
Purchase of Common Shares and Non-Voting
shares in excess of stated capital (205.6) (202.6)
Adjustment to purchase of share option
awards not in excess of their fair value -- 2.1
--------------------------------------------------------------------------------------------------------------------
Balance at end of period $ (416.5) $ (577.3)
====================================================================================================================
The following is an analysis of major balance sheet
categories reflecting the application of U.S. GAAP:
As at (millions) June 30, December 31,
2007 2006
------------------------------------------------------------------------------------------------------------------------
(adjusted
- Note 2(c))
Current Assets $ 1,227.2 $ 1,344.9
Capital Assets
Property, plant, equipment and other 7,296.7 7,466.5
Intangible assets subject to amortization (c) 2,395.3 2,156.2
Intangible assets with indefinite lives 2,966.5 2,966.4
Goodwill (d) 3,571.3 3,572.0
Other Assets 807.7 675.7
------------------------------------------------------------------------------------------------------------------------
$ 18,264.7 $ 18,181.7
========================================================================================================================
Current Liabilities $ 2,467.4 $ 3,782.2
Long-Term Debt 4,833.0 3,493.7
Other Long-Term Liabilities 1,702.3 1,550.0
Deferred Income Taxes (f) 1,383.7 1,319.7
Non-Controlling Interest 22.1 23.6
Shareholders' Equity 7,856.2 8,012.5
------------------------------------------------------------------------------------------------------------------------
$ 18,264.7 $ 18,181.7
========================================================================================================================
TELUS(R) 37
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
The following is a reconciliation of shareholders' equity incorporating the
differences between Canadian and U.S. GAAP:
Shareholders' Equity
----------------------------------------------------------------------------------------
Retained Accumulated other
Common Non-voting earnings comprehensive Contributed
As at June 30, 2007 (millions) Shares Shares (deficit) income (loss) surplus Total
-------------------------------------------------------------------------------------------------------------------------------
Under Canadian GAAP $2,235.3 $3,337.9 $1,023.4 $ (125.8) $ 144.0 $6,614.8
Adjustments:
Merger of BC TELECOM and
TELUS (a), (c), (d) 1,747.2 966.5 (1,334.1) -- -- 1,379.6
Share-based compensation (b) 10.5 60.9 (102.0) -- 30.6 --
Acquisition of Clearnet
Communications Inc.
Goodwill (d) -- 131.4 (7.9) -- -- 123.5
Convertible debentures -- (2.9) 4.1 -- (1.2) --
Accumulated other comprehensive
income (loss) (g) -- -- -- (261.7) -- (261.7)
--------------------------------------------------------------------------------------------------------------------------------
Under U.S. GAAP $3,993.0 $4,493.8 $ (416.5) $ (387.5) $ 173.4 $7,856.2
================================================================================================================================
Shareholders' Equity (as adjusted - Note 2(b))
-----------------------------------------------------------------------------------------
Accumulated
Retained other
Common Non-Voting earnings comprehensive Contributed
As at December 31, 2006 (millions) Shares Shares Options (deficit) income(loss) surplus Total
---------------------------------------------------------------------------------------------------------------------------------
Under Canadian GAAP $2,264.4 $3,420.8 $ 0.8 $1,080.1 $ (1.5) $ 163.5 $ 6,928.1
Adjustments:
Merger of BC TELECOM
and TELUS (a), (c), (d) 1,770.1 993.0 -- (1,368.3) -- -- 1,394.8
Share-based compensation (b) 10.6 63.3 -- (131.2) -- 57.3 --
Acquisition of Clearnet
Communications Inc.
Goodwill (d) -- 131.4 -- (7.9) -- -- 123.5
Convertible debentures -- (2.9) -- 4.1 -- (1.2) --
Accounting for derivatives (e) -- -- -- 3.7 -- -- 3.7
Accumulated other comprehensive
income (loss) (g) -- -- -- -- (437.6) -- (437.6)
---------------------------------------------------------------------------------------------------------------------------------
Under U.S. GAAP $4,045.1 $4,605.6 $ 0.8 $ (419.5) $ (439.1) $ 219.6 $8,012.5
=================================================================================================================================
(a) Merger of BC TELECOM and TELUS
The business combination between BC TELECOM and TELUS Corporation (renamed TELUS
Holdings Inc., which was wound up June 1, 2001) was accounted for using the
pooling of interests method under Canadian GAAP. Under Canadian GAAP, the
application of the pooling of interests method of accounting for the merger of
BC TELECOM and TELUS Holdings Inc. resulted in a restatement of prior periods as
if the two companies had always been combined. Under U.S. GAAP, the merger is
accounted for using the purchase method. Use of the purchase method resulted in
TELUS (TELUS Holdings Inc.) being acquired by BC TELECOM for $4,662.4 million
(including merger related costs of $51.9 million) effective January 31, 1999.
(b) Operating expenses - Operations
Future employee benefits: Under U.S. GAAP, TELUS' future employee benefit assets
and obligations have been recorded at their fair values on acquisition.
Accounting for future employee benefits under Canadian GAAP changed to become
more consistent with U.S. GAAP effective January 1, 2000. Canadian GAAP provides
that the transitional balances can be accounted for prospectively. Therefore, to
conform to U.S. GAAP, the amortization of the transitional amount needs to be
removed from the future employee benefit expense. As of June 30, 2007, the
amortization of this difference had been completed.
Effective as of the end of the first year ending after December 15, 2006,
U.S. GAAP requires the full recognition of obligations associated with its
employee future benefit plans as prescribed by Financial Accounting Standards
Board Statement of Financial Accounting Standard No. 158, "Employers' Accounting
for Defined Benefit Pension and other Postretirement Plans". Applying this
standard, the funded status of the Company's plans is shown gross on the
consolidated balance sheets and the difference between the net funded plan
states and the net accrued benefit asset or liability is included as a component
of accumulated other comprehensive income.
Share-based compensation: Effective January 1, 2004, Canadian GAAP required
the adoption of the fair value method of accounting for share-based compensation
for awards made after 2001. The Canadian GAAP disclosures for share-based
compensation awards are set out in Note 10.
TELUS(R) 38
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
Effective January 1, 2006, U.S. GAAP required the adoption of the fair
value method of accounting for share-based compensation for awards made after
1994. Prior to the adoption of the fair value method of accounting, the
intrinsic value based method was used to account for share option awards granted
to employees.
On a prospective basis, commencing January 1, 2006, there is no longer a
difference between Canadian GAAP and U.S. GAAP share-based compensation expense
recognized in the results of operations arising from current share-based
compensation awards accounted for as equity instruments. As share option awards
granted subsequent to 1994 and prior to 2002 are captured by U.S. GAAP, but are
not captured by Canadian GAAP, differences in shareholders' equity accounts
arising from these awards will continue.
In 2007, the Company amended substantially all of its share option awards
that were granted prior to January 1, 2005, and which were outstanding on
January 1, 2007, by adding a net-cash settlement feature; the optionee has the
choice of exercising the net-cash settlement feature. The result of such
amendment is that the affected outstanding share option awards largely take on
the characteristics of liability instruments rather than equity instruments; the
minimum expense recognized for the affected share option awards will be their
grant-date fair values. Under U.S. GAAP, the grant-date fair value of affected
outstanding share option awards granted subsequent to 1994 affect the
transitional amount whereas Canadian GAAP only considers grant-date fair values
for affected outstanding share option awards granted subsequent to 2001; this
resulted in the U.S. GAAP expense being less than the Canadian GAAP expense by
$NIL and $26.6 million, for the three-month and six-month periods ended June 30,
2007, respectively.
(c) Operating expenses - Amortization of intangible assets
As TELUS' intangible assets on acquisition have been recorded at their fair
value (see (a)), amortization of such assets, other than for those with
indefinite lives, needs to be included under U.S. GAAP; consistent with prior
years, amortization is calculated using the straight-line method.
The incremental amounts recorded as intangible assets arising from the
TELUS acquisition above are as follows:
Accumulated
Cost amortization Net book value
-------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
As at (millions) 2007 2006
-------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscribers - wireline $ 1,950.0 $ 368.1 $ 1,581.9 $ 1,607.0
Subscribers - wireless 250.0 250.0 -- --
-------------------------------------------------------------------------------------------------------------------------
2,200.0 618.1 1,581.9 1,607.0
-------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 1,833.3 1,833.3 -- --
-------------------------------------------------------------------------------------------------------------------------
$ 4,033.3 $ 2,451.4 $ 1,581.9 $ 1,607.0
=========================================================================================================================
(1) Accumulated amortization of spectrum licences is amortization recorded prior to 2002 and the
transitional impairment amount.
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at June 30, 2007, for each of
the next five fiscal years is as follows:
Years ending December 31 (millions)
--------------------------------------------------------------------------
2007 (balance of year) $ 157.6
2008 243.2
2009 186.7
2010 118.1
2011 99.7
--------------------------------------------------------------------------
(d) Goodwill
Merger of BC TELECOM and TELUS: Under the purchase method of accounting, TELUS'
assets and liabilities at acquisition (see (a)) have been recorded at their fair
values with the excess purchase price being allocated to goodwill in the amount
of $403.1 million. Commencing January 1, 2002, rather than being systematically
amortized, the carrying value of goodwill is periodically tested for impairment.
Additional goodwill on Clearnet purchase: Under U.S. GAAP, shares issued by
the acquirer to effect an acquisition are measured at the date the acquisition
was announced; however, under Canadian GAAP, at the time the transaction took
place, shares issued to effect an acquisition were measured at the transaction
date. This results in the purchase price under U.S. GAAP being $131.4 million
higher than under Canadian GAAP. The resulting difference is assigned to
goodwill. Commencing January 1, 2002, rather than being systematically
amortized, the carrying value of goodwill is periodically tested for impairment.
TELUS(R) 39
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
(e) Accounting for derivatives
Under U.S. GAAP, all derivatives need to be recognized as either assets or
liabilities and measured at fair value. Prior to January 1, 2007, this was
different from the Canadian GAAP treatment for financial instruments as applied
by the Company; see Note 2(b).
(f) Income taxes
Three months Six months
Periods ended June 30 (millions) 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------------------
Current $ 1.2 $ (6.7) $ 2.3 $ (3.7)
Deferred 79.7 (36.8) 152.3 71.0
---------------------------------------------------------------------------------------------------------------------
80.9 (43.5) 154.6 67.3
Investment Tax Credits (1.1) (12.6) (10.6) (12.6)
---------------------------------------------------------------------------------------------------------------------
$ 79.8 $ (56.1) $ 144.0 $ 54.7
=====================================================================================================================
The Company's income tax expense (recovery), for U.S. GAAP purposes,
differs from that calculated by applying statutory rates for the following
reasons:
Three-month periods ended June 30 ($ in millions) 2007 2006
------------------------------------------------------------------------------- ------------------------------------------------
Basic blended federal and provincial tax at statutory income tax rates $ 110.9 33.6% $ 115.1 33.3%
Revaluation of deferred income tax liability to reflect future statutory
income tax rates (31.3) (162.7)
Share option award compensation 1.2 1.6
Tax rate differential on, and consequential adjustments from, reassessment
of prior year tax issues -- 1.3
Investment Tax Credits, net of tax (0.6) (8.4)
Other (0.4) (0.1)
------------------------------------------------------------------------------- ------------------------------------------------
79.8 24.2% (53.2) (15.4)%
Large corporations tax -- (2.9)
------------------------------------------------------------------------------- ------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 79.8 24.2% $ (56.1) (16.3)%
=============================================================================== ================================================
Six-month periods ended June 30 ($ in millions) 2007 2006
------------------------------------------------------------------------------- ------------------------------------------------
Basic blended federal and provincial tax at statutory income tax rates $ 203.3 33.5% $ 221.3 33.6%
Revaluation of deferred income tax liability to reflect future statutory
income tax rates (35.0) (162.7)
Share option award compensation (15.4) 3.1
Tax rate differential on, and consequential adjustments from, reassessment
of prior year tax issues -- 1.0
Investment Tax Credits, net of tax (7.0) (8.4)
Other (1.9) 0.4
------------------------------------------------------------------------------- ------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 144.0 23.8% $ 54.7 8.3%
=============================================================================== ================================================
The operations of the Company are complex, and related tax interpretations,
regulations and legislation are continually changing. As a result, there are
usually some tax matters in question.
Effective January 1, 2007 the Company adopted the method of accounting for
uncertain income tax positions prescribed by Financial Accounting Standards
Board Financial Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes". This Interpretation is intended to standardize accounting practice for
the recognition, derecognition and measurement of tax benefits to enable
consistency and comparability among reporting entities for the reporting of
income tax assets and liabilities. No consequential adjustments were required
in the Company's financial statements as a result of that adoption.
As at January 1, 2007, the Company had net unrecognized tax benefits
totaling $277.1 million, of which $240.5 million would, if recognized, have
impacted the effective tax rate.
During the three-month and six-month periods ended June 30, 2007, the
Company recognized Canadian Investment Tax Credits arising from the Company's
conduct of its scientific research and experimental development activities of
$1.1 million ($0.7 million after applicable income tax effect) and $10.6 million
($7.1 million after applicable income tax effect), respectively. Investment Tax
Credits of $23.9 million ($17.4 million after applicable income tax effect) have
been abandoned and will no longer be pursued. During the three-month and
six-month periods ended June 30, 2007, the
TELUS(R) 40
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
Company filed additional claims for Canadian Investment Tax Credits of $41.2
million ($28.0 million after applicable income tax effect) that have not been
recognized in the accounts.
During the three-month and six-month periods ended June 30, 2007, a tax
rate reduction for 2011 was enacted which resulted in an increase in
unrecognized tax benefits of $1.9 million that would, if recognized, impact the
effective tax rate.
As at June 30, 2007, the Company had net unrecognized tax benefits
aggregating $284.0 million, of which $247.4 million would, if fully recognized,
impact the effective tax rate.
In the application of both Canadian GAAP and U.S. GAAP, the Company accrues
for interest charges on current tax liabilities that have not been funded, which
would include interest and penalties arising from uncertain tax positions. The
Company includes such charges as a component of financing costs. As at January
1, 2007, and June 30, 2007, the Company has recorded accrued interest of $7.6
million in respect of differences between the time tax-related exposures have
been funded compared to the time the tax-related exposures may have come into
existence. There was no interest nor were there penalties relating to current
tax liabilities charged by the Company against its income during the three-month
and six-month periods ended June 30, 2007.
As at January 1, 2007, it was reasonably possible that the Company's
unrecognized tax benefits (before tax) would significantly decrease, in an
estimated range of between $30 million and $35 million, in the following twelve
months for the resolution of certain Canadian Investment Tax Credits arising
from the Company's conduct of its scientific research and experimental
development activities.
As at January 1, 2007, and June 30, 2007, it is reasonably possible that
the Company's net unrecognized tax benefits will significantly increase and
decrease in the next twelve months for the following items:
o It is expected that Notices of Reassessment will be issued by various
government authorities over the next twelve months that are expected to
effectively settle a number of uncertain tax positions and result in both
adjustments to the effective tax rate and the abandonment of any
remaining unrecognized tax benefits. Certain presently unrecognized tax
benefits pertaining to a number of items involving uncertainty as to the
exact taxation period tax deductions may be claimed among periods of
changing statutory tax rates are expected to be resolved within an
estimated range of $35 million to $45 million. It is also expected that
net unrecognized benefits estimated to range between $40 million
and $50 million, that relate to issues pertaining to the eligibility
of certain capital and operating costs will be concluded.
o It is expected that the statute of limitations for challenge by
governmental authorities will lapse for certain taxation years for which
tax returns have previously been filed. Such unrecognized tax benefits
are reasonably estimated at $4 million.
As at January 1, 2007, and June 30, 2007, income tax returns pertaining to
taxation years that remain subject to examination by major jurisdictions are as
follows:
Restricted to Other
Appeals
---------------------------------------------------------------------------
Canada 1999 - 2000 2001 - 2006
United States N/A 2003 - 2006
---------------------------------------------------------------------------
(g) Additional disclosures required under U.S. GAAP - Comprehensive income
U.S. GAAP requires that a statement of comprehensive income be displayed with
the same prominence as other financial statements. Comprehensive income, which
incorporates net income, includes all changes in equity during a period except
those resulting from investments by and distributions to owners. There is no
requirement to disclose comprehensive income under Canadian GAAP prior to fiscal
periods beginning on or after January 1, 2007.
TELUS(R) 41
--------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------
Three-month periods
ended June 30 (millions) 2007 2006
------------------------------------------------------------------------- --------------------------------------------------------
Unrealized
Canadian GAAP Pension Canadian GAAP Pension fair value of
other and other US GAAP other other and other derivative US GAAP other
comprehensive benefit comprehensive comprehensive benefit cash flow comprehensive
income (loss)(1) plans income (loss) income (loss) plans hedges income (loss)
----------------------------------------------------------------------------------------------------------------------------------
Amount arising $ 32.9 $ 8.7 $ 41.6 $ 0.1 $ (2.2) $ 91.2 $ 89.1
Income tax expense (recovery) 11.3 2.6 13.9 -- (0.7) 32.0 31.3
----------------------------------------------------------------------------------------------------------------------------------
Net 21.6 6.1 27.7 0.1 (1.5) 59.2 57.8
Accumulated other comprehensive
income (loss), beginning
of period (147.4) (267.8) (415.2) (6.6) (169.1) (223.7) (399.4)
----------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), end of
period $ (125.8) $ (261.7) $ (387.5) $ (6.5) $ (170.6) $ (164.5) $ (341.6)
==================================================================================================================================
(1) As the Canadian GAAP other comprehensive income amounts at June 30, 2007, reflect total-to-date
amounts for the unrealized fair value of derivative cash flow hedges, the opening balance for
U.S. GAAP is no longer required to determine the total-to-date accumulated other comprehensive
income amount for U.S. GAAP purposes.
Six-month periods
ended June 30 (millions) 2007 2006
------------------------------------------------------------------------- -------------------------------------------------------
Unrealized
Canadian GAAP Pension Canadian GAAP Pension fair value of
other and other US GAAP other other and other derivative US GAAP other
comprehensive benefit comprehensive comprehensive benefit cash flow comprehensive
income (loss)(1) plans income (loss) income (loss) plans hedges income (loss)
----------------------------------------------------------------------------------------------------------------------------------
Amount arising $ 77.6 $ 17.4 $ 95.0 $ 0.8 $ (3.0) $ 56.2 $ 54.0
Income tax expense (recovery) 25.7 5.3 31.0 -- (0.1) 20.1 20.0
----------------------------------------------------------------------------------------------------------------------------------
Net 51.9 12.1 64.0 0.8 (2.9) 36.1 34.0
Accumulated other comprehensive
income (loss), beginning
of period (177.7) (273.8) (451.5) (7.3) (167.7) (200.6) (375.6)
----------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), end of
period $ (125.8) $ (261.7) $ (387.5) $ (6.5 $(170.6) $ (164.5) $ (341.6)
==================================================================================================================================
(1) As the Canadian GAAP other comprehensive income amounts at June 30, 2007, reflect total-to-date
amounts for the unrealized fair value of derivative cash flow hedges, the opening balance for
U.S. GAAP is no longer required to determine the total-to-date accumulated other comprehensive
income amount for U.S. GAAP purposes.
(h) Recently issued accounting standards not yet implemented
Single definition of "fair value". Under U.S. GAAP, effective for its 2008
fiscal year, the Company is expected to be required to comply with a unified
approach to fair value measurement of assets and liabilities, as prescribed by
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements". The Company is assessing the provisions of
this statement.
Other: As would affect the Company, there are no other U.S. accounting
standards currently issued and not yet implemented that would differ from
Canadian accounting standards currently issued and not yet implemented.
TELUS(R) 42
_______________________________________________________________________________
TELUS Corporation
Management's discussion and analysis - 2007 Q2
Caution regarding forward-looking statements
=========================================================================
This report and Management's discussion and analysis contain statements
about expected future events and financial and operating results of TELUS
Corporation (TELUS or the Company) that are forward-looking. By their
nature, forward-looking statements require the Company to make
assumptions and are subject to inherent risks and uncertainties. There is
significant risk that predictions, assumptions (see below) and other
forward-looking statements will not prove to be accurate. Readers are
cautioned not to place undue reliance on forward-looking statements as a
number of factors could cause actual future results, conditions, actions
or events to differ materially from financial and operating targets,
expectations, estimates or intentions expressed in the forward-looking
statements.
Assumptions for 2007 guidance purposes include: economic growth
consistent with recent provincial and national estimates by the
Conference Board of Canada, including 2007 real GDP (gross domestic
product) growth of approximately 2.5% in Canada; increased wireline
competition in both business and consumer markets, particularly from
cable-TV and voice over Internet Protocol (VoIP) companies; forbearance
for local retail wireline services in major urban incumbent markets by
the second half of 2007; no further price cap mandated consumer price
reductions; a wireless industry market penetration gain of 4.5 to five
percentage points; restructuring expenses not to exceed $35 million;
statutory tax rate of 33 to 34%; a discount rate of 5.0% and an expected
long-term average return of 7.25% for pension accounting, unchanged from
2006; average shares outstanding of 330 to 335 million; and no
prospective significant acquisitions or divestitures. Earnings per share
(EPS), cash balances, net debt and common equity may be affected by the
potential purchases of up to 24 million TELUS shares over a 12-month
period under the normal course issuer bid that commenced December 20,
2006.
Factors that could cause actual results to differ materially include but
are not limited to: competition; economic growth and fluctuations
(including pension performance, funding and expenses); capital
expenditure levels (including possible spectrum asset purchases);
financing and debt requirements (including share repurchases); tax
matters (including acceleration or deferral of required payments of
significant amounts of cash taxes); human resource developments
(including possible labour disruptions); technology (including reliance
on systems and information technology); regulatory developments
(including local forbearance, wireless number portability, the timing,
rules, process and cost of future spectrum auctions, and possible changes
to foreign ownership restrictions); process risks (including internal
reorganizations, conversion of legacy systems and billing system
integrations); health, safety and environmental developments; litigation
and legal matters; business continuity events (including manmade and
natural threats); any prospective acquisitions or divestitures; and other
risk factors discussed herein and listed from time to time in TELUS'
public disclosure documents including its annual report, annual
information form, and other filings with securities commissions in Canada
(at www.sedar.com) and filings in the United States including Form 40-F
(on EDGAR at www.sec.gov).
For further information, see Section 10: Risks and risk management of
TELUS' 2006 annual and 2007 first quarter Management's discussion and
analyses, as well as updates reported in Section 10 of this document.
=========================================================================
Management's discussion and analysis
August 1, 2007
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, 2007 and 2006, 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 19 to the interim
Consolidated financial statements for a summary of the principal differences
between Canadian and U.S. GAAP as they relate to TELUS. The 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 and are used to manage the capital structure.
Because non-GAAP measures do not have a standardized meaning, securities
regulations require that non-GAAP measures be clearly defined and qualified,
and reconciled with their nearest GAAP measure. For the readers' reference,
the definition, calculation and reconciliation of consolidated non-GAAP
measures is provided in Section 11: Reconciliation of non-GAAP measures and
definition of key operating indicators.
Management's discussion and analysis contents
-------------------------------------------------------------------------
Section Description
-------------------------------------------------------------------------
1. Introduction and A summary of TELUS' consolidated results for
performance summary the second quarter and first half of 2007
-------------------------------------------------------------------------
2. Core business, vision Examples of TELUS' activities in support of
and strategy its six strategic imperatives
-------------------------------------------------------------------------
3. Key performance drivers TELUS' 2007 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 2007
-------------------------------------------------------------------------
6. Financial condition A discussion of changes in the balance sheet
for the six-month period ended June 30, 2007
-------------------------------------------------------------------------
7. Liquidity and capital A discussion of cash flow, liquidity,
resources credit facilities and other disclosures
-------------------------------------------------------------------------
8. Critical accounting A description of accounting estimates and
estimates and changes to accounting policies
accounting policy
developments
-------------------------------------------------------------------------
9. Annual guidance TELUS' revised annual guidance for 2007
for 2007
-------------------------------------------------------------------------
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. Introduction and performance summary
1.1 Materiality for disclosures
Management determines whether or not information is material based on
whether it believes a reasonable investor's decision to buy, sell or hold
securities in the Company would likely be influenced or changed if the
information were omitted or misstated.
1.2 Canadian telecommunications industry developments
In mid-April 2007, Canada's largest telecommunications service provider
BCE Inc. announced a strategic review process. Three consortia that included
Canadian pension funds and U.S. private equity investors signed non-disclosure
and standstill agreements to gain access to a BCE data room in order to enable
them to potentially prepare an offer to BCE shareholders under a competitive
auction process. On June 21, 2007, TELUS confirmed that it had entered into a
mutual non-disclosure and standstill agreement and was pursuing non-exclusive
discussions to acquire BCE. On June 26, the three consortia submitted bids to
acquire BCE, while TELUS announced that inadequacies in BCE's bid process did
not make it possible for TELUS to submit an offer as part of the strategic
review process announced by BCE. On June 30, BCE announced that it had entered
into a definitive agreement for BCE to be acquired by a consortium led by
Teachers Private Capital, a division of the Ontario Teachers Pension Plan. The
BCE Board recommended that their common shareholders accept the offer at an
all-cash price of $42.75 per common share. Other consortium members include
Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. TELUS in
July continued its assessment of whether it should potentially make a
competing offer for BCE. TELUS has concluded this assessment and it does not
intend to submit a competing offer to acquire BCE. See Caution regarding
forward-looking statements.
In July 2007, the Minister of Industry and the Minister of Finance
announced the creation of a Competition Review Panel to review Canadian
competition and investment legislation: the Competition Act and the Investment
Canada Act. The Panel will report to the Minister of Industry by June 30,
2008. Implications for the telecommunications industry include possible change
to, or removal of, the effective 47% restriction on foreign ownership for the
telecom sector. See Section 10.1 Regulatory - Foreign ownership restrictions.
On July 23, a new independent telecommunications complaints commission,
known as the Commissioner for Complaints for Telecommunications Services
(CCTS), was launched to help consumers and small businesses handle un-resolved
service concerns. The CCTS was created in response to a request from the
Minister of Industry to telecommunications companies to work together to
establish and fund this independent agency. Founding members TELUS, Bell
Aliant, Bell Canada, SaskTel, MTS Allstream, Rogers, Virgin Mobile, Cogeco,
Videotron, and Vonage filed a joint proposal for the structure and mandate of
the new organization with the CRTC (Canadian Radio-television and
Telecommunications Commission) for its consideration. The CCTS is intended to
assist where the normal complaint resolution process of member companies do
not resolve concerns.
1.3 Consolidated highlights
-------------------------------------------------------------------------
($ millions, except
shares, per share Quarters ended Six-month periods
amounts, subscribers June 30 ended June 30
and ratios) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Consolidated statements of income
-------------------------------------------------------------------------
Operating revenues 2,228.1 2,135.2 4.4 % 4,433.7 4,215.7 5.2 %
Operating income 493.8 515.0 (4.1)% 890.8 974.6 (8.6)%
Net-cash settlement
feature expense(1) 1.8 - - 175.3 - -
-------- -------- -------- -------- -------- -------
Operating income
(as adjusted) 495.6 515.0 (3.8)% 1,066.1 974.6 9.4 %
Income before
income taxes 348.1 377.9 (7.9)% 623.7 706.2 (11.7)%
Net-cash settlement
feature expense 1.8 - - 175.3 - -
-------- -------- -------- -------- -------- -------
Income before income
taxes (as adjusted) 349.9 377.9 (7.4)% 799.0 706.2 13.1 %
Net income 253.1 356.6 (29.0)% 447.9 566.7 (21.0)%
Net-cash settlement
feature expense,
after tax 1.3 - - 109.0 - -
-------- -------- -------- -------- -------- -------
Net income
(as adjusted) 254.4 356.6 (28.7)% 556.9 566.7 (1.7)%
Earnings per share,
basic ($) 0.76 1.03 (26.2)% 1.34 1.63 (17.8)%
Net-cash settlement
feature per share - - - 0.33 - -
-------- -------- -------- -------- -------- -------
Earnings per share,
basic (as adjusted)
(2) ($) 0.76 1.03 (26.2)% 1.67 1.63 2.5 %
Earnings per share,
diluted ($) 0.75 1.02 (26.5)% 1.32 1.62 (18.5)%
Cash dividends
declared per
share ($) 0.375 0.275 36.4 % 0.75 0.55 36.4 %
-------------------------------------------------------------------------
Consolidated statements of cash flows
-------------------------------------------------------------------------
Cash provided by
operating
activities 1,061.9 813.0 30.6 % 1,522.5 1,486.1 2.4 %
Cash used by
investing
activities 477.8 486.1 (1.7)% 870.1 802.2 8.5 %
Capital
expenditures 481.8 458.8 5.0 % 863.7 779.3 10.8 %
Cash used by
financing
activities 1,115.9 344.4 n.m. 638.7 711.1 (10.2)%
-------------------------------------------------------------------------
Subscribers and other measures
-------------------------------------------------------------------------
Subscriber
connections(3)
(thousands) at
June 30 10,885 10,404 4.6 %
EBITDA(4) 884.6 897.1 (1.4)% 1,648.9 1,759.8 (6.3)%
Net-cash settlement
feature expense 1.8 - - 175.3 - -
-------- -------- -------- -------- -------- -------
EBITDA
(as adjusted)(4) 886.4 897.1 (1.2)% 1,824.2 1,759.8 3.7 %
Free cash flow(5) 161.7 191.0 (15.3)% 642.5 826.6 (22.3)%
-------------------------------------------------------------------------
Debt and payout ratios
-------------------------------------------------------------------------
Net debt to total
capitalization
ratio (%)(6) 48.0 47.8 0.2 pts
Net debt to EBITDA
- excluding
restructuring(6) 1.8 1.8 -
Dividend payout
ratio (%)(7) 50 46 4 pts
-------------------------------------------------------------------------
n.m. - not meaningful; pts - percentage point(s)
(1) A non-cash expense recorded in 2007 for introducing a net-cash
settlement feature for share option awards granted prior to 2005.
(2) Earnings per share - basic (as adjusted) excludes the charge for
introducing the net cash settlement feature, is regularly reported to
the chief operating decision-maker and corresponds to the definition
used in setting TELUS' 2007 basic earnings per share target and
revised guidance.
(3) The sum of wireless subscribers, network access lines and Internet
subscribers measured at the end of the respective periods.
(4) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA). EBITDA (as
adjusted) is regularly reported to the chief operating decision-maker
and corresponds to the definition used in setting TELUS' 2007 EBITDA
targets and revised guidance.
(5) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash
flow.
(6) See Section 11.4 Definition of liquidity and capital resource
measures.
(7) The current annualized rate of dividend declared per share divided by
basic earnings per share for the 12-month trailing period.
-------------------------------------------------------------------------
TELUS' annual guidance for 2007, described in Section 9 of its 2007 first
quarter Management's discussion and analysis included the expectation that a
non-cash charge of approximately $180 million would be recorded in Operations
expense as a result of introducing a net-cash settlement feature for share
option awards granted prior to 2005. For the six-month period ended June 30,
2007, $175.3 million in respect of this charge was recorded in Operations
expense ($109.0 million after-tax impact in Net income or 33 cents per share).
Highlights for the second quarter and first six months of 2007, as
discussed in Section 5: Results from operations, include the following:
- Subscriber connections increased by 481,000 during the 12-month
period ended June 30, 2007. The number of wireless subscribers grew
by 11.3% to 5.27 million, the number of Internet subscribers grew by
8.3% to 1.135 million and the number of network access lines
decreased by 3.1% to 4.48 million.
- Operating revenues increased by $92.9 million and $218.0 million,
respectively, in the second quarter and first six months of 2007,
when compared to the same periods in 2006 due primarily to growth in
wireless network revenues and wireline data revenues, which more than
offset declines in long distance revenue.
- Operating income decreased by $21.2 million and $83.8 million,
respectively, in the second quarter and first six months of 2007 when
compared with the same periods in 2006. When adjusted to exclude the
net-cash settlement feature expense recorded in 2007, Operating
income decreased by $19.4 million in the second quarter and increased
by $91.5 million in the first six months. In the second quarter,
growth in wireless EBITDA (as adjusted) and a lower depreciation
expense were more than offset by lower wireline EBITDA (as adjusted)
and higher amortization expense for a wireline billing and client
care system put into service in March. For the six-month period,
increased wireless EBITDA (as adjusted) and lower net depreciation
and amortization expense exceeded erosion in wireline EBITDA (as
adjusted).
- Income before income taxes decreased by $29.8 million and
$82.5 million, respectively, in the second quarter and first six
months of 2007 when compared with the same periods in 2006. Excluding
the effect of the net-cash settlement feature, Income before income
taxes decreased by $28.0 million and increased by $92.8 million,
respectively, as a result of changes in adjusted operating income and
a second quarter 2007 equity investment write-off, partly offset in
the six-month period by lower financing costs.
- Net income included favourable tax-related adjustments of
approximately $10 million or three cents per share in the second
quarter of 2007 and approximately $14 million or four cents per share
in the first six months of 2007. This compares with favourable tax
adjustments of approximately $118 million or 34 cents per share in
the second quarter of 2006 and $115 million or 33 cents per share in
the first six months of 2006.
- Net income and EPS for the second quarter of 2007 decreased by
$103.5 million and 27 cents, respectively, when compared to the same
period in 2006. Similarly, Net income and EPS for the first six
months of 2007 decreased by $118.8 million and 29 cents,
respectively, when compared to the same period in 2006. Excluding the
effect of the net-cash settlement feature for first six months of
2007, Net income (as adjusted) decreased by $9.8 million while EPS -
basic (as adjusted) increased by four cents.
- The average number of shares outstanding during second quarter and
first half of 2007 were approximately 3% lower than in 2006 due to
share repurchase programs and a lower number of shares issued because
of the net-cash settlement feature for options.
Highlights for the second quarter and first half of 2007, as discussed in
Section 7: Liquidity and capital resources, include the following:
- Cash provided by operating activities increased by $248.9 million and
$36.4 million, respectively, in the second quarter and first six
months of 2007, when compared to the same periods in 2006.
Contributing to the increase was reduced interest paid. Proceeds from
securitized accounts receivable increased by a net $350 million
during the second quarter of 2007, compared with an increase of
$135 million during the second quarter of 2006 for a comparative
increase in operating cash flow of $215 million.
- Cash used by investing activities decreased by $8.3 million in the
second quarter of 2007 and increased by $67.9 million in the first
six months of 2007, when compared to the same periods in 2006. The
decrease in the second quarter was due mainly to an acquisition in
2006. Otherwise, investing activities increased because of higher
capital expenditures to support new enterprise customers in Central
Canada as well as network sustainment, continued enhancement of
digital wireless capacity and coverage, and strategic investments in
high-speed EVDO (evolution data optimized) wireless network
technology.
- On May 15, 2007, TELUS' entered into an unsecured commercial paper
program, which is backstopped by a portion of its credit facility,
enabling it to issue commercial paper up to a maximum aggregate of
$800 million (or U.S. dollar equivalent), to be used for general
corporate purposes.
- Cash used by financing activities increased by $771.5 million in the
second quarter of 2007 and decreased by $72.4 million in the first
six months of 2007, when compared to the same periods in 2006. The
increase in the second quarter included the June 1, 2007 repayment of
$1,483.3 million (U.S. $1,166.5 million) for 7.50% Notes that
matured, partly offset by the net issue of $663.5 million of
commercial paper. The decrease for the six-month period included a
lower amount used to repurchase shares under the normal course issuer
bid (NCIB), net of increased dividend payments.
- Free cash flow decreased by $29.3 million and $184.1 million,
respectively, in the second quarter and first six months of 2007,
when compared to the same periods in 2006. The decrease for the
second quarter was caused by lower EBITDA net of restructuring and
share-based compensation payments, and higher capital expenditures
partly offset by lower interest payments. The decrease for the first
six months of 2007 was caused by lower EBITDA net of restructuring
payments, higher capital expenditures, and lower recoveries of cash
taxes, partly offset by shared-based compensation expense in excess
of payments and lower interest payments.
- Net debt to total capitalization of 48% at June 30, 2007 continued to
be in the long-term target range of 45 to 50%.
- Net debt to EBITDA of 1.8 continued to be in the long-term target
range of 1.5 to 2.0 times.
- The dividend payout ratio of 50%, measured as the annualized dividend
declared in the second quarter divided by earnings per share for the
12-month trailing period, was at the guideline midpoint of 45 to 55%
of net sustainable earnings; favourable tax-related adjustments for
the trailing 12 months nearly offset the unfavourable impact of
introducing the net cash settlement feature in 2007.
2. Core business, vision and strategy
The following discussion is qualified in its entirety by the Caution
regarding forward-looking statements at the beginning of Management's
discussion and analysis. It is also qualified by Section 10: Risks and risk
management of TELUS' 2006 annual and 2007 first quarter Management's
discussions and analyses, as well as updates reported in Section 10 of this
document.
TELUS' core business, vision and strategy were detailed in its 2006
Management's discussion and analysis. Recent activities supporting, and events
affecting, the Company's six strategic imperatives include the following:
Building national capabilities across data, IP, voice and wireless
In May, TELUS announced in that it expects to invest $23 million in
Quebec by the fall of 2007 to expand and upgrade wireless 1X digital network
coverage in up to 30 additional communities, as well as enhance existing
digital coverage in the greater Montreal and Quebec City areas where TELUS
network traffic continues to increase. Through the expansion, 30 new
communities will have access to the full suite of TELUS Spark(TM) mobile
services that includes entertainment, information, messaging, downloadable
music, ringtones and games.
In July, TELUS announced the availability of faster speeds on its
wireless high-speed EVDO network in B.C., Alberta and Quebec. The EVDO network
was upgraded to the next generation, Rev A, which has typical download speeds
of 450 to 800 kilobits per second (with a maximum possible speed of
3.1 megabits per second) and typical upload speeds of 300 to 400 kilobits per
second (with a maximum possible speed of 1.8 megabits per second). The speed
increase helps improve the experience of streaming services and sharing of
large data files such as pictures. TELUS wireless high speed services are
available in areas of British Columbia, Alberta, Winnipeg, Ontario and Quebec,
reaching more than 60 per cent of Canadians. When traveling in the United
States, TELUS customers can roam onto EVDO Rev A networks in 242 major
metropolitan areas. TELUS has a variety of EVDO Rev A-capable devices
available now and more are expected. These products operate throughout the
full EVDO coverage area and are backward compatible with the 1X data network,
which offers coverage to 94 per cent of Canadians, when outside the EVDO
coverage area.
The Company enhanced wireless international roaming for its business and
consumer customers with the June launch of the BlackBerry 8830 World Edition
smartphone. TELUS also expanded its global roaming services so that users of
the new BlackBerry can access voice and data services internationally using
GSM-based networks. In North America, coverage is provided on CDMA-based 1X
and high-speed EVDO networks.
In July, TELUS launched its first Ethernet to the suite (ETTS) building -
the Melville - a 42-story multi-dwelling unit tower in Vancouver. ETTS
leverages the latest technology to deliver greater bandwidth and higher speeds
to customers. Melville residents will have access to high-speed Internet at up
to 25 Mbps (five to seven faster than average) and the opportunity to leverage
the full suite of Future Friendly(R) Home products and services.
Focusing relentlessly on the growth markets of data, IP and wireless
TELUS was selected this quarter by the Department of Public Works and
Government Services Canada through a competitive bid process to provide and
manage the telecommunications services for the Department of National Defence
(DND), including national and international locations. TELUS will provide
managed telecommunications services including voice, data, video and IP
solutions. The advanced telecommunications framework supports DND's goals of
accessing a cost-effective infrastructure that supports their current
requirements and, at the same time, provides a secure IP backbone for new
services and solutions.This contract value is estimated at $200 million over
five years.
In addition, TELUS is providing the Government of Alberta with the latest
multimedia technology for some 73 courtrooms in the new Calgary Courts Centre.
TELUS will design, supply, install and maintain technology to provide digital
recording, video-conferencing, remote witness facilitation, electronic
annotation, and remote management, which is expected to improve safety and
efficiency in the justice system.
The Company was also selected to provide the TELUS Community Care
Management Solution (CCMS) to Ontario-based Closing the Gap Healthcare Group.
CCMS is an electronic health record and patient management system that makes
patient data available to community, home care and long-term care providers,
wherever their jobs take them. TELUS will implement, host and manage
application software from New Zealand-based Healthphone, as well as provide
network connectivity and security support, "24x7" customer service and
required hardware such as personal digital assistants, mobile phones,
infrastructure and servers.
Building integrated solutions that differentiate TELUS from its
competitors
TELUS has introduced a number of new services in 2007. One new solution
is TELUS Fleet Tracking Bundle for small businesses, which allows companies to
efficiently track their mobile assets in real-time using global positioning
system (GPS) technology. The bundle includes a TELUS wireless data plan, Fleet
Complete GPS software from Complete Innovations and a GPS modem professionally
installed by TELUS dealers or retailer Best Buy.
Another new service is a new wireless tool for Canadian financial
institutions, TELUS Mobile Customer Self Service(TM). The service provides
two- way interaction between financial institutions and their customers,
enabling secure banking transactions that include actionable alerts (such as
questionable account activity or transaction approvals), on-demand access to
account information and no-hold customer service via text messaging.
Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy and focus TELUS' resources on core business
In March 2007, AMP'D Mobile Canada Inc. launched its interactive and
customized mobile entertainment, information and messaging services targeting
the high value, young adult (ages 18 to 35) market segment in Canada. In early
June, the U.S. based parent company AMP'D Mobile, Inc. entered bankruptcy
proceedings in the U.S. As a result, AMP'D Mobile sales have been
discontinued in Canada. See Section 4.2 for financial impacts on TELUS
results.
3. Key performance drivers
The following discussion is qualified in its entirety by the Caution
regarding forward-looking statements at the beginning of Management's
discussion and analysis. It is also qualified by Section 10: Risks and risk
management of TELUS' 2006 annual and 2007 first quarter Management's
discussions and analyses, as well as updates reported in Section 10 of this
document.
-------------------------------------------------------------------------
2007 corporate priorities across wireline and wireless
-------------------------------------------------------------------------
Advancing TELUS' leadership position in the consumer market
- Combining TELUS' suite of data applications with deregulated heritage
services
- Attaining best-in-class customer loyalty and growth through
unparalleled customer experiences
- Achieving customer addition targets by expanding distribution
channels and addressing key market segments with new service
offerings.
Advancing TELUS' leadership position in the business market
- Progressing further in key industry verticals with specific
applications that provide non-price-based differentiation
- Leveraging wireless number portability to expand TELUS' business
market share in Central Canada
- Focusing on small business customer loyalty and growth with
innovative solutions.
Advancing TELUS' leadership position in the wholesale market
- Growing in domestic and international markets through recognition
that TELUS is Canada's IP leader
- Achieving excellence in customer service to support local forbearance
in key incumbent markets
- Expanding the Company's markets, channels and products by focusing on
strategic relationships with TELUS' partners.
Driving TELUS' technology evolution and improvements in productivity and
service excellence
- Implementing technology roadmaps for Future Friendly Home and
wireless service offerings that simplify TELUS' product portfolio and
improve service development and execution
- Rolling out consolidated customer care systems to replace multiple
legacy systems in Alberta and B.C.
- Accelerating customer service delivery dates.
Strengthening the spirit of the TELUS team and brand, and developing the
best talent in the global communications industry
- Growing TELUS' business ownership culture with a team philosophy of
"our business, our customers, our team, my responsibility" thereby
attracting, developing and retaining great talent
- Leading the way in corporate social responsibility as TELUS strives
to be Canada's premier corporate citizen.
-------------------------------------------------------------------------
4. Capability to deliver results
The following discussion is qualified in its entirety by the Caution
regarding forward-looking statements at the beginning of Management's
discussion and analysis.
4.1 Principal markets addressed and competitors
The principal markets addressed and competitors have not changed
significantly from those described in TELUS' annual 2006 Management's
discussion and analysis. Early indications are that implementing wireless
number portability (WNP) in March 2007 has been a net contributing factor to
increased subscriber loading (inbound porting exceeded outbound porting), but
has also contributed to increased wireless customer retention costs (8.2% of
network revenue in the second quarter of 2007 compared to 6.2% of network
revenue in the same period in 2006) and increased subscriber churn (1.45% in
the second quarter of 2007 compared to 1.30% in the same period in 2006).
4.2 Operational capabilities
Regulation
Following the April 2007, Federal Government Order-in-Council that varied
the conditions for forbearance from regulation of local services, TELUS filed
forbearance applications for residential local services in Victoria,
Vancouver, Calgary, Edmonton and Rimouski. TELUS later applied for
deregulation of regulated business phone services in phone exchanges covering
78 per cent of business lines in B.C. and Alberta, and 52 per cent in eastern
Quebec. The CRTC granted forbearance for residential services in Fort McMurray
on July 25, with additional rulings expected for Victoria, Vancouver, Calgary
and Edmonton by early August. Forbearance was previously received for Fort
McMurray, contingent on meeting competitor quality-of-service measures, which
are now met. For further discussion, see Section 10.1 Regulatory.
Development of a new billing and client care system in the
wireline segment
In late-March 2007, the Company converted more than one million wireline
customers in Alberta to a new billing and client care system. The expected
customer service and cost benefits of this project include streamlined and
standardized processes and the elimination over time of multiple legacy
information systems. During the second quarter of 2007, the transition from
pilot to full scale implementation resulted in initial system difficulties
that reduced order processing capability, which caused increased installation
backlogs and higher than expected costs such as extra call centre resources in
order to maintain service levels. The critical billing function performed as
expected and at this time the backlogs have been significantly reduced and
call centre operations are expected to return to normal levels. See Section
10.3 Process risks.
Transition to the new system reduced Wireline EBITDA by approximately
$29 million in the second quarter of 2007, including $16 million of costs
primarily related to additional temporary labour to perform system fixes and
maintain service levels, as well as a one-time reduction of $13 million in
long distance revenue. The one-time revenue reduction resulted from system
enhancements, which provided management with better data for estimating
earned, but unbilled revenue.
AMP'D Mobile Canada
In early June, the U.S. based parent company AMP'D Mobile, Inc. entered
bankruptcy proceedings in the U.S. As a result, AMP'D Mobile sales have been
discontinued in Canada. TELUS' interim Consolidated financial statements for
June 30, 2007 include a pre-tax write-off of its $11.8 million equity
investment in AMP'D Mobile, Inc. (reflected in Other expense, net) as well as
pre-tax adjustments of approximately $5 million for accelerated depreciation
and approximately $2 million in Operations expense.
4.3 Liquidity and capital resources
Capital structure financial policies (Note 3 of the interim
Consolidated financial statements)
The Company monitors capital on a number of bases, including: net debt to
total capitalization; net debt to EBITDA - excluding restructuring costs; and
dividend payout ratio of sustainable net earnings. For further discussion and
specific guidelines, see Section 7.4 Liquidity and capital resource measures.
TELUS' 2007 financing plan was described in Section 9.3 of its 2006
Management's discussion and analysis. Progress against the financing plan is
outlined below.
-------------------------------------------------------------------------
TELUS' 2007 financing plan and results
-------------------------------------------------------------------------
Repurchase TELUS Common Shares and TELUS Non-Voting Shares under the
normal course issuer bid (NCIB)
During the second quarter of 2007, a total of 2.7 million Common and
Non-Voting Shares were repurchased for cancellation for an outlay of
$169.5 million. From December 20, 2004 to June 30, 2007, TELUS
repurchased a total of 45.6 million Common and Non-Voting Shares for
$2.14 billion under three NCIB programs. See Section 7.3 Cash used by
financing activities.
Pay dividends
The dividend declared in the second quarter of 2007, payable on July 1,
was 37.5 cents per share, an increase of 36.4% from the dividend declared
in the second quarter of 2006.
Use proceeds from securitized receivables and bank facilities, as needed,
to supplement free cash flow and meet other cash requirements
During the second quarter of 2007, the balance of proceeds from
securitized accounts receivable increased from $150 million to
$550 million on May 31, and was later reduced to $500 million at June 30.
The proceeds were used for general corporate purposes including repayment
of U.S. $1,166.5 million 7.50% Notes that matured June 1.
Maintain a minimum $1 billion in unutilized liquidity
TELUS had approximately $1.3 billion of available liquidity from
unutilized credit facilities at June 30, 2007. See Section 7.5 Credit
facilities.
Maintain position of fully hedging foreign exchange exposure for
indebtedness
Maintained for the 8.00% U.S. dollar Notes due 2011, the one remaining
foreign currency-denominated debt issue.
Give consideration to refinancing all or a portion of U.S. dollar Notes
in advance of its June 1, 2007 scheduled maturity
In March 2007, the Company publicly issued $300 million 4.50%, Series CC,
2012 Canadian dollar Notes and $700 million 4.95%, Series CD, 2017
Canadian dollar Notes. Proceeds from these debt issues, combined with a
second quarter commercial paper issue of $663.5 million and the second
quarter increase in proceeds from securitized accounts receivable, were
used for general corporate purposes and repayment of $1,483.3 million for
the June 1 maturity of U.S. $1,166.5 million, 7.50% Notes.
Preserve access to the capital markets at a reasonable cost by
maintaining investment grade credit ratings and targeting improved credit
ratings in the range of BBB+ to A-, or the equivalent, in the future
At June 30, 2007, investment grade credit ratings from the four rating
agencies that cover TELUS were in the desired range. Three of four credit
rating agencies placed their outlooks under review on June 21, 2007, when
TELUS announced that it was in non-exclusive discussions to acquire BCE.
See Section 7.7 Credit Ratings.
-------------------------------------------------------------------------
4.4 Changes in internal control over financial reporting
There were no changes in internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
5. Results from operations
5.1 General
The Company has two reportable segments: wireline and wireless.
Segmentation is based on similarities in technology, the technical expertise
required to deliver the products and services, the distribution channels used
and regulatory treatment. Intersegment sales are recorded at the exchange
value. Segmented information is regularly reported to the Company's Chief
Executive Officer (the chief operating decision-maker). See Note 5 of the
interim Consolidated financial statements.
5.2 Quarterly results summary
-------------------------------------------------------------------------
($ in millions, except
per share amounts) 2007 Q2 2007 Q1 2006 Q4 2006 Q3
-------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,180.1 1,205.6 1,234.3 1,200.3
Wireless segment 1,048.0 1,000.0 1,020.3 1,010.4
-------------------------------------------------------------------------
Operating revenues (consolidated) 2,228.1 2,205.6 2,254.6 2,210.7
Operations expense 1,340.3 1,436.6 1,368.6 1,245.8
Restructuring costs 3.2 4.7 7.9 12.5
-------------------------------------------------------------------------
EBITDA(1) 884.6 764.3 878.1 952.4
Depreciation 318.3 317.7 353.2 325.8
Amortization of intangible assets 72.5 49.6 53.9 57.5
-------------------------------------------------------------------------
Operating income 493.8 397.0 471.0 569.1
Other expense (income) 18.5 3.8 10.1 4.0
Financing costs 127.2 117.6 133.6 116.6
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 348.1 275.6 327.3 448.5
Income taxes 93.7 79.3 89.7 126.5
Non-controlling interests 1.3 1.5 1.4 2.4
-------------------------------------------------------------------------
Net income 253.1 194.8 236.2 319.6
=========================================================================
Net income per Common Share
and Non-Voting Share
- basic 0.76 0.58 0.70 0.94
- diluted 0.75 0.57 0.69 0.92
Dividends declared per Common
Share and Non-Voting Share 0.375 0.375 0.375 0.275
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ 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 costs 30.7 16.7 35.5 1.6
-------------------------------------------------------------------------
EBITDA(1) 897.1 862.7 734.4 839.7
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 interest 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 Common Share
and Non-Voting Share
- 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 0.275 0.275 0.275 0.20
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA) for the
definition.
-------------------------------------------------------------------------
The consolidated revenue trend continues to reflect strong growth in
wireless revenues generated from an increasing subscriber base and increasing
average revenue per subscriber unit (ARPU). ARPU growth was due to increasing
provision and adoption of wireless data services, which more than offset the
declining voice component of ARPU. The consolidated revenue trend also
reflected growth in wireline segment data revenue, while wireline voice local
and long distance revenues continue to decrease due to substitution by
wireless and Internet services, as well as competition from VoIP competitors
and resellers.
Historically, there is significant fourth quarter seasonality with higher
wireless subscriber additions and related acquisition costs and equipment
sales, resulting in lower wireless EBITDA. The seasonality affects, to a
lesser extent, the wireline high-speed Internet subscriber additions and
related costs.
Operations expenses in the first and second quarter of 2007 included non-
cash charges of $173.5 million and $1.8 million, respectively, for introducing
a net-cash settlement feature for share option awards, as described earlier.
Operations expenses in third and fourth quarter of 2005 were affected by
temporary net labour disruption expenses of approximately $65 million and
$52 million, respectively. Restructuring costs varied by quarter, depending on
the progress of ongoing initiatives underway.
The downward trend in depreciation expense was interrupted by a fourth
quarter 2006 provision of approximately $17 million to align estimated useful
lives for TELUS Quebec assets, resulting from integration of financial
systems. The downward trend in Amortization of intangible assets was reversed
in the second quarter 2007 with approximately $18 million of additional
amortization for a major new wireline billing and client care system being put
into service in March. Amortization expenses in the second and fourth quarters
of 2006 and the first quarter of 2007 were reduced by approximately
$12 million, $5 million and $5 million, respectively, for investment tax
credits relating to assets capitalized in prior years that are now fully
amortized, following a determination of eligibility by a government tax
authority.
Within Financing costs shown in the table above, interest expenses
trended lower except for the following items: (i) interest expense in respect
of a court decision in a lawsuit related to a 1997 BC TEL bond redemption
matter (including $7.8 million in the fourth quarter of 2006); and (ii) a
charge of $33.5 million in the fourth quarter of 2005 for early redemption of
$1.578 billion of Notes. The early redemption of Notes on December 1, 2005,
contributed to lower financing costs in the first half of 2006. Financing
costs are net of varying amounts of interest income.
The generally upward trend in Net income and earnings per share reflect
the items noted above as well as adjustments arising from legislated income
tax changes and tax reassessments for prior years, including any related
interest on reassessments.
-------------------------------------------------------------------------
Tax-related adjustments
($ in millions, except
EPS amounts) 2007 Q2 2007 Q1 2006 Q4 2006 Q3
-------------------------------------------------------------------------
Approximate Net income impact 10 4 20 30
Approximate EPS impact 0.03 0.01 0.06 0.09
Approximate basic EPS excluding
tax-related impacts 0.73 0.57 0.64 0.85
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Tax-related adjustments
($ in millions, except
EPS amounts) 2006 Q2 2006 Q1 2005 Q4 2005 Q3
-------------------------------------------------------------------------
Approximate Net income impact 118 (3) (3) 17
Approximate EPS impact 0.34 (0.01) (0.01) 0.05
Approximate basic EPS excluding
tax-related impacts 0.69 0.61 0.23 0.48
-------------------------------------------------------------------------
5.3 Consolidated results from operations
-------------------------------------------------------------------------
($ in millions except Quarters ended Six-month periods
EBITDA margin in % June 30 ended June 30
and Employees) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Operating revenues 2,228.1 2,135.2 4.4 % 4,433.7 4,215.7 5.2 %
Operations expense 1,340.3 1,207.4 11.0 % 2,776.9 2,408.5 15.3 %
Restructuring costs 3.2 30.7 (89.6)% 7.9 47.4 (83.3)%
-------------------------------------------------------------------------
EBITDA(1) 884.6 897.1 (1.4)% 1,648.9 1,759.8 (6.3)%
Depreciation 318.3 335.2 (5.0)% 636.0 674.4 (5.7)%
Amortization of
intangible assets 72.5 46.9 54.6 % 122.1 110.8 10.2 %
-------------------------------------------------------------------------
Operating income 493.8 515.0 (4.1)% 890.8 974.6 (8.6)%
=========================================================================
Operations expense
(as adjusted)(2) 1,338.5 1,207.4 10.9 % 2,601.6 2,408.5 8.0 %
EBITDA
(as adjusted)(2) 886.4 897.1 (1.2)% 1,824.2 1,759.8 3.7 %
Operating income
(as adjusted)(2) 495.6 515.0 (3.8)% 1,066.1 974.6 9.4 %
EBITDA margin(3) 39.7 42.0 (2.3)pts 37.2 41.7 (4.5)pts
EBITDA margin
(as adjusted)(4) 39.8 42.0 (2.2)pts 41.1 41.7 (0.6)pts
Full-time equivalent
employees at end
of period 32,362 29,157 11.0 %
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) Excludes non-cash charges of $1.8 million and $175.3 million,
respectively, in the second quarter and first six months of 2007 for
introducing a net-cash settlement feature for share option awards
granted prior to 2005. Operations expense (as adjusted) and EBITDA
(as adjusted) are both regularly reported to the chief operating
decision-maker. EBITDA (as adjusted) corresponds to the definition
used in setting TELUS' 2007 EBITDA target and revised guidance.
(3) EBITDA divided by Operating revenues.
(4) EBITDA (as adjusted) divided by Operating revenues.
-------------------------------------------------------------------------
The following discussion is for the consolidated results of TELUS.
Further detail by segment is provided for Operating revenues, Operations
expense, Restructuring costs, EBITDA and Capital expenditures in Section 5.4
Wireline segment results, Section 5.5 Wireless segment results and Section 7.2
Cash used by investing activities - capital expenditures.
Operating revenues
Consolidated Operating revenues increased by $92.9 million and
$218.0 million, respectively, in the second quarter and first six months of
2007 when compared to the same periods in 2006. Wireless revenue and wireline
data revenues continue to exceed erosion in wireline voice local and long
distance revenues. In the second quarter of 2007, a one-time reduction of
about $13 million in long distance revenues resulted from billing system
enhancements, which provided management with better data for estimating
earned, but unbilled revenue.
Operations expense
Consolidated Operations expense increased by $132.9 million and
$368.4 million, respectively, in the second quarter and first six months of
2007 when compared to the same periods in 2006. The increases include non-cash
charges for introducing a net-cash settlement feature for share option awards
granted before 2005. Operations expense adjusted to exclude these non-cash
charges increased by $131.1 million and $193.1 million, respectively,
primarily to support the 11.3% year-over-year growth in the wireless
subscriber base and growth in wireless network revenue. In addition, expenses
in the wireline segment increased primarily due to billing system conversion
costs and external labour costs to improve service levels. TELUS' net defined
benefit pension plan expense decreased by approximately $22 million and
$44 million, respectively, due primarily to favourable returns on plan assets
in 2006.
The number of employees increased to support the wireline segment's
provision of outsourcing services to TELUS' customers, including human
resources outsourcing services and international call centre services, and to
support the growing wireless segment subscriber base. The number of full-time
equivalent employees providing outsourcing services to the Company's customers
increased by about 1,049 at June 30, 2007 when compared to one year earlier,
while elsewhere in the wireline segment the increase was 1,185 including
temporary call centre staff to support billing system conversion. In the
wireless segment, the number of full-time equivalent employees increased by
971 over the same period.
Restructuring costs
Restructuring costs decreased by $27.5 million and $39.5 million in the
second quarter and first six months of 2007, respectively, when compared to
the same periods in 2006. Restructuring expenses in 2007 were in respect of
several smaller efficiency initiatives. The Company's estimate of
restructuring costs for the full year of 2007, which arises from its
competitive efficiency program, are not expected to exceed $35 million.
EBITDA
EBITDA decreased by $12.5 million and $110.9 million in the second
quarter and first six months of 2007, respectively, when compared to the same
periods in 2006. EBITDA adjusted to exclude the net-cash settlement feature
expenses decreased by $10.7 million in the second quarter and increased by
$64.4 million in the first six months. Wireline EBITDA (as adjusted) decreased
by $22.4 million and $15.2 million, respectively, due to second quarter
implementation impacts of a new wireline billing and client care system,
including about $13 million in reduced long distance revenues and $16 million
in conversion costs. Wireless segment EBITDA (as adjusted) increased by
$11.7 million and $79.6 million, respectively, due to strong revenue growth
partially offset by the increased cost of acquisition (COA) related to the
higher gross subscriber additions, higher retention spend related to the
implementation of wireless number portability, and to a lesser extent, higher
operations costs to support subscriber growth.
Depreciation and amortization expenses
Depreciation decreased by $16.9 million and $38.4 million in the second
quarter and first six months of 2007, respectively, when compared to the same
periods in 2006 primarily due to adjustments in the 2006 periods, partly
offset by write-downs in 2007 for certain network equipment and accelerated
depreciation of approximately $5 million for assets related to AMP'D Mobile
Canada services. Depreciation expense adjustments in 2006 included a reduction
in the estimated useful service lives for computer servers and furniture as
well as write-offs of certain other network assets.
Amortization of intangible assets increased by $25.6 million and
$11.3 million in the second quarter and first six months of 2007,
respectively, when compared to the same periods in 2006. The increase was
mainly due to approximately $18 million of additional expense for putting a
new wireline billing and client care system into service in March 2007, partly
offset by other intangible assets becoming fully amortized. In addition,
amortization expenses were reduced by approximately $5 million for the first
six-months of 2007 and reduced by approximately $12 million in the second
quarter and first six months of 2006 to recognize investment tax credits
relating to assets capitalized in prior years that are now fully amortized,
following determination of eligibility by a government tax authority.
Operating income
Operating income decreased by $21.2 million and $83.8 million in the
second quarter and first six months of 2007, respectively, when compared to
the same periods in 2006. When adjusted to exclude the net-cash settlement
feature expense recorded in 2007, Operating income decreased by $19.4 million
in the second quarter and increased by $91.5 million in the first six months.
The decrease in the second quarter was caused mainly by lower wireline
adjusted EBITDA and a higher amortization expense. The increase for the six-
month period was due mainly to improved wireless adjusted EBITDA and lower net
depreciation and amortization expenses.
Other income statement items
-------------------------------------------------------------------------
Quarters ended Six-month periods
Other expense, net June 30 ended June 30
($ millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
18.5 9.6 92.7 % 22.3 13.9 60.4 %
-------------------------------------------------------------------------
Other expense in the second quarter of 2007 included an equity investment
write-off of $11.8 million for AMP'D Mobile Inc. Accounts receivable
securitization expenses of $5.0 million and $8.1 million, respectively, in the
second quarter and first six months of 2007, did not change significantly from
same periods in 2006 (see Section 7.6 Accounts receivable sale).
-------------------------------------------------------------------------
Quarters ended Six-month periods
Financing costs June 30 ended June 30
($ millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Interest on long-
term debt, short-
term obligations
and other 126.8 125.5 1.0 % 246.1 252.5 (2.5)%
Foreign exchange
losses (gains) 5.7 3.7 54.1 % 7.6 4.8 58.3 %
Interest income (5.3) (1.7) n.m. (8.9) (2.8) n.m.
-------------------------------------------------------------------------
127.2 127.5 (0.2)% 244.8 254.5 (3.8)%
=========================================================================
Interest expenses increased by $1.3 million in the second quarter when
compared with same period in 2006 primarily due to a higher average debt
balance from the March bond issue and commercial paper issue ahead of the
June 1 repayment of maturing debt. This more than offset the positive impact
of a slightly lower effective interest rate. The $6.4 million decrease in
interest expenses for the first six months of 2007 when compared with same
period in 2006 was mainly due to an adjustment for application of the
effective rate method for issue costs as required under CICA Handbook Section
3855 (recognition and measurement of financial instruments). In March 2007,
forward starting interest rate swaps were terminated and prepaid interest of
approximately $10 million was deferred and is being amortized over 10 years,
which is the term of the new debt.
The Company's net debt, as calculated in Section 11.4, was $6,240 million
at June 30, 2007, down slightly from $6,275 million one year earlier.
Interest income increased by $3.6 million and $6.1 million, respectively,
in the second quarter and first six months of 2007 when compared with the same
periods in 2006, due primarily to interest earned on short-term investments in
2007.
-------------------------------------------------------------------------
Quarters ended Six-month periods
Income taxes June 30 ended June 30
($ millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Blended federal
and provincial
statutory income
tax based on net
income before tax 116.9 125.8 (7.1)% 209.2 237.3 (11.8)%
Revaluation of future
income tax liability (24.2) (107.0) 77.4 % (27.9) (107.0) 73.9 %
Share option award
compensation 1.2 1.6 (25.0)% (6.5) 3.1 n.m.
Other (0.2) (1.7) 88.2 % (1.8) 1.4 n.m.
-------------------------------------------------------------------------
93.7 18.7 n.m. 173.0 134.8 28.3 %
=========================================================================
Blended federal and
provincial statutory
tax rates (%) 33.6 33.3 0.3 pts 33.5 33.6 (0.1)pts
Effective tax
rates (%) 26.9 4.9 22.0 pts 27.7 19.1 8.6 pts
-------------------------------------------------------------------------
The decrease in the blended federal and provincial statutory income tax
expense in the second quarter and first six months of 2007, when compared with
the same periods in 2006, relates primarily to the decreases in income before
taxes of 7.9% and 11.7%, respectively. Revaluation of the future income tax
liability in the second quarter of 2007 arose from further reductions to
future federal income tax rates as well as future tax rates being applied to
temporary differences. The effective tax rates in 2006 were lower due to
revaluation of future income tax liabilities because of enacted changes in
federal tax rates in the second quarter of 2006.
Based on the assumption of the continuation of the rate of TELUS
earnings, the existing legal entity structure, and no substantive changes to
tax regulations, the Company expects to be able to substantially utilize its
non-capital losses before the end of 2007. The Company's assessment is that
the risk of expiry of such non-capital losses is remote. Under the existing
legal entity structure, TELUS currently expects cash tax payments to be
minimal in 2007, increasing in 2008, with substantial cash tax payments in
2009. The blended federal and provincial statutory tax rate for 2007 is
expected to be approximately 33 to 34%.
-------------------------------------------------------------------------
Non-controlling Quarters ended Six-month periods
interests June 30 ended June 30
($ millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
1.3 2.6 (50.0)% 2.8 4.7 (40.4)%
-------------------------------------------------------------------------
Non-controlling interests represents minority shareholders' interests in
several small subsidiaries.
Comprehensive income
As discussed in Section 8.2 Accounting policy developments, commencing
with the 2007 fiscal year, the Company adopted the recommendations of the
Canadian Institute of Chartered Accountants (CICA) for accounting for
comprehensive income (CICA Handbook Section 1530). Currently, the concept of
comprehensive income for purposes of Canadian GAAP, in the Company's specific
instance, is primarily to include changes in shareholders' equity arising from
unrealized changes in the fair values of financial instruments (see Section
7.8). The calculation of earnings per share is based on Net income and Common
Share and Non-Voting Share income, as required by GAAP.
5.4 Wireline segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Six-month periods
wireline segment June 30 ended June 30
($ millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Voice local(1) 515.6 523.3 (1.5)% 1,047.7 1,058.9 (1.1)%
Voice long distance(2) 167.7 205.7 (18.5)% 355.3 413.5 (14.1)%
Data(3) 434.6 403.1 7.8 % 859.4 796.7 7.9 %
Other 62.2 57.8 7.6 % 123.3 119.4 3.3 %
-------------------------------------------------------------------------
External operating
revenue 1,180.1 1,189.9 (0.8)% 2,385.7 2,388.5 (0.1)%
Intersegment revenue 28.7 24.8 15.7 % 53.8 48.3 11.4 %
-------------------------------------------------------------------------
Total operating
revenues 1,208.8 1,214.7 (0.5)% 2,439.5 2,436.8 0.1 %
=========================================================================
(1) Voice local revenue, after adjusting to exclude the impact of first-
quarter regulatory adjustments, decreased by approximately
$26 million or 2.5% for the first six months of 2007.
(2) Voice long distance revenue, after adjusting to exclude the impact
from billing system conversion, decreased by approximately
$25 million or 12% in the second quarter and decreased by
approximately $45 million or 11% in first six months of 2007.
(3) Data revenue, after adjusting to exclude the impact of two mandated
retroactive competitor price reductions in the first quarter, grew by
approximately $74 million or 9.3% in the first six months of 2007.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Network access lines As at June 30
(000s) 2007 2006 Change
-------------------------------------------------------------------------
Residential network
access lines 2,685 2,848 (5.7)%
Business network
access lines 1,793 1,771 1.2 %
-------- -------- -------
Total network access
lines(1) 4,478 4,619 (3.1)%
Quarters ended Six-month periods
June 30 ended June 30
(000s) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Change in residential
network access lines (56) (52) (7.7)% (90) (80) (12.5)%
Change in business
network access lines 8 8 - % 20 8 150.0 %
-------- -------- -------- -------- -------- -------
Change in total
network access lines (48) (44) (9.1)% (70) (72) 2.8 %
-------------------------------------------------------------------------
(1) Network access lines are measured at the end of the reporting period
based on information in billing and other systems.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Internet subscribers As at June 30
(000s) 2007 2006 Change
-------------------------------------------------------------------------
High-speed Internet
subscribers 962.7 830.9 15.9 %
Dial-up Internet
subscribers 172.2 216.8 (20.6)%
-------- -------- -------
Total Internet
subscribers(1) 1,134.9 1,047.7 8.3 %
Quarters ended Six-month periods
June 30 ended June 30
(000s) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
High-speed Internet
net additions 13.9 29.2 (52.4)% 46.0 67.8 (32.2)%
Dial-up Internet net
reductions (9.4) (11.0) 14.5 % (21.9) (19.3) (13.5)%
-------- -------- -------- -------- -------- -------
Total Internet
subscriber net
additions 4.5 18.2 (75.3)% 24.1 48.5 (50.3)%
-------------------------------------------------------------------------
(1) Internet subscribers are measured at the end of the reporting period
based on Internet access counts from billing and other systems.
-------------------------------------------------------------------------
Revenues in the Wireline segment decreased by $5.9 million in the second
quarter and increased by $2.7 million in the first six months of 2007, when
compared with the same periods in 2006.
- Voice local revenue decreased by $7.7 million and $11.2 million,
respectively, in the second quarter and first six months of 2007,
when compared with the same periods in 2006. The decrease was due
primarily to lower revenues from basic access and optional enhanced
services arising from increased competition for residential
subscribers offset in part by growth in business local services and
price increases allowed under regulation. For the first six months of
2007, this was partly offset by first quarter recoveries of
approximately $14.5 million from the price cap deferral account,
which offset unfavourable mandated retroactive rate adjustments for
basic data revenue pursuant to two recent CRTC (Canadian Radio-
television and Telecommunications Commission) decisions and included
recovery of previously incurred amounts associated with mandated
local number portability and start-up costs.
Residential line losses include the effect of increased competition
from resellers and VoIP competitors (including cable-TV companies,
which have expanded their geographic coverage and introduced lower-
priced telephony services), as well as technological substitution to
wireless services. To a lesser degree, residential second lines
decreased from migration of dial-up Internet subscribers to high-
speed Internet service. The net increase in business lines was
experienced in the Ontario and Quebec urban non-incumbent areas.
- Voice long distance revenues decreased by $38.0 million and
$58.2 million, respectively, in the second quarter and first six
months of 2007, when compared with the same periods in 2006 due
primarily to lower average per-minute rates (due to industry-wide
price competition) and lower business minute volumes, partly offset
by increased consumer minute volumes. In addition, a one-time
reduction of about $13 million was recorded in the second quarter of
2007 as a result of system enhancements, which provided management
with better data for estimating earned, but unbilled revenue.
- Wireline segment data revenues increased by $31.5 million and
$62.7 million, respectively, in the second quarter and first six
months of 2007, when compared with the same periods in 2006. This
growth was primarily due to increased Internet, enhanced data and
hosting service revenues from growth in business services and high-
speed Internet subscribers. High-speed Internet subscriber net
additions were lower than one year earlier, reflecting competitive
markets and the impact by the new billing and client care system,
which temporarily reduced the Company's order processing capability
in the second quarter. Monthly rates for high-speed Internet services
were raised by one dollar per month in the second quarter of 2006 for
those customers not on rate protection plans, which contributed to an
overall increase in average revenue per subscriber. Managed data
revenues from the provision of business process outsourcing services
to customers also increased.
Pursuant to CRTC Decision 2007-6 (relating to digital network access
link charges) and CRTC Decision 2007-10 (relating to basic service
extension feature charges), retroactive rate reductions totalling
approximately $11 million in basic data services revenues the first
quarter of 2007. Data revenue for the first six months of 2007 grew
by approximately $74 million or 9.3% once adjusted to exclude the
impact of these two mandated retroactive competitor price reductions.
- Other revenue increased by approximately $4 million for both the
second quarter and first six months of 2007 when compared with the
same periods in 2006. The increase was due mainly to a reduction in
the provision for quality-of-service rate rebates (see Section 10.1
Regulatory - Quality-of-service rebate program), partly offset by
lower voice equipment sales.
- Intersegment revenue represents services provided by the wireline
segment to the wireless segment. These revenues are eliminated upon
consolidation together with the associated expense in the wireless
segment.
-------------------------------------------------------------------------
Operating expenses -
wireline segment Quarters ended Six-month periods
($ millions, except June 30 ended June 30
employees) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Salaries, benefits
and other employee-
related costs,
before net-cash
settlement feature 428.0 417.0 2.6 % 856.9 830.2 3.2 %
Net-cash settlement
feature expense - - - 153.1 - -
Other operations
expenses 344.1 311.6 10.4 % 667.5 638.8 4.5 %
-------------------------------------------------------------------------
Operations expense 772.1 728.6 6.0 % 1,677.5 1,469.0 14.2 %
Restructuring costs 2.8 29.8 (90.6)% 7.2 44.7 (83.9)%
-------------------------------------------------------------------------
Total operating
expenses 774.9 758.4 2.2 % 1,684.7 1,513.7 11.3 %
=========================================================================
Operations expense
(as adjusted)(1) 772.1 728.6 6.0 % 1,524.4 1,469.0 3.8 %
Total operating
expenses
(as adjusted)(1) 774.9 758.4 2.2 % 1,531.6 1,513.7 1.2 %
Full-time equivalent
employees, end
of period(2) 24,786 22,552 9.9 %
-------------------------------------------------------------------------
(1) Excludes the net-cash settlement feature expense. Operations expense
(as adjusted) is regularly reported to the chief operating decision-
maker.
(2) The number of full-time equivalent employees providing outsourcing
services to the Company's customers was 4,811 on June 30, 2007 and
3,761 on June 30, 2006. Full-time equivalent staff elsewhere
increased by 1,185 or 6.3%.
-------------------------------------------------------------------------
Total Wireline operating expenses increased by $16.5 million and
$171.0 million, respectively, in the second quarter and first six months of
2007, when compared with the same periods in 2006. Expenses in the second
quarter included approximately $16 million of additional costs related to the
March billing and client care system conversion (of which approximately
$5 million was recorded in salaries and benefits for customer contact centres
and $11 million was recorded in other operations expenses primarily for
external labour costs), as well as $2 million in preparation costs for
expected flooding in British Columbia.
Operations expense:
- Salaries, benefits and employee-related expenses increased by
$11.0 million and $26.7 million, respectively, in the second quarter
and first six months of 2007, when compared with the same periods in
2006. The increase was mainly due to scheduled compensation increases
and increased staffing, partly offset by a lower defined benefit
pension plan expense.
- A non-cash charge of $153.1 million was recorded in the first quarter
of 2007 as a result of introducing a net-cash settlement feature for
share option awards granted prior to 2005.
- Other operations expenses increased by $32.5 million and
$28.7 million, respectively, in the second quarter and first six
months of 2007, when compared with the same periods in 2006.
Approximately half of the increase in the second quarter was due to
higher external labour costs for billing/client care system support,
installation/repair activity to improve service levels, and flood
preparation costs. The remaining second quarter increases was due to
network facility costs from higher customer demand, increased cost of
sales as well as inflationary increases. The increase for the six-
month period also included external labour costs to help clear
backlogs caused by severe winter weather on the west coast early in
2007, partly offset by: (i) increased capitalization of labour
related to the higher capital expenditure activity in 2007; (ii)
lower transit and termination charges due to lower per-minute rates
partly offset by higher outbound minute volumes; and (iii) lower
expenses arising from CRTC decisions on basic service extension
features and network access link charges.
Restructuring costs in 2007 were for several small efficiency initiatives
and decreased by $27.0 million and $37.5 million, respectively, in the second
quarter and first six months of 2007, when compared with the same periods in
2006.
-------------------------------------------------------------------------
EBITDA ($ millions) Quarters ended Six-month periods
and EBITDA margin (%) June 30 ended June 30
wireline segment 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
EBITDA 433.9 456.3 (4.9)% 754.8 923.1 (18.2)%
EBITDA
(as adjusted)(1) 433.9 456.3 (4.9)% 907.9 923.1 (1.6)%
EBITDA margin 35.9 37.6 (1.7)pts 30.9 37.9 (7.0)pts
EBITDA margin
(as adjusted) 35.9 37.6 (1.7)pts 37.2 37.9 (0.7)pts
-------------------------------------------------------------------------
(1) Excludes a non-cash charge of $153.1 million in the first six months
of 2007 for introducing a net-cash settlement feature for share
option awards granted prior to 2005. EBITDA (as adjusted) is
regularly reported to the chief operating decision-maker and
corresponds to the definition used in setting TELUS' 2007 EBITDA
target and revised guidance.
-------------------------------------------------------------------------
Wireline EBITDA decreased by $22.4 million and $168.3 million,
respectively, in the second quarter and first six months of 2007, when
compared with the same periods in 2006, while Wireline EBITDA (as adjusted)
decreased by $22.4 million and $15.2 million, respectively. The decrease to
adjusted EBITDA resulted mainly from second quarter billing system conversion
impacts of about $29 million, including increased expenses of $16 million and
a one-time long distance revenue reduction of $13 million. In addition,
increased labour costs to deal with weather-related backlogs were
approximately $2 million in the second quarter of 2007 and approximately
$4 million in the first six months of 2007.
5.5 Wireless segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Six-month periods
wireless segment June 30 ended June 30
($ millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Network revenue 989.8 884.0 12.0 % 1,934.3 1,708.7 13.2 %
Equipment revenue 58.2 61.3 (5.1)% 113.7 118.5 (4.1)%
-------------------------------------------------------------------------
External operating
revenue 1,048.0 945.3 10.9 % 2,048.0 1,827.2 12.1 %
Intersegment
revenue 6.7 5.2 28.8 % 13.0 11.1 17.1 %
-------------------------------------------------------------------------
Total operating
revenues 1,054.7 950.5 11.0 % 2,061.0 1,838.3 12.1 %
=========================================================================
-------------------------------------------------------------------------
Key operating indicators
- wireless segment As at June 30
(000s) 2007 2006 Change
-------------------------------------------------------------------------
Subscribers -
postpaid(1) 4,236.0 3,840.5 10.3 %
Subscribers -
prepaid 1,036.0 896.6 15.5 %
--------- -------- --------
Subscribers -
total(2) 5,272.0 4,737.1 11.3 %
Digital POPs(3)
covered including
roaming/resale
(millions)(4) 31.5 31.0 1.6 %
Quarters ended Six-month periods
June 30 ended June 30
2007 2006 Change 2007 2006 Change
---------------------------------------------------
Subscriber gross
additions - postpaid 219.2 205.7 6.6 % 392.5 385.4 1.8 %
Subscriber gross
additions - prepaid 134.8 100.9 33.6 % 257.5 196.0 31.4 %
------- ------- ------- ------- ------- ------
Subscriber gross
additions - total 354.0 306.6 15.5 % 650.0 581.4 11.8 %
Subscriber net
additions - postpaid 99.2 103.3 (4.0)% 160.0 173.7 (7.9)%
Subscriber net
additions - prepaid 29.0 20.6 40.8 % 58.7 42.7 37.5 %
------- ------- ------- ------- ------- ------
Subscriber net
additions - total 128.2 123.9 3.5 % 218.7 216.4 1.1 %
ARPU ($)(5) 63.65 63.18 0.7 % 62.85 61.76 1.8 %
Churn, per month
(%)(5) 1.45 1.30 0.15 pts 1.40 1.32 0.8 pts
Lifetime revenue per
subscriber ($)(5) 4,390 4,860 (9.7)% 4,489 4,679 (4.1)%
COA(6) per gross
subscriber addition
($)(5) 425 394 7.9 % 431 411 4.9 %
COA per gross
subscriber addition
to lifetime revenue
(%)(5) 9.7 8.1 1.6 pts 9.6 8.8 0.8 pts
Average minutes of
use per subscriber
per month (MOU) 411 412 (0.2)% 397 399 (0.5)%
EBITDA ($ millions) 450.7 440.8 2.2 % 894.1 836.7 6.9 %
EBITDA (as adjusted)
(7) ($ millions) 452.5 440.8 2.7 % 916.3 836.7 9.5 %
EBITDA to network
revenue (%) 45.5 49.9 (4.4)pts 46.2 49.0 (2.8)pts
EBITDA (as adjusted)
to network revenue (%) 45.7 49.9 (4.2)pts 47.4 49.0 (1.6)pts
Retention spend to
network revenue (5)(%) 8.2 6.2 2.0 pts 7.8 6.2 1.6 pts
EBITDA excluding COA
($ millions)(5) 601.1 561.7 7.0 % 1,174.0 1,075.5 9.2 %
EBITDA (as adjusted)
excluding COA
($ millions) 602.9 561.7 7.3 % 1,196.2 1,075.5 11.2 %
-------------------------------------------------------------------------
pts - percentage points
(1) A one-time adjustment was made to the postpaid subscriber base.
Cumulative subscribers were reduced by approximately 2,600 in the
period to reflect the discontinuation of network service to its
cellular digital packet data (CDPD) subscribers effective January 31,
2007.
(2) Subscribers are measured at the end of the reporting period based on
information from billing systems.
(3) POPs is an abbreviation for population. A POP refers to one person
living in a population area, which in whole or substantial part is
included in the coverage areas.
(4) At June 30, 2007, TELUS' wireless PCS digital population coverage
included expanded coverage of approximately 7.5 million PCS POPs due
to roaming/resale agreements principally with Bell Mobility (Bell
Canada).
(5) See Section 11.3 Definition of key operating indicators. These are
industry measures useful in assessing operating performance of a
wireless company, but are not defined under accounting principles
generally accepted in Canada and the U.S.
(6) Cost of acquisition.
(7) Excludes non-cash charges of $1.8 million and $22.2 million,
respectively, in the second quarter and first six months of 2007 for
introducing a net-cash settlement feature for share option awards
granted prior to 2005. EBITDA (as adjusted) is regularly reported to
the chief operating decision-maker and corresponds to the definition
used in setting TELUS' 2007 EBITDA targets and revised guidance.
-------------------------------------------------------------------------
Wireless segment revenues increased by $104.2 million and $222.7 million,
respectively, in the second quarter and first six months of 2007 when compared
with the same periods in 2006, due to the following:
- Network revenue increased by $105.8 million and $225.6 million in the
second quarter and first six months of 2007, respectively, when
compared with the same periods in 2006. The increase was a result of
the 11.3% expansion of the subscriber base combined with increased
average revenue per subscriber unit per month. ARPU increased by
$0.47 in the second quarter of 2007, when compared to the same period
in 2006, representing the 18th successive quarter of year-over-year
growth, as increased data usage more than offset declining voice
ARPU. Voice ARPU was $57.07 in the second quarter of 2007, a decrease
of $1.66 or 2.8% from the same period in 2006, caused mainly by a
greater mix of included-minute rate plans as voice minutes of use per
subscriber per month (MOU) remained relatively steady. Similarly,
voice ARPU declined by $1.24 or 2.2% to $56.43 for the first six
months of 2007.
Data revenues increased to 10.4% of Network revenue, or
$103.2 million, in the second quarter of 2007 as compared with 7.1%
of Network revenues, or $62.8 million, in the second quarter of
2006 - reflecting a growth rate of 64.3%. Similarly, data revenues
for the first six months of 2007 increased to 10.3% of Network
revenue, or $199.4 million, as compared with 6.7% of Network revenue,
or $114.1 million, for the same period in 2006 - reflecting a growth
rate of 74.8%. Data ARPU increased by 47.9% to $6.58 for the second
quarter and increased by 57.0% to $6.42 for the first six months of
2007 as compared with $4.45 and $4.09, respectively, for the same
periods in 2006. This growth, driven by the significant increase in
voice to data migrations, was principally related to text messaging,
mobile computing, personal digital assistant (PDA) devices, Internet
browser activities and pay-per-use downloads such as ringtones,
music, games and videos.
At June 30, 2007, postpaid subscribers represented 80.3% of the total
cumulative subscriber base, remaining relatively stable from one year
earlier. The 99,200 postpaid subscriber net additions for the second
quarter of 2007 represented 77.4% of all net additions as compared
with 103,300 or 83.4% of all net additions for the same period in
2006. Moreover, the 160,000 postpaid subscriber net additions for the
first six months of 2007 represented 73.2% of all net additions as
compared with 173,700 or 80.3% of all net additions for the same
period in 2006. Total net subscriber additions increased in the
second quarter and first six months of 2007 as compared with the same
periods in 2006 as a result of the growth in prepaid net subscriber
additions.
The blended churn rate increased in the second quarter and first
six months of 2007 when compared with the respective periods in 2006.
The postpaid monthly churn rates for the second quarter and first
six months of 2007 were approximately one per cent, increasing
slightly over the same periods last year. The prepaid churn rates
also increased slightly in the second quarter and first six months of
2007 when compared with the same periods in 2006. Total deactivations
were 225,800 for the second quarter and 431,300 for the first six
months of 2007 as compared with 182,700 and 365,000, respectively,
for the same periods last year. Wireless number portability had a
full quarter impact on churn and deactivation results for the first
time since its implementation in late-March 2007.
- Equipment sales, rental and service revenue decreased by $3.1 million
and $4.8 million, respectively, in the second quarter and first six
months of 2007 when compared with the same periods in 2006. The
decreases, despite continued subscriber growth and higher retention
activity, were principally due to a shift in product mix and
increased promotional activity related to wireless number
portability. Gross subscriber additions were 354,000 for the second
quarter of 2007 (a record second quarter loading for TELUS) and
650,000 for the first six months of 2007 as compared with 306,600 and
581,400, respectively, for the same periods in 2006. The increase in
gross additions included the impact of increased competitive porting-
in as a result of wireless number portability. Handset revenues
associated with gross subscriber activations are included in COA per
gross subscriber addition.
- Intersegment revenues represent services provided by the wireless
segment to the wireline segment and are eliminated upon consolidation
along with the associated expense in the wireline segment.
-------------------------------------------------------------------------
Operating expenses -
wireless segment Quarters ended Six-month periods
($ millions, except June 30 ended June 30
employees) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Equipment sales
expenses 166.6 136.9 21.7 % 312.0 263.1 18.6 %
Network operating
expenses 126.7 111.6 13.5 % 241.3 217.5 10.9 %
Marketing expenses 114.6 92.0 24.6 % 215.4 185.8 15.9 %
General and
administration
expenses 195.7 168.3 16.3 % 397.5 332.5 19.5 %
-------------------------------------------------------------------------
Operations expense 603.6 508.8 18.6 % 1,166.2 998.9 16.7 %
Restructuring costs 0.4 0.9 (55.6)% 0.7 2.7 (74.1)%
-------------------------------------------------------------------------
Total operating
expenses 604.0 509.7 18.5 % 1,166.9 1,001.6 16.5 %
=========================================================================
Operations expense
(as adjusted)(1) 601.8 508.8 18.3 % 1,144.0 998.9 14.5 %
Total operating
expenses
(as adjusted)(1) 602.2 509.7 18.1 % 1,144.7 1,001.6 14.3 %
Full-time equivalent
employees at end
of period 7,576 6,605 14.7 %
-------------------------------------------------------------------------
(1) Excludes non-cash charges of $1.8 million and $22.2 million,
respectively, in the second quarter and first six months of 2007 for
introducing a net-cash settlement feature for share option awards
granted prior to 2005. Operations expense (as adjusted) is regularly
reported to the chief operating decision-maker.
-------------------------------------------------------------------------
Wireless segment total operating expenses increased by $94.3 million and
$165.3 million, respectively, in the second quarter and first six months of
2007 when compared with the same periods in 2006. Total operating expenses as
adjusted to exclude the 2007 non-cash charges for share option awards expense
increased by $92.5 million and $143.1 million, respectively, to promote,
acquire, retain and support 11.3% year-over-year growth in the subscriber base
and the significant increase in Network revenue.
- Equipment sales expenses increased by $29.7 million and
$48.9 million, respectively, in the second quarter and first six
months of 2007 when compared with the same periods in 2006, due
principally to an increase in gross subscriber activations and
increased retention activity related to wireless number portability
combined with a greater mix of data products but, partially offset by
favourable exchange rates. Handset costs including data equipment
associated with gross subscriber activations are included in COA per
gross subscriber addition.
- Network operating expenses increased by $15.1 million and
$23.8 million in the second quarter and first six months of 2007,
respectively, when compared with the same periods in 2006. The
increases were principally due to higher transmission and site-
related expenses to support the greater number of cell sites, a
larger subscriber base, third party data content providers, and
improved network quality and coverage. Moreover, expenses for the
first six months of 2007 were net of a reduction arising from CRTC
Decision 2007-6 related to retail network access link charges.
- Marketing expenses increased by $22.6 million and $29.6 million in
the second quarter and first six months of 2007, respectively, when
compared with the same periods in 2006, primarily due to higher
advertising and promotions costs driven by wireless number
portability and increased dealer compensation costs related to the
higher gross subscriber additions and increased retention activity.
Despite higher prepaid gross additions, COA per gross subscriber
addition increased by $31 or 7.9% in the second quarter as compared
with the same period last year. The increase was principally related
to higher subsidies on certain popular handsets driven by competitive
activity and higher advertising and promotion spending related to
wireless number portability and new product launches. Similarly, COA
increased by $20 or 4.9% for the first six months of 2007. Wireless
number portability also contributed to increased retention costs,
which as a percentage of network revenue, were 8.2% and 7.8%,
respectively, in the second quarter and first six months of 2007, as
compared to 6.2% in the same periods in 2006. Despite higher ARPU,
the lifetime revenue per subscriber decreased in the second quarter
and first half of 2007 because of the increased churn rates.
Consequently, COA as a percentage of lifetime revenue increased in
the second quarter and first six months of 2007.
- General and administration expense increased by $27.4 million and
$65.0 million in the second quarter and first six months of 2007,
respectively, when compared with the same periods in 2006. Excluding
non-cash charges for share option awards granted before 2005, general
and administration expenses grew by $25.6 million and $42.8 million
for the second quarter and first six months of 2007, respectively.
The increases were principally due to the 14.7% increase in employees
to support the significant growth in Network revenue, subscriber
base, and continued expansion of the client care team and company-
owned retail stores.
- Restructuring costs were in respect of the Company's operational
efficiency program.
-------------------------------------------------------------------------
EBITDA ($ millions) Quarters ended Six-month periods
and EBITDA margin (%) June 30 ended June 30
wireless segment 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
EBITDA 450.7 440.8 2.2 % 894.1 836.7 6.9 %
EBITDA
(as adjusted)(1) 452.5 440.8 2.7 % 916.3 836.7 9.5 %
EBITDA margin 42.7 46.4 (3.7)pts 43.4 45.5 (2.1)pts
EBITDA margin
(as adjusted) 42.9 46.4 (3.5)pts 44.5 45.5 (1.0)pts
-------------------------------------------------------------------------
(1) Excludes non-cash charges of $1.8 million and $22.2 million,
respectively, in the second quarter and first six months of 2007 for
introducing a net-cash settlement feature for share option awards
granted prior to 2005. EBITDA (as adjusted) is regularly reported to
the chief operating decision-maker and corresponds to the definition
used in setting TELUS' 2007 EBITDA targets and revised guidance.
-------------------------------------------------------------------------
Wireless segment EBITDA increased by $9.9 million and $57.4 million,
respectively, in the second quarter and first six months of 2007 when compared
with the same periods in 2006. When adjusted to exclude the non-cash charge
for options expense in 2007, EBITDA increased by $11.7 million and
$79.6 million, respectively, due to strong revenue growth partially offset by
the increased COA related to the improved gross additions, higher retention
spend related to the implementation of wireless number portability, and to a
lesser extent, higher operations costs to support growth in the total
subscriber base.
6. Financial condition
The following are changes in the Consolidated balance sheets in the six-
month period Notional Carrying Fair June 30, 2007.
-------------------------------------------------------------------------
June 30, Dec. 31, Changes Explanation of the
2007 2006 change in balance
($ millions) (adjusted)
-------------------------------------------------------------------------
Current Assets
Cash and 2.2 (11.5) 13.7 n.m. See Section 7.
temporary Liquidity and
investments, capital resources
net
Short-term 54.8 110.2 (55.4) (50.3)% Liquidation of some
investments investments of
surplus cash
Accounts 571.8 707.2 (135.4) (19.1)% Lower days
receivable outstanding on
wireline
receivables, a
decrease in wireless
voice ARPU and
receivables from
dealers, and receipt
of inducements for
renegotiated
building leases
Income and 99.2 95.4 3.8 4.0 % -
other taxes
receivable
Inventories 158.8 196.4 (37.6) (19.1)% Primarily a seasonal
reduction of
wireless handset
inventories
Prepaid 291.7 195.3 96.4 49.4 % Primarily prepayment
expenses of annual property
and other taxes and wireless
licence fees as well
as accrued and
prepaid employee
benefits, all net of
amortization
Current 48.7 40.4 8.3 20.5 % Primarily new net
portion cash-settled equity
derivative swaps offset by the
assets maturity of cross-
currency swaps
related to the notes
maturing June 1
-------------------------------------------------------------------------
Current
Liabilities
Accounts 1,547.9 1,363.6 184.3 13.5 % Primarily increases
payable in the liability for
and net-cash settled
accrued share options and
liabilities NCIB purchases
awaiting settlement
Income and 6.7 10.3 (3.6) (35.0)% -
other
taxes
payable
Restructuring 28.8 53.1 (24.3) (45.8)% Payments under
accounts previous and current
payable and programs exceeded
accrued new obligations
liabilities
Advance 609.4 606.3 3.1 0.5 % Primarily increased
billings billings and
and customer deposits,
customer net of draw-downs
deposits from price cap
deferred revenue
Current 6.4 1,433.5 (1,427.1) (99.6)% Repayment of U.S.
maturities dollar notes that
of long- matured June 1 and
term debt medium-term TCI
notes that matured
in February
Current 10.1 165.8 (155.7) (93.9)% Maturity of cross-
portion of currency swaps
derivative related to the note
liabilities maturing June 1,
partly offset by
changes to U.S.
currency forward
contracts
Current 258.1 137.2 120.9 88.1 % An increase in
portion temporary
of future differences for
income current assets and
taxes liabilities as well
as partnership
taxable income that
will be allocated in
the next 12 months.
The December 31,
2006 balance
includes a
reclassification of
$44 million from
long-term future
income taxes. See
Note 2(c) of the
interim Consolidated
financial statements
-------------------------------------------------------------------------
Working (1,240.2) (2,436.4) 1,196.2 49.1 % Mainly repayment of
capital(1) the current
maturities of long-
term debt. See
Section 7.3 Cash
used by financing
activities
-------------------------------------------------------------------------
Capital 11,076.6 10,982.1 94.5 0.9 % See Sections 5.3
Assets, Consolidated results
Net from operations -
Depreciation and
amortization and 7.2
Cash used by
investing activities
-------------------------------------------------------------------------
Other Assets
Deferred 1,064.6 956.6 108.0 11.3 % Primarily pension
charges plan contributions
and pension
recoveries resulting
from favourable
returns on plan
assets
Investments 30.6 35.2 (4.6) (13.1)% Includes an
$11.8 million write-
off of an equity
investment in AMP'D
Mobile, Inc., net of
new investments and
fair value
adjustments
Goodwill 3,168.8 3,169.5 (0.7) 0.0 % -
-------------------------------------------------------------------------
Long-Term 4,800.5 3,474.7 1,325.8 38.2 % Includes notes
Debt issued in March and
commercial paper
issued in May, net
of the repayment of
bank facilities and
a reduction in the
Canadian dollar
value of 2011 U.S.
dollar notes
-------------------------------------------------------------------------
Other 1,644.4 1,257.3 387.1 30.8 % Primarily foreign
Long-Term exchange rate
Liabilities changes and a fair
value adjustment of
the deferred hedging
liability associated
with 2011 U.S.
dollar notes
-------------------------------------------------------------------------
Future 1,018.6 1,023.3 (4.7) (0.5)% A decrease in
Income temporary
Taxes differences for
long-term assets and
liabilities
-------------------------------------------------------------------------
Non- 22.1 23.6 (1.5) (6.4)% -
Controlling
Interests
-------------------------------------------------------------------------
Shareholders'
Equity
Common 6,614.8 6,928.1 (313.3) (4.5)% Decreased primarily
equity due to NCIB
expenditures of
$370.2 million,
dividends of
$250.9 million and
transitional amounts
for accumulated
other comprehensive
income of
$176.2 million;
partly offset by Net
income of
$447.9 million and
Other comprehensive
income of
$51.9 million.
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
-------------------------------------------------------------------------
7. Liquidity and capital resources
7.1 Cash provided by operating activities
-------------------------------------------------------------------------
($ millions) Quarters Six-month periods
ended June 30 ended June 30
2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
1,061.9 813.0 30.6 % 1,522.5 1,486.1 2.4 %
-------------------------------------------------------------------------
Cash provided by operating activities increased by $248.9 million and
$36.4 million, respectively, in the second quarter and first six months of
2007, when compared with the same periods in 2006. Changes in cash provided by
operating activities included:
- EBITDA decreased by $12.5 million and $110.9 million, respectively,
in the second quarter and first six months of 2007, when compared to
the same periods in 2006;
- Share-based compensation payments in excess of the expense included
in EBITDA increased by $21.6 million in the second quarter of 2007
when compared with the same period in 2006. Share-based compensation
expense in excess of payments in the first six months of 2007
increased by $108.6 million when compared with the same period in
2006;
- Employer contributions to employee defined benefit plans decreased by
$30.3 million and $26.9 million, respectively, in the second quarter
and first six months of 2007, when compared to the same periods in
2006 mainly due to accelerated funding in 2006;
- Interest paid decreased by $53.0 million and $42.5 million,
respectively, in the second quarter and first six months of 2007 when
compared to the same periods in 2006. The decrease in the second
quarter was due to the paid amounts in the second quarter of 2006
including $31.2 million for terminating cross currency interest rate
swaps as well as partial payment of interest in respect of a court
decision in a lawsuit regarding a 1997 BC TEL bond redemption matter.
The decrease for the six-month period was caused by the same reasons,
partly offset by repayment of forward starting interest rate swaps in
the first quarter of 2007.
- Interest received decreased by $15.8 million in the first six months
of 2007 when compared to the same period in 2006, due to the receipt
of interest on tax refunds in the first quarter of 2006;
- Income taxes received net of installment payments decreased by
$92.4 million in the first six months of 2007 when compared to the
same period in 2006, due mainly to collection of income taxes
receivable during first quarter of 2006;
- Cash provided by a decrease in Short-term investments was
approximately $55 million during the second quarter and first six
months of 2007;
- Proceeds from securitized accounts receivable increased by a net
$350 million during the second quarter of 2007, compared with an
increase of $135 million during the second quarter of 2006 for a
comparative increase in operating cash flow of $215 million. Proceeds
from securitized accounts receivable were unchanged during the first
six months of 2007, compared with a net increase of $35 million
during the first six months of 2006 for a comparative decrease of
$35 million in operating cash flow for the six-month period; and
- Other changes in non-cash working capital for the respective periods.
7.2 Cash used by investing activities
-------------------------------------------------------------------------
($ millions) Quarters ended Six-month periods
June 30 ended June 30
2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
477.8 486.1 (1.7)% 870.1 802.2 8.5 %
-------------------------------------------------------------------------
Cash used by investing activities decreased by $8.3 million in the second
quarter of 2007 and increased by $67.9 million in the first six months of
2007, when compared with the same periods in 2006. The decrease in the second
quarter was primarily due to $19.5 million for acquisitions in 2006. Capital
expenditures increased by $23.3 million and $84.4 million, respectively, in
the second quarter and first six months of 2007, when compared to the same
periods in 2006 (see below).
Assets under construction were $603.8 million at June 30, 2007, a
decrease of $121.6 million from December 31, 2006. The decrease primarily
reflects a transfer of $342.1 million to intangible assets subject to
amortization in the first quarter of 2007 for activation of certain phases of
the new consolidated wireline billing and client care system, net of increases
in other assets under construction during 2007.
-------------------------------------------------------------------------
Capital
expenditures Quarters ended Six-month periods
($ in millions, June 30 ended June 30
ratios in %) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Wireline segment 308.7 311.4 (0.9)% 579.4 570.4 1.6 %
Wireless segment 173.1 147.4 17.4 % 284.3 208.9 36.1 %
-------------------------------------------------------------------------
TELUS consolidated
capital expenditures 481.8 458.8 5.0 % 863.7 779.3 10.8 %
=========================================================================
Capital expenditure
intensity ratio(1) 21.6 21.5 0.1 pts 19.5 18.5 1.0 pt
EBITDA less capital
expenditures(2) 402.8 438.3 (8.1)% 785.2 980.5 (19.9)%
EBITDA (as adjusted)
less capital
expenditures(2) 404.6 438.3 (7.7)% 960.5 980.5 (2.0)%
-------------------------------------------------------------------------
(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.
(2) See Section 11.1 EBITDA for the calculation and description.
-------------------------------------------------------------------------
TELUS' capital intensity ratio in the second quarter of 2007 was similar
to the same period in 2006. For the first six months of 2007, capital
expenditures are tracking towards the annual guidance of approximately
$1.75 billion, which implies higher capital intensity. See Section 9: Annual
guidance for 2007. TELUS' EBITDA (as adjusted) less capital expenditures
decreased primarily because of higher capital expenditures levels in 2007,
largely offset by higher EBITDA (as adjusted) for the six month period.
- Wireline segment capital expenditures decreased by $2.7 million in
second quarter of 2007 and increased by $9.0 million in the first six
months of 2007 when compared to the same periods in 2006.
Expenditures decreased for billing and client care system development
in both the second quarter and first six months of 2007 as a result
of putting the system into service in March. Up-front capital
investment to support new enterprise customers in Central Canada as
well as expenditures for network sustainment increased for both the
second quarter and first six months of 2007. Wireline capital
expenditure intensity levels in 2007 were 25.5% for the second
quarter and 23.8% for the first six months of 2007 - similar to 2006.
Wireline cash flow (EBITDA less capital expenditures) was
$125.2 million and $175.4 million, respectively, in the second
quarter and first six months of 2007, or decreases of 13.6% and
50.3%, respectively, from the same periods in 2006. Wireline cash
flow based on EBITDA (as adjusted) for the first six months of was
$328.5 million in the first six months of 2007, a decrease of 6.9%
from the same period in 2006.
- Wireless segment capital expenditures increased by $25.7 million and
$75.4 million, respectively, in the second quarter and first six
months of 2007 when compared to the same periods in 2006. The
increases were principally related to continued enhancement of
digital wireless capacity and coverage, and strategic investments in
high-speed EVDO Rev A wireless network technology. Wireless capital
expenditure intensity levels in 2007 were 16.4% for the second
quarter and 13.8% for the first six months of 2007 as compared to
15.5% and 11.4%, respectively, for the same periods in 2006. Wireless
cash flows (EBITDA less capital expenditures) were $277.6 million in
the second quarter and $609.8 million for the first six months of
2007 representing declines of 5.4% and 2.9%, respectively. Wireless
cash flows based on EBITDA (as adjusted) were $279.4 million in the
second quarter, a decrease of 4.8% from the same period in 2006, and
was $632.0 million for the first six months of 2007, an increase of
0.7%, from the same period in 2006.
7.3 Cash used by financing activities
-------------------------------------------------------------------------
($ millions) Quarters ended Six-month periods
June 30 ended June 30
2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
1,115.9 344.4 n.m. 638.7 711.1 (10.2)%
-------------------------------------------------------------------------
Cash used by financing activities increased by $771.5 million in the
second quarter of 2007 and decreased by $72.4 million in the first six months
of 2007, when compared with the same periods in 2006:
- Proceeds from Common Shares and Non-Voting Shares issued were
$0.2 million in the second quarter of 2007 and $0.6 million for the
first six months of 2007, as compared to $12.5 million and
$45.7 million, respectively, in the same periods in 2006. The
decreases were due to implementation of the net-cash settlement
feature for share option awards granted prior to 2005 and the
introduction of the net equity settlement feature in May 2006.
- Cash dividends paid to shareholders were $125.0 million in the second
quarter of 2007 and $250.9 million in the first six months of 2007,
representing increases of approximately 32% when compared to the same
periods in 2006. The increases were due to the higher quarterly
dividend paid per share, partly offset by lower average shares
outstanding.
- The Company's renewed NCIB program (Program 3) came into effect on
December 20, 2006 and is set to expire on December 19, 2007. At
June 30, 2007, the Company has purchased 19% of the maximum
12 million Common shares and 34% of the maximum 12 million Non-Voting
Shares under this program. From December 20, 2004 to June 30, 2007,
TELUS repurchased approximately 18.7 million Common Shares and
26.9 million Non-Voting Shares for $2.14 billion under three NCIB
programs.
The following table shows quarterly purchases under NCIB programs for
2007 and 2006.
Normal course issuer bid programs
-------------------------------------------------------------------------
Purchase cost
Shares repurchased ($ millions)
--------------------------------- -----------------------
Charged Charged
to to
Share Retained
Common Non-Voting capital earnings
By program Shares Shares Total (1) (2) Paid
--------------- --------------------------------- -----------------------
2006
(Program 2)
First quarter 1,783,300 3,334,500 5,117,800 93.3 138.3 231.6
Second quarter 2,913,600 2,643,300 5,556,900 93.0 156.4 249.4
-------------------------------------------------------------------------
Six months 4,696,900 5,977,800 10,674,700 186.3 294.7 481.0
=========================================================================
2007
(Program 3)
First quarter 1,975,000 1,530,000 3,505,000 57.8 142.9 200.7
Second quarter 330,000 2,367,300 2,697,300 55.0 114.5 169.5
-------------------------------------------------------------------------
Six months 2,305,000 3,897,300 6,202,300 112.8 257.4 370.2
=========================================================================
(1) Represents the book value of shares repurchased
(2) Represents the cost in excess of the book value of shares repurchased
-------------------------------------------------------------------------
- A major debt issue was completed in March 2007 with five-year and
10-year maturities:
2012 Canadian dollar notes: the Company publicly issued $300 million
4.50%, Series CC, Notes at a price of $999.91 per $1,000.00 of
principal.
2017 Canadian dollar notes: the Company publicly issued $700 million
4.95%, Series CD, Notes at a price of $999.53 per $1,000.00 of
principal.
The notes are redeemable at the option of the Company, in whole at
any time, or in part from time to time, on not fewer than 30 and not
more than 60 days' prior notice, at a redemption price equal to the
greater of (i) the present value of the notes discounted at the
Government of Canada yield plus 15 basis points for the 2012 notes
and 24 basis points for the 2017 notes, or (ii) 100% of the principal
amount thereof. In addition, accrued and unpaid interest, if any,
will be paid to the date fixed for redemption.
- On May 15, 2007, TELUS entered into an unsecured commercial paper
program, which is backstopped by a portion of its credit facility,
enabling it to issue commercial paper up to a maximum aggregate of
$800 million (or U.S. dollar equivalent), to be used for general
corporate purposes. Commercial paper totaling $663.5 million was
outstanding at June 30, 2007.
- Other debt issues in 2007 were primarily periodic draws on the bank
facility, which were subsequently repaid (amounts outstanding:
March 31 and June 30, 2007 - nil; December 31, 2006 - $120 million).
- Debt repayments in 2007 included the $1,483.3 million to repay U.S.
$1,166.5 million 7.50% Notes that matured on June 1, and $70 million
to repay TCI 7.10% Medium-Term Notes that matured in February.
The following are anticipated requirements to meet long-term debt
repayments, including related hedge amounts and calculated upon such long-term
debts owing as at June 30, 2007, during each of the five years ending
December 31. Interest obligations are not included.
Long-term debt maturities
-------------------------------------------------------------------------
Deferred
hedging
liability,
($ millions) Principal net Total(1)
-------------------------------------------------------------------------
2007 (balance of year) 2.3 - 2.3
2008 5.6 - 5.6
2009 1.5 - 1.5
2010 80.8 - 80.8
2011 2,048.1 903.5 2,951.6
-------------------------------------------------------------------------
(1) Where applicable, principal repayments reflect foreign exchange rates
at June 30, 2007.
-------------------------------------------------------------------------
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
As at, or 12-month periods ended, June 30 2007 2006 Change
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Components of debt and coverage ratios(1)
($ millions)
-------------------------------------------------------------------------
Net debt (including securitized accounts
receivables) 6,239.7 6,274.6 (34.9)
Total capitalization - book value 13,002.4 13,139.0 (136.6)
EBITDA - excluding restructuring costs -
12-month trailing 3,507.7 3,418.4 89.3
Net interest cost - 12-month trailing 495.0 571.0 (76.0)
-------------------------------------------------------------------------
Debt ratios
-------------------------------------------------------------------------
Fixed-rate debt as a proportion of total
indebtedness (%) 81.4 90.8 (9.4)pts
Average term to maturity of debt (years) 5.7 5.0 0.7
Net debt to total capitalization (%)(1) 48.0 47.8 0.2 pts
Net debt to EBITDA - excluding
restructuring costs(1) 1.8 1.8 -
-------------------------------------------------------------------------
Coverage ratios(1)
-------------------------------------------------------------------------
Interest coverage on long-term debt 3.8 2.9 0.9
EBITDA - excluding restructuring costs
interest coverage 7.1 6.0 1.1
-------------------------------------------------------------------------
Other measures - 12-month trailing
-------------------------------------------------------------------------
Free cash flow ($ millions)(2) 1,387.2 1,506.7 (119.5)
Dividend payout ratio (%)(1) 50 46 4 pts
-------------------------------------------------------------------------
(1) See Section 11.4 Definition of liquidity and capital resource
measures.
(2) See Section 11.2 Free cash flow for the definition.
-------------------------------------------------------------------------
Net debt and total capitalization are calculated on a basis generally
consistent with the Company's credit agreements. Net debt excludes accumulated
comprehensive income amounts arising from financial instruments used to manage
interest rate and currency risks associated with U.S. dollar denominated debt.
Total capitalization also excludes accumulated other comprehensive income. See
Section 11.4.
Total capitalization decreased because of lower net debt and share
capital, partly offset by higher retained earnings. Changes in Net debt and
12- month trailing EBITDA did not have a significant impact on the net debt to
EBITDA ratio at June 30, 2007 when compared to one year earlier. The average
term to maturity of debt of 5.7 years at June 30, 2007 represents an increase
from 4.5 years at December 31, 2006 due to repayment of maturing notes on
June 1 net of the March debt issue and May commercial paper issue. The
proportion of debt on a fixed-rate basis decreased with the issue of
commercial paper.
Interest coverage on long-term debt improved by 0.4 because of lower
interest expenses, and improved by 0.5 because of increased income before
taxes and interest expense. The EBITDA interest coverage ratio improved by 0.9
due to lower net interest cost and improved by 0.2 due to higher EBITDA -
excluding restructuring costs. The decrease in 12-month trailing free cash
flow resulted from higher capital expenditures and lower recoveries of income
tax and related interest, net of improved EBITDA before share-based
compensation and lower interest paid. The dividend payout ratio based on
actual earnings at June 30, 2007 was at the midpoint of the target guideline
(45 to 55% for sustainable net earnings). The dividend payout ratio was 48%
when the impacts of tax-related adjustments and the charge for introducing the
net cash feature are excluded from earnings.
The Company's strategy is to maintain the financial policies and
guidelines set out below. The Company believes that these measures are
currently at the optimal level and provide access to capital at a reasonable
cost by maintaining credit ratings in the range of BBB+ to A-, or the
equivalent.
TELUS' long-term financial policies and guidelines are:
- Net debt to total capitalization of 45 to 50%;
- Net debt to EBITDA of 1.5 to 2.0 times; and
- Dividend payout ratio of 45 to 55% of sustainable net earnings.
7.5 Credit facilities
On March 2, 2007, TELUS closed a new five-year $2 billion credit facility
with a syndicate of 18 financial institutions. The new facility replaced
$1.6 billion of existing credit facilities, of which $800 million would have
expired in 2008 and $800 million would have expired in 2010. The new facility
may be used for general corporate purposes including the backstop of
commercial paper. The new facility has no substantial changes in terms and
conditions other than reduced pricing and extended term, which reflects
favourable market conditions and TELUS' financial position. Notably, the May
2012 maturity date of the new credit facility extends beyond the maturity date
of TELUS' June 2011 Notes.
TELUS had available liquidity from unutilized credit facilities of
approximately $1.3 billion at June 30, 2007, consistent with the Company's
objective of maintaining at least $1 billion of unutilized liquidity.
TELUS Credit Facilities at June 30, 2007
-------------------------------------------------------------------------
Outstanding Backstop
undrawn for
letters commercial
($ in of paper Available
millions) Expiry Size Drawn credit program liquidity
-------------------------------------------------------------------------
Five-year
revolving May 1,
facility(1) 2012 2,000.0 - (103.7) (663.5) 1,232.8
Other bank
facilities - 77.3 - (2.9) - 74.4
-------------------------------------------------------------------------
Total - 2,077.3 - (106.6) (663.5) 1,307.2
=========================================================================
(1) Canadian dollars or U.S. dollar equivalent.
-------------------------------------------------------------------------
TELUS' revolving credit facility contains customary covenants including a
requirement that TELUS not permit its consolidated Leverage Ratio (debt to
trailing 12-month EBITDA) to exceed 4.0:1 (approximately 1.8:1 at June 30,
2007) and not permit its consolidated Coverage Ratio (EBITDA to Interest
Expense on a trailing 12-month basis) to be less than 2.0:1 (approximately
7.1:1 at June 30, 2007) at the end of any financial quarter. There are certain
minor differences in the calculation of the Leverage Ratio and Coverage Ratio
under the credit agreement as compared with the calculation of Net debt to
EBITDA and EBITDA interest coverage. Historically, the calculations have not
been materially different. The covenants are not impacted by revaluation of
capital assets, intangible assets and goodwill for accounting purposes.
Continued access to TELUS' credit facility is not contingent on the
maintenance by TELUS of a specific credit rating.
7.6 Accounts receivable sale
On July 26, 2002, TCI, a wholly owned subsidiary of TELUS, entered into
an agreement, which was amended September 30, 2002, and March 1, 2006, and
November 30, 2006, with an arm's-length securitization trust under which TCI
is able to sell an interest in certain of its trade receivables up to a
maximum of $650 million. As a result of selling the interest in certain of the
trade receivables on a fully serviced basis, a servicing liability is
recognized on the date of sale and is, in turn, amortized to earnings over the
expected life of the trade receivables. This revolving-period securitization
agreement had an initial term ending July 18, 2007; the November 30, 2006
amendment resulted in the term being extended to July 18, 2008.
TCI is required to maintain at least a BBB (low) credit rating by
Dominion Bond Rating Service (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 1, 2007. The balance of proceeds from
securitized receivables increased from $150 million at March 31, 2007 to
$550 million at May 31, 2007 and subsequently decreased to $500.0 million at
June 30, 2007, with the closing balance equal to the balance at December 31,
2006. The balance of proceeds from securitized receivables on June 30, 2006
was $535 million.
7.7 Credit ratings
On February 26, 2007, Moody's Investors Services upgraded its rating for
TELUS by one level to Baa1 (equivalent to BBB+) and assigned an outlook of
stable. On March 5, 2007, DBRS upgraded the rating of TELUS notes to A (low)
from BBB (high) and confirmed its A (low) ratings for TCI, all with a stable
trend. In addition, DBRS confirmed its preliminary rating of R-1 (low) for
TELUS' commercial paper program.
On June 21, 2007, TELUS announced that it was in non-exclusive
discussions to acquire BCE. This was followed by a second announcement by
TELUS on June 26 that inadequacies in BCE's bid process did not make it
possible for TELUS to submit an offer as part of the strategic review process
announced by BCE. After the June 21 announcement, DBRS placed the credit
ratings for TELUS Corporation and TCI "under review with developing
implications". Similarly, Moody's affirmed its Baa1 rating for TELUS and
changed its outlook to "developing" and Standard and Poors (S&P) placed the
credit ratings of TELUS Corporation and TCI on "credit watch with negative
implications." As of August 1, these three credit rating agencies have not
removed their qualifications.
-------------------------------------------------------------------------
Credit rating summary DBRS(1) S&P(2) Moody's(3) Fitch(4)
-------------------------------------------------------------------------
TELUS Corporation
Senior bank debt - - - BBB+
Notes A (low) BBB+ Baa1 BBB+
Commercial paper R-1 (low) - - -
TELUS Communications Inc.
Debentures A (low) BBB+ - BBB+
Medium-term notes A (low) BBB+ - BBB+
First mortgage bonds A (low) A- - -
-------------------------------------------------------------------------
(1) Under review with developing implications.
(2) Credit watch with negative implications.
(3) Outlook developing.
(4) Outlook stable.
-------------------------------------------------------------------------
7.8 Financial instruments; Commitments and contingent liabilities
Financial instruments (Note 4 of the interim Consolidated financial
statements)
The Company's financial instruments consist of cash and temporary
investments, accounts receivable, investments accounted for using the cost
method, accounts payable, restructuring accounts payable, short-term
obligations, long-term debt, interest rate swap agreements, share-based
compensation cost hedges, as further discussed in Note 10(b)-(c) of the
interim Consolidated financial statements, and foreign exchange hedges.
Fair value: The carrying value of cash and temporary investments,
accounts receivable, accounts payable, restructuring accounts payable and
short-term obligations approximates their fair values due to the immediate or
short-term maturity of these financial instruments. The carrying values of the
Company's investments accounted for using the cost method would not exceed
their fair values.
The carrying value of short-term investments equals their fair value as
they are classified as held for trading. The fair value is determined directly
by reference to quoted market prices.
The fair values of the Company's long-term debt are estimated based on
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same maturity as well as the use of
discounted future cash flows using current rates for similar financial
instruments subject to similar risks and maturities. The fair values of the
Company's derivative financial instruments used to manage exposure to interest
rate and currency risks are estimated similarly.
The fair values of the Company's derivative financial instruments used to
manage exposure to increases in compensation costs arising from certain forms
of share-based compensation are estimated based upon fair value estimates of
the related cash-settled equity forward agreements provided by the
counterparty to the transactions.
The effect of the adoption of comprehensive income on the Company's
derivatives was to record them at their fair values rather than at their
carrying amounts. The primary change was in derivatives classified as held for
hedging and used to manage interest rate and currency risks associated with
U.S. dollar denominated debt, as shown in the table below.
As at ($ millions) June 30, 2007
-------------------------------------------------------------------------
Hedging
item
maximum
maturity Notional Carrying Fair
date amount amount value
-------------------------------------------------------------------------
Liabilities
Long-term debt
Principal 4,806.9 5,154.4
Derivatives(1) classified as
held for hedging and used to
manage interest rate and
currency risks associated with
U.S. Dollar denominated debt
- Derivative asset 2007 - -
- Derivative liability
- Current 2007 - -
- Non-current 2011 2,950.5 1,081.8
1,081.8
- Interest payable 7.3
Net 1,089.1 1,089.1
Derivatives(1) used to manage
interest rate risk associated
with planned refinancing of
debt maturing June 1, 2007 2007 $ - - -
-------------------------------------------------------------------------
5,896.0 6,243.5
=========================================================================
December 31, 2006
-------------------------------------------------------------------------
Hedging
item
maximum
maturity Notional Carrying Fair
date amount amount value
-------------------------------------------------------------------------
Liabilities
Long-term debt
Principal 4,908.2 5,535.9
Derivatives(1) classified as
held for hedging and used to
manage interest rate and
currency risks associated with
U.S. Dollar denominated debt
- Derivative asset 2007 809.9 (40.4)
- Derivative liability
- Current 2007 673.4 165.8
- Non-current 2011 2,950.5 710.3
835.7
- Interest payable 6.3
Net 842.0 1,090.6
Derivatives(1) used to manage
interest rate risk associated
with planned refinancing of
debt maturing June 1, 2007 2007 500.0 - 6.5
-------------------------------------------------------------------------
5,750.2 6,633.0
=========================================================================
(1) Designated as cash flow hedging items.
-------------------------------------------------------------------------
Commitments and contingent liabilities (Note 17 of the interim
Consolidated financial statements)
The Company's commitments and contingent liabilities have not changed
significantly in the six-month period ended June 30, 2007. Changes to
maturities of long-term debt as a result of financing activities in the first
six months of 2007 were described in Section 7.3 above.
On July 6, 2007, the CRTC issued Decision Telecom 2007-50, Use of
deferral account to expand broadband services to certain rural and remote
communities. In this decision, the CRTC approved the use of the deferral
account for the purpose of expanding broadband services in a limited number of
communities in British Columbia and Quebec. The Company is currently reviewing
the implications of this decision in conjunction with its previously filed
submission for use of the deferral account funds and, as directed by the CRTC,
will file an update to the previously filed submission in September 2007.
A number of claims and lawsuits seeking damages and other relief are
pending against the Company. It is impossible at this time for the Company to
predict with any certainty the outcome of such litigation. However, management
is of the opinion, based upon legal assessment and information presently
available, that it is unlikely that any liability, to the extent not provided
for through insurance or otherwise, would be material in relation to the
Company's Consolidated financial position, excepting the items enumerated in
Note 17(c) of the interim Consolidated financial statements.
7.9 Outstanding share information
The following is a summary of the outstanding shares for each class of
equity at June 30, 2007 and at July 13, 2007. In addition, for July 13, 2007,
the total number of outstanding and issuable shares is presented assuming full
conversion of outstanding options as well as options not yet granted, but for
which shares have been reserved.
-------------------------------------------------------------------------
Class of equity security Common Non-Voting Total
(millions of shares) Shares Shares shares
-------------------------------------------------------------------------
Common equity
Outstanding shares at June 30 and
July 13, 2007 176.4 155.3 331.7(1)
Options outstanding and issuable(2)(3)
at July 13, 2007 0.5 16.3 16.8
-------------------------------------------------------------------------
Outstanding and issuable shares at
July 13, 2007 176.9 171.6 348.5
=========================================================================
(1) For the purposes of calculating diluted earnings per share, the
number of shares for the second quarter of 2007 was 336.9.
(2) Assuming full conversion and ignoring exercise prices.
(3) Not reduced for any options that may have been forfeited or expired
in the period July 1 to July 13, 2007.
-------------------------------------------------------------------------
8. Critical accounting estimates and accounting policy developments
8.1 Critical accounting estimates
TELUS' critical accounting estimates are described Section 8.1 of its
2006 Management's discussion and analysis. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
8.2 Accounting policy developments (Note 2 of the interim Consolidated
financial statements)
The interim Consolidated financial statements follow the same accounting
policies and methods of their application as set out in Note 1 of TELUS' 2006
Consolidated financial statements for the year ended December 31, 2006, other
than as set out below, including that certain of the comparative amounts have
been reclassified to conform with the presentation adopted currently.
Convergence with International Financial Reporting Standards
In 2006, Canada's Accounting Standards Board ratified a strategic plan
that will result in Canadian GAAP, as used by public companies, being
converged with International Financial Reporting Standards over a transitional
period currently expected to be complete by 2011. The precise timing of
convergence will depend on an Accounting Standards Board progress review to be
undertaken and released by March 31, 2008.
Canadian GAAP will be converged with International Financial Reporting
Standards through a combination of two methods: as current joint-convergence
projects of the United States' Financial Accounting Standards Board and the
International Accounting Standards Board are agreed upon, they will be adopted
by Canada's Accounting Standards Board and may be introduced in Canada before
the complete changeover to International Financial Reporting Standards; and
standards not subject to a joint-convergence project will be exposed in an
omnibus manner.
As this convergence initiative is very much in its infancy, it would be
premature to currently assess the impact of the initiative, if any, on the
Company.
Comprehensive income; recognition and measurement of financial
instruments
Commencing with the Company's 2007 fiscal year, the recommendations of
the Canadian Institute of Chartered Accountants (CICA) for accounting for
comprehensive income (CICA Handbook Section 1530), for the recognition and
measurement of financial instruments (CICA Handbook Section 3855) and for
hedges (CICA Handbook Section 3865) apply to the Company. Currently, the
concept of comprehensive income for purposes of Canadian GAAP, in the
Company's specific instance, is to include changes in shareholders' equity
arising from unrealized changes in the values of financial instruments. The
implementation and the application of Handbook Sections 1530, 3855 and 3865
were described in the Company's 2007 first quarter Management's discussion and
analysis. See Note 2(b) of the interim Consolidated financial statements.
Income taxes arising from partnership income
In mid-2006, Canada's Accounting Standards Board's Emerging Issues
Committee issued a Draft Abstract (D59) regarding the accounting for income
taxes related to entities that consolidate partnership interests that have a
different year end than the consolidating entity. The Company has applied the
guidance therein contained through its 2006 year-end. In March 2007, the
Emerging Issues Committee issued a revised Draft Abstract (RD59) which changed
the approach to determination of the classification of future income taxes
between current and non-current. In May 2007, the Emerging Issues Committee
removed this issue from its agenda.
Given the absence of specific guidance on the issue, the Company has
adopted the policy of accounting for the current portion of the future income
tax liability for partnerships to include the tax effect of differences
between the accounting and tax bases of current assets and current liabilities
and the tax on partnership income to be allocated during the next twelve
months. The Company has retrospectively applied this policy, which has, in the
Company's specific current instance, the net effect of increasing the current
portion of future income tax liabilities. The consolidated balance sheet
reclassification is as set out in Note 2(c) of the interim Consolidated
financial statements.
Financial instruments - disclosure and presentation
Commencing with the Company's 2008 fiscal year, the new recommendations
of the CICA for financial instrument disclosures and presentation (CICA
Handbook Section 3862) will apply to the Company. The new recommendations will
result in incremental disclosures, relative to those currently, with an
emphasis on risks associated with both recognized and unrecognized financial
instruments to which an entity is exposed during the period and at the balance
sheet date, and how an entity manages those risks. The Company is assessing
how it will be affected by these new recommendations.
9. Annual guidance for 2007
The following discussion is qualified in its entirety by the Caution
regarding forward-looking statements at the beginning of Management's
discussion and analysis. It is also qualified by Section 10: Risks and risk
management of TELUS' 2006 annual and 2007 first quarter Management's
discussion and analyses, as well as this report.
The Company has revised its annual guidance for high-speed Internet net
additions as a result of competitive activity and temporarily reduced order
processing capability resulting from the billing and client care system
conversion. See Section 10.3 Process Risks.
Previous guidance
Revised guidance and original Change
for 2007 targets for 2007
-------------------------------------------------------------------------
Consolidated
Revenues $9.175 to $9.175 to
$9.275 billion $9.275 billion no change
EBITDA(1) $3.725 to $3.725 to
(as adjusted)(2) $3.825 billion $3.825 billion no change
Earnings per share
- basic
(as adjusted)(3) $3.25 to $3.45 $3.25 to $3.45 no change
Capital expenditures Approx. Approx.
$1.75 billion $1.75 billion no change
-------------------------------------------------------------------------
Wireline segment
Revenue (external) $4.85 to $4.85 to
$4.9 billion $4.9 billion no change
EBITDA $1.775 to $1.775 to
(as adjusted)(2) $1.825 billion $1.825 billion no change
Capital expenditures Approx. Approx.
$1.2 billion $1.2 billion no change
High-speed Internet More than More than Approximately
net additions 125,000 135,000 10,000 fewer
-------------------------------------------------------------------------
Wireless segment
Revenue (external) $4.325 to $4.325 to
$4.375 billion $4.375 billion no change
EBITDA $1.95 to $1.95 to
(as adjusted)(2) $2.0 billion $2.0 billion no change
Capital expenditures Approx. Approx.
$550 million $550 million no change
Wireless subscriber More than More than
net additions 550,000 550,000 no change
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest taxes depreciation and
amortization (EBITDA) for the definition.
(2) Excluding a cash-settled share option expense of approximately
$180 million in 2007 for introducing the net-cash settlement feature,
of which, approximately $155 million is in wireline and approximately
$25 million is in wireless.
(3) Excluding an after-tax charge per share of approximately $0.33 for
introducing the net-cash settlement feature.
-------------------------------------------------------------------------
The following key assumptions were made at the time the original targets
for 2007 were announced in December 2006. Management believes the assumptions
remain reasonable.
-------------------------------------------------------------------------
Key assumption for 2007 targets Actual result for the year to-date
-------------------------------------------------------------------------
Canadian real GDP growth of 2.7% The Conference Board of Canada recently
(revised to 2.5%) issued a revised estimate of 2.5% for
2007 and 3.2% for 2008.
Increased wireline competition Cable-TV competitors have begun to
in both business and consumer market VoIP services to home office
markets, particularly from type business in some communities, and
cable-TV and VoIP companies have increased promotion of lower-
price "light" services to residential
households
Forbearance for local retail Assumption unchanged. TELUS has filed
wireline services in major forbearance applications following the
urban markets by the second first quarter Federal Cabinet
half of 2007 Order-in-Council that simplified the
conditions for regulatory forbearance.
On July 25, the CRTC granted TELUS
local forbearance in Fort McMurray
with additional rulings expected by
early August. See Section 10.1
Regulatory
No further price cap mandated The CRTC's decision on the parameters
consumer price reductions for the next price cap period was
announced on April 30, 2007 confirming
this assumption.
Canadian wireless industry TELUS' gross additions and net
market penetration gain of additions in the first half of 2007
4.5 to five percentage points were consistent with this assumption
TELUS would record approximately Restructuring costs are currently not
$50 million of restructuring expected to exceed $35 million in 2007
expenses
TELUS' statutory income tax Assumptions unchanged. See Section 5:
rate is expected to be 33 to Consolidated results from operations -
34% with minimal cash tax Income taxes
payments in 2007
A discount rate of 5.0% and Assumptions unchanged
expected long-term average
return of 7.25% for pension
accounting
Average TELUS shares Average shares outstanding were
outstanding of 330 to 335.3 million in the first half of
335 million shares for the 2007, a decrease of about 3% from the
full year same period in 2006 and within the
range of the 2.5 to 4% reduction
implied by the key assumption for the
full year
-------------------------------------------------------------------------
TELUS continues to have long-term policy guidelines for Net debt to total
capitalization, Net debt to EBITDA and dividend payout, described in Section
7.4. The 2007 annual guidance is in compliance with these policy guidelines.
10. Risks and risk management
The following are significant updates to the risks described in Section
10 of TELUS' 2006 annual and 2007 first quarter Management's discussions and
analyses.
10.1 Regulatory
The outcome of any existing or future regulatory reviews, proceedings,
court appeals, Federal Cabinet appeals or other regulatory developments could
have a material impact on TELUS' operating procedures, costs and revenues.
Local forbearance
On July 25, in Telecom Decision 2007-58, the CRTC granted forbearance for
local residential services in Fort McMurray, Alberta. The CRTC had granted
conditional forbearance for Fort McMurray, Alberta in March 2007 subject to
achievement of certain competitor quality-of-service standards, which were
met, on average, for the six-month period from December 2006 to May 2007.
Forbearance decisions are expected for Victoria, Vancouver, Calgary and
Edmonton by early August and for Rimouski later this year. TELUS has also
applied for deregulation of regulated business phone services in phone
exchanges covering 78 per cent of business lines in B.C. and Alberta, and
52 per cent in eastern Quebec.There can be no assurance that forbearance will
be granted for any or all of the outstanding applications.
Price cap regulation
The CRTC issued Telecom Decision 2007-27 on April 30, 2007, setting the
parameters for the price cap regulation effective June 1, 2007. The decision
created a uniform price cap regime for TELUS across its incumbent territories
in B.C., Alberta and Eastern Quebec and eliminated the deferral account on a
go-forward basis. Constraints were removed for upward pricing of optional
residential services, features and bundles. Flexibility was granted to
increase basic residential services in rural high cost serving areas by the
lesser of the annual inflation rate and five per cent with a corresponding
reduction to the contribution subsidy paid and received. Flexibility to
increase business rates was maintained at the overall annual inflation rate,
with a maximum increase of 10% for individual rates. In addition, local
payphone calls may be increased to a maximum of 50 cents per cash call ($1 per
non-cash call) and rates remain frozen at existing levels for public safety
and social services such as 911 and message relay service. Competitor services
were largely unchanged by the price cap decision.
Essential services
In Telecom Decision 2007-46, the CRTC ruled that ILECs should not be
required to implement Ethernet and high-speed Internet (ADSL) orders
concerning competitor services until the CRTC issues a decision on review and
vary applications filed by TELUS and certain other ILECs - such decision
expected by the end of August 2007. In the essential services proceeding
currently under way (Public Notice 2006-14), TELUS continues to argue that
ADSL and Ethernet are not essential services and should not be unbundled.
Quality-of-service rebate program - CRTC decisions on TELUS'
exclusion applications
In May, the CRTC released decisions on two of TELUS' exclusion
applications for retail quality-of-service rate rebates. Decision 2007-29
addressed three adverse events from mid-July 2003 to December 2003: forest
fires in the Interior of B.C. and South-western Alberta, a cable-cut in
Vancouver and floods in the Lower Mainland of B.C. The CRTC granted that three
retail quality-of-service measures could be excluded during these adverse
event periods. The CRTC also directed TELUS to adjust three other quality-of-
service measures to an average level measured in the six-month period
preceding the adverse events and to implement applicable customer credits for
the July 2002 to December 2003 rate adjustment period. In Decision 2007-30,
the CRTC granted TELUS' exclusion application for severe flooding in Southern
Alberta in June 2005, directing that TELUS exclude three retail quality-of-
service measures for the months of June and July, similar to the February
Decision 2007-14 for TELUS' exclusion application for competitor quality-of-
service measures.
In June, the CRTC granted relief from the competitor quality-of-service
rate rebate program from November 2006 to January 2007 for the Lower Mainland
of B.C. during a series of severe storms. In addition, under Telecom Decision
CRTC 2007-40, the CRTC made provision such that TELUS can substitute the
competitor quality-of-service results for the excluded periods with results
from adjacent periods as part of applicable forbearance applications.
In July, the CRTC acknowledged in Telecom Decisions 2007-52 and 2007-55
that the 2005 labour disruption qualified as an adverse event. The first of
these two decisions granted relief from four of seven competitor quality-of-
service indicators for the period of the actual disruption as well as the time
required to return to normal operations (July 2005 through February 2006
inclusive). The second decision granted relief for all six retail quality-of-
service indicators for applicable period between July 2005 through February
2006.
TELUS has one remaining exclusion application before the CRTC for retail
quality-of-service programs concerning the series of severe storms in the
Lower Mainland of B.C. from November 2006 to January 2007. If the CRTC grants
relief from the remaining outstanding exclusion application or future adverse
events, any mandated quality-of-service rate rebates in the future would be
reduced; however, there can be no assurance that relief will be granted.
Wireless number portability (WNP)
Phase one of WNP (sometimes referred to as local number portability, or
LNP) was implemented successfully on March 14, 2007 in the majority of
populated centres in Canada by Canadian wireless carriers, including TELUS.
Implementation of WNP in remaining areas is mandated for September 2007.
Experience from one full-quarter of WNP, indicates that it is a net
contributor to increased subscriber loading for TELUS with inbound porting
exceeding outbound porting, but WNP has also contributed to increased wireless
customer retention costs (8.2% of network revenue in the second quarter of
2007 compared to 6.2% of network revenue in the same period in 2006) and
increased subscriber churn (1.45% in the second quarter of 2007 compared to
1.30% in the same period in 2006). Subscriber churn and retention spending may
be permanently higher in the future.
WNP could also lead to an increase in migration of network access lines
to wireless services, as well as present opportunities to TELUS to market more
effectively in the business/enterprise market in Central Canada where TELUS
has a lower market share than its competitors. There can be no assurance that
this will be the case.
Foreign-ownership restrictions
TELUS and its subsidiaries are subject to the foreign ownership
restrictions imposed by the Telecommunications Act, the Radiocommunication Act
and the Broadcasting Act. In July 2007, the Minister of Industry and the
Minister of Finance announced the creation of a Competition Review Panel to
review Canadian competition and investment legislation: the Competition Act
and the Investment Canada Act. As the Panel will report to the Minister of
Industry by June 30, 2008, it is expected that any subsequent legislation
changes would not be effective until late-2008 or 2009. TELUS has supported
the relaxation of foreign ownership restrictions in the past, but believes
that any such relaxation must be on an equal basis for broadcasting and
telecommunications companies.
10.2 Human resources
Collective bargaining at TELUS Quebec
Two collective agreements between TELUS Quebec and the Syndicat des
agents de maitrise de TELUS covering professional and supervisory team members
in Quebec expired on March 31, 2007. The parties continue to negotiate to
achieve a new collective agreement.
10.3 Process risks
TELUS systems and processes could negatively impact financial
results and customer service - Billing/revenue assurance and
efficiency programs
TELUS successfully converted all of its wireline consumer customers in
Alberta to a new integrated billing and client care system in late-March 2007.
The new system includes re-engineered processes for order entry, pre-
qualification, service fulfillment and assurance, customer care,
collections/credit, customer contract and information management. During the
second quarter of 2007, initial system difficulties were experienced that
reduced order processing capability, which caused increased installation
backlogs and higher costs such as extra call centre resources in order to
maintain service levels. The critical billing function performed as expected
and call centre operations are expected to return to normal levels in future.
There can be no assurance that this undertaking will not negatively impact, on
an extended basis, TELUS' customer service levels, competitive position and
financial results.
Additional phases of development and conversion are planned over the next
several years including a similar system conversion for B.C. consumers planned
for the first half of 2008. There is no assurance that the B.C. conversion
will be as successful as the Alberta conversion. This customer-focused project
required extensive system development and, in itself, presents future
implementation risks due to the complexity of the implementation task and
resource constraints, as well as reliance on newly developed third party
software code. Significant time delays in implementing new phases of this
system, or system instability, could negatively impact TELUS' competitive
ability to quickly and effectively launch new products, services and
promotions; achieve and maintain a competitive cost structure; and deliver
better information and analytics to management.
11. Reconciliation of non-GAAP measures and definition of key operating
indicators
11.1 Earnings before interest taxes depreciation and amortization
(EBITDA)
TELUS has issued guidance on and reports EBITDA because it is a key
measure used by management to evaluate performance of business units, segments
and the Company. EBITDA is also utilized in measuring compliance with debt
covenants - see Section 11.4 EBITDA excluding restructuring costs. EBITDA is a
measure commonly reported and widely used by investors as an indicator of a
company's operating performance and ability to incur and service debt, and as
a valuation metric. The Company believes EBITDA assists investors in comparing
a company's performance on a consistent basis without regard to depreciation
and amortization, which are non-cash in nature and can vary significantly
depending upon accounting methods or non-operating factors such as historical
cost.
EBITDA is not a calculation based on Canadian or U.S. GAAP and should not
be considered an alternative to Operating income or Net income in measuring
the Company's performance, nor should it be used as an exclusive measure of
cash flow, because it does not consider the impact of working capital growth,
capital expenditures, debt principal reductions and other sources and uses of
cash, which are disclosed in the Consolidated statements of cash flows.
Investors should carefully consider the specific items included in TELUS'
computation of EBITDA. While EBITDA has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance and debt
servicing ability relative to other companies, investors should be cautioned
that EBITDA as reported by TELUS may not be comparable in all instances to
EBITDA as reported by other companies.
The following is a reconciliation of EBITDA with Net income and Operating
income. EBITDA (as adjusted) excludes a non-cash charge for introducing a net-
cash settlement feature for share option awards granted prior to January 1,
2005. EBITDA (as adjusted) is regularly reported to the chief operating
decision-maker and corresponds to the definition used in setting TELUS' 2007
EBITDA targets and revised guidance (see Section 9).
-------------------------------------------------------------------------
Quarters Six-month periods
ended June 30 ended June 30
($ millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
Net income 253.1 356.6 447.9 566.7
Other expense (income) 18.5 9.6 22.3 13.9
Financing costs 127.2 127.5 244.8 254.5
Income taxes 93.7 18.7 173.0 134.8
Non-controlling interest 1.3 2.6 2.8 4.7
-------------------------------------------------------------------------
Operating income 493.8 515.0 890.8 974.6
Depreciation 318.3 335.2 636.0 674.4
Amortization of intangible assets 72.5 46.9 122.1 110.8
-------------------------------------------------------------------------
EBITDA 884.6 897.1 1,648.9 1,759.8
Add back: Non-cash charge in 2007
for introducing a net-cash
settlement feature for options
granted prior to 2005 1.8 - 175.3 -
-------------------------------------------------------------------------
EBITDA (as adjusted) 886.4 897.1 1,824.2 1,759.8
=========================================================================
In addition to EBITDA, TELUS calculates EBITDA less capital expenditures
as a simple proxy for cash flow in its two reportable segments. EBITDA less
capital expenditures may be used for comparison to the reported results for
other telecommunications companies over time and is subject to the potential
comparability issues of EBITDA described above.
-------------------------------------------------------------------------
Quarters Six-month periods
ended June 30 ended June 30
($ millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
EBITDA 884.6 897.1 1,648.9 1,759.8
Capital expenditures (Capex) (481.8) (458.8) (863.7) (779.3)
-------------------------------------------------------------------------
EBITDA less capital expenditures 402.8 438.3 785.2 980.5
Add back: Non-cash charge in 2007
for introducing a net-cash
settlement feature for options
granted prior to 2005 1.8 - 175.3 -
-------------------------------------------------------------------------
EBITDA (as adjusted) less capital
expenditures 404.6 438.3 960.5 980.5
=========================================================================
11.2 Free cash flow
The Company reports free cash flow because it is a key measure used by
management to evaluate its performance. Free cash flow excludes certain
working capital changes and other sources and uses of cash, which are
disclosed in the Consolidated statements of cash flows. Free cash flow is not
a calculation based on Canadian or U.S. GAAP and should not be considered an
alternative to the Consolidated statements of cash flows. Free cash flow is a
measure that can be used to gauge TELUS' performance over time. Investors
should be cautioned that free cash flow as reported by TELUS may not be
comparable in all instances to free cash flow as reported by other companies.
While the closest GAAP measure is Cash provided by operating activities less
Cash used by investing activities, free cash flow is considered relevant
because it provides an indication of how much cash generated by operations is
available after capital expenditures, but before proceeds from divested
assets, and changes in certain working capital items (such as trade
receivables, which can be significantly distorted by securitization changes
that do not reflect operating results, and trade payables).
The following reconciles free cash flow with Cash provided by operating
activities less Cash used by investing activities:
-------------------------------------------------------------------------
Quarters Six-month periods
ended June 30 ended June 30
($ millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
Cash provided by operating
activities 1,061.9 813.0 1,522.5 1,486.1
Cash (used) by investing
activities (477.8) (486.1) (870.1) (802.2)
-------------------------------------------------------------------------
584.1 326.9 652.4 683.9
Net employee defined benefit
plans expense 21.0 1.3 45.0 2.9
Employer contributions to employee
defined benefit plans 14.7 45.0 48.6 75.5
Amortization of deferred gains on
sale-leaseback of buildings,
amortization of deferred charges
and other, net (4.3) 7.3 4.8 (8.6)
Reduction (increase) in
securitized accounts receivable (350.0) (135.0) - (35.0)
Non-cash working capital changes
except changes in taxes, interest,
and securitized accounts
receivable, and other (99.8) (81.8) (114.7) 85.0
Acquisition - 19.5 - 19.5
Proceeds from the sale of property
and other assets (1.3) (0.6) (1.3) (8.0)
Other investing activities (2.7) 8.4 7.7 11.4
-------------------------------------------------------------------------
Free cash flow 161.7 191.0 642.5 826.6
=========================================================================
The following shows management's calculation of free cash flow.
-------------------------------------------------------------------------
Quarters Six-month periods
ended June 30 ended June 30
($ millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
EBITDA 884.6 897.1 1,648.9 1,759.8
Restructuring costs net of
cash payments (7.3) 19.0 (24.3) 3.4
Share-based compensation (8.9) 12.7 129.7 21.1
Donations and securitization fees
included in Other expense (9.1) (7.6) (18.4) (12.1)
Cash interest paid (218.5) (271.5) (242.1) (284.6)
Cash interest received 5.6 0.8 7.5 23.3
Income taxes received (paid), less
investment tax credits received
that were previously recognized
in either EBITDA or capital
expenditures, and other (2.9) (0.7) 4.9 95.0
Capital expenditures (481.8) (458.8) (863.7) (779.3)
-------------------------------------------------------------------------
Free cash flow 161.7 191.0 642.5 826.6
=========================================================================
11.3 Definition of key operating indicators
These measures are industry metrics and are useful in assessing the
operating performance of a wireless company.
Average revenue per subscriber unit per month (ARPU) is calculated as
Network revenue divided by the average number of subscriber units on the
network during the period and expressed as a rate per month. Data ARPU is a
component of ARPU, calculated on the same basis for revenues derived from
services such as text messaging, mobile computing, personal digital assistance
devices, Internet browser activity and pay-per-use downloads.
Churn per month is calculated as the number of subscriber units
disconnected during a given period divided by the average number of subscriber
units on the network during the period, and expressed as a rate per month. A
prepaid subscriber is disconnected when the subscriber has no usage for
90 days following expiry of the prepaid card.
Cost of acquisition (COA) consists of the total of handset subsidies,
commissions, and advertising and promotion expenses related to the initial
subscriber acquisition during a given period. As defined, COA excludes costs
to retain existing subscribers (retention spend).
COA per gross subscriber addition is calculated as cost of acquisition
divided by gross subscriber activations during the period.
COA per gross subscriber addition to lifetime revenue is calculated as
cost of acquisition for new subscribers divided by expected lifetime revenue
of the subscriber base, expressed as a percentage.
EBITDA excluding COA is a measure of operational profitability normalized
for the period costs of adding new customers. COA was $150.4 million and
$279.9 million, respectively, for the second quarter and first six months of
2007 as compared to $120.9 million and $238.8 million, respectively, for the
same periods in 2006.
Lifetime revenue per subscriber is calculated as ARPU divided by the
churn per month. The metric provides a means of estimating the average total
revenue expected from existing subscribers.
Retention spend to Network revenue represents direct costs associated
with marketing and promotional efforts aimed at the retention of the existing
subscriber base divided by Network revenue.
11.4 Definition of liquidity and capital resource measures
Dividend payout ratio is defined as the most recent quarterly dividend
declared per share multiplied by four and divided by basic earnings per share
for the 12-month trailing period. The target guideline for the annual dividend
payout ratio on a prospective basis, rather than on a trailing basis, is 45 to
55% of sustainable net earnings.
EBITDA - excluding restructuring costs is used in the calculation of Net
debt to EBITDA and EBITDA interest coverage, consistent with the calculation
of the Leverage Ratio and the Coverage Ratio in credit facility covenants.
Restructuring costs were $28.3 million and $84.5 million, respectively, for
the twelve-month periods ended June 30, 2007 and 2006.
EBITDA - excluding restructuring costs interest coverage is defined as
EBITDA excluding restructuring costs divided by Net interest cost.
Historically, this measure is substantially the same as the Coverage Ratio
covenant in TELUS' credit facilities.
Interest coverage on long-term debt is calculated on a 12-month trailing
basis as Net income before interest expense on long-term debt and income tax
expense divided by interest expense on long-term debt. Interest expense on
long-term debt for the 12-month trailing period ending June 30, 2006 includes
losses on redemption of long-term debt. The 12-month periods ended June 30,
2007 and 2006 also include accruals for estimated costs to settle a lawsuit.
Net debt is a non-GAAP measure whose nearest GAAP measure is the sum of
Long-term debt and Current maturities of long-term debt, as reconciled below.
Net debt is one component of a ratio used to determine compliance with debt
covenants (refer to the description of Net debt to EBITDA below).
-------------------------------------------------------------------------
As at As at As at
June 30, Dec. 31, June 30,
($ millions) 2007 2006 2006
-------------------------------------------------------------------------
Long-term debt including current portion 4,806.9 4,908.2 4,708.3
Debt issuance costs netted against
long-term debt 32.5 19.9 22.2
Deferred hedging liability, net 1,081.8 838.5 990.5
Accumulated other comprehensive income
amounts arising from financial instruments
used to manage interest rate and currency
risks associated with U.S. Dollar
denominated debt (179.3) - -
-------------------------------------------------------------------------
Debt 5,741.9 5,766.6 5,721.0
Deduct Cash and temporary investments (2.2) 11.5 18.6
Add proceeds from securitized accounts
receivable 500.0 500.0 535.0
Net debt 6,239.7 6,278.1 6,274.6
=========================================================================
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, which at June 30, 2007,
is in respect of the U.S. $1,925.0 million debenture maturing June 1, 2011. At
December 31, 2006 and June 30, 2006, the deferred hedging liability was in
respect of the 2011 debenture and the U.S. $1,166.5 million debenture that
matured June 1, 2007. Management believes that Net debt is a useful measure
because it incorporates the exchange rate impact of cross currency swaps put
into place that fix the value of U.S. dollar-denominated debt, and because it
represents the amount of long-term debt obligations that are not covered by
available cash and temporary investments.
Net debt to EBITDA - excluding restructuring costs is defined as Net debt
as at the end of the period divided by the 12-month trailing EBITDA excluding
restructuring costs. TELUS' guideline range for Net debt to EBITDA is from 1.5
to 2.0 times. Historically, Net debt to EBITDA - excluding restructuring costs
is substantially the same as the Leverage Ratio covenant in TELUS' new credit
facilities.
Net debt to total capitalization provides a measure of the proportion of
debt used in the Company's capital structure. The long-term target ratio for
Net debt to total capitalization is 45 to 50%.
Net interest cost is defined as Financing costs before gains on
redemption and repayment of debt, calculated on a 12-month trailing basis. No
gains on redemption and repayment of debt were recorded in the respective
periods. Losses recorded on the redemption of long-term debt are included in
net interest cost. Net interest costs for the 12-months ending June 30, 2007
and 2006 are equivalent to reported quarterly financing costs over those
periods.
Total capitalization - book value excludes Accumulated other
comprehensive income and is calculated as follows.
-------------------------------------------------------------------------
As at As at As at
June 30, Dec. 31, June 30,
($ millions) 2007 2006 2006
-------------------------------------------------------------------------
Net debt 6,239.7 6,278.1 6,274.6
Non-controlling interests 22.1 23.6 25.3
Shareholders equity 6,614.8 6,928.1 6,839.1
Less: Accumulated other comprehensive income 125.8 - -
-------------------------------------------------------------------------
Total capitalization - book value 13,002.4 13,229.8 13,139.0
=========================================================================
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 3, 2007
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary