Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of ___November___ 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:
Third Quarter Results
dated November 2, 2007
CONSOLIDATED FINANCIAL STATEMENTS
and
MANAGEMENT'S DISCUSSION AND ANALYSIS
______________________________________________________________________________
TELUS CORPORATION
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2007
______________________________________________________________________________
--------------------------------------------------------------------------------------------------------------------------------
interim consolidated statements of income (unaudited)
--------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
Periods ended September 30 (millions except per share amounts) 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
(restated - (restated -
Note 2(b)) Note 2(b))
OPERATING REVENUES $ 2,309.9 $ 2,210.7 $ 6,743.6 $ 6,426.4
--------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,316.5 1,245.8 4,093.4 3,654.3
Restructuring costs (Note 6) 6.4 12.5 14.3 59.9
Depreciation 332.5 325.8 968.5 1,000.2
Amortization of intangible assets 70.1 57.5 192.2 168.3
--------------------------------------------------------------------------------------------------------------------------------
1,725.5 1,641.6 5,268.4 4,882.7
--------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 584.4 569.1 1,475.2 1,543.7
Other expense, net 8.0 4.0 30.3 17.9
Financing costs (Note 7) 86.2 116.6 331.0 371.1
--------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND NON-CONTROLLING
INTEREST 490.2 448.5 1,113.9 1,154.7
Income taxes (Note 8) 78.6 126.5 251.6 261.3
Non-controlling interests 1.7 2.4 4.5 7.1
--------------------------------------------------------------------------------------------------------------------------------
NET INCOME AND COMMON SHARE AND NON-VOTING
SHARE INCOME 409.9 319.6 857.8 886.3
OTHER COMPREHENSIVE INCOME (Note 16(d))
Change in unrealized fair value of derivatives
designated as cash flow hedges 8.5 -- 64.3 --
Foreign currency translation adjustment arising
from translating financial statements of
self-sustaining foreign operations (1.1) 0.4 (4.9) 1.2
Change in unrealized fair value of
available-for-sale financial assets (0.2) -- (0.3) --
--------------------------------------------------------------------------------------------------------------------------------
7.2 0.4 59.1 1.2
--------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 417.1 $ 320.0 $ 916.9 $ 887.5
================================================================================================================================
NET INCOME PER COMMON SHARE AND NON-VOTING SHARE
(Note 9)
- Basic $ 1.24 $ 0.94 $ 2.57 $ 2.57
- Diluted $ 1.23 $ 0.92 $ 2.55 $ 2.54
DIVIDENDS DECLARED PER COMMON SHARE AND
NON-VOTING SHARE $ 0.375 $ 0.275 $ 1.125 $ 0.825
TOTAL WEIGHTED AVERAGE COMMON SHARES AND
NON-VOTING SHARES OUTSTANDING
- Basic 330.1 341.4 335.5 345.2
- Diluted 332.8 346.0 336.2 348.8
The accompanying notes are an integral part of these interim consolidated financial statements
--------------------------------------------------------------------------------------------------------------------------------
interim consolidated statements of retained earnings and
accumulated other comprehensive income (loss) (unaudited)
--------------------------------------------------------------------------------------------------------------------------------
Nine-month periods ended September 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 857.8 59.1 916.9 886.3 1.2 887.5
--------------------------------------------------------------------------------------------------------------------------------
1,937.9 (118.6) 1,819.3 1,736.0 (6.1) 1,729.9
Common Share and Non-Voting Share
dividends paid, or payable, in cash (374.3) -- (374.3) (284.5) -- (284.5)
Purchase of Common Shares and
Non-Voting Shares in excess of
stated capital (Note 16(g)) (400.0) -- (400.0) (376.5) -- (376.5)
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) $ 1,167.3 $ (118.6) $ 1,048.7 $ 1,093.2 $ (6.1) $ 1,087.1
================================================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements
--------------------------------------------------------------------------------------------------------------------------------
interim consolidated balance sheets (unaudited)
--------------------------------------------------------------------------------------------------------------------------------
As at (millions) September 30, 2007 December 31, 2006
--------------------------------------------------------------------------------------------------------------------------------
(restated -
Notes 2(b)-(c))
ASSETS
Current Assets
Cash and temporary investments, net $ 1.0 $ --
Short-term investments 44.1 110.2
Accounts receivable (Notes 12,18(b)) 590.7 707.2
Income and other taxes receivable 269.0 95.4
Inventories 170.6 196.4
Prepaid expenses and other (Note 18(b)) 209.0 195.3
Current portion of derivative assets 16.4 40.4
--------------------------------------------------------------------------------------------------------------------------------
1,300.8 1,344.9
--------------------------------------------------------------------------------------------------------------------------------
Capital Assets, Net (Note 13)
Property, plant, equipment and other 7,354.0 7,466.5
Intangible assets subject to amortization 779.0 549.2
Intangible assets with indefinite lives 2,966.5 2,966.4
--------------------------------------------------------------------------------------------------------------------------------
11,099.5 10,982.1
--------------------------------------------------------------------------------------------------------------------------------
Other Assets
Deferred charges (Note 18(b)) 1,098.2 956.6
Investments 30.3 35.2
Goodwill (Note 14) 3,168.5 3,169.5
--------------------------------------------------------------------------------------------------------------------------------
4,297.0 4,161.3
--------------------------------------------------------------------------------------------------------------------------------
$ 16,697.3 $ 16,488.3
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ -- $ 11.5
Accounts payable and accrued liabilities (Note 18(b)) 1,438.5 1,363.6
Income and other taxes payable 5.1 10.3
Restructuring accounts payable and accrued liabilities (Note 6) 32.1 53.1
Dividends payable 123.4 --
Advance billings and customer deposits (Note 18(b)) 614.5 606.3
Current maturities of long-term debt (Note 15) 6.0 1,433.5
Current portion of derivative liabilities 13.6 165.8
Current portion of future income taxes 426.5 137.2
--------------------------------------------------------------------------------------------------------------------------------
2,659.7 3,781.3
--------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (Note 15) 4,496.6 3,474.7
--------------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities (Note 18(b)) 1,760.8 1,257.3
--------------------------------------------------------------------------------------------------------------------------------
Future Income Taxes 1,076.8 1,023.3
--------------------------------------------------------------------------------------------------------------------------------
Non-Controlling Interests 23.8 23.6
--------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Note 16) 6,679.6 6,928.1
--------------------------------------------------------------------------------------------------------------------------------
$ 16,697.3 $ 16,488.3
================================================================================================================================
Commitments and Contingent Liabilities (Note 17)
The accompanying notes are an integral part of these interim consolidated financial statements
--------------------------------------------------------------------------------------------------------------------------------
interim consolidated statements of cash flows (unaudited)
--------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
Periods ended September 30 (millions) 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 409.9 $ 319.6 $ 857.8 $ 886.3
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 402.6 383.3 1,160.7 1,168.5
Future income taxes 222.7 146.3 393.4 284.8
Share-based compensation (Note 10(a)) (3.3) 14.2 126.4 35.3
Net employee defined benefit plans expense (24.0) (1.5) (69.0) (4.4)
Employer contributions to employee defined benefit plans (18.9) (28.8) (67.5) (104.3)
Restructuring costs, net of cash payments (Note 6) 3.3 (1.2) (21.0) 2.2
Amortization of deferred gains on sale-leaseback of
buildings, amortization of deferred charges and other, net 5.9 3.9 1.1 12.5
Net change in non-cash working capital (Note 18(c)) (166.4) (265.4) (27.6) (224.4)
--------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 831.8 570.4 2,354.3 2,056.5
--------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (Notes 5, 13) (434.1) (423.9) (1,297.8) (1,203.2)
Acquisitions -- (25.0) -- (44.5)
Proceeds from the sale of property and other assets 4.1 6.9 5.4 14.9
Change in non-current materials and supplies, purchase
of investments and other -- (9.0) (7.7) (20.4)
--------------------------------------------------------------------------------------------------------------------------------
Cash used by investing activities (430.0) (451.0) (1,300.1) (1,253.2)
--------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 0.1 37.2 0.7 82.9
Dividends to shareholders -- (93.8) (250.9) (284.5)
Purchase of Common Shares and Non-Voting Shares for
cancellation (Note 16(g)) (232.2) (119.7) (602.4) (600.7)
Long-term debt issued (Note 15) 2,679.9 499.0 4,771.5 1,341.8
Redemptions and repayment of long-term debt (Note 15) (2,850.8) (448.9) (4,955.4) (1,064.4)
Partial repayment of deferred hedging liability -- -- -- (309.4)
Dividends paid by a subsidiary to non-controlling interests -- -- (4.3) (3.0)
Other -- -- (0.9) --
--------------------------------------------------------------------------------------------------------------------------------
Cash used by financing activities (403.0) (126.2) (1,041.7) (837.3)
--------------------------------------------------------------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in cash and temporary investments, net (1.2) (6.8) 12.5 (34.0)
Cash and temporary investments, net, beginning of period 2.2 (18.6) (11.5) 8.6
--------------------------------------------------------------------------------------------------------------------------------
Cash and temporary investments, net, end of period $ 1.0 $ (25.4) $ 1.0 $ (25.4)
================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Interest (paid) (Note 18(c)) $ (41.1) $ (13.0) $ (283.2) $ (297.6)
================================================================================================================================
Interest received $ 1.4 $ 0.6 $ 8.9 $ 23.9
================================================================================================================================
Income taxes (inclusive of Investment Tax Credits (Note 8))
(paid) received, net $ (1.7) $ (0.6) $ 0.9 $ 94.4
================================================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements
------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
------------------------------------------------------------------------------
SEPTEMBER 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
----------------------------------------------------- -------- ----------------------------------------------------------------
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 evolved and converged with
International Financial Reporting Standards ("IFRS") 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 IFRS 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 IFRS; and
standards not subject to a joint-convergence project will be exposed in an
omnibus manner for introduction at the time of the complete changeover to IFRS.
As the International Accounting Standards Board currently, and expectedly,
has projects underway that should result in new pronouncements that continue to
evolve IFRS, and that this Canadian 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 Canadian 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:
--------------------------------------------------------------------------------------------------------------------------------
notes to interim consolidated financial statements (unaudited)
--------------------------------------------------------------------------------------------------------------------------------
As at (millions) September 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 1,912.2 1,357.9 2,240.2 3,598.1
--------------------------------------------------------------------------------------------------------------------------------
Hedge value necessary to reflect rates of exchange
in hedging items 1,038.3 125.4 710.3 835.7
Difference arising from newly applied CICA
recommendations(1) 163.2 14.2 250.8 265.0
--------------------------------------------------------------------------------------------------------------------------------
Fair value of hedging items $ 1,201.5 $ 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 16(d), 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 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
-------------------------------------------------- ------------------ ------------- ---------------------------------------------
.. Short-term marketable security investments(3) X . The Company has selected this method as it
held as at January 1, 2007 better reflects management's investment
intentions
-------------------------------------------------- ------------------ ------------- ---------------------------------------------
.. Long-term investments(3) held as at January X . The Company has selected classification as
1, 2007 available-for-sale as it better reflects
management's investment intentions
-------------------------------------------------- ------------------ ------------- ---------------------------------------------
.. Stand-alone derivatives which are a part of an X . 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 cash flow hedging relationship) or held for trading is
that unrealized changes in the fair values of financial instruments
classified as available-for-sale, or the effective portion of unrealized
changes in the fair value of financial instruments 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.
* Accounts receivable that are available-for-sale to an arm's-length
securitization trust are accounted for as loans and receivables. The
Company has selected this method as the benefits that would have been
expected to arise from using the available-for-sale method were not
expected to exceed the costs of selecting and implementing that method.
* 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.
* 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.
* 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 CICA Handbook
Sections 1530, 3855 and 3865, on the Company's results of operations for
the three-month and nine-month periods ended September 30, 2007, are as
set out in the following table:
Periods ended September 30, 2007
(millions except per share amounts) Three months Nine 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 $ 2,309.9 $ -- $ 2,309.9 $ 6,743.6 $ -- $ 6,743.6
--------------------------------------------------------------------------------------------------------------------------------
Operating expenses 1,725.5 -- 1,725.5 5,268.4 -- 5,268.4
--------------------------------------------------------------------------------------------------------------------------------
Operating income 584.4 -- 584.4 1,475.2 -- 1,475.2
Other expenses, net 9.5 (1.5) 8.0 31.7 (1.4) 30.3
Financing costs 86.8 (0.6) 86.2 336.6 (5.6) 331.0
--------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 488.1 2.1 490.2 1,106.9 7.0 1,113.9
Income taxes 78.4 0.2 78.6 249.7 1.9 251.6
Non-controlling interests 1.7 -- 1.7 4.5 -- 4.5
--------------------------------------------------------------------------------------------------------------------------------
Net income and Common Share and
Non-Voting Share income 408.0 1.9 409.9 852.7 5.1 857.8
Other comprehensive income
Change in unrealized fair
value of derivatives designated as
cash flow hedges -- 8.5 8.5 -- 64.3 64.3
Foreign currency translation adjustment
arising from translating financial
statements of self-sustaining foreign
operations -- (1.1) (1.1) -- (4.9) (4.9)
Change in unrealized fair value of
available-for-sale financial assets -- (0.2) (0.2) -- (0.3) (0.3)
--------------------------------------------------------------------------------------------------------------------------------
-- 7.2 7.2 -- 59.1 59.1
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 408.0 $ 9.1 $ 417.1 $ 852.7 $ 64.2 $ 916.9
================================================================================================================================
Net income per Common Share and
Non-Voting Share
- Basic $ 1.24 $ -- $ 1.24 $ 2.56 $ 0.01 $ 2.57
- Diluted $ 1.23 $ -- $ 1.23 $ 2.54 $ 0.01 $ 2.55
The effects of the application of CICA Handbook Sections 1530, 3855 and
3865, on the Company's retained earnings for the nine-month period ended
September 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
Nine-month period ended September 30, 2007 (millions) and HB 3865 HB 3865 reported
--------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 1,080.1 $ -- $ 1,080.1
Income 852.7 5.1 857.8
--------------------------------------------------------------------------------------------------------------------------------
1,932.8 5.1 1,937.9
Common Share and Non-Voting Share dividends paid,
or payable, in cash (374.3) -- (374.3)
Purchase of Common Shares and Non-Voting Shares in
excess of stated capital (400.0) -- (400.0)
Other 3.7 -- 3.7
--------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 1,162.2 $ 5.1 $ 1,167.3
================================================================================================================================
The effects of the application of CICA Handbook Sections 1530, 3855 and 3865,
on the Company's financial position as at September 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 September 30, 2007 (millions) HB 3855 and HB 3865 and HB 3865 reported
--------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and temporary investments, net $ 1.0 $ -- $ 1.0
Short-term investments 42.7 1.4 44.1
Accounts receivable 590.7 -- 590.7
Income and other taxes receivable 269.0 -- 269.0
Inventories 170.6 -- 170.6
Prepaid expenses and other 209.0 -- 209.0
Derivative assets 15.5 0.9 16.4
--------------------------------------------------------------------------------------------------------------------------------
1,298.5 2.3 1,300.8
--------------------------------------------------------------------------------------------------------------------------------
Capital assets, net 11,099.5 -- 11,099.5
--------------------------------------------------------------------------------------------------------------------------------
Other assets
Deferred charges 1,121.4 (23.2) 1,098.2
Investments 28.9 1.4 30.3
Goodwill 3,168.5 -- 3,168.5
--------------------------------------------------------------------------------------------------------------------------------
4,318.8 (21.8) 4,297.0
--------------------------------------------------------------------------------------------------------------------------------
$ 16,716.8 $ (19.5) $ 16,697.3
================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 1,438.5 $ -- $ 1,438.5
Income and other taxes payable 5.1 -- 5.1
Restructuring accounts payable and accrued liabilities 32.1 -- 32.1
Dividends payable 123.4 -- 123.4
Advance billings and customer deposits 614.5 -- 614.5
Current maturities of long-term debt 6.0 -- 6.0
Current portion of derivative liabilities 7.5 6.1 13.6
Current portion of future income taxes 426.5 -- 426.5
--------------------------------------------------------------------------------------------------------------------------------
2,653.6 6.1 2,659.7
--------------------------------------------------------------------------------------------------------------------------------
Long-term debt 4,528.1 (31.5) 4,496.6
--------------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 1,597.6 163.2 1,760.8
--------------------------------------------------------------------------------------------------------------------------------
Future income taxes 1,127.0 (50.2) 1,076.8
--------------------------------------------------------------------------------------------------------------------------------
Non-controlling interests 23.8 -- 23.8
--------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common Shares 2,230.9 -- 2,230.9
Non-Voting Shares 3,252.8 -- 3,252.8
--------------------------------------------------------------------------------------------------------------------------------
5,483.7 -- 5,483.7
--------------------------------------------------------------------------------------------------------------------------------
Cumulative foreign currency translation adjustment (6.4) 6.4 --
--------------------------------------------------------------------------------------------------------------------------------
Retained earnings and accumulated other comprehensive income
Retained earnings 1,162.2 5.1 1,167.3
Accumulated other comprehensive income (loss) -- (118.6) (118.6)
--------------------------------------------------------------------------------------------------------------------------------
1,162.2 (113.5) 1,048.7
--------------------------------------------------------------------------------------------------------------------------------
Contributed surplus 147.2 -- 147.2
--------------------------------------------------------------------------------------------------------------------------------
6,786.7 (107.1) 6,679.6
--------------------------------------------------------------------------------------------------------------------------------
$ 16,716.8 $ (19.5) $ 16,697.3
================================================================================================================================
(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 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) September 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 $ 308.5 $ 118.0 $ 426.5 $ 93.2 $ 44.0 $ 137.2
Future Income Taxes $ 1,194.8 $ (118.0) $ 1,076.8 $ 1,067.3 $ (44.0) $ 1,023.3
--------------------------------------------------------------------------------------------------------------------------------
(d) Financial instruments - disclosure; presentation
In respect of its 2007 fiscal year, the Company must comply with the
recommendations of the CICA for financial instrument disclosure and
presentation (CICA Handbook Section 3861). As an activity consistent with
Canadian GAAP being evolved and converged with IFRS, the existing
recommendations for financial instrument disclosure will be replaced with new
recommendations (CICA Handbook Section 3862); the existing recommendations for
financial instrument presentation will be carried forward, unchanged (CICA
Handbook Section 3863).
Commencing with the Company's 2008 fiscal year, the new recommendations of
the CICA for financial instrument disclosures 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.
(e) Inventories
Commencing with the Company's 2008 fiscal year, the new, IFRS-converged
recommendations of the CICA for accounting for inventories (CICA Handbook
Section 3031) will apply to the Company. The new recommendations provide more
guidance on the measurement and disclosure requirements for inventories;
significantly, the new recommendations allow the reversals of previous
write-downs to net realizable value where there is a subsequent increase in the
value of inventories. The Company does not expect to be materially affected by
the 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 on a number of bases, 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 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, Policies
September 30 ($ in millions) and guidelines 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Components of debt and coverage ratios
Net debt(1) $ 6,121.4 $ 6,147.2
Total capitalization - book value $ 12,943.4 $ 13,157.4
EBITDA - excluding restructuring costs(2) $ 3,536.2 $ 3,542.0
Net interest cost(3) $ 464.6 $ 542.8
Debt ratios
Net debt to total capitalization 47.3% 46.7%
Net debt to EBITDA - excluding restructuring costs 1.5:1 - 2.0:1 1.7 1.7
Coverage ratios
Interest coverage on long-term debt(4) 3.9 3.3
EBITDA - excluding restructuring costs interest coverage(5) 7.6 6.5
Other measures
Dividend payout ratio of sustainable net earnings 45 - 55% 46% 39%
--------------------------------------------------------------------------------------------------------------------------------
(1) Net debt is calculated as follows:
As at September 30 2007 2006
----------------------------------------------------------------------------------------------------------------------------
Long-term debt (Note 15) $ 4,502.6 $ 4,764.5
Debt issuance costs netted against long-term debt 31.5 21.5
Derivative liabilities, net 1,201.5 985.8
Accumulated other comprehensive income amounts arising from financial instruments
used to manage interest rate and currency risks associated with U.S. Dollar
denominated debt (163.2) --
Cash and temporary investments, net (1.0) 25.4
Securitized accounts receivable (Note 12) 550.0 350.0
--------------------------------------------------------------------------------------------------------------------------------
Net debt $ 6,121.4 $ 6,147.2
================================================================================================================================
(2) EBITDA - excluding restructuring costs is calculated as follows:
Twelve-month periods ended 2007 2006
September 30
---------------------------------- ------------------------------------------- ----------------------------------------------
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) $(2,712.2) $3,590.3 $2,635.9 $3,514.0 $(2,560.9) $3,295.3 $2,712.2 $3,446.6
Restructuring costs (Note 6) (59.9) 67.8 14.3 22.2 (18.4) 53.9 59.9 95.4
-----------------------------------------------------------------------------------------------------------------------------
EBITDA - excluding restructuring
costs $(2,772.1) $3,658.1 $2,650.2 $3,536.2 $(2,579.3) $3,349.2 $2,772.1 $3,542.0
=============================================================================================================================
(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 share capital and lower net
debt, partly offset by higher retained earnings.
Changes in 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 September 30,
2007, when compared to one year earlier.
Interest coverage on long-term debt improved by 0.3 because of lower
interest expenses and improved by 0.3 because of increased income before
taxes and interest expense. The EBITDA - excluding restructuring costs
interest coverage ratio improved by 1.1 due to lower net interest costs.
The dividend payout ratio for the twelve-month period ended September 30,
2007, was at 46% and the ratio calculated to exclude 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 was also 46%.
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) September 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 $ 44.1 $ 44.1 $ 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 $ 5.5 0.2 0.2 $ -- -- --
--------------------------------------------------------------------------------------------------------------------------------
$ 44.3 $ 44.3 $ 110.2 $ 110.2
================================================================================================================================
Derivatives used to manage changes in share-based
compensation costs and classified as held for
- Trading (Note 10(b)) 2012 $ 238.3 $ 4.8 $ -- $ -- $ --
- Net amounts due from counterparties (1.2)
----------
3.6 $ 3.6
----------
- Hedging(1) (Note 10(c)) 2009 $ 71.3 18.2 $ 48.7 6.0 11.4
- Net amounts due from counterparties (4.4)
----------
13.8 13.8
--------------------------------------------------------------------------------------------------------------------------------
$ 17.4 $ 17.4 $ 6.0 $ 11.4
================================================================================================================================
Long-term investments designated as available-
for-sale upon initial recognition $ 30.3 $ 30.3 $ 35.2 $ 36.9
================================================================================================================================
As at (millions) September 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) $4,502.6 $4,886.1 $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 1,201.5 $2,950.5 710.3
---------- -----------
1,201.5 835.7
- Interest payable 32.3 6.3
---------- -----------
Net 1,233.8 1,233.8 842.0 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
--------------------------------------------------------------------------------------------------------------------------------
$5,736.4 $6,119.9 $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 $ 65.8 $ 6.1 $ 6.1 $ 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 2008 $ 106.8 $ 7.4 $ 7.4 $ 141.5 $ -- $ (5.6)
================================================================================================================================
(1) Designated as cash flow hedging items.
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
September 30 (millions) 2007 2006 2007 2006 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Operating revenues
External revenue $1,204.6 $1,200.3 $1,105.3 $1,010.4 $ -- $ -- $2,309.9 $2,210.7
Intersegment revenue 29.7 23.5 7.0 6.0 (36.7) (29.5) -- --
--------------------------------------------------------------------------------------------------------------------------------
1,234.3 1,223.8 1,112.3 1,016.4 (36.7) (29.5) 2,309.9 2,210.7
--------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Operations expense 761.6 742.5 591.6 532.8 (36.7) (29.5) 1,316.5 1,245.8
Restructuring costs 6.4 11.7 -- 0.8 -- -- 6.4 12.5
--------------------------------------------------------------------------------------------------------------------------------
768.0 754.2 591.6 533.6 (36.7) (29.5) 1,322.9 1,258.3
--------------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $ 466.3 $ 469.6 $ 520.7 $ 482.8 $ -- $ -- $ 987.0 $ 952.4
================================================================================================================================
CAPEX(2) $ 302.6 $ 311.4 $ 131.5 $ 112.5 $ -- $ -- $ 434.1 $ 423.9
================================================================================================================================
EBITDA less CAPEX $ 163.7 $ 158.2 $ 389.2 $ 370.3 $ -- $ -- $ 552.9 $ 528.5
================================================================================================================================
Operating expenses
(as adjusted)(3)
Operations expense
(as adjusted)(3) 771.1 742.5 589.3 532.8 (36.7) (29.5) 1,323.7 1,245.8
Restructuring costs 6.4 11.7 -- 0.8 -- -- 6.4 12.5
---------------------------------------------------------------------------------------------------------------------------------
777.5 754.2 589.3 533.6 (36.7) (29.5) 1,330.1 1,258.3
---------------------------------------------------------------------------------------------------------------------------------
EBITDA
(as adjusted)(3) $ 456.8 $ 469.6 $ 523.0 $ 482.8 $ -- $ -- $ 979.8 $ 952.4
=================================================================================================================================
CAPEX(2) $ 302.6 $ 311.4 $ 131.5 $ 112.5 $ -- $ -- $ 434.1 $ 423.9
=================================================================================================================================
EBITDA (as adjusted)
less CAPEX $ 154.2 $ 158.2 $ 391.5 $ 370.3 $ -- $ -- $ 545.7 $ 528.5
=================================================================================================================================
EBITDA (as adjusted)
(from above) $ 979.8 $ 952.4
Incremental charge(3) (7.2) --
-----------------------------------------------
EBITDA (from above) 987.0 952.4
Depreciation 332.5 325.8
Amortization 70.1 57.5
-----------------------------------------------
Operating income 584.4 569.1
Other expense, net 8.0 4.0
Financing costs 86.2 116.6
-----------------------------------------------
Income before income
taxes and non-
controlling interests 490.2 448.5
Income taxes 78.6 126.5
Non-controlling
interests 1.7 2.4
-----------------------------------------------
Net income $ 409.9 $ 319.6
===============================================
(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 (recovery from) operations of $(7.2)
and did not result in an immediate cash outflow (inflow). 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.
Nine-month periods ended Wireline Wireless Eliminations Consolidated
September 30 (millions) 2007 2006 2007 2006 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Operating revenues
External revenue $3,590.3 $3,588.8 $3,153.3 $2,837.6 $ -- $ -- $6,743.6 $6,426.4
Intersegment revenue 83.5 71.8 20.0 17.1 (103.5) (88.9) -- --
--------------------------------------------------------------------------------------------------------------------------------
3,673.8 3,660.6 3,173.3 2,854.7 (103.5) (88.9) 6,743.6 6,426.4
--------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Operations expense 2,439.1 2,211.5 1,757.8 1,531.7 (103.5) (88.9) 4,093.4 3,654.3
Restructuring costs 13.6 56.4 0.7 3.5 -- -- 14.3 59.9
--------------------------------------------------------------------------------------------------------------------------------
2,452.7 2,267.9 1,758.5 1,535.2 (103.5) (88.9) 4,107.7 3,714.2
--------------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $1,221.1 $1,392.7 $1,414.8 $1,319.5 $ -- $ -- $2,635.9 $2,712.2
================================================================================================================================
CAPEX(2) $ 882.0 $ 881.8 $ 415.8 $ 321.4 $ -- $ -- $1,297.8 $1,203.2
================================================================================================================================
EBITDA less CAPEX $ 339.1 $ 510.9 $ 999.0 $ 998.1 $ -- $ -- $1,338.1 $1,509.0
================================================================================================================================
Operating expenses
(as adjusted)(3)
Operations expense
(as adjusted)(3) 2,295.5 2,211.5 1,733.3 1,531.7 (103.5) (88.9) 3,925.3 3,654.3
Restructuring costs 13.6 56.4 0.7 3.5 -- -- 14.3 59.9
--------------------------------------------------------------------------------------------------------------------------------
2,309.1 2,267.9 1,734.0 1,535.2 (103.5) (88.9) 3,939.6 3,714.2
--------------------------------------------------------------------------------------------------------------------------------
EBITDA
(as adjusted)(3) $1,364.7 $1,392.7 $1,439.3 $1,319.5 $ -- $ -- $2,804.0 $2,712.2
================================================================================================================================
CAPEX(2) $ 882.0 $ 881.8 $ 415.8 $ 321.4 $ -- $ -- $1,297.8 $1,203.2
================================================================================================================================
EBITDA (as adjusted)
less CAPEX $ 482.7 $ 510.9 $1,023.5 $ 998.1 $ -- $ -- $1,506.2 $1,509.0
================================================================================================================================
EBITDA (as adjusted)
(from above) $2,804.0 $2,712.2
Incremental charge(3) 168.1 --
----------------------------------------------------
EBITDA (from above) 2,635.9 2,712.2
Depreciation 968.5 1,000.2
Amortization 192.2 168.3
----------------------------------------------------
Operating income 1,475.2 1,543.7
Other expense, net 30.3 17.9
Financing costs 331.0 371.1
----------------------------------------------------
Income before income
taxes and non-
controlling interests 1,113.9 1,154.7
Income taxes
Non-controlling 251.6 261.3
interests 4.5 7.1
----------------------------------------------------
Net income $ 857.8 $ 886.3
====================================================
(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 $168.1 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.
6 restructuring costs
Three months Nine months
Periods ended September 30 (millions) 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Restructuring costs
Workforce
Voluntary $ 2.6 $ 6.9 $ 3.7 $ 28.7
Involuntary 3.1 5.0 8.8 28.9
Other 0.7 0.6 1.8 2.3
--------------------------------------------------------------------------------------------------------------------------------
6.4 12.5 14.3 59.9
--------------------------------------------------------------------------------------------------------------------------------
Disbursements
Workforce
Voluntary -- 4.6 14.1 20.3
Involuntary and other 3.0 8.3 19.8 34.5
Other 0.1 0.8 1.4 2.9
--------------------------------------------------------------------------------------------------------------------------------
3.1 13.7 35.3 57.7
--------------------------------------------------------------------------------------------------------------------------------
Expenses greater than (less than) disbursements 3.3 (1.2) (21.0) 2.2
Restructuring accounts payable and accrued liabilities
Balance, beginning of period 28.8 60.5 53.1 57.1
--------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 32.1 $ 59.3 $ 32.1 $ 59.3
================================================================================================================================
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 approximately $25 million.
7 financing costs
Three months Nine months
Periods ended September 30 (millions) 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt $ 108.2 $ 125.3 $ 353.9 $ 375.2
Interest on short-term obligations and other 0.6 0.3 1.0 2.9
Foreign exchange(1) 3.5 (0.3) 11.1 4.5
--------------------------------------------------------------------------------------------------------------------------------
112.3 125.3 366.0 382.6
Interest income
Interest on tax refunds (25.3) (7.9) (25.5) (9.2)
Other interest income (0.8) (0.8) (9.5) (2.3)
--------------------------------------------------------------------------------------------------------------------------------
(26.1) (8.7) (35.0) (11.5)
--------------------------------------------------------------------------------------------------------------------------------
$ 86.2 $ 116.6 $ 331.0 $ 371.1
=================================================================================================================================
(1)For the three-month and nine-month periods ended September 30, 2007,
these amounts include gains of $0.2 (2006 - $NIL) and $0.5 (2006 - $0.1),
respectively, in respect of cash flow hedge ineffectiveness.
8 income taxes
Three months Nine months
Periods ended September 30 (millions) 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Current $ (144.1) $ (19.8) $ (141.8) $ (23.5)
Future 222.7 146.3 393.4 284.8
---------------------------------------------------------------------------------------------------------------------------------
$ 78.6 $ 126.5 $ 251.6 $ 261.3
=================================================================================================================================
The Company's income tax expense differs from that calculated by applying
statutory rates for the following reasons:
Three-month periods ended September 30 ($ in millions) 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at statutory
income tax rates $ 164.6 33.6% $ 150.7 33.6%
Tax rate differential on, and consequential adjustments
from, reassessment of prior year tax issues (76.3) (24.9)
Revaluation of future income tax liability to reflect
future statutory income tax rates (8.6) --
Share option award compensation 1.1 1.8
Other (2.2) (1.1)
---------------------------------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated Statements of Income $ 78.6 16.0% $ 126.5 28.2%
=================================================================================================================================
Nine-month periods ended September 30 ($ in millions) 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at statutory
income tax rates $ 373.8 33.6% $ 388.0 33.6%
Tax rate differential on, and consequential adjustments
from, reassessment of prior year tax issues (76.3) (23.9)
Revaluation of future income tax liability to reflect
future statutory income tax rates (36.5) (107.0)
Share option award compensation (5.4) 4.9
Other (4.0) (0.7)
---------------------------------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated Statements of Income $ 251.6 22.6% $ 261.3 22.6%
=================================================================================================================================
The Company conducts research and development activities, which are eligible to
earn Investment Tax Credits. During the three-month and nine-month periods
ended September 30, 2007, the Company recorded Investment Tax Credits of $NIL
(2006 - $NIL) and $10.6 million (2006 - $12.6 million), respectively, $NIL
(2006 - $NIL) 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 Nine months
Periods ended September 30 (millions) 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
Basic total weighted average Common Shares and Non-Voting
Shares outstanding 330.1 341.4 333.5 345.2
Effect of dilutive securities
Exercise of share option awards 2.7 4.6 2.7 3.6
---------------------------------------------------------------------------------------------------------------------------------
Diluted total weighted average Common Shares and Non-Voting Shares outstanding 332.8 346.0 336.2 348.8
=================================================================================================================================
For the three-month and nine-month periods ended September 30, 2007, certain
outstanding share option awards, in the amount of 1.3 million (2006 - NIL) and
0.3 million (2006 - 0.3 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.
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 September 30 2007 2006
--------------------------------------------------------------------------------- ----------------------------------------------
Operations Associated Statement of Associated Statement of
expense operating cash cash flows Operations operating cash flows
(millions) (recovery) outflows adjustment expense cash outflows adjustment
---------------------------------------------------------------------------------------------------------------------------------
Share option awards(1) $ (4.1) $ (6.8) $ (10.9) $ 5.2 $ -- $ 5.2
Restricted stock units 7.8 (0.2) 7.6 9.6 (0.6) 9.0
Employee share purchase plan 9.2 (9.2) -- 8.6 (8.6) --
---------------------------------------------------------------------------------------------------------------------------------
$ 12.9 $ (16.2) $ (3.3) $ 23.4 $ (9.2) $ 14.2
=================================================================================================================================
(1) For the three-month period ended September 30, 2007, the expense
(recovery) arising from share options with the net-cash settlement
feature, net of hedging effects, was $(7.3) (2006 - $NIL).
Nine-month periods ended September 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) $ 179.1 $ (74.1) $ 105.0 $ 14.5 $ -- $ 14.5
Restricted stock units 23.7 (2.3) 21.4 23.9 (3.1) 20.8
Employee share purchase plan 26.9 (26.9) -- 25.0 (25.0) --
---------------------------------------------------------------------------------------------------------------------------------
$ 229.7 $ (103.3) $ 126.4 $ 63.4 $ (28.1) $ 35.3
=================================================================================================================================
(1) For the nine-month period ended September 30, 2007, the expense arising
from share options with the net-cash settlement feature, net of hedging
effects, was $168.3 (2006 - $NIL).
For the three-month and nine-month periods ended September 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 $1.1 million (2006
- $NIL) and $10.0 million (2006 - $NIL), respectively. For the three-month and
nine-month periods ended September 30, 2007, the income tax benefit arising
from share-based compensation was $3.3 million (2006 - $6.1 million) and $81.0
million (2006 - $16.5 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 Nine months
Periods ended September 30 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
Share option award fair value (per share option) $ 11.46 $ 11.96 $ 12.46 $ 12.35
Risk free interest rate 4.5% 4.2% 4.1% 4.0%
Expected lives(1) (years) 4.6 4.5 4.5 4.6
Expected volatility 24.6% 30.0% 26.4% 35.9%
Dividend yield 2.8% 2.3% 2.6% 2.6%
---------------------------------------------------------------------------------------------------------------------------------
(1) The maximum contractual term of the share option awards granted in 2007 and
2006 was seven years.
The risk free interest rate used in determining the fair value of the share
option awards is based on a Government of Canada yield curve that is current at
the time of grant. The expected lives of the share option awards are based on
historical share option award exercise data of the Company. Similarly, expected
volatility considers the historical volatility of the Company's Non-Voting
Shares. The dividend yield is the annualized dividend current at the date of
grant divided by the share option award exercise price. Dividends are not paid
on unexercised share option awards and are not subject to vesting.
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. The following table sets out
the number of affected outstanding share option awards and the composition of
their capped exercise date fair values.
As at September 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 $ 35.97 $ 30.31 $ 21.77 $ 26.88
Weighted average grant date fair value -- -- 6.70 3.24
---------------------------------------------------------------------------------------------------------------------------------
35.97 30.31 28.47 30.12
Weighted average incremental share-based
compensation award expense arising from
net-cash settlement feature 18.29 24.84 26.68 24.92
---------------------------------------------------------------------------------------------------------------------------------
Exercise date fair value capped by cash-
settled equity swap agreement $ 54.26 $ 55.15 $ 55.15 $ 55.04
=================================================================================================================================
Affected share option awards outstanding 510,466 1,633,301 2,003,822 4,147,589
=================================================================================================================================
(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 September 30, 2007 Three months Nine 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 2,033,647 -- $ 44.99 1,518,613 -- $ 40.99
Vested -- 3,389 39.48 -- 37,251 38.85
Issued
Initial allocation 36,997 -- 54.52 557,558 -- 56.48
In lieu of dividends 13,695 -- 55.99 38,896 -- 58.53
Vested (2,437) 2,437 40.68 (7,266) 7,266 40.17
Settled in cash -- (2,437) 40.68 -- (41,128) 39.03
Forfeited and cancelled (6,758) -- 43.57 (32,657) -- 41.18
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period
Non-vested 2,075,144 -- 45.23 2,075,144 -- 45.23
Vested -- 3,389 $ 39.48 -- 3,389 $ 39.48
=================================================================================================================================
With respect to certain issuances of restricted stock units, the Company
entered into cash-settled equity forward agreements that fix the cost to the
Company; that information, as well as a schedule of the Company's non-vested
restricted stock units outstanding as at September 30, 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 71,650 671,650
2008 160,000 $ 50.91
440,000 $ 50.02
-------------------
600,000 268,756 868,756
-------------------
2009 400,000 $ 64.26 134,738 534,738
---------------------------------------------------------------------------------------------------------------------------------
1,600,000 475,144 2,075,144
=================================================================================================================================
(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 employees up
to a certain job classification, for every dollar contributed by an employee,
to a maximum of 6% of employee pay; for more highly compensated job
classifications, the Company contributes 40%. There are no vesting requirements
and the Company records its contributions as a component of operating expenses.
Three months Nine months
Periods ended September (millions) 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
Employee contributions $ 22.2 $ 20.4 $ 64.2 $ 59.2
Company contributions 9.2 8.6 26.9 25.0
---------------------------------------------------------------------------------------------------------------------------------
$ 31.4 $ 29.0 $ 91.1 $ 84.2
=================================================================================================================================
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 three-month
and nine-month periods ended September 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 September 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 81.6 -- 81.6 79.0 -- 79.0
Return on plan assets (19.4) (103.0) (122.4) (170.5) 59.2 (111.3)
Past service costs -- 0.2 0.2 -- 0.2 0.2
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 -- (11.0) (11.0) -- (11.2) (11.2)
---------------------------------------------------------------------------------------------------------------------------------
$ 89.8 $ (113.8) $ (24.0) $ (56.7) $ 54.7 $ (2.0)
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
Nine-month periods ended September 30 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) $ 74.7 $ -- $ 74.7 $ 72.9 $ -- $ 72.9
Interest cost 244.8 -- 244.8 236.9 -- 236.9
Return on plan assets (256.9) (110.2) (367.1) (242.6) (91.3) (333.9)
Past service costs -- 0.6 0.6 -- 0.5 0.5
Actuarial loss (gain) 8.1 -- 8.1 31.5 -- 31.5
Valuation allowance provided against
accrued benefit asset -- -- -- -- 19.5 19.5
Amortization of transitional asset -- (33.1) (33.1) -- (33.6) (33.6)
---------------------------------------------------------------------------------------------------------------------------------
$ 70.7 $ (142.7) $ (72.0) $ 98.7 $ (104.9) $ (6.2)
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
Three-month periods ended September 30 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) $ -- $ -- $ -- $ 0.8 $ -- $ 0.8
Interest cost 0.6 -- 0.6 0.5 -- 0.5
Return on plan assets (0.3) 0.1 (0.2) (0.6) -- (0.6)
Actuarial loss (gain) (0.7) -- (0.7) (0.5) -- (0.5)
Amortization of transitional obligation -- 0.2 0.2 -- 0.2 0.2
---------------------------------------------------------------------------------------------------------------------------------
$ (0.4) $ 0.3 $ (0.1) $ 0.2 $ 0.2 $ 0.4
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as
to recognize the long-term nature of employee future benefits.
Nine-month periods ended September 30 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) $ -- $ -- $ -- $ 2.6 $ -- $ 2.6
Interest cost 1.9 -- 1.9 1.4 -- 1.4
Return on plan assets (0.9) 0.1 (0.8) (1.8) (0.1) (1.9)
Actuarial loss (gain) (1.9) -- (1.9) (1.4) -- (1.4)
Amortization of transitional obligation -- 0.6 0.6 -- 0.6 0.6
---------------------------------------------------------------------------------------------------------------------------------
$ (0.9) $ 0.7 $ (0.2) $ 0.8 $ 0.5 $ 1.3
=================================================================================================================================
(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 $91 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 Nine months
Periods ended September 30 (millions) 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
Union pension plan and public service pension plan contributions $ 7.9 $ 8.2 $ 23.9 $ 24.3
Other defined contribution pension plans 7.5 4.9 20.9 13.6
---------------------------------------------------------------------------------------------------------------------------------
$ 15.4 $ 13.1 $ 44.8 $ 37.9
=================================================================================================================================
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
associated with a major Schedule I bank 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 September 30, 2007, the rating was A
(low).
As at (millions) September 30, 2007 December 31, 2006
---------------------------------------------------------------------------------------------------------------------------------
Total managed portfolio $ 1,150.8 $ 1,216.1
Securitized receivables (624.2) (567.3)
Retained interest in receivables sold 64.1 58.4
---------------------------------------------------------------------------------------------------------------------------------
Receivables held $ 590.7 $ 707.2
=================================================================================================================================
For the three-month and nine-month periods ended September 30, 2007, the
Company recognized composite losses of $7.3 million (2006 - $3.7 million) and
$15.4 million (2006 - $12.4 million), respectively, on the sale of receivables
arising from the securitization.
Cash flows from the securitization are as follows:
Three months Nine months
Periods ended September 30 (millions) 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization,
beginning of period $ 500.0 $ 535.0 $ 500.0 $ 500.0
Proceeds from new securitizations 70.0 -- 470.0 260.0
Securitization reduction payments (20.0) (185.0) (420.0) (410.0)
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization,
end of period $ 550.0 $ 350.0 $ 550.0 $ 350.0
=================================================================================================================================
Proceeds from collections reinvested in
revolving-period securitizations $ 1,102.5 $ 1,080.0 $ 2,877.3 $ 2,910.6
=================================================================================================================================
Proceeds from collections pertaining to
retained interest $ 142.0 $ 138.7 $ 350.3 $ 384.8
=================================================================================================================================
13 capital assets
(a) Capital assets, net
As at (millions) September 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 $18,761.5 $13,445.5 $ 5,316.0 $18,061.8 $12,755.3 $ 5,306.5
Assets leased to customers 743.4 596.9 146.5 693.3 550.9 142.4
Buildings and leasehold improvements 1,907.4 1,086.8 820.6 1,852.5 1,002.7 849.8
Office equipment and furniture 1,156.7 904.6 252.1 1,110.6 840.8 269.8
Assets under capital lease 18.4 11.8 6.6 18.5 9.4 9.1
Other 340.8 266.4 74.4 340.6 259.6 81.0
Land 48.1 -- 48.1 48.9 -- 48.9
Assets under construction 655.2 -- 655.2 725.4 -- 725.4
Materials and supplies 34.5 -- 34.5 33.6 -- 33.6
---------------------------------------------------------------------------------------------------------------------------------
23,666.0 16,312.0 7,354.0 22,885.2 15,418.7 7,466.5
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscriber base 362.9 154.6 208.3 362.9 138.3 224.6
Software 1,686.5 1,186.4 500.1 1,306.0 1,043.4 262.6
Access to rights-of-way and other 138.5 67.9 70.6 122.3 60.3 62.0
---------------------------------------------------------------------------------------------------------------------------------
2,187.9 1,408.9 779.0 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
---------------------------------------------------------------------------------------------------------------------------------
$29,838.9 $18,739.4 $11,099.5 $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 Nine months
Periods ended September 30 (millions) 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
Additions of intangible assets
- Subject to amortization $ 35.7 $ 33.5 $ 429.8 $ 82.5
- With indefinite lives -- -- 0.1 1.7
---------------------------------------------------------------------------------------------------------------------------------
$ 35.7 $ 33.5 $ 429.9 $ 84.2
=================================================================================================================================
The following table presents items included in capital expenditures.
Three months Nine months
Periods ended September 30 (millions) 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
Capitalized internal labour costs $ 82.5 $ 73.2 $ 244.3 $ 224.7
=================================================================================================================================
(b) Intangible assets subject to amortization
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at September 30, 2007, for
each of the next five fiscal years is as follows:
Years ending December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2007 (balance of year) $ 66.4
2008 205.5
2009 149.0
2010 73.6
2011 49.7
---------------------------------------------------------------------------------------------------------------------------------
14 goodwill
Periods ended September 30, 2007 (millions) Three months Nine months
---------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 3,168.8 $ 3,169.5
Foreign exchange on goodwill of self-sustaining foreign operations (0.3) (1.0)
---------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 3,168.5 $ 3,168.5
=================================================================================================================================
15 long-term debt
(a) Details of long-term debt
As at ($ in millions) September 30, December 31,
Series Rate of interest Maturity 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
(restated -
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 1,897.8 2,227.1
CB 5.00%(1) June 2013 298.0 298.0
CC 4.50%(1) March 2012 298.8 --
CD 4.95%(1) March 2017 686.8 --
---------------------------------------------------------------------------------------------------------------------------------
3,181.4 3,883.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Commercial Paper 5.02% Through December 2007 292.5 --
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Credit Facility 5.32% May 2012 199.6 120.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Debentures
1 12.00%(1) May 2010 49.8 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
---------------------------------------------------------------------------------------------------------------------------------
789.0 792.5
---------------------------------------------------------------------------------------------------------------------------------
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 16.6% and maturing on
various dates up to 2013 6.9 9.2
---------------------------------------------------------------------------------------------------------------------------------
Other 3.3 3.5
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 4,502.6 4,908.2
Less: Current maturities 6.0 1,433.5
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt - non-current $ 4,496.6 $ 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.
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 had 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 $25.8 million
and which was deferred and amortized over the remainder of the life of the 2007
(U.S. Dollar) Notes.
The weighted average effective fixed interest rates and effective fixed
exchange rates arising from the cross currency interest rate swap agreements
are summarized in the following table:
As at September 30, 2007 December 31, 2006
---------------------------------------------------------------------------------------------------------------------------------
Effective fixed Effective fixed
Effective fixed exchange rate Effective fixed exchange rate
interest rate ($: 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 September 30, 2007, comprised a net derivative liability
of $1,201.5 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.
(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) September 30, 2007 December 31, 2006
---------------------------------------------------------- ----------------------------------------------------------------------
Revolving credit facility expiring May 1, 2012 May 7, 2008 May 4, 2010 Total
---------------------------------------------------------------------------------------------------------------------------------
Net available $ 1,402.4 $ 579.9 $ 800.0 $ 1,379.9
Drawn(1) 200.0 120.0 -- 120.0
Outstanding, undrawn letters of credit 103.7 100.1 -- 100.1
Backstop of commercial paper 293.9 -- -- --
---------------------------------------------------------------------------------------------------------------------------------
Gross available $ 2,000.0 $ 800.0 $ 800.0 $ 1,600.0
=================================================================================================================================
(1) Amounts drawn at September 30, 2007, include Bankers Acceptances of $200.0
(December 31, 2006 - NIL).
(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 September
30, 2007, for each of the next five fiscal years are as follows:
Years ending December 31 (millions) Principal Derivative liability Total(1)
---------------------------------------------------------------------------------------------------------------------------------
2007 (balance of year) $ 1.2 $ -- $ 1.2
2008 5.6 -- 5.6
2009 1.5 -- 1.5
2010 80.8 -- 80.8
2011 1,916.1 1,035.5 2,951.6
---------------------------------------------------------------------------------------------------------------------------------
(1) Where applicable, principal repayments reflect foreign exchange rates at
September 30, 2007.
16 shareholders' equity
(a) Details of shareholders' equity
As at ($ in millions) September 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) $ 2,230.9 $ 2,264.4
Non-Voting Shares (b) 3,252.8 3,420.8
---------------------------------------------------------------------------------------------------------------------------------
5,483.7 5,685.2
---------------------------------------------------------------------------------------------------------------------------------
Options (c) -- 0.8
---------------------------------------------------------------------------------------------------------------------------------
Retained earnings and accumulated other comprehensive income
Retained earnings 1,167.3 1,080.1
Accumulated other comprehensive income (loss) (d) (118.6) (1.5)
---------------------------------------------------------------------------------------------------------------------------------
Total 1,048.7 1,078.6
---------------------------------------------------------------------------------------------------------------------------------
Contributed surplus (e) 147.2 163.5
---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 6,679.6 $ 6,928.1
=================================================================================================================================
(b) Changes in Common Shares and Non-Voting Shares
Periods ended September, 30 2007 ($ in millions) Three months Nine months
---------------------------------------------------------------------------------------------------------------------------------
Number of shares Share capital Number of shares Share capital
---------------------------------------------------------------------------------------------------------------------------------
Common Shares
Beginning of period 176,366,014 $ 2,235.3 178,667,834 $ 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) (349,900) (4.4) (2,654,900) (33.6)
---------------------------------------------------------------------------------------------------------------------------------
End of period 176,016,114 $ 2,230.9 176,016,114 $ 2,230.9
=================================================================================================================================
Non-Voting Shares
Beginning of period 155,374,240 $ 3,337.9 159,240,734 $ 3,420.8
Non-Voting Shares issued pursuant to exercise
of share options (f) 4,523 0.1 23,240 0.7
Non-Voting Shares issued pursuant to use of share
option award net-equity settlement feature (f) 3,478 -- 15,567 0.1
Purchase of shares for cancellation pursuant to
normal course issuer bid (g) (3,967,100) (85.2) (7,864,400) (168.8)
---------------------------------------------------------------------------------------------------------------------------------
End of period 151,415,141 $ 3,252.8 151,415,141 $ 3,252.8
=================================================================================================================================
The amounts credited to the Common Share capital account upon exercise of
share options in the preceding table are all for cash received from exercise.
Amounts credited to the Non-Voting Share capital account are comprised as
follows:
Periods ended September 30, 2007 (millions) Three months Nine months
---------------------------------------------------------------------------------------------------------------------------------
Non-Voting Shares issued pursuant to exercise of share options
Cash received from exercise of share options $ 0.1 $ 0.6
Share option award expense reclassified from contributed surplus upon
exercise of share options (e) -- 0.1
---------------------------------------------------------------------------------------------------------------------------------
$ 0.1 $ 0.7
=================================================================================================================================
(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 (loss) comprehensive income (loss)
------------------------------------- ------------------------------
Three-month period ended September 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 $ (123.5) $ (18.7) $ (104.8)
Gains and losses on derivatives designated as cash flow
hedges in prior periods transferred to net income in
the current period 135.9 22.6 113.3
---------------------------------------------------------------------------------------------------------------------------------
12.4 3.9 8.5 $ (122.1) $ (113.6)
---------------------------------------------------------------------------------------------------------------------------------
Cumulative foreign currency translation adjustment (1.1) -- (1.1) (5.3) (6.4)
---------------------------------------------------------------------------------------------------------------------------------
Change in unrealized fair value of available-for-sale
financial assets (0.2) -- (0.2) 1.6 1.4
---------------------------------------------------------------------------------------------------------------------------------
$ 11.1 $ 3.9 $ 7.2 $ (125.8) $ (118.6)
=================================================================================================================================
Other comprehensive Accumulated other
income (loss) comprehensive income (loss)
------------------------------ ------------------------------------------
Opening balance
-----------------------------------
Nine-month period ended September 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 $ (370.6) $ (49.6) $ (321.0)
Gains and losses on derivatives designated
as cash flow hedges in prior periods
transferred to net income in the
current period 464.5 79.2 385.3
---------------------------------------------------------------------------------------------------------------------------------
93.9 29.6 64.3 $ -- $ (177.9) $ (177.9) $ (113.6)
---------------------------------------------------------------------------------------------------------------------------------
Cumulative foreign currency translation
adjustment (4.9) -- (4.9) (1.5) -- (1.5) (6.4)
---------------------------------------------------------------------------------------------------------------------------------
Change in unrealized fair value of
available-for-sale financial assets (0.3) -- (0.3) -- 1.7 1.7 1.4
---------------------------------------------------------------------------------------------------------------------------------
$ 88.7 $ 29.6 $ 59.1 $ (1.5) $ (176.2) $ (177.7) $ (118.6)
=================================================================================================================================
(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 September 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 $2.2 million.
(e) Contributed surplus
Periods ended September 30, 2007 (millions) Three months Nine months
--------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 144.0 $ 163.5
Share option award expense
- Recognized in period(1) (Note 10(a)) 3.2 10.8
- 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 $ 147.2 $ 147.2
================================================================================================================================
(1) This amount represents the expense for share option awards accounted for as
equity instruments; the difference between thisamount 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 nine-month periods ended
September 30.
Periods ended September 30, 2007 Three months Nine months
-------------------------------------------------------------------------------------------------------------------------------
Number of share Weighted average Number of share Weighted average
options share option price options share option price
-------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 9,341,918 $ 36.13 10,569,462 $ 31.46
Granted 41,170 54.27 1,310,743 56.82
Exercised(1) (252,632) 25.49 (2,705,722) 26.73
Forfeited and other (501,792) 33.14 (545,819) 32.98
-------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 8,628,664 $ 36.70 8,628,664 $ 36.70
===============================================================================================================================
(1) The total intrinsic value of share option awards exercised for the three-
month and nine-month periods ended September 30, 2007, was $8.2 million
and $85.7 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.
The following table reconciles the number of share options exercised and the
associated number of Common Shares and Non-Voting Shares issued.
Periods ended September 30, 2007 Three months Nine months
---------------------------------------------------------------------------------------- --------------------------------------
Common Non-Voting Common Non-Voting
Shares Shares Total Shares Shares Total
--------------------------------------------------------------------------------------------------------------------------------
Shares issued pursuant to exercise
of share options -- 4,523 4,523 3,180 23,240 26,420
Impact of optionee choosing to
settle share option award
exercises using net-cash settlement
feature 16,590 225,490 242,080 324,709 2,331,397 2,656,106
Shares issued pursuant to use of share
option award net-equity settlement
feature N/A(1) 3,478 3,478 N/A(1) 15,567 15,567
Impact of Company choosing to settle
share option award exercises using
net-equity settlement feature N/A(1) 2,551 2,551 N/A(1) 7,629 7,629
--------------------------------------------------------------------------------------------------------------------------------
Share options exercised 16,590 236,042 252,632 327,889 2,377,833 2,705,722
================================================================================================================================
(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 September 30, 2007.
Options outstanding(1) Options exercisable
------------------------------------------------------------------------------------------------------------ --------------------
Range of option prices Total
------------------------------------------------------------------------------------------------------------ Weighted
Low $ 5.95 $ 9.14 $ 14.63 $ 21.99 $ 34.88 $ 53.09 $ 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 -- -- 24,159 39,500 -- 66,931 66,931 $ 38.94
2009 -- 2,944 362,606 104,660 69,745 -- 539,955 539,955 $ 21.31
2010 -- -- 101,471 638,865 262,547 -- 1,002,883 1,002,883 $ 27.07
2011 -- -- 3,700 1,399,482 910,984 -- 2,314,166 2,263,966 $ 28.63
2012 4,966 6,167 145,067 65,000 1,654,624 -- 1,875,824 221,200 $ 18.13
2013 -- -- -- -- 1,468,230 63,017 1,531,247 -- $ --
2014 -- -- -- -- -- 1,295,204 1,295,204 -- $ --
--------------------------------------------------------------------------------------------------------------------------------
8,238 11,565 612,844 2,232,166 4,405,630 1,358,221 8,628,664 4,097,389 $ 26.87
================================================================================================================================
Weighted average
remaining life
(years) 3.4 3.2 2.9 3.5 4.5 6.4 4.4
Weighted average price $ 7.45 $ 10.36 $ 16.00 $ 24.75 $ 39.58 $ 56.76 $ 36.70
Aggregate intrinsic
value(2)(millions) $ 0.4 $ 0.5 $ 24.5 $ 70.0 $ 72.9 $ 0.1 $ 168.4
Options exercisable
----------------------------------------------------------------------------------------------------------------
Number of shares 8,238 11,565 612,844 2,181,966 1,282,776 -- 4,097,389
Weighted average
remaining contractual
life (years) 3.4 3.2 2.9 3.5 3.1 -- 3.3
Weighted average price $ 7.45 $ 10.36 $ 16.00 $ 24.68 $ 36.07 $ -- $ 26.87
Aggregate intrinsic
value(2) (millions) $ 0.4 $ 0.5 $ 24.5 $ 68.6 $ 26.1 $ -- $ 120.1
(1) As at September 30, 2007, 8,371,983 share options, with a weighted average
remaining contractual life of 3.4 years, a weighted average price of $36.28
and an aggregate intrinsic value of $166.9 million, are vested or were
expected to vest; these amounts differ from the corresponding amounts for
all share options outstanding due to an estimate for expected forfeitures.
(2) The aggregate intrinsic value is calculated upon September 30, 2007, per
share prices of $57.50 for Common Shares and $56.00 for Non-Voting Shares.
As at September 30, 2007, 0.5 million Common Shares and 16.1 million Non-
Voting Shares were reserved for issuance, from Treasury, under the share
option plans.
(g) Purchase of shares for cancellation pursuant to normal course issuer bid
The Company purchased, for cancellation, through the facilities of the Toronto
Stock Exchange, Common Shares and Non-Voting Shares pursuant to successive
normal course issuer bids; the Company's most current normal course issuer bid
runs for a twelve-month period ending December 19, 2007, for up to 12.0 million
Common Shares and 12.0 million Non-Voting Shares. The excess of the purchase
price over the average stated value of shares purchased for cancellation was
charged to retained earnings. The Company ceases to consider shares outstanding
on the date of the Company's purchase of its shares although the actual
cancellation of the shares by the transfer agent and registrar occurs on a
timely basis on a date shortly thereafter. As at September 30, 2007, 210,000
Non-Voting Shares had been purchased that are not yet cancelled.
Three-month period ended September 30, 2007 ($ 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 2,305,000 $ 135.0 $ 29.2 $ 105.8
During period 349,900 19.0 4.4 14.6
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative total 2,654,900 $ 154.0 $ 33.6 $ 120.4
===================================================================================================================================
Non-Voting Shares purchased for cancellation
Prior to beginning of period 4,084,023 $ 245.0 $ 87.6 $ 157.4
During period 3,967,100 213.2 85.2 128.0
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative total 8,051,123 $ 458.2 $ 172.8 $ 285.4
===================================================================================================================================
Common Shares and Non-Voting Shares purchased
for cancellation
Prior to beginning of period 6,389,023 $ 380.0 $ 116.8 $ 263.2
During period 4,317,000 232.2 89.6 142.6
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative total 10,706,023 $ 612.2 $ 206.4 $ 405.8
===================================================================================================================================
Nine-month period ended September 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 2,654,900 154.0 33.6 120.4
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative total 2,654,900 $ 154.0 $ 33.6 $ 120.4
===================================================================================================================================
Non-Voting Shares purchased for cancellation
Prior to beginning of period 186,723 $ 9.8 $ 4.0 $ 5.8
During period 7,864,400 448.4 168.8 279.6
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative total 8,051,123 $ 458.2 $ 172.8 $ 285.4
===================================================================================================================================
Common Shares and Non-Voting Shares purchased for cancellation
Prior to beginning of period 186,723 $ 9.8 $ 4.0 $ 5.8
During period 10,519,300 602.4 202.4 400.0
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative total 10,706,023 $ 612.2 $ 206.4 $ 405.8
===================================================================================================================================
(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 nine-month periods ended September 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 nine-month periods ended September 30, 2007, $4.5 million
(2006 - $4.1 million) and $12.2 million (2006 - $8.6 million), respectively,
was to be reinvested in Non-Voting Shares.
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 September 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 early 2008 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
nine-month periods ended September 30, 2007, the Company drew down the deferral
account by $NIL (2006 - $NIL) and $15.9 million (2006 - $19.9 million),
respectively, in respect of discounts on Competitor Digital Network services
and other qualifying expenditures.
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 to 115 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, filed an update to the
previously filed submission on September 4, 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 September 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 September 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 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.
Certified 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. The class was certified on September 17,
2007, by the Saskatchewan Court of Queen's Bench. The Company has applied for
leave to appeal the certification decision. The Company believes that it has
good defences to the action.
Similar proceedings have also been filed by, or on behalf of, plaintiffs'
counsel in other provincial jurisdictions.
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; management's
assessments and assumptions include that a reliable estimate of the exposure
cannot be made at this preliminary stage of the lawsuit.
18 additional financial information
(a) Income statement
Periods ended September 30 (millions) 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------------------------------
Operations expense(1):
Cost of sales and service $ 764.8 $ 683.9 $ 2,242.1 $ 2,012.5
Selling, general and administrative 551.7 561.9 1,851.3 1,641.8
---------------------------------------------------------------------------------------------------------------------------------
$ 1,316.5 $ 1,245.8 $ 4,093.4 $ 3,654.3
=================================================================================================================================
Advertising expense $ 71.6 $ 64.2 $ 211.6 $ 174.3
=================================================================================================================================
(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 telecommunication
infrastructure. Selling, general and administrative costs include sales and
marketing costs (including commissions), customer care, bad debt expense,
real estate costs and corporate overhead costs such as information
technology, finance (including billing services, credit and collection),
legal, human resources and external affairs.
Employee salaries, benefits and related costs are included in one of
the two components of operations expense to the extent that the costs are
related to the component functions.
(b) Balance sheet
As at (millions) September 30, December 31,
2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Accounts receivable
Customer accounts receivable $ 398.6 $ 545.6
Accrued receivables - customer 151.0 83.2
Allowance for doubtful accounts (65.1) (54.8)
--------------------------------------------------------------------------------------------------------------------------------
484.5 574.0
Accrued receivables - other 100.0 125.4
Other 6.2 7.8
--------------------------------------------------------------------------------------------------------------------------------
$ 590.7 $ 707.2
================================================================================================================================
Prepaid expense and other
Prepaid expenses $ 130.8 $ 109.9
Deferred customer activation and connection costs 67.3 69.5
Other 10.9 15.9
--------------------------------------------------------------------------------------------------------------------------------
$ 209.0 $ 195.3
================================================================================================================================
September 30, December 31,
As at (millions) 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Deferred charges (restated - Note 2(b))
Recognized transitional pension assets and pension plan contributions
in excess of charges to income $ 970.2 $ 826.2
Deferred customer activation and connection costs 11.9 115.4
Other 16.1 15.0
--------------------------------------------------------------------------------------------------------------------------------
$ 1,098.2 $ 956.6
================================================================================================================================
Accounts payable and accrued liabilities
Accrued liabilities $ 418.7 $ 449.7
Payroll and other employee-related liabilities 362.9 383.8
Accrual for net-cash settlement feature for share option awards (Note 10(b)) 127.8 --
Asset retirement obligations 4.1 4.1
--------------------------------------------------------------------------------------------------------------------------------
913.5 837.6
Trade accounts payable 336.9 427.3
Interest payable 115.8 47.7
Other 72.3 51.0
--------------------------------------------------------------------------------------------------------------------------------
$ 1,438.5 $ 1,363.6
================================================================================================================================
Advance billings and customer deposits
Advance billings $ 360.7 $ 348.8
Regulatory deferral accounts (Note 17(a)) 148.9 164.8
Deferred customer activation and connection fees 69.8 72.3
Customer deposits 35.1 20.4
--------------------------------------------------------------------------------------------------------------------------------
$ 614.5 $ 606.3
================================================================================================================================
Other long-term liabilities
Derivative liabilities (Note 4) $ 1,201.5 $ 710.3
Pension and other post-retirement liabilities 206.1 198.7
Other 143.9 128.2
--------------------------------------------------------------------------------------------------------------------------------
1,551.5 1,037.2
Deferred customer activation and connection fees 111.9 115.4
Deferred gain on sale-leaseback of buildings 64.3 71.6
Asset retirement obligations 33.1 33.1
--------------------------------------------------------------------------------------------------------------------------------
$ 1,760.8 $ 1,257.3
================================================================================================================================
(c) Supplementary cash flow information
Three months Nine months
Periods ended September 30 (millions) 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Net change in non-cash working capital
Short-term investments $ 10.7 $ (98.8) $ 66.1 $ (98.8)
Accounts receivable (18.9) (225.6) 116.5 (128.1)
Inventories (11.8) (28.2) 25.8 (5.2)
Prepaid expenses and other 86.8 54.0 (13.7) (63.1)
Accounts payable and accrued liabilities (66.9) 66.3 (60.9) (8.2)
Income and other taxes receivable and payable, net (171.4) (21.5) (169.6) 79.8
Advance billings and customer deposits 5.1 (11.6) 8.2 (0.8)
--------------------------------------------------------------------------------------------------------------------------------
$ (166.4) $ (265.4) $ (27.6) $ (224.4)
================================================================================================================================
Interest (paid)
Amount paid in respect of interest expense $ (41.1) $ (13.0) $ (272.8) $ (266.4)
Forward starting interest rate swap agreement
termination payments -- -- (10.4) --
Interest related portion of cross currency
interest rate swap agreement termination payments -- -- -- (31.2)
--------------------------------------------------------------------------------------------------------------------------------
$ (41.1) $ (13.0) $ (283.2) $ (297.6)
================================================================================================================================
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 Nine months
Periods ended September 30 (millions except per share amounts) 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with Canadian GAAP $ 409.9 $ 319.6 $ 857.8 $ 886.3
Adjustments:
Operating expenses
Operations (b) (1.3) (4.2) 17.0 (12.7)
Amortization of intangible assets (c) (12.5) (12.5) (37.6) (38.2)
Accounting for derivatives (e) -- 1.7 -- 1.1
Taxes on the above adjustments and tax rate changes (f) 4.1 5.0 22.5 72.5
--------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP 400.2 309.6 859.7 909.0
Other comprehensive income (loss), net of taxes (g)
In accordance with Canadian GAAP 7.2 0.4 59.1 1.2
Change in pension related other comprehensive
income accounts 6.1 (0.7) 18.2 (3.6)
Change in unrealized fair value of derivatives
designated as cash flow hedges -- (33.1) -- 3.0
--------------------------------------------------------------------------------------------------------------------------------
In accordance with U.S. GAAP 13.3 (33.4) 77.3 0.6
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive income in accordance with U.S. GAAP $ 413.5 $ 276.2 $ 937.0 $ 909.6
================================================================================================================================
Net income in accordance with U.S. GAAP per Common
Share and Non-Voting Share
- Basic $ 1.21 $ 0.91 $ 2.58 $ 2.63
- Diluted $ 1.20 $ 0.90 $ 2.56 $ 2.61
The following is an analysis of retained earnings (deficit) reflecting the application of U.S. GAAP:
Nine-month periods ended September 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 859.7 909.0
--------------------------------------------------------------------------------------------------------------------------------
440.2 123.5
Common Share and Non-Voting Share dividends paid, or payable, in cash (374.3) (284.5)
Purchase of Common Shares and Non-Voting shares in excess of stated capital (315.0) (267.1)
Adjustment to purchase of share optionawards not in excess of their fair value -- 2.1
--------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ (249.1) $ (426.0)
================================================================================================================================
The following is an analysis of major balance sheet
categories reflecting the application of U.S. GAAP:
As at (millions) September 30, December 31,
2007 2006
--------------------------------------------------------------------------------------------------------------------------------
(adjusted
- Note 2(c))
Current Assets $ 1,300.8 $ 1,344.9
Capital Assets
Property, plant, equipment and other 7,354.0 7,466.5
Intangible assets subject to amortization (c) 2,348.4 2,156.2
Intangible assets with indefinite lives 2,966.5 2,966.4
Goodwill (d) 3,571.0 3,572.0
Other Assets 852.2 675.7
--------------------------------------------------------------------------------------------------------------------------------
$ 18,392.9 $ 18,181.7
================================================================================================================================
Current Liabilities $ 2,659.7 $ 3,782.2
Long-Term Debt 4,528.1 3,493.7
Other Long-Term Liabilities 1,822.1 1,550.0
Deferred Income Taxes (f) 1,440.4 1,319.7
Non-Controlling Interest 23.8 23.6
Shareholders' Equity 7,918.8 8,012.5
--------------------------------------------------------------------------------------------------------------------------------
$ 18,392.9 $ 18,181.7
================================================================================================================================
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 September 30, 2007 (millions) Shares Shares (deficit) income (loss) surplus Total
--------------------------------------------------------------------------------------------------------------------------------
Under Canadian GAAP $2,230.9 $3,252.8 $1,167.3 $ (118.6) $ 147.2 $6,679.6
Adjustments:
Merger of BC TELECOM and
TELUS (a), (c), (d) 1,743.7 941.6 (1,314.0) -- -- 1,371.3
Share-based compensation (b) 10.5 56.4 (98.6) -- 31.7 --
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) -- -- -- (255.6) -- (255.6)
--------------------------------------------------------------------------------------------------------------------------------
Under U.S. GAAP $3,985.1 $4,379.3 $ (249.1) $ (374.2) $ 177.7 $7,918.8
================================================================================================================================
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.
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 (greater than) the Canadian
GAAP expense by $(1.3 million) and $25.3 million, for the three-month and
nine-month periods ended September 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
--------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
As at (millions) 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscribers - wireline $ 1,950.0 $ 380.6 $ 1,569.4 $ 1,607.0
Subscribers - wireless 250.0 250.0 -- --
--------------------------------------------------------------------------------------------------------------------------------
2,200.0 630.6 1,569.4 1,607.0
--------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 1,833.3 1,833.3 -- --
--------------------------------------------------------------------------------------------------------------------------------
$ 4,033.3 $ 2,463.9 $ 1,569.4 $ 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 September 30, 2007, for
each of the next five fiscal years is as follows:
Years ending December 31 (millions)
--------------------------------------------------------------------------------------------------------------------------------
2007 (balance of year) $ 78.9
2008 255.6
2009 199.1
2010 123.7
2011 99.8
--------------------------------------------------------------------------------------------------------------------------------
(d) Goodwill
Merger of BC TELECOM and TELUS: Under the purchase method of accounting, TELUS'
assets and liabilities at acquisition (see (a)) have been recorded at their
fair values with the excess purchase price being allocated to goodwill in the
amount of $403.1 million. Commencing January 1, 2002, rather than being
systematically amortized, the carrying value of goodwill is periodically tested
for impairment.
Additional goodwill on Clearnet purchase: Under U.S. GAAP, shares issued by
the acquirer to effect an acquisition are measured at the date the acquisition
was announced; however, under Canadian GAAP, at the time the transaction took
place, shares issued to effect an acquisition were measured at the transaction
date. This results in the purchase price under U.S. GAAP being $131.4 million
higher than under Canadian GAAP. The resulting difference is assigned to
goodwill. Commencing January 1, 2002, rather than being systematically
amortized, the carrying value of goodwill is periodically tested for
impairment.
(e) 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 September 30 (millions) 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Current $ (144.1) $ (19.8) $ (141.8) $ (23.5)
Deferred 218.6 141.3 370.9 212.3
--------------------------------------------------------------------------------------------------------------------------------
74.5 121.5 229.1 188.8
Investment Tax Credits -- -- (10.6) (12.6)
--------------------------------------------------------------------------------------------------------------------------------
$ 74.5 $ 121.5 $ 218.5 $ 176.2
================================================================================================================================
The Company's income tax expense (recovery), for U.S. GAAP purposes, differs
from that calculated by applying statutory rates for the following reasons:
Three-month periods ended September 30 ($ in millions) 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at statutory income tax rates $ 160.0 33.6% $ 145.7 33.6%
Tax rate differential on, and consequential adjustments from, reassessment
of prior year tax issues (76.3) (24.9)
Revaluation of deferred income tax liability to reflect future statutory
income tax rates (8.6) --
Share option award compensation 1.5 1.8
Other (2.1) (1.1)
--------------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 74.5 15.6% $ 121.5 28.0%
================================================================================================================================
Nine-month periods ended September 30 ($ in millions) 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at statutory income tax rates $ 363.3 33.6% $ 367.0 33.6%
Tax rate differential on, and consequential adjustments from, reassessment
of prior year tax issues (76.3) (23.9)
Revaluation of deferred income tax liability to reflect future statutory
income tax rates (43.6) (162.7)
Share option award compensation (13.9) 4.9
Investment Tax Credits, net of tax (7.0) (8.4)
Other (4.0) (0.7)
--------------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 218.5 20.2% $ 176.2 16.1%
================================================================================================================================
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. The gross amount of the unrecognized tax
benefits was $662.8 million. The gross amount of unrecognized tax benefits is
calculated as the undiscounted cumulative impact of such positions on taxable
income before timing-related reversals that have yet to be realized and before
the application of losses carried forward multiplied by the applicable tax rate
for the estimated period when such benefit will be realized.
During the three-month and nine-month periods ended September 30, 2007, the
Company recognized Canadian Investment Tax Credits arising from the Company's
conduct of its scientific research and experimental development activities of
$NIL ($NIL after applicable income tax effect) and $10.6 million ($7.0 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. Gross unrecognized tax benefits were
reduced by $45.1 million. During the three-month and nine-month period ended
September 30, 2007, the Company filed additional claims for Canadian Investment
Tax Credits of $NIL ($NIL after applicable income tax effect) and $41.2 million
($28.0 million after applicable income tax effect), respectively, that have not
been recognized in the accounts. Gross unrecognized tax benefits increased by
$41 million.
During the nine-month period ended September 30, 2007, additional gross
unrecognized tax benefits of $159.3 million were claimed on tax returns filed
during the period. Net unrecognized tax benefits from such positions were
nominal.
During the second quarter of 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. There was no impact on the
gross unrecognized tax benefits.
During the three-month and nine-month periods ended September 30, 2007, net
unrecognized tax benefits for prior periods decreased by $70.5 million due to
the effective settlement of certain positions in prior taxation years. Gross
unrecognized tax benefits for such prior periods decreased by $64 million. In
addition, the net and gross unrecognized tax benefits decreased by $25.7
million to reflect a change in the estimated timing of the utilization of such
unrecognized tax benefits should they ultimately be realized.
As at September 30, 2007, the Company had net unrecognized tax benefits
aggregating $186.3 million, of which $149.7 million would, if fully recognized,
impact the effective tax rate. The gross amount of unrecognized tax benefits
was $728.4 million.
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 September 30, 2007, the Company has recorded accrued
interest of $7.6 million in respect of differences between the times
tax-related exposures have been funded compared to the times 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 nine-month periods ended September 30,
2007.
As at January 1, 2007, it was reasonably possible that the Company's net
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, it was reasonably possible that the Company's
unrecognized tax benefits would significantly increase and decrease in the next
twelve months for the following items:
* It was expected that Notices of Reassessment would be issued by
various government authorities over the next twelve months that were
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 were expected to
be resolved within an estimated range of $35 million to $45 million. The
gross amount of such unrecognized tax benefits range from $100 million
to $110 million. It was also expected that both net and gross 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 would be concluded.
As at September 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:
* It is expected that Notices of Reassessment will be issued and/or
settlement will be reached with 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 that may be claimed among periods of changing statutory tax
rates are expected to be resolved within an estimated range of $45
million to $55 million. The gross amount of such unrecognized tax
benefits range from $90 million to $110 million. It is also expected
that both net and gross unrecognized benefits estimated to range between
$15 million and $25 million, that relate to issues pertaining to the
eligibility of certain capital and operating costs will be concluded.
As at January 1, 2007, and September 30, 2007, it is reasonably possible
that the Company's net and gross unrecognized tax benefits will significantly
increase and decrease due to the expected lapse of the statute of limitations
that would otherwise allow governmental authorities to challenge positions
taken in tax returns for certain prior taxation years. Such unrecognized tax
benefits are reasonably estimated at $4 million.
As at January 1, 2007, and September 30, 2007, income tax returns pertaining
to taxation years that remain open 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
(loss)
U.S. GAAP requires that a statement of comprehensive income be displayed with
the same prominence as other financial statements. Comprehensive income, which
incorporates net income, includes all changes in equity during a period except
those resulting from investments by and distributions to owners. There is no
requirement to disclose comprehensive income under Canadian GAAP prior to
fiscal periods beginning on or after January 1, 2007.
Three-month periods ended September 30
(millions) 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 $ 11.1 $ 8.7 $ 19.8 $ 0.4 $ (0.9) $ (49.9) $ (50.4)
Income tax expense (recovery) 3.9 2.6 6.5 -- (0.2) (16.8) (17.0)
--------------------------------------------------------------------------------------------------------------------------------
Net 7.2 6.1 13.3 0.4 (0.7) (33.1) (33.4)
Accumulated other comprehensive
income (loss), beginning
of period (125.8) (261.7) (387.5) (6.5) (170.6) (164.5) (341.6)
--------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), end of
period $ (118.6) $ (255.6) $ (374.2) $ (6.1) $ (171.3) $ (197.6) $ (375.0)
================================================================================================================================
(1)As the Canadian GAAP other comprehensive income amounts at September 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.
Nine-month periods ended September 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 $ 88.7 $ 26.1 $ 114.8 $ 1.2 $ (3.9) $ 6.3 $ 3.6
Income tax expense (recovery) 29.6 7.9 37.5 -- (0.3) 3.3 3.0
--------------------------------------------------------------------------------------------------------------------------------
Net 59.1 18.2 77.3 1.2 (3.6) 3.0 0.6
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 $ (118.6) $ (255.6) $ (374.2) $ (6.1) $(171.3) $ (197.6) $ (375.0)
================================================================================================================================
(1)As the Canadian GAAP other comprehensive income amounts at September 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.
Fair value option. Under U.S. GAAP, effective for its 2008 fiscal year, the
Company will be able to choose to measure eligible items at fair value at
specified election dates, as prescribed by Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". The Company does not expect to be
materially affected by the new 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.
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 2.6% 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 approximately
4.5 to five percentage points (excluding competitors' subscriber write-
offs in the first half of 2007); restructuring expenses of approximately
$25 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 (including more active price
discounting); 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 and second quarter Management's
discussion and analyses, as well as updates reported in Section 10 of
this document.
_________________________________________________________________________
Management's discussion and analysis
October 31, 2007
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month and nine-month
periods ended September 30, 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 third quarter and first nine months 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 third quarter and first nine months
of 2007
-------------------------------------------------------------------------
6. Financial condition A discussion of changes in the balance sheet
for the nine-month period ended
September 30, 2007
-------------------------------------------------------------------------
7. Liquidity and capital A discussion of cash flow, liquidity, credit
resources 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 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 to be acquired by a
consortium led by Teachers Private Capital, the private investment arm of the
Ontario Teachers' Pension Plan, and the U.S.-based Providence Equity Partners
and Madison Dearborn Partners, LLC. The consortium also included TD Securities
Inc. who, with several other institutions, agreed to provide equity financing
for the purchase. The BCE Board recommended that their common shareholders
accept the offer at an all-cash price of $42.75 per common share. In September
2007, BCE Inc. announced that its shareholders overwhelmingly approved the
plan of arrangement, which involves the acquisition by the consortium of all
outstanding common and preferred shares of BCE. The closing of the transaction
is subject to receipt of regulatory approvals widely expected to occur in the
first half of 2008.
The CRTC continues to process and approve certain applications from
incumbent telecommunications companies for regulatory forbearance of both
residential and business local services. This provides more flexibility in
pricing and bundling of services for incumbents as they compete with other
service providers.
1.3 Consolidated highlights
-------------------------------------------------------------------------
($ millions, except
shares, per share Quarters ended Nine-month periods
amounts, subscribers September 30 ended Sept. 30
and ratios) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Consolidated statements of income
-------------------------------------------------------------------------
Operating revenues 2,309.9 2,210.7 4.5 % 6,743.6 6,426.4 4.9 %
Operating income 584.4 569.1 2.7 % 1,475.2 1,543.7 (4.4)%
Net-cash settlement
feature (recovery)
expense(1) (7.2) - - 168.1 - -
-------- ------- -------- -------- -------- --------
Operating income
(as adjusted) 577.2 569.1 1.4 % 1,643.3 1,543.7 6.5 %
Income before
income taxes 490.2 448.5 9.3 % 1,113.9 1,154.7 (3.5)%
Net-cash settlement
feature (recovery)
expense (7.2) - - 168.1 - -
-------- ------- -------- -------- -------- --------
Income before
income taxes
(as adjusted) 483.0 448.5 7.7 % 1,282.0 1,154.7 11.0 %
Net income 409.9 319.6 28.3 % 857.8 886.3 (3.2)%
Net-cash settlement
feature (recovery)
expense, after tax (4.9) - - 104.1 - -
-------- ------- -------- -------- -------- --------
Net income
(as adjusted) 405.0 319.6 26.7 % 961.9 886.3 8.5 %
Earnings per share,
basic ($) 1.24 0.94 31.9 % 2.57 2.57 - %
Net-cash settlement
feature per share (0.01) - - 0.31 - -
-------- ------- -------- -------- -------- --------
Earnings per share,
basic (as
adjusted)(2) ($) 1.23 0.94 30.9 % 2.88 2.57 12.1 %
Earnings per share,
diluted ($) 1.23 0.92 33.7 % 2.55 2.54 0.4 %
Cash dividends
declared per
share ($) 0.375 0.275 36.4 % 1.125 0.825 36.4 %
-------------------------------------------------------------------------
Consolidated statements of cash flows
-------------------------------------------------------------------------
Cash provided by
operating
activities 831.8 570.4 45.8 % 2,354.3 2,056.5 14.5 %
Cash used by
investing
activities 430.0 451.0 (4.7)% 1,300.1 1,253.2 3.7 %
Capital
expenditures 434.1 423.9 2.4 % 1,297.8 1,203.2 7.9 %
Cash used by
financing
activities 403.0 126.2 n.m. 1,041.7 837.3 24.4 %
-------------------------------------------------------------------------
Subscribers and other measures
-------------------------------------------------------------------------
Subscriber
connections(3)
(thousands) at
Sept. 30 11,008 10,531 4.5 %
EBITDA(4) 987.0 952.4 3.6 % 2,635.9 2,712.2 (2.8)%
Net-cash settlement
feature (recovery)
expense (7.2) - - 168.1 - -
-------- ------- -------- -------- -------- --------
EBITDA (as
adjusted)(4) 979.8 952.4 2.9 % 2,804.0 2,712.2 3.4 %
Free cash flow(5) 502.9 519.8 (3.3)% 1,145.4 1,346.4 (14.9)%
-------------------------------------------------------------------------
Debt and payout ratios
-------------------------------------------------------------------------
Net debt to
EBITDA - excluding
restructuring(6) 1.7 1.7 -
Dividend payout
ratio (%)(7) 46 39 7 pts
-------------------------------------------------------------------------
n.m. - not meaningful; pts - percentage point(s)
(1) A non-cash (recovery) 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
and second 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
nine- month period ended September 30, 2007, $168.1 million in respect of this
charge was recorded in Operations expense ($104.1 million after-tax impact in
Net income or 31 cents per share). The recovery in the third quarter was an
adjustment to the initial estimate recorded. The net-cash settlement feature
expense for full year of 2007 is expected to be approximately $170 million.
See Caution regarding forward looking statements as well as Section 9 for
TELUS' guidance for the full year.
Highlights for the third quarter and first nine months of 2007, as
discussed in Section 5: Results from operations, include the following:
- Subscriber connections increased by 477,000 during the 12-month
period ended September 30, 2007. The number of wireless subscribers
grew by 10.9% to 5.41 million, the number of Internet subscribers
grew by 7.5% to 1.16 million and the number of network access lines
decreased by 3.0% to 4.44 million.
- Operating revenues increased by $99.2 million and $317.2 million,
respectively, in the third quarter and first nine 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 wireline voice local and long distance revenue.
- Operating income increased by $15.3 million in the third quarter of
2007 and decreased by $68.5 million in the first nine months of 2007,
when compared to the same periods in 2006. Excluding the net-cash
settlement feature expense recorded in 2007, operating income (as
adjusted) increased by $8.1 million and $99.6 million, respectively,
in the third quarter and the first nine months, primarily due to
growth in wireless EBITDA partly offset by higher amortization
expenses.
- Income before income taxes increased by $41.7 million in the third
quarter of 2007 and decreased by $40.8 million in the first nine
months of 2007, when compared to the same periods in 2006. Excluding
the effect of the net-cash settlement feature, Income before income
taxes increased by $34.5 million and $127.3 million, respectively, in
the third quarter and the first nine months, due to lower financing
costs and growth in operating income (as adjusted).
- Net income in 2007 included favourable tax-related adjustments of
approximately $93 million or 28 cents per share in the third quarter
and approximately $107 million or 32 cents per share in the first
nine months. In 2006, favourable tax-related adjustments of
approximately $30 million or nine cents per share were recorded in
the third quarter and $145 million or 42 cents per share were
recorded in the first nine months.
- Net income and EPS - basic for the third quarter of 2007 increased by
$90.3 million and 30 cents, respectively, when compared to the same
period in 2006. Net income for the first nine months of 2007
decreased by $28.5 million when compared to the same period in 2006,
while EPS - basic was unchanged. Excluding the effect of the net-cash
settlement feature for first nine months of 2007, Net income (as
adjusted) increased by $75.6 million while EPS - basic (as adjusted)
increased by 31 cents.
- The average numbers of shares outstanding during third quarter and
first nine months of 2007 were 3% lower than in same periods in 2006.
The decrease in shares was due to repurchases under normal course
issuer bid (NCIB) programs as well as fewer shares being issued from
treasury following the introduction of the net-cash settlement
feature for options.
Highlights for the third quarter and first nine months of 2007, as
discussed in Section 7: Liquidity and capital resources, include the
following:
- Cash provided by operating activities increased by $261.4 million and
$297.8 million, respectively, in the third quarter and first nine
months of 2007, when compared to the same periods in 2006. In 2007,
proceeds from securitized accounts receivable increased by $50
million during the third quarter and first nine months of 2007, while
in 2006, proceeds decreased by $185 million and $150 million,
respectively, for comparative increases in 2007 operating cash flow
of $235 million and $200 million, respectively.
- Cash used by investing activities decreased by $21.0 million in the
third quarter and increased by $46.9 million in the first nine months
of 2007, when compared to the same periods in 2006. The decrease for
the quarter was primarily due to acquisitions in the prior year
period. Capital expenditure intensity ratios were consistent at about
19% of consolidated revenues in the third quarter and first nine
months of both 2007 and 2006. Capital expenditures increased by
$10.2 million and $94.6 million, respectively, in the third quarter
and first nine months of 2007, when compared with the same periods in
2006 due to primarily to increased investment in digital wireless
capacity and coverage.
- Cash used by financing activities increased by $276.8 million and
$204.4 million, respectively, in the third quarter and first nine
months of 2007, when compared to the same periods in 2006. Under its
NCIB programs, the Company repurchased 4.3 million shares for
cancellation for an outlay of $232.2 million in the third quarter of
2007 (2006: 2.1 million shares for $119.7 million), while for the
first nine months of 2007, the Company repurchased 10.5 million
shares for cancellation for outlay of $602.4 million (2006: 12.7
million shares for $600.7 million). The increase cash used by
financing activities for the first nine-months included the June 1,
2007 repayment of $1,483.3 million (US$1,166.5 million) for matured
7.50% Notes, net of $1 billion debt issue in March 2007 and
outstanding commercial paper issue of $293.9 million.
- Free cash flow decreased by $16.9 million and $201.0 million,
respectively, in the third quarter and first nine months of 2007,
when compared to the same periods in 2006. The decrease for the third
quarter was caused by higher interest payments (mainly from March
2007 debt issues with semi-annual interest payments), higher capital
expenditures and higher share-based compensation payments, net of
improved EBITDA and lower restructuring payments. The decrease for
the first nine months of 2007 was caused by lower EBITDA, higher
capital expenditures, and lower recoveries of cash taxes and related
interest, partly offset by lower restructuring payments, share-based
compensation expense in excess of payments and lower interest
payments.
- Net debt to EBITDA of 1.7 continued to be in the long-term target
range of 1.5 to 2.0 times.
- The dividend payout ratio based on actual earnings at September 30,
2007 was 46% and the dividend payout ratio calculated to exclude the
impacts of tax-related adjustments and the charge for introducing the
net-cash feature was also 46% - within the target guideline of 45 to
55% of net sustainable earnings.
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 and second 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:
Focusing relentlessly on the growth markets of data, IP and wireless
The Company expanded the number of urban areas where TELUS TV(R) service
is offered. On September 17, TELUS TV was officially launched in the Eastern
Quebec communities of Luceville, Mont-Joli, Rimouski, Sainte-Blandine, Saint-
Georges-de-Beauce and Sainte-Luce. TELUS' digital television and entertainment
service is made possible by investments in broadband infrastructure. The
service is also available in select areas of Calgary, Greater Edmonton and the
Lower Mainland of B.C.
In August, TELUS signed an eight-year contract with the Western Canada
Lottery Corporation to implement an Alberta-wide Internet Protocol (IP)
lottery terminal network. The IP network will connect more than 2,300 lottery
ticket machines in Alberta to each other and to the WCLC headquarters in
Winnipeg.
Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy and focus TELUS' resources on core business
On June 21, 2007, TELUS had 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, 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. In its second quarter
results news release on August 3, TELUS announced it had concluded its
assessment and did not intend to submit a competing offer to acquire BCE. An
expense of approximately $4 million related to various costs of this
assessment was recorded in Other expense in the third quarter.
Investing in internal capabilities to build a high-performance
culture and efficient operations
TELUS recognizes that training is a key element for success and has
implemented many training programs. By the end of the quarter, close to
100 per cent of TELUS team members completed the mandatory online ethics and
respect course. The course is designed to help team members in their ethical
decisions at work, point them to TELUS' related policies and to teach with
case situations and dilemmas to apply judgement. Underlying this initiative is
an "Ask First, Act Later" approach when a proper course of action is unclear.
TELUS' mandatory security awareness course was also being completed by
team members. This online course interactively promotes a safe, secure
environment for clients and employees alike. It is also designed to protect
company assets, sensitive information and our client's privacy.
TELUS has hundreds of training courses including the Premier Sales
Organization training program and the training programs for the Connections
Women's Network, and the Spirited Teamwork - Stronger Together program.
Recently, the American Society for Training & Development recognized these
TELUS initiatives with a BEST award and recognized TELUS as one of the top
organizations when it comes to using employee learning and development to
enable enterprise-wide success.
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 and second 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. After two full quarters of wireless number
portability (WNP), implemented March 2007, indications are that WNP has been a
net contributing factor to increased subscriber loading (inbound porting
exceeded outbound porting). WNP initially contributed to increased wireless
customer retention costs as a percentage of revenues in the second quarter of
2007 (8.2% compared to 6.2% in 2006) and continues to contribute to a small
increase in subscriber churn (total churn was 1.45% and 1.43% in the second
and third quarters of 2007 compared to 1.30% and 1.36% in the same periods in
2006).
4.2 Operational capabilities
Regulation
To the end of September, the CRTC has granted forbearance for residential
local services in Calgary, Edmonton, Fort McMurray, Rimouski, Victoria and
most Greater Vancouver exchanges, as well as nine additional exchanges in
Eastern Quebec. The areas forborne from regulation cover more than one million
residential subscribers of TELUS. As communities are deregulated, TELUS for
the first time will be able to bring promotions and bundles of services that
are better tailored to the needs of community residents. TELUS expects to
receive decisions on a number of other applications in the near future.
In September, the CRTC granted forbearance for eligible business local
services in 35 exchanges, including Calgary, Edmonton, Fort McMurray and
Rimouski, Victoria and most of Greater Vancouver, or approximately two-thirds
of TELUS' total business lines. 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, while largely successful, 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 to maintain service levels. The critical billing
function performed as expected. At this time the backlogs have been
significantly reduced and additional call centre resources are being reduced.
The additional expenses in the third quarter were approximately $8 million or
half of the $16 million expenses recorded in the second quarter. See Section
10.3 Process risks.
Transition to the new system in 2007 reduced Wireline EBITDA by
approximately $8 million in the third quarter and $37 million in the nine-
month period. This included costs primarily related to additional temporary
labour to perform system fixes and maintain service levels were $8 million in
the third quarter and $24 million for the nine-month period. It also included
a one-time reduction of $13 million in long distance revenue recorded in the
second quarter of 2007. 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 the second quarter, the U.S. based parent company AMP'D Mobile, Inc.
entered bankruptcy proceedings in the U.S. As a result, AMP'D Mobile sales
were discontinued in Canada. In the second quarter, TELUS recorded a pre-tax
write-off of its $11.8 million equity investment in AMP'D Mobile, Inc. (in
Other expense, net) along with pre-tax adjustments of approximately $5 million
for accelerated depreciation and amortization and approximately $2 million in
Operations expense. Operations expense in the third quarter included
approximately $3 million for a write-down of subscriber equipment and write-
off of prepaid marketing costs.
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 third quarter of 2007, approximately 350,000 Common Shares
and 3.97 million Non-Voting Shares were repurchased for cancellation
for an outlay totalling $232.2 million. From December 20, 2004 to
September 30, 2007 under three NCIB programs, approximately 19
million Common Shares and 30.9 million Non-Voting Shares were
repurchased for cancellation for an outlay totalling $2.37 billion.
See Section 7.3 Cash used by financing activities.
Pay dividends
The dividend declared in the third quarter of 2007, payable on
October 1, was 37.5 cents per share, an increase of 36.4% from the
dividend declared in the third quarter of 2006. The dividend declared
for the fourth quarter of 2007 increased by 7.5 cents per share, or
20%, to 45 cents per share, which is payable on January 1, 2008.
Use proceeds from securitized receivables and bank facilities, as
needed, to supplement free cash flow and meet other cash requirements
The balance of proceeds from securitized accounts receivable
increased by a net $50 million during the third quarter of 2007,
closing at $550 million. During the second quarter, proceeds
increased from $150 million to $550 million at May 31 and were
reduced to $500 million at June 30. Increases in proceeds were used
for general corporate purposes.
Maintain a minimum $1 billion in unutilized liquidity
TELUS had more than $1.4 billion of available liquidity from
unutilized credit facilities at September 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 US$1,166.5 million, 7.50%
Notes.
Preserve access to the capital markets at a reasonable cost by
maintaining investment grade credit ratings and targeting improved
credit ratings in the range of BBB+ to A-, or the equivalent, in the
future
Three of four rating agencies put their outlooks to under review in
the second quarter due to TELUS being in non-exclusive discussions to
acquire BCE. With the TELUS' announcement in August that it did not
intend to submit a competing offer to acquire BCE, the rating
agencies in the third quarter reinstated their stable trend outlooks.
At October 31, 2007, investment grade credit ratings from the four
rating agencies that cover TELUS were in the desired range. See
Section 7.7 Credit Ratings.
---------------------------------------------------------------------
4.4 Changes in internal control over financial reporting
There were no changes in internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
5. Results from operations
5.1 General
The Company has two reportable segments: wireline and wireless.
Segmentation is based on similarities in technology, the technical expertise
required to deliver the products and services, the distribution channels used
and regulatory treatment. Intersegment sales are recorded at the exchange
value. Segmented information is regularly reported to the Company's Chief
Executive Officer (the chief operating decision-maker). See Note 5 of the
interim Consolidated financial statements.
5.2 Quarterly results summary
-------------------------------------------------------------------------
($ in millions, except
per share amounts) 2007 Q3 2007 Q2 2007 Q1 2006 Q4
-------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,204.6 1,180.1 1,205.6 1,234.3
Wireless segment 1,105.3 1,048.0 1,000.0 1,020.3
-------------------------------------------------------------------------
Operating revenues (consolidated) 2,309.9 2,228.1 2,205.6 2,254.6
Operations expense 1,316.5 1,340.3 1,436.6 1,368.6
Restructuring costs 6.4 3.2 4.7 7.9
-------------------------------------------------------------------------
EBITDA(1) 987.0 884.6 764.3 878.1
Depreciation 332.5 318.3 317.7 353.2
Amortization of intangible assets 70.1 72.5 49.6 53.9
-------------------------------------------------------------------------
Operating income 584.4 493.8 397.0 471.0
Other expense (income) 8.0 18.5 3.8 10.1
Financing costs 86.2 127.2 117.6 133.6
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 490.2 348.1 275.6 327.3
Income taxes 78.6 93.7 79.3 89.7
Non-controlling interests 1.7 1.3 1.5 1.4
-------------------------------------------------------------------------
Net income 409.9 253.1 194.8 236.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per Common Share
and Non-Voting Share
- basic 1.24 0.76 0.58 0.70
- diluted 1.23 0.75 0.57 0.69
Dividends declared per Common
Share and Non-Voting Share 0.375 0.375 0.375 0.375
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in millions, except
per share amounts) 2006 Q3 2006 Q2 2006 Q1 2005 Q4
-------------------------------------------------------------------------
Segmented revenue (external)
Wireline segment 1,200.3 1,189.9 1,198.6 1,209.9
Wireless segment 1,010.4 945.3 881.9 876.8
-------------------------------------------------------------------------
Operating revenues (consolidated) 2,210.7 2,135.2 2,080.5 2,086.7
Operations expense 1,245.8 1,207.4 1,201.1 1,316.8
Restructuring costs 12.5 30.7 16.7 35.5
-------------------------------------------------------------------------
EBITDA(1) 952.4 897.1 862.7 734.4
Depreciation 325.8 335.2 339.2 346.2
Amortization of intangible assets 57.5 46.9 63.9 67.0
-------------------------------------------------------------------------
Operating income 569.1 515.0 459.6 321.2
Other expense (income) 4.0 9.6 4.3 9.3
Financing costs 116.6 127.5 127.0 171.7
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 448.5 377.9 328.3 140.2
Income taxes 126.5 18.7 116.1 58.8
Non-controlling interests 2.4 2.6 2.1 2.9
-------------------------------------------------------------------------
Net income 319.6 356.6 210.1 78.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per Common Share
and Non-Voting Share
- basic 0.94 1.03 0.60 0.22
- diluted 0.92 1.02 0.60 0.22
Dividends declared per Common
Share and Non-Voting Share 0.275 0.275 0.275 0.275
-------------------------------------------------------------------------
(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 network revenues generated from an increasing subscriber base.
Wireless ARPU (average revenue per subscriber unit per month) declined 1.3% in
third quarter following 18 successive quarters of year-over-year increases, as
strong data growth was offset by declining voice revenues, due to shifting
product mix, pricing competition and an increase in-bucket (included minute)
usage. The consolidated revenue trend also reflected growth in wireline
segment data revenue, while wireline voice local and long distance revenues
continue to decline due to substitution for wireless and Internet services, as
well as competition from VoIP service providers, resellers and facilities-
based competitors.
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.
As described in Section 4.2, quarterly Operations expenses in 2007
include an expense for introducing a net-cash settlement feature for share
option awards. The net-cash settlement feature expense (recovery) for the
first, second and third quarters of 2007 were $173.5 million, $1.8 million and
$(7.2) million, respectively. The credit in the third quarter was an
adjustment to the initial estimate recorded. Operations expense in the fourth
quarter of 2005 was affected by temporary net labour disruption expenses of
approximately $52 million. Restructuring costs varied by quarter, depending on
the progress of ongoing initiatives underway.
The downward trend in depreciation expense was interrupted by: (i) a
provision of approximately $20 million in the third quarter of 2007 for a
reduction in estimated useful service lives for certain network assets; and
(ii) a provision of approximately $17 million in the fourth quarter of 2006 to
align estimated useful lives for TELUS Quebec assets, resulting from
integration of financial systems. With a major new wireline billing and client
care system put into service in March 2007, $18 million of additional
amortization was recorded in each of the second and third quarters of 2007,
reversing the downward trend in Amortization of intangible assets. In
addition, 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
$1.578 billion of Notes. The early redemption of Notes on December 1, 2005,
contributed to lower financing costs in the first half of 2006. The sequential
decline in financing costs in the third quarter 2007 is due to lower effective
interest rates and debt balances plus increased interest income from tax
refunds. Financing costs in the eight periods shown are net of varying amounts
of interest income.
The generally upward trend in Net income and earnings per share reflect
the items noted above as well as adjustments arising from legislated income
tax changes and tax reassessments for prior years, including any related
interest on reassessments.
-------------------------------------------------------------------------
Tax-related adjustments
($ in millions, except
EPS amounts) 2007 Q3 2007 Q2 2007 Q1 2006 Q4
-------------------------------------------------------------------------
Approximate Net income impact 93 10 4 20
Approximate EPS impact 0.28 0.03 0.01 0.06
Approximate basic EPS
excluding tax-related impacts 0.96 0.73 0.57 0.64
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Tax-related adjustments
($ in millions, except 2006 Q3 2006 Q2 2006 Q1 2005 Q4
EPS amounts)
-------------------------------------------------------------------------
Approximate Net income impact 30 118 (3) (3)
Approximate EPS impact 0.09 0.34 (0.01) (0.01)
Approximate basic EPS
excluding tax-related impacts 0.85 0.69 0.61 0.23
-------------------------------------------------------------------------
5.3 Consolidated results from operations
-------------------------------------------------------------------------
($ in millions except Quarters ended Nine-month periods
EBITDA margin in % September 30 ended Sept. 30
and Employees) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Operating revenues 2,309.9 2,210.7 4.5 % 6,743.6 6,426.4 4.9 %
Operations expense 1,316.5 1,245.8 5.7 % 4,093.4 3,654.3 12.0 %
Restructuring costs 6.4 12.5 (48.8)% 14.3 59.9 (76.1)%
-------------------------------------------------------------------------
EBITDA(1) 987.0 952.4 3.6 % 2,635.9 2,712.2 (2.8)%
Depreciation 332.5 325.8 2.1 % 968.5 1,000.2 (3.2)%
Amortization of
intangible assets 70.1 57.5 21.9 % 192.2 168.3 14.2 %
-------------------------------------------------------------------------
Operating income 584.4 569.1 2.7 % 1,475.2 1,543.7 (4.4)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense
(as adjusted)(2) 1,323.7 1,245.8 6.3 % 3,925.3 3,654.3 7.4 %
EBITDA
(as adjusted)(2) 979.8 952.4 2.9 % 2,804.0 2,712.2 3.4 %
Operating income
(as adjusted)(2) 577.2 569.1 1.4 % 1,643.3 1,543.7 6.5 %
EBITDA margin(3) 42.7 43.1 (0.4)pts 39.1 42.2 (3.1)pts
EBITDA margin
(as adjusted)(4) 42.4 43.1 (0.7)pts 41.6 42.2 (0.6)pts
Full-time equivalent
employees at end of
period 33,282 29,754 11.9 %
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) Excludes non-cash (recovery) charge of $(7.2) million and
$168.1 million, respectively, in the third quarter and first
nine 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 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 $99.2 million and
$317.2 million, respectively, in the third quarter and first nine months of
2007 when compared to the same periods in 2006. Growth in wireless network
revenue and wireline data revenue continue to exceed erosion in wireline voice
local and long distance revenues. Consolidated operating revenues for the
first nine months of 2007 include a one-time reduction of about $13 million in
long distance revenues, recorded in the second quarter. The second quarter
adjustment resulted from billing system enhancements, which provided
management with better data for estimating earned, but unbilled revenue.
Operations expense
Consolidated Operations expense increased by $70.7 million and
$439.1 million in the third quarter and first nine months of 2007,
respectively, 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 $77.9 million and $271.0 million,
respectively, primarily to support the 10.9% 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, as well
as from increased staffing. TELUS' net defined benefit pension plan expense
decreased by approximately $22 million and $66 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 1,730 at September 30, 2007 when compared to one year
earlier, while elsewhere in the wireline segment the increase was 1,222. In
the wireless segment, the number of full-time equivalent employees increased
by 576 to support growth over the same period.
Restructuring costs
Restructuring costs decreased by $6.1 million and $45.6 million in the
third quarter and first nine 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 expects restructuring
costs for the full year to be approximately $25 million.
EBITDA
Consolidated EBITDA increased by $34.6 million in the third quarter of
2007 and decreased by $76.3 million in the first nine months of 2007, when
compared to the same periods in 2006. EBITDA adjusted to exclude the net-cash
settlement feature increased by $27.4 million and $91.8 million, respectively,
in the third quarter and first nine months of 2007, when compared to the same
periods in 2006. Wireline EBITDA (as adjusted) decreased mainly due to
implementation impacts of a new wireline billing and client care system
(described in Section 4.2 Operational capabilities). Wireless segment EBITDA
(as adjusted) increased as growth in the subscriber base increased network
revenues, but was partially offset by higher operations costs to support
subscriber growth, and for the nine month period, increased cost of
acquisition (COA) related to the higher gross subscriber additions and higher
retention spend related to the implementation of wireless number portability.
Depreciation
Depreciation increased by $6.7 million in the third quarter of 2007 and
decreased by $31.7 million in the first nine months of 2007, when compared to
the same periods in 2006. The increase in the third quarter of 2007 included
approximately $20 million for a reduction in estimated useful service lives
for certain network assets. The decrease for nine-month period was primarily
due to write-downs in 2006, partly offset by the 2007 write-downs as well as
accelerated depreciation of $1.5 million in the second quarter of 2007 for
assets related to the discontinuation of AMP'D Mobile Canada services. The
2006 adjustments 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
Amortization increased by $12.6 million and $23.9 million, respectively,
in the third quarter and first nine months of 2007, when compared to the same
periods in 2006. A new wireline billing and client care system was put into
service in March 2007, increasing amortization by $18.0 million and
$36.0 million, respectively. Accelerated amortization of $3.5 million was
recorded in the second quarter of 2007 for assets related to the
discontinuation of AMP'D Mobile Canada services. These increases were partly
offset by lower amortization for other fully amortized software assets. In
addition, amortization expenses were reduced by approximately $5 million for
the first nine months of 2007 and reduced by approximately $12 million in the
first nine months of 2006 to recognize investment tax credits, now determined
eligible by the tax authority, relating to assets capitalized in prior years
that are now fully amortized.
Operating income
Operating income increased by $15.3 million in the third quarter of 2007
and decreased by $68.5 million in the first nine months of 2007, when compared
to the same periods in 2006. When adjusted to exclude the net-cash settlement
feature recorded in 2007, operating income (as adjusted) increased by
$8.1 million and $99.6 million, respectively, in the third quarter and the
first nine months. The increase was due mainly to growth in Wireless EBITDA.
Other income statement items
-------------------------------------------------------------------------
Quarters ended Nine-month periods
Other expense, net September 30 ended Sept. 30
($ millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
8.0 4.0 100.0 % 30.3 17.9 69.3 %
-------------------------------------------------------------------------
Other expense increased by $4.0 million and $12.4 million, respectively,
in the third quarter and first nine months of 2007, when compared to the same
periods in 2006. Accounts receivable securitization expenses were $7.2 million
and $15.4 million in the third quarter and first nine months of 2007, which
increased by $3.5 million and $3.0 million, respectively, from the same
periods in 2006 (see Section 7.6 Accounts receivable sale). In the third
quarter of 2007, the Company expensed approximately $4 million for various
costs of assessing whether to acquire BCE, which ultimately led to the
decision in August to not bid for BCE. For the first nine months of 2007,
increased expenses includes an $11.8 million second quarter write-off was
taken for the Company's equity investment of in AMP'D Mobile Inc.
-------------------------------------------------------------------------
Quarters ended Nine-month periods
Financing costs September 30 ended Sept. 30
($ millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Interest on long-
term debt, short-
term obligations
and other 108.8 125.6 (13.4)% 354.9 378.1 (6.1)%
Foreign exchange
losses (gains) 3.5 (0.3) n.m. 11.1 4.5 146.7 %
Interest income (26.1) (8.7) n.m. (35.0) (11.5) n.m.
-------------------------------------------------------------------------
86.2 116.6 (26.1)% 331.0 371.1 (10.8)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expenses decreased by $16.8 million and $23.2 million,
respectively, in the third quarter and first nine months of 2007, when
compared to the same periods in 2006. The decreases were primarily due to
financing activities in the first half of 2007 (see Section 7.3 Cash used by
financing activities), which resulted in a lower effective interest rate for
the third quarter and first nine months of 2007 as well as a lower average
debt balance for the third quarter, when compared to the same periods in 2006.
Partly offsetting the lower effective interest rate was a higher average debt
balance for the first nine months of 2007 as debt issues were completed in
March 2007 and commercial paper was issued in May ahead of the June 1 maturity
of $1,483.3 million (US$1,166.5 million) Notes. The Company's net debt, as
calculated in Section 11.4, was $6,121 million at September 30, 2007, down
slightly from $6,147 million one year earlier.
The decrease in interest expenses for the first nine months of 2007 also
included 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 resulting in prepaid interest of
approximately $10 million being deferred and amortized over 10 years, which is
the term of the new debt.
Interest income increased by $17.4 million and $23.5 million,
respectively, in the third quarter and first nine months of 2007, when
compared with the same periods in 2006, due primarily to recognition of
increased interest on tax refunds, and for the first nine months, increased
interest from investments.
-------------------------------------------------------------------------
Quarters ended Nine-month periods
Income taxes September 30 ended Sept. 30
($ millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Blended federal
and provincial
statutory income
tax based on net
income before tax 164.6 150.7 9.2 % 373.8 388.0 (3.7)%
Tax rate
differential on,
and consequential
adjustments from,
reassessments for
prior years (76.3) (24.9) n.m. (76.3) (23.9) n.m.
Revaluation of
future income tax
liability (8.6) - n.m. (36.5) (107.0) 65.9 %
Share option award
compensation 1.1 1.8 (38.9)% (5.4) 4.9 n.m.
Other (2.2) (1.1) (100.0)% (4.0) (0.7) n.m.
-------------------------------------------------------------------------
78.6 126.5 (37.9)% 251.6 261.3 (3.7)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Blended federal and
provincial statutory
tax rates (%) 33.6 33.6 - pts 33.6 33.6 - pts
Effective tax
rates (%) 16.0 28.2 (12.2)pts 22.6 22.6 - pts
-------------------------------------------------------------------------
The blended federal and provincial statutory income tax expense increased
in the third quarter of 2007 and decreased in first nine months of 2007, when
compared with the same periods in 2006, due primarily to the comparable
changes in income before taxes of 9.3 per cent and (3.5) per cent,
respectively. The effective tax rates were lower than the statutory tax rates
due to favourable reassessments of prior years' tax matters and revaluation of
future income tax liabilities. Revaluations of future tax liabilities resulted
from reductions to future federal income tax rates (during the second quarters
of 2007 and 2006) as well as future tax rates being applied to temporary
differences.
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 Nine-month periods
interests September 30 ended Sept. 30
($ millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
1.7 2.4 (29.2)% 4.5 7.1 (36.6)%
-------------------------------------------------------------------------
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 Nine-month periods
wireline segment September 30 ended Sept. 30
($ millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Voice local(1) 511.3 533.4 (4.1)% 1,559.0 1,592.3 (2.1)%
Voice long
distance(2) 181.3 199.1 (8.9)% 536.6 612.6 (12.4)%
Data(3) 446.3 410.8 8.6 % 1,305.7 1,207.5 8.1 %
Other 65.7 57.0 15.3 % 189.0 176.4 7.1 %
-------------------------------------------------------------------------
External operating
revenue 1,204.6 1,200.3 0.4 % 3,590.3 3,588.8 0.0 %
Intersegment
revenue 29.7 23.5 26.4 % 83.5 71.8 16.3 %
-------------------------------------------------------------------------
Total operating
revenues 1,234.3 1,223.8 0.9 % 3,673.8 3,660.6 0.4 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Voice local revenue for the first nine months of 2007, after
adjusting to exclude the impact of first-quarter 2007 regulatory
adjustments, decreased by approximately $48 million or 3%.
(2) Voice long distance revenue for first nine months of 2007, after
adjusting to exclude the second quarter 2007 impact from billing
system conversion, decreased by approximately $63 million or 10%.
(3) Data revenue for the first nine months of 2007, after adjusting to
exclude the impact of two mandated retroactive competitor price
reductions in the first quarter of 2007, grew by approximately $110
million or 9%.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Network access lines As at September 30
(000s) 2007 2006 Change
-------------------------------------------------------------------------
Residential network
access lines 2,643 2,809 (5.9)%
Business network
access lines 1,800 1,770 1.7 %
------- -------- --------
Total network
access lines(1) 4,443 4,579 (3.0)%
Quarters ended Nine-month periods
September 30 ended Sept. 30
(000s) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Change in residential
network access lines (42) (39) (7.7)% (132) (119) (10.9)%
Change in business
network access lines 7 (1) n.m. 27 7 n.m.
------- -------- -------- -------- -------- --------
Change in total
network access lines (35) (40) 12.5 % (105) (112) 6.3 %
-------------------------------------------------------------------------
(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 September 30
(000s) 2007 2006 Change
-------------------------------------------------------------------------
High-speed Internet
subscribers 994.0 872.3 14.0 %
Dial-up Internet
subscribers 164.6 205.5 (19.9)%
-------- -------- --------
Total Internet
subscribers(1) 1,158.6 1,077.8 7.5 %
Quarters ended Nine-month periods
September 30 ended Sept. 30
(000s) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
High-speed Internet
net additions 31.3 41.5 (24.6)% 77.3 109.3 (29.3)%
Dial-up Internet
net reductions (7.6) (11.4) 33.3 % (29.5) (30.7) 3.9 %
-------- -------- -------- -------- -------- --------
Total Internet
subscriber net
additions 23.7 30.1 (21.3)% 47.8 78.6 (39.2)%
-------------------------------------------------------------------------
(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 increased by $10.5 million and
$13.2 million, respectively, in the third quarter and first nine months of
2007, when compared with the same periods in 2006.
- Voice local revenue decreased by $22.1 million and $33.3 million,
respectively, in the third quarter and first nine months of 2007,
when compared with the same periods in 2006. The decreases were due
primarily to lower revenues from basic access and optional enhanced
services arising from ncreased competition for residential
subscribers offset in part by growth in business local services and
price increases allowed under regulation. For the first nine 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. Residential line losses of 42,000 in the
third quarter of 2007 reflected a sequential improvement from losses
of 56,000 in the second quarter of 2007. The net increase in business
lines was experienced in Ontario and Quebec urban non-incumbent
areas.
- Voice long distance revenues decreased by $17.8 million and
$76.0 million, respectively, in the third quarter and first nine
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 $35.5 million and
$98.2 million, respectively, in the third quarter and first nine
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 of the new billing and client care system,
which temporarily reduced the Company's order processing capability
in the second quarter and to a lesser degree, in the third 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
increased from the provision of business process outsourcing services
to customers as well as digital entertainment services to consumers
in larger urban incumbent markets.
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 were
recorded in the first quarter of 2007. Data revenue for the first
nine months of 2007 grew by approximately $110 million or 9% once
adjusted to exclude the impact of these two mandated retroactive
competitor price reductions.
- Other revenue increased by approximately $8.7 million and
$12.6 million, respectively, in the third quarter and first nine
months of 2007, when compared with the same periods in 2006. The
increases were due mainly to a reduction in the provision for
quality-of-service rate rebates, which resulted from improved service
delivery, as measured by CRTC-defined quality-of-service indicators,
and favourable decisions by the CRTC on exclusion applications for
severe weather and other extraordinary events. Voice equipment sales
increased in the third quarter, but decreased in the nine-month
period.
- Intersegment revenue represents services provided by the wireline
segment to the wireless segment. These revenues are eliminated upon
consolidation together with the associated expense in the wireless
segment.
-------------------------------------------------------------------------
Operating expenses -
wireline segment Quarters ended Nine-month periods
($ millions, except September 30 ended Sept. 30
employees) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Salaries, benefits
and other employee-
related costs,
before net-cash
settlement feature 425.2 416.8 2.0 % 1,282.1 1,247.0 2.8 %
Net-cash settlement
feature (recovery)
expense (9.5) - - 143.6 - -
Other operations
expenses 345.9 325.7 6.2 % 1,013.4 964.5 5.1 %
-------------------------------------------------------------------------
Operations expense 761.6 742.5 2.6 % 2,439.1 2,211.5 10.3 %
Restructuring costs 6.4 11.7 (45.3)% 13.6 56.4 (75.9)%
-------------------------------------------------------------------------
Total operating
expenses 768.0 754.2 1.8 % 2,452.7 2,267.9 8.1 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense
(as adjusted)(1) 771.1 742.5 3.9 % 2,295.5 2,211.5 3.8 %
Total operating
expenses
(as adjusted)(1) 777.5 754.2 3.1 % 2,309.1 2,267.9 1.8 %
Full-time equivalent
employees, end of
period(2) 25,828 22,876 12.9 %
-------------------------------------------------------------------------
(1) Excludes the net-cash settlement feature (recovery) expense.
Operations expense (as adjusted) and total operating expenses (as
adjusted) are regularly reported to the chief operating decision-
maker.
(2) The number of full-time equivalent employees providing outsourcing
services to the Company's customers was approximately 5,820 on
September 30, 2007 and approximately 4,090 on September 30, 2006.
Full-time equivalent staff elsewhere increased by 1,222 or 6.5%.
-------------------------------------------------------------------------
Total Wireline operating expenses increased by $13.8 million and
$184.8 million, respectively, in the third quarter and first nine months of
2007, when compared with the same periods in 2006. Expenses in the third
quarter included approximately $8 million of additional costs ($24 million for
the first nine months) related to the March billing and client care system
conversion. Of the additional costs, approximately $2 million ($8 million for
the first nine months) was recorded in salaries and benefits for customer
contact centres and approximately $6 million ($16 million for the first nine
months) was recorded in other operations expenses primarily for external
labour costs. External labour for the first nine-months of 2007 also included
about $4 million to deal with severe winter weather-related backlogs in early
2007 and preparation costs for expected flooding in British Columbia in the
second quarter.
Operations expense:
- Salaries, benefits and employee-related expenses increased by
$8.4 million and $35.1 million, respectively, in the third quarter
and first nine months of 2007, when compared with the same periods in
2006. The increase was mainly due to increased staffing and scheduled
compensation increases, partly offset by a lower defined benefit
pension plan expense.
- Introduction of a net-cash settlement feature for share option awards
granted prior to 2005 resulted in a non-cash charge of $143.6 million
being recorded for the first nine months of 2007. In the third
quarter of 2007, a recovery of $9.5 million was recorded for an
adjustment to the initial estimate as well as forfeitures in the
current quarter.
- Other operations expenses increased by $20.2 million and
$48.9 million, respectively, in the third quarter and first nine
months of 2007, when compared with the same periods in 2006. The
increases in the third quarter and first nine months included higher
external labour costs for billing/client care system support and
installation/repair activity to improve service levels. The remaining
third quarter increases were due to network facility costs from
higher customer demand, increased cost of sales as well as
inflationary increases. The increase for the nine-month period also
included external labour costs to help clear backlogs caused by
severe winter weather on the west coast early in 2007 and flood
preparation costs in the second quarter, partly offset by: (i) lower
transit and termination charges due to lower per-minute rates partly
offset by higher outbound minute volumes; (ii) lower expenses arising
from CRTC decisions on basic service extension features and network
access link charges; and (iii) increased capitalization of labour
related to the higher capital expenditure activity in 2007.
Restructuring costs in 2007 were for several small efficiency initiatives
and decreased by $5.3 million and $42.8 million, respectively, in the third
quarter and first nine months of 2007, when compared with the same periods in
2006.
-------------------------------------------------------------------------
EBITDA ($ millions) Quarters ended Nine-month periods
and EBITDA margin (%) September 30 ended Sept. 30
wireline segment 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
EBITDA 466.3 469.6 (0.7)% 1,221.1 1,392.7 (12.3)%
EBITDA
(as adjusted)(1) 456.8 469.6 (2.7)% 1,364.7 1,392.7 (2.0)%
EBITDA margin 37.8 38.4 (0.6)pts 33.2 38.0 (4.8)pts
EBITDA margin
(as adjusted) 37.0 38.4 (1.4)pts 37.1 38.0 (0.9)pts
-------------------------------------------------------------------------
(1) Excludes a non-cash (recovery) charge of $(9.5) million and
$143.6 million, respectively, in the third quarter and first nine
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.
-------------------------------------------------------------------------
Wireline EBITDA decreased by $3.3 million and $171.6 million,
respectively, in the third quarter and first nine months of 2007, when
compared with the same periods in 2006. Wireline EBITDA (as adjusted)
decreased by $12.8 million and $28.0 million, respectively, mainly due to
billing system conversion impacts of about $8 million and $37 million,
respectively. In addition, increased labour costs to deal with weather-related
backlogs and emergency preparations were approximately $4 million in the first
nine months of 2007.
5.5 Wireless segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Nine-month periods
wireless segment September 30 ended Sept. 30
($ millions) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Network revenue 1,034.8 944.5 9.6 % 2,969.1 2,653.2 11.9 %
Equipment revenue 70.5 65.9 7.0 % 184.2 184.4 (0.1)%
-------------------------------------------------------------------------
External operating
revenue 1,105.3 1,010.4 9.4 % 3,153.3 2,837.6 11.1 %
Intersegment
revenue 7.0 6.0 16.7 % 20.0 17.1 17.0 %
-------------------------------------------------------------------------
Total operating
revenues 1,112.3 1,016.4 9.4 % 3,173.3 2,854.7 11.2 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Key operating indicators
- wireless segment As at September 30
(000s) 2007 2006 Change
-------------------------------------------------------------------------
Subscribers -
postpaid(1) 4,334.2 3,949.1 9.8 %
Subscribers -
prepaid 1,072.3 925.2 15.9 %
-------- -------- --------
Subscribers -
total(2) 5,406.5 4,874.3 10.9 %
Digital POPs(3)
covered including
roaming/resale
(millions)(4) 31.6 31.0 1.9 %
Quarters ended Nine-month periods
September 30 ended Sept. 30
2007 2006 Change 2007 2006 Change
----------------------------------------------------
Subscriber gross
additions - postpaid 217.1 215.8 0.6 % 609.6 601.2 1.4 %
Subscriber gross
additions - prepaid 145.8 116.7 24.9 % 403.3 312.7 28.9 %
------- -------- -------- -------- -------- --------
Subscriber gross
additions - total 362.9 332.5 9.1 % 1,012.9 913.9 10.8 %
Subscriber net
additions - postpaid 98.2 108.6 (9.6)% 258.2 282.3 (8.5)%
Subscriber net
additions - prepaid 36.3 28.6 26.9 % 95.0 71.3 33.2 %
------- -------- -------- -------- -------- --------
Subscriber net
additions - total 134.5 137.2 (2.0)% 353.2 353.6 (0.1)%
ARPU($)(5) 64.80 65.67 (1.3)% 63.52 63.10 0.7 %
Churn, per
month(%)(5) 1.43 1.36 0.07pts 1.41 1.33 0.08pts
Lifetime revenue
per subscriber($)(5) 4,546 4,845 (6.2)% 4,515 4,744 (4.8)%
COA(6) per gross
subscriber
addition ($)(5) 379 386 (1.8)% 412 402 2.5 %
COA per gross
subscriber addition
to lifetime
revenue (%)(5) 8.3 8.0 0.3 pts 9.1 8.5 0.6 pts
Average minutes of
use per subscriber
per month (MOU) 410 409 0.2 % 401 403 (0.5)%
EBITDA ($ millions) 520.7 482.8 7.9 % 1,414.8 1,319.5 7.2 %
EBITDA (as adjusted)
(7) ($ millions) 523.0 482.8 8.3 % 1,439.3 1,319.5 9.1 %
EBITDA to network
revenue (%) 50.3 51.1 (0.8)pts 47.7 49.7 (2.0)pts
EBITDA (as adjusted)
to network
revenue (%) 50.5 51.1 (0.4)pts 48.5 49.7 (1.2)pts
Retention spend
to network
revenue(5) (%) 6.3 6.7 (0.4)pts 7.2 6.4 0.8 pts
EBITDA excluding COA
($ millions)(5) 658.1 611.4 7.6 % 1,832.1 1,686.9 8.6 %
EBITDA (as adjusted)
excluding COA
($ millions) 660.4 611.4 8.0 % 1,856.6 1,686.9 10.1 %
-------------------------------------------------------------------------
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 September 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 $2.3 million and $24.5 million,
respectively, in the third quarter and first nine 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 $95.9 million and $318.6 million,
respectively, in the third quarter and first nine months of 2007 when compared
with the same periods in 2006, due to the following:
- Network revenue increased by $90.3 million and $315.9 million in the
third quarter and first nine months of 2007, respectively, when
compared with the same periods in 2006. The increase was the result
of a 10.9% expansion in the subscriber base during this period. While
data ARPU increased by 40.9% to $7.20 for the third quarter and
increased by 50.7% to $6.69 for the first nine months of 2007 as
compared with $5.11 and $4.44, respectively, for the same periods in
2006, total ARPU decreased by 87 cents in the third quarter of 2007,
when compared to the same period in 2006. The change is attributed to
a shifting product mix driven by successful prepaid net additions and
maturity of the iDEN business, combined with a decline in voice ARPU.
Voice ARPU was $57.60 in the third quarter of 2007, a decrease of
$2.96 or 4.5% from the same period in 2006, caused mainly by a
greater mix of included-minute rate plans as voice MOU remained
relatively steady at 410 and increased pricing competition in the
business and discount segments of the market. Similarly, voice ARPU
declined by $1.83 or 3.1% to $56.83 for the first nine months of
2007.
Data revenues increased to 11.1% of Network revenue, or $115.9
million, in the third quarter of 2007 as compared with 7.8% of
Network revenues, or $74.1 million, in the third quarter of 2006 -
reflecting a growth rate of 56.3%. Similarly, data revenues for the
first nine months of 2007 increased to 10.6% of Network revenue, or
$315.3 million, as compared with 7.0% of Network revenue, or $188.2
million, for the same period in 2006 - reflecting a growth rate of
67.6%. This growth, driven by continued migration to full function
personal digital assistants (PDA) and EVDO-capable handsets as well
as increased EVDO coverage, was principally related to text
messaging, Internet browser activities and RIM/BlackBerry service
revenues.
At September 30, 2007, the mix of postpaid subscribers declined
slightly to 80.2% of the total cumulative subscriber base, as
compared to 81.0% from one year earlier. The 98,200 postpaid
subscriber net additions for the third quarter of 2007 represented
73.0% of all net additions as compared with 108,600 or 79.2% of all
net additions for the same period in 2006. Moreover, the 258,200
postpaid subscriber net additions for the first nine months of 2007
represented 73.1% of all net additions as compared with 282,300 or
79.8% of all net additions for the same period in 2006. Total net
subscriber additions remained strong and were down only marginally in
the third quarter and first nine months of 2007 as compared with the
same periods in 2006 as growth in prepaid largely offset the decline
in postpaid.
The blended churn rate increased in the third quarter and first nine
months of 2007 when compared with the respective periods in 2006. The
postpaid monthly churn rates for the third quarter and first nine
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 third quarter and first nine months of 2007
when compared with the same periods in 2006. Total deactivations were
228,400 for the third quarter and 659,700 for the first nine months
of 2007 as compared with 195,300 and 560,300, respectively, for the
same periods last year. Wireless number portability continued to have
an impact on churn and deactivations in the quarter and first nine
months of 2007, as compared to the prior year. However, churn at
1.43% has improved slightly from 1.45% reported in second quarter of
2007, despite a reduction in retention costs as described below.
- Equipment sales, rental and service revenue increased by $4.6 million
in the third quarter and decreased by $0.2 million, respectively, in
the third quarter and first nine months of 2007 when compared with
the same periods in 2006. The increase in the third quarter is due to
higher gross additions and related handset and accessory revenue. The
marginal decrease for the first nine months was due principally to an
increase in gross subscriber additions offset by higher retention
costs in the form of increased discounts on upgrades. Gross
subscriber additions were 362,900 for the third quarter of 2007 and
1,012,900 for the first nine months of 2007 as compared with 332,500
and 913,900, respectively, for the same periods in 2006. The higher
gross additions include the impact of increased promotional offerings
and competitive porting-in resulting from wireless number
portability. Handset revenues associated with gross subscriber
activations are included in COA per gross subscriber addition.
- Intersegment revenues represent services provided by the wireless
segment to the wireline segment and are eliminated upon consolidation
along with the associated expense in the wireline segment.
-------------------------------------------------------------------------
Operating expenses -
wireless segment Quarters ended Nine-month periods
($ millions, except September 30 ended Sept. 30
employees) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Equipment sales
expenses 163.3 148.2 10.2 % 475.3 411.3 15.6 %
Network operating
expenses 131.7 114.9 14.6 % 373.0 332.4 12.2 %
Marketing expenses 104.4 102.0 2.4 % 319.8 287.8 11.1 %
General and
administration
expenses 192.2 167.7 14.6 % 589.7 500.2 17.9 %
-------------------------------------------------------------------------
Operations expense 591.6 532.8 11.0 % 1,757.8 1,531.7 14.8 %
Restructuring costs - 0.8 (100.0)% 0.7 3.5 (80.0)%
-------------------------------------------------------------------------
Total operating
expenses 591.6 533.6 10.9 % 1,758.5 1,535.2 14.5 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense
(as adjusted)(1) 589.3 532.8 10.6 % 1,733.3 1,531.7 13.2 %
Total operating
expenses
(as adjusted)(1) 587.0 533.6 10.0 % 1,734.0 1,535.2 12.9 %
Full-time equivalent
employees at end of
period 7,454 6,878 8.4 %
-------------------------------------------------------------------------
(1) Excludes non-cash charges of $2.3 million and $24.5 million,
respectively, in the third quarter and first nine months of 2007 for
introducing a net-cash settlement feature for share option awards
granted prior to 2005. Operations expense (as adjusted) and total
operating expenses (as adjusted) are regularly reported to the chief
operating decision-maker.
-------------------------------------------------------------------------
Wireless segment total operating expenses increased by $58.0 million and
$223.3 million, respectively, in the third quarter and first nine months of
2007 when compared with the same periods in 2006. Total operating expenses as
adjusted to exclude the 2007 net-cash settlement feature increased by
$55.7 million and $198.8 million, respectively, to promote, acquire, retain
and support the 10.9% year-over-year growth in the subscriber base and the
11.9% growth in Network revenue during the first nine months of 2007.
- Equipment sales expenses increased by $15.1 million and
$64.0 million, respectively, in the third quarter and first nine
months of 2007 when compared with the same periods in 2006, due
primarily to an increase in gross subscriber activations and
increased retention activity related to wireless number portability
combined with a greater mix of data devices, partly offset by reduced
handset costs from the strong appreciation of the Canadian Dollar
against the U.S. Dollar in the third quarter of 2007. Handset costs
including data equipment associated with gross subscriber activations
are included in COA per gross subscriber addition.
- Network operating expenses increased by $16.8 million and
$40.6 million in the third quarter and first nine months of 2007,
respectively, when compared with the same periods in 2006. The
increases were principally due to higher revenue share with third
party data content providers, licensing costs on data services, site-
related expenses to support cell sites, a larger subscriber base and
higher Canadian and U.S. roaming costs. Expenses for the first nine
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 only $2.4 million or 2.4% in the
third quarter when compared to 2006, to support a 9.1% increase in
gross subscriber additions reflecting strong efficiencies in
marketing spending. For the first nine months, marketing expenses
increased by $32.0 million when compared to 2006, due primarily 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.
COA per gross subscriber addition decreased by $7 or 2.1% in the
third quarter as compared with the same period last year as an
increase in data units as a percentage of total gross subscriber
additions was offset by a favourable rate on prepaid gross subscriber
additions. COA per gross subscriber addition increased by $10 or 2.5%
for the first nine months of 2007, due principally to higher
subsidies on data units, higher advertising and promotion on new
product launches and spending related to wireless number portability.
COA was $137.4 million and $417.3 million, respectively, for the
third quarter and first nine months of 2007 as compared to
$128.6 million and $367.4 million, respectively, for the same periods
in 2006.
Retention costs as a percentage of network revenue decreased to 6.3%
in the third quarter, down from 6.7% in the same period in 2006, with
a continued focus on re-contracting high value clients. Retention
costs to Network Revenue were 7.2% in the first nine months of 2007
as compared to 6.4% in the same period in 2006, due mainly to the
impact of Wireless number portability. The lifetime revenue per
subscriber decreased in the third quarter and first nine months of
2007, when compared to the same periods in 2006 because of the
increased churn rates and lower ARPU. Consequently, COA as a
percentage of lifetime revenue increased in the third quarter and
first nine months of 2007. Lifetime revenue per subscriber and COA as
a percentage of lifetime revenue improved by $156 and 1.4 points,
respectively, compared to the second quarter of 2007.
- General and administration expense increased by $24.5 million and
$89.5 million in the third quarter and first nine 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 $22.2 million and $65.0 million
for the third quarter and first nine months of 2007, respectively.
The increases were primarily due to a 8.4% increase in employees to
support the growth in Network revenue, subscriber base, and expansion
of the client care and company-owned retail stores teams to manage
customer service levels.
- Restructuring costs for the first nine months of 2007 were in respect
of the Company's operational efficiency program.
-------------------------------------------------------------------------
Wireless segment Quarters ended Nine-month periods
EBITDA ($ millions) September 30 ended Sept. 30
and EBITDA margin (%) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
EBITDA 520.7 482.8 7.9 % 1,414.8 1,319.5 7.2 %
EBITDA
(as adjusted)(1) 523.0 482.8 8.3 % 1,439.3 1,319.5 9.1 %
EBITDA margin 46.8 47.5 (0.7)pts 44.6 46.2 (1.6)pts
EBITDA margin
(as adjusted) 47.0 47.5 (0.5)pts 45.4 46.2 (0.8)pts
-------------------------------------------------------------------------
(1) Excludes non-cash charges of $2.3 million and $24.5 million,
respectively, in the third quarter and first nine 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 $37.9 million and $95.3 million,
respectively, in the third quarter and first nine months of 2007 when compared
with the same periods in 2006. EBITDA (as adjusted) increased by $40.2 million
and $119.8 million, respectively, due to Network revenue growth partially
offset by increased COA expense related to higher gross additions, higher
retention spend due to increased data device upgrades, increased network
costs, and higher general and administration costs to support growth in
subscriber base. EBITDA in the third quarter of 2007 represents a sequential
improvement of $70.0M from EBITDA in the second quarter of 2007, while the
EBITDA margin (as adjusted) showed a sequential improvement of 4.1 percentage
points in the third quarter of 2007.
6. Financial condition
The following are changes in the Consolidated balance sheets in the nine-
month period ended September 30, 2007.
-------------------------------------------------------------------------
Sept. 30, Dec. 31, Changes Explanation of the
2007 2006 change in balance
($ millions) (adjusted)
-------------------------------------------------------------------------
Current Assets
Cash and 1.0 (11.5) 12.5 n.m. See Section 7.
temporary Liquidity and
investments, capital resources
net
Short-term 44.1 110.2 (66.1) (60.0)% Liquidation of some
investments investments of
surplus cash
Accounts 590.7 707.2 (116.5) (16.5)% Decreased by
receivable $50 million for the
net increase in
securitized accounts
receivable (see
Section 7.6), lower
days outstanding on
wireline receivables,
and receipt of
inducements for
renegotiated building
leases
Income and 269.0 95.4 173.6 182.0 % Increased recovery and
other taxes interest receivable
receivable for favourable tax
reassessments of prior
years, net of
approximately
$10 million refunds
and interest received
Inventories 170.6 196.4 (25.8) (13.1)% Primarily a seasonal
reduction of wireless
handset inventories
net of an increase to
wireline work-in-
progress inventories
Prepaid 209.0 195.3 13.7 7.0 % Primarily prepayment
expenses of annual property
and other taxes and wireless
licence fees net of
amortization
Current 16.4 40.4 (24.0) (59.4)% Primarily new net-
portion cash-settled equity
derivative swaps offset by the
assets maturity of cross-
currency swaps related
to the notes that
matured June 1, 2007
-------------------------------------------------------------------------
Current
Liabilities
Accounts 1,438.5 1,363.6 74.9 5.5 % Primarily an increase
payable in the liability for
and net-cash settled share
accrued options and increased
liabilities interest payable,
partly offset by
reduced payables for
inventories and
capital expenditures,
as well as reductions
in quality-of-service
rate rebate accruals
Income and 5.1 10.3 (5.2) (50.5)% Periodic instalment
other taxes payments made
payable
Restruct- 32.1 53.1 (21.0) (39.5)% Payments under
uring previous and current
accounts programs exceeded new
payable and obligations
accrued
liabilities
Dividends 123.4 - 123.4 n.m. Dividends payable on
payable September 30 were
remitted on the
October 1 dividend
payment date. See
Section 7.3 Cash used
by financing
activities
Advance 614.5 606.3 8.2 1.4 % Primarily increased
billings customer deposits and
and wireless billings, net
customer of draw-downs from
deposits price cap deferred
revenue
Current 6.0 1,433.5 (1,427.5) (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 13.6 165.8 (152.2) (91.8)% Maturity of cross-
portion currency swaps related
of to the note maturing
derivative June 1, partly offset
liabilities by changes to U.S.
currency forward
contracts
Current 426.5 137.2 289.3 n.m. An increase in
portion temporary differences
of for current assets and
future liabilities as well as
income partnership taxable
taxes 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 (1,358.9)(2,436.4) 1,077.5 44.2 % Mainly the repayment
capital(1) of long-term debt that
matured June 1 with
proceeds from new
long-term debt. See
Section 7.3 Cash used
by financing
activities
-------------------------------------------------------------------------
Capital 11,099.5 10,982.1 117.4 1.1 % See Sections 5.3
Assets, Consolidated results
Net from operations -
Depreciation,
Amortization as well
as 7.2 Cash used by
investing activities
-------------------------------------------------------------------------
Other Assets
Deferred 1,098.2 956.6 141.6 14.8 % Primarily pension plan
charges contributions and
pension recoveries
resulting from
favourable returns on
plan assets
Investments 30.3 35.2 (4.9) (13.9)% 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 3,168.5 3,169.5 (1.0) 0.0 % -
-------------------------------------------------------------------------
Long-Term 4,496.6 3,474.7 1,021.9 29.4 % Includes notes issued
Debt in March, commercial
paper issues under a
program established in
May, and an increase
in utilized bank
facilities, partly
offset by a reduction
in the Canadian dollar
value of 2011 U.S.
Dollar Notes. At Dec.
31, 2006, the current
portion of long-term
debt was
$1,433.5 million.
-------------------------------------------------------------------------
Other 1,760.8 1,257.3 503.5 40.0 % Primarily changes in
Long-Term U.S. Dollar exchange
Liabilities rates and a fair value
adjustment of the
derivative liabilities
associated with 2011
U.S. Dollar Notes
-------------------------------------------------------------------------
Future 1,076.8 1,023.3 53.5 5.2 % An increase in
Income temporary differences
Taxes for long-term assets
and liabilities
-------------------------------------------------------------------------
Non- 23.8 23.6 0.2 0.8 % -
Controlling
Interests
-------------------------------------------------------------------------
Shareholders'
Equity
Common 6,679.6 6,928.1 (248.5) (3.6)% Decreased primarily
equity due to NCIB
expenditures of $602.4
million, dividends of
$374.3 million and
transitional amounts
for accumulated other
comprehensive income
of $176.2 million;
partly offset by Net
income of $857.7
million and Other
comprehensive income
of $59.1 million
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
-------------------------------------------------------------------------
7. Liquidity and capital resources
7.1 Cash provided by operating activities
-------------------------------------------------------------------------
($ millions) Quarters ended Nine-month periods
September 30 ended Sept. 30
2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
831.8 570.4 45.8 % 2,354.3 2,056.5 14.5 %
-------------------------------------------------------------------------
Cash provided by operating activities increased by $261.4 million and
$297.8 million, respectively, in the third quarter and first nine months of
2007, when compared with the same periods in 2006. Changes in cash provided by
operating activities included:
- EBITDA increased by $34.6 million in the third quarter of 2007 and
decreased by $76.3 million in the first nine months of 2007, when
compared to the same periods in 2006 (as described in Section 5:
Results from operations);
- Share-based compensation payments in excess of the expense included
in EBITDA increased by $17.5 million in the third quarter of 2007
when compared with the same period in 2006 for a comparative
reduction in cash flow. Share-based compensation expense in excess of
payments in the first nine months of 2007 increased by $91.1 million
when compared with the same period in 2006, for a comparative
increase in cash flow;
- Employer contributions to employee defined benefit plans decreased by
$9.9 million and $36.8 million, respectively, in the third quarter
and first nine months of 2007, when compared to the same periods in
2006 mainly due to updated actuarial valuations;
- Interest paid increased by $28.1 million in the third quarter of 2007
and decreased by $14.4 million in the first nine months of 2007 when
compared to the same periods in 2006. The increase in the third
quarter was primarily due to new debt issues in March 2007, which
have semi-annual interest payments in September, and use of
commercial paper in the third quarter of 2007. The decrease for the
nine-month period 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, partly offset by repayment of forward starting
interest rate swaps in the first quarter of 2007;
- Interest received decreased by $15.0 million in the first nine months
of 2007 when compared to the same period in 2006, due mainly to the
receipt of interest on tax refunds in the first quarter of 2006;
- Income taxes received net of instalment payments decreased by
$93.5 million in the first nine months of 2007 when compared to the
same period in 2006, due mainly to collection of income taxes
receivable during first quarter of 2006;
- Proceeds from securitized accounts receivable increased by a net
$50 million during the third quarter and first nine months of 2007.
In the comparable periods in 2006, proceeds were reduced by
$185 million and $150 million, respectively. Consequently, operating
cash flow increased by $235 million and $200 million, respectively,
in the third quarter and first nine months of 2007 when compared to
the same periods in 2006. See Section 7.6 Accounts receivable sale;
- Cash provided by a decrease in Short-term investments was
$10.7 million and $66.1 million, respectively, in the third quarter
and first nine months of 2007, for a comparative increase in cash
flow of $109.5 million and $164.9 million, respectively, when
compared with $98.8 million cash used for Short-term investments in
the third quarter and first nine months of 2006; and
- Other changes in non-cash working capital for the respective periods.
7.2 Cash used by investing activities
-------------------------------------------------------------------------
($ millions) Quarters ended Nine-month periods
September 30 ended Sept. 30
2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
430.0 451.0 (4.7)% 1,300.1 1,253.2 3.7 %
-------------------------------------------------------------------------
Cash used by investing activities decreased by $21.0 million in the third
quarter of 2007 and increased by $46.9 million in the first nine months of
2007, when compared with the same periods in 2006. The decrease in the third
quarter was primarily due to $25 million for acquisitions in 2006. The
increase for the first nine months was primarily due to increased capital
expenditures (see below), partly offset by $44.5 million for acquisitions in
2006 and changes in other investing activities.
Assets under construction were $655.2 million at September 30, 2007, a
decrease of $70.2 million from December 31, 2006. The decrease primarily
reflects a transfer of $342.1 million to intangible assets subject to
amortization in the first quarter of 2007 for activation of certain phases of
the new consolidated wireline billing and client care system, net of increases
in other assets under construction during 2007.
-------------------------------------------------------------------------
Capital expenditures Quarters ended Nine-month periods
($ in millions, September 30 ended Sept. 30
ratios in %) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Wireline segment 302.6 311.4 (2.8)% 882.0 881.8 0.0 %
Wireless segment 131.5 112.5 16.9 % 415.8 321.4 29.4 %
-------------------------------------------------------------------------
TELUS consolidated
capital
expenditures 434.1 423.9 2.4 % 1,297.8 1,203.2 7.9 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditure
intensity ratio(1) 18.8 19.2 (0.4)pts 19.2 18.7 0.5pts
EBITDA less capital
expenditures(2) 552.9 528.5 4.6 % 1,338.1 1,509.0 (11.3)%
EBITDA (as adjusted)
less capital
expenditures(2) 545.7 528.5 3.3 % 1,506.2 1,509.0 (0.2)%
------------------------------------------------------------------------
(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.
-------------------------------------------------------------------------
Capital expenditures increased by $10.2 million and $94.6 million,
respectively, in the third quarter and first nine months of 2007, when
compared to the same periods in 2006. The capital intensity level was
consistent at about 19% of consolidated revenues in 2007 and 2006. TELUS'
EBITDA (as adjusted) less capital expenditures increased by $10.4 million in
the third quarter of 2007, when compared to the same period in 2006, as
wireless EBITDA (as adjusted) growth exceeded the increase in wireless capital
expenditures.
- Wireline segment capital expenditures decreased by $8.8 million in
the third quarter and increased by $0.2 million in first nine months
of 2007 when compared to the same periods in 2006. Expenditures
decreased for billing and client care system development in both the
third quarter and first nine months of 2007, when compared to the
same periods in 2006, because the Alberta phase of the system was put
into service in March 2007. Increases in capital expenditures
included up-front capital investment to support new enterprise
customers, network sustainment, and non-incumbent growth. Wireline
capital expenditure intensity levels were in the 24 to 25% range for
the third quarter and first nine months of 2007 and 2006. Wireline
cash flow (EBITDA less capital expenditures) was $339.1 million in
the first nine months of 2007, or a decrease of 33.6% when compared
to the same period in 2006. Wireline cash flow based on EBITDA (as
adjusted) for the first nine months of 2007 was $482.7 million, a
decrease of 5.5% from the same period in 2006.
- Wireless segment capital expenditures increased by $19.0 million and
$94.4 million, respectively, in the third quarter and first nine
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. Wireless capital expenditure
intensity levels in 2007 were 11.8% for the third quarter and 13.1%
for the first nine months of 2007 as compared to 11.1% and 11.3%,
respectively, for the same periods in 2006. Wireless cash flows
(EBITDA less capital expenditures) were $389.2 million in the third
quarter and $999.0 million for the first nine months of 2007
representing an increase of 5.1% for the quarter and no change for
the nine-month period. Wireless cash flows based on EBITDA (as
adjusted) were $391.5 million and $1,023.5 million, respectively, for
the third quarter and first nine months of 2007, or increases of 5.7%
and 2.5%, respectively, from the same periods in 2006.
7.3 Cash used by financing activities
-------------------------------------------------------------------------
($ millions) Quarters ended Nine-month periods
September 30 ended Sept. 30
2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
403.0 126.2 n.m. 1,041.7 837.3 24.4 %
-------------------------------------------------------------------------
Cash used by financing activities increased by $276.8 million and
$204.4 million, respectively, in the third quarter and first nine months of
2007, when compared with the same periods in 2006.
- Proceeds from Common Shares and Non-Voting Shares issued were $0.1
million in the third quarter of 2007 and $0.7 million for the first
nine months of 2007, as compared to $37.2 million and $82.9 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 for the third quarter of 2007 were zero because
the declared dividend for the third quarter was paid on Monday,
October 1, 2007. For the third quarter of 2006, cash dividends of
$93.8 million were remitted at the end of September and recorded in
the third quarter because the dividend payment date of October 1,
2006 was on a weekend. Cash dividends paid to shareholders in the
first nine months of 2007 were $250.9 million, compared to $284.5
million in the same period of 2006, with the decrease due primarily
to the different remittance dates for the third quarter dividend,
partly offset by an increased dividend rate for dividends paid in
2007. The fourth quarter of 2007 is expected to reflect remittance of
the declared dividends for both the third and fourth quarters.
- 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
September 30, 2007, the Company has purchased 22% of the maximum 12
million Common shares and 67% of the maximum 12 million Non-Voting
Shares under this program. From December 20, 2004 to September 30,
2007, TELUS repurchased approximately 19.0 million Common Shares and
30.9 million Non-Voting Shares for $2.37 billion under three NCIB
programs. The Company intends to renew in December the normal course
issuer bid share repurchase program for 2008.
The following table shows quarterly purchases under NCIB programs for
2007 and 2006.
Normal course issuer bid programs
-------------------------------------------------------------------------
Purchase cost
Shares repurchased ($ 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
Third quarter 743,700 1,328,600 2,072,300 37.9 81.8 119.7
-------------------------------------------------------------------------
Nine months 5,440,600 7,306,400 12,747,000 224.2 376.5 600.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
Third quarter 349,900 3,967,100 4,317,000 89.6 142.6 232.2
-------------------------------------------------------------------------
Nine months 2,654,900 7,864,400 10,519,300 202.4 400.0 602.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 of $293.9 million was
outstanding at September 30, 2007, a decrease of $369.6 million from
June 30, 2007.
- During the third quarter of 2007, utilized bank facilities increased
from $0 at June 30, 2007 to $200 million at September 30, or an
increase of $80 million since December 31, 2006.
- Debt repayments in 2007 included the $1,483.3 million to repay
US$1,166.5 million 7.50% Notes that matured on June 1, and $70
million to repay TCI 7.10% Medium-Term Notes that matured in
February.
The following are anticipated requirements to meet long-term debt
repayments, including related hedge amounts and calculated upon such long-term
debts owing as at September 30, 2007, during each of the five years ending
December 31. Interest obligations are not included.
Long-term debt maturities
-------------------------------------------------------------------------
Derivative
($ millions) Principal liability Total(1)
-------------------------------------------------------------------------
2007 (balance of year) 1.2 - 1.2
2008 5.6 - 5.6
2009 1.5 - 1.5
2010 80.8 - 80.8
2011 1,916.1 1,035.5 2,951.6
-------------------------------------------------------------------------
(1) Where applicable, principal repayments reflect foreign exchange rates
at September 30, 2007.
-------------------------------------------------------------------------
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
As at, or 12-month periods ended,
September 30 2007 2006 Change
-------------------------------------------------------------------------
Components of debt and coverage
ratios(1) ($ millions)
-------------------------------------------------------------------------
Net debt (including securitized accounts
receivables) 6,121.4 6,147.2 (25.8)
Total capitalization - book value 12,943.4 13,157.4 (214.0)
EBITDA - excluding restructuring costs -
12-month trailing 3,536.2 3,542.0 (5.8)
Net interest cost - 12-month trailing 464.6 542.8 (78.2)
-------------------------------------------------------------------------
Debt ratios
-------------------------------------------------------------------------
Fixed-rate debt as a proportion of total
indebtedness (%) 83.0 92.6 (9.6)pts
Average term to maturity of debt (years) 5.8 4.8 1.0
Net debt to total capitalization (%)(1) 47.3 46.7 0.6pts
Net debt to EBITDA - excluding
restructuring costs(1) 1.7 1.7 -
-------------------------------------------------------------------------
Coverage ratios(1)
-------------------------------------------------------------------------
Interest coverage on long-term debt 3.9 3.3 0.6
EBITDA - excluding restructuring costs
interest coverage 7.6 6.5 1.1
-------------------------------------------------------------------------
Other measures - 12-month trailing
-------------------------------------------------------------------------
Free cash flow ($ millions)(2) 1,370.3 1,449.4 (79.1)
Dividend payout ratio (%)(1) 46 39 7pts
-------------------------------------------------------------------------
(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 share capital and lower
net debt, 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 September 30, 2007 when compared to one year earlier. The
average term to maturity of debt of 5.8 years at September 30, 2007 represents
an increase from 4.5 years at December 31, 2006 due to repayment of maturing
notes on June 1 and the March debt issue, net of commercial paper issues in
beginning in May. The proportion of debt on a fixed-rate basis decreased from
one year-earlier with the issue of commercial paper as well as higher
outstanding balances of bank facilities and securitized accounts receivable.
Interest coverage on long-term debt improved by 0.3 because of lower
interest expenses, and improved by 0.3 because of increased income before
taxes and interest expense. The EBITDA interest coverage ratio improved by 1.1
due to lower net interest 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 lower interest paid and improved EBITDA
before share-based compensation. The dividend payout ratio based on actual
earnings at September 30, 2007 was 46% and the ratio calculated to exclude the
impacts of tax-related adjustments and the charge for introducing the net-cash
feature was also 46%.
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 EBITDA of 1.5 to 2.0 times; and
- Dividend payout ratio of 45 to 55% of sustainable net earnings.
The Company no longer considers the ratio Net debt to total
capitalization to be a long-term policy measure. The measure is based on book
values of net debt and equity; however, the book value of equity has been
reduced significantly by cumulative effect of normal course issuer bids, which
includes the market value of equity in excess of book value.
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.
At September 30, 2007, TELUS had available liquidity exceeding
$1.4 billion from unutilized credit facilities, consistent with the Company's
objective of maintaining at least $1 billion of unutilized liquidity.
TELUS Credit Facilities at September 30, 2007
-------------------------------------------------------------------------
Backstop
Outstanding for
undrawn commer-
letters cial
of paper Available
($ in millions) Expiry Size Drawn credit program liquidity
-------------------------------------------------------------------------
Five-year
revolving May 1,
facility(1) 2012 2,000.0 (200.0) (103.7) (293.9) 1,402.4
Other bank
facilities - 77.2 - (2.9) - 74.3
-------------------------------------------------------------------------
Total - 2,077.2 (200.0) (106.6) (293.9) 1,476.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 1.7:1 at September
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
7.6:1 at September 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 associated with a
major Schedule I bank, under which TCI is able to sell an interest in certain
of its trade receivables up to a maximum of $650 million. As a result of
selling the interest in certain of the trade receivables on a fully serviced
basis, a servicing liability is recognized on the date of sale and is, in
turn, amortized to earnings over the expected life of the trade receivables.
This revolving-period securitization agreement had an initial term ending
July 18, 2007; the November 30, 2006 amendment resulted in the term being
extended to July 18, 2008.
TCI is required to maintain at least a BBB (low) credit rating by
Dominion Bond Rating Service (DBRS) or the securitization trust may require
the sale program to be wound down. The necessary credit rating was exceeded by
three levels at A (low) as of August 1, 2007.
-------------------------------------------------------------------------
Balance of proceeds from 2007 2007 2007 2006 2006 2006 2006 2005
securitized receivables Sept. June Mar. Dec. Sept. June Mar. Dec.
($ millions) 30 30 31 31 30 30 31 31
-------------------------------------------------------------------------
550.0 500.0 150.0 500.0 350.0 535.0 400.0 500.0
-------------------------------------------------------------------------
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. Following 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."
Following TELUS' earnings announcement on August 3, 2007, in which
management indicated that TELUS did not intend to make a competing offer for
BCE, DBRS affirmed its ratings and restored its trend to stable. On August 7,
Moody's affirmed its ratings and restored the outlook to stable. On
September 26, S&P removed TELUS and TCI from credit watch, affirmed the
ratings for TELUS and TCI and changed the outlook to stable.
-------------------------------------------------------------------------
Credit rating summary DBRS S&P Moody's Fitch
-------------------------------------------------------------------------
TELUS Corporation
Senior bank debt - - - BBB+
Notes A (low) BBB+ Baa1 BBB+
Commercial paper R-1 (low) - - -
TELUS Communications Inc. (TCI)
Debentures A (low) BBB+ - BBB+
Medium-term notes A (low) BBB+ - BBB+
First mortgage bonds A (low) A- - -
Trend or outlook Stable Stable Stable 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) September 30, 2007
-------------------------------------------------------------------------
Hedging
item
maximum
maturity Notional Carrying Fair
date amount amount value
-------------------------------------------------------------------------
Liabilities
Long-term debt
Principal 4,502.6 4,886.1
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 1,201.5
---------
1,201.5
- Interest payable 32.3
---------
Net 1,233.8 1,233.8
Derivatives(1) used to manage
interest rate risk associated
with planned refinancing of debt
maturing June 1, 2007 2007 - - -
-------------------------------------------------------------------------
5,736.4 6,119.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at ($ millions) 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 nine-month period ended September 30, 2007. Changes to
maturities of long-term debt as a result of financing activities in the first
nine months of 2007 were described in Section 7.3 above. Uncertain income tax
positions are substantially funded.
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 to 115 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,
filed an update to the previously filed submission on September 4, 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 and updated in
Section 10.4 Litigation and legal matters.
7.9 Outstanding share information
The following is a summary of the outstanding shares for each class of
equity at September 30 and October 12, 2007. In addition, for October 12,
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 Sept. 30 and
Oct. 12, 2007 176.0 151.4 327.4(1)
Options outstanding and issuable(2)(3)
at Oct. 12, 2007 0.5 16.1 16.6
-------------------------------------------------------------------------
Outstanding and issuable shares at
Oct. 12, 2007 176.5 167.5 344.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share, the
number of shares for the third quarter of 2007 was 332.8.
(2) Assuming full conversion and ignoring exercise prices.
(3) Not reduced for any options that may have been forfeited or expired
in the period October 1 to 12, 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 evolved
and converged with International Financial Reporting Standards (IFRS) 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 IFRS 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 IFRS; and
standards not subject to a joint-convergence project will be exposed in an
omnibus manner for introduction at the time of the complete changeover to
IFRS.
As the International Accounting Standards Board currently, and
expectedly, has projects underway that should result in new pronouncements
that continue to evolve IFRS, and that this Canadian 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 Canadian
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; presentation
In respect of its 2007 fiscal year, the Company must comply with the
recommendations of the CICA for financial instrument disclosure and
presentation (CICA Handbook Section 3861). As an activity consistent with
Canadian GAAP being evolved and converged with IFRS, the existing
recommendations for financial instrument disclosure will be replaced with new
recommendations (CICA Handbook Section 3862); the existing recommendations for
financial instrument presentation will be carried forward, unchanged (CICA
Handbook Section 3863).
Commencing with the Company's 2008 fiscal year, the new recommendations
of the CICA for financial instrument disclosures 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.
Inventories
Commencing with the Company's 2008 fiscal year, the new, IFRS-converged
recommendations of the CICA for accounting for inventories (CICA Handbook
Section 3031) will apply to the Company. The new recommendations provide more
guidance on the measurement and disclosure requirements for inventories;
significantly, the new recommendations allow the reversals of previous write-
downs to net realizable value where there is a subsequent increase in the
value of inventories. The Company does not expect to be materially affected by
the 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 and second quarter
Management's discussion and analyses, as well as this report.
The Company has revised its annual guidance for 2007 to reflect tax-
related recoveries, continuing focus on profitable subscriber growth, and the
impact on high-speed Internet net additions from temporarily reduced order
processing capability resulting from the billing and client care system
conversion, and other factors.
-------------------------------------------------------------------------
Revised guidance Previous guidance Change
for 2007 for 2007
(Second quarter MD&A)
-------------------------------------------------------------------------
Consolidated
Narrowed range
and reduced by
Revenues $9.125 to $9.175 to $50 to
$9.175 billion $9.275 billion $100 million
EBITDA(1) $3.725 to $3.725 to Reduced upper
(as adjusted)(2) $3.775 billion $3.825 billion end of range by
$50 million
Earnings per share
(as adjusted)(3) $3.55 to $3.65 $3.25 to $3.45 Increased 20 to
30 cents and
narrowed range
Capital expenditures No Change Approx. No Change
$1.75 billion
-------------------------------------------------------------------------
Wireline segment
Revenue (external) $4.85 to $4.85 to Reduced upper
$4.875 billion $4.9 billion end of range by
$25 million
EBITDA $1.80 to $1.775 to Increased
(as adjusted)(2) $1.825 billion $1.825 billion lower end of
range by
$25 million
Capital expenditures No Change Approx. No Change
$1.2 billion
High-speed Internet Approx. More than Reduced by
net additions 110,000 125,000 approx. 15,000
-------------------------------------------------------------------------
Wireless segment
Narrowed range
and reduced by
Revenue (external) $4.275 to $4.325 to $50 to
$4.30 billion $4.375 billion $75 million
Narrowed range
and reduced by
EBITDA $1.925 to $1.95 to $25 to
(as adjusted)(2) $1.95 billion $2.0 billion $50 million
Capital expenditures No Change Approx. No Change
$550 million
Wireless subscriber Approx. More than Reduced by
net additions 530,000 550,000 20,000
-------------------------------------------------------------------------
(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
$170 million in 2007 for introducing the net-cash settlement feature,
of which, approximately $145 million is in wireline and approximately
$25 million is in wireless.
(3) Excluding an after-tax charge per share of approximately $0.32 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. Where applicable, updates are
provided for the key assumptions.
-------------------------------------------------------------------------
Key assumption for 2007 targets Actual result for the year to-date
-------------------------------------------------------------------------
Canadian real GDP growth of 2.7% In its Autumn outlook, the Conference
(revised to 2.6%) Board of Canada issued revised
estimates for Canadian real GDP growth
of 2.6% for 2007 and 2.8% for 2008
Increased wireline competition Evidence of healthy competition within
in both business and consumer TELUS' incumbent business and consumer
markets, particularly from markets are forbearance decisions from
cable-TV and VoIP companies the CRTC that cover urban areas with
more than one million residential
subscribers and 35 business exchanges
that serve more than two-thirds of
TELUS total business lines.
Forbearance for local retail Assumption confirmed for residential
wireline services in major services by early August and for
urban markets by the second retail business services by late
half of 2007 September. 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 Based on Company estimates and Canadian
market penetration gain of industry net additions in the first
4.5 to five percentage points half of 2007 (excluding any impacts of
competitors' subscriber write-offs),
the industry penetration gain for 2007
is trending within the key assumption
range
TELUS would record approximately Restructuring costs are expected to be
$50 million of restructuring approximately $25 million in 2007
expenses (see revision)
TELUS' statutory income tax rate Assumptions unchanged. See Section 5:
is expected to be 33 to 34% Consolidated results from operations -
with minimal cash tax payments Income taxes
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 outstanding Average shares outstanding of
of 330 to 335 million shares 333.5 million for the first nine
for the full year months of 2007 was 3% lower than the
same period in 2006, and is 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
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 - Telecom Decisions 2007-64, 2007-84, 2007-92 and
2007-97
The CRTC granted forbearance on August 3 (Decision 2007-64) for incumbent
residential local services in Victoria, most of Greater Vancouver, Calgary,
Edmonton and Rimouski. Forbearance was also granted on September 10 (Decision
2007-84) for nine additional exchanges in Eastern Quebec. The areas forborne
from regulation cover more than one million residential subscribers and TELUS
expects to receive decisions on a number of other applications in the near
future.
TELUS also applied for deregulation of business local services in phone
exchanges covering 78 per cent of business lines in B.C. and Alberta, and
52 per cent in Eastern Quebec. In Telecom Decision 2007-92 on September 27,
the CRTC granted forbearance for eligible business local services in 35
exchanges, including Victoria, most of Greater Vancouver, Calgary, Edmonton,
Fort McMurray and Rimouski, which cover about two-thirds of TELUS' total
business lines. Decision 2007-92 deregulated services such as single and
multi-line business access, features and bundles, integrated services digital
network primary rate interface (ISDN-PRI) and direct-in-dial (DID). TELUS' IP-
One Evolution(R) service, Centrex service and enhanced exchange wide dialling
(EEWD) lines were not included in this decision and are expected to be
addressed in proceedings under Telecom Public Notice 2007-14, in early 2008.
There can be no assurance that forbearance will be granted for any or all of
the exchanges or services included in the Company's outstanding or future
forbearance applications.
On October 5, 2007, in Decision 2007-97, the CRTC eliminated winback
rules for telecommunication companies' incumbent ADSL Internet services as
well as for large cable carriers' higher-speed access services.
With these forbearance and winback decisions, pricing and marketing of
retail local services can be set by the marketplace, rather than by
regulators. TELUS expects to bundle services and features in new ways to
better meet customer needs. However, competitive intensity is expected to
increase as the entire industry is expected to be more innovative.
Essential services - Application to review and vary Ethernet and
ADSL orders (Telecom Decision 2007-77)
In this decision in August, the CRTC rescinded its previous orders with
respect to implementation of new services and new rates that were ordered in
Ethernet and high-speed Internet (ADSL) decisions in January 2007. The
commission also approved deferral account compensation for revenues forgone as
a result of its previous determination to retroactively reduce TELUS ADSL
central office activation fees. 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
TELUS' remaining exclusion application 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, was decided favourably in August 2007 in
Decision 2007-72. TELUS will not be required to issue rebates.
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 was achieved in September 2007.
Experience from two full quarters 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 initially to
increased wireless customer retention costs as a percentage of revenues in the
second quarter of 2007 and a slight increase in subscriber churn in the second
and third quarters of 2007. Subscriber churn and retention costs 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 for 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 approximately 520 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, and to a lesser degree in the third 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 additional call centre
operations are being reduced. Additional post-conversion expenses were
approximately $8 million in the third quarter, down from $16 million in the
second quarter. 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. Although the Company expects to benefit from
lessons learned in the Alberta conversion, the legacy systems in B.C. are
different enough that 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.
10.4 Litigation and legal matters
Certified 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. The class was certified on September 17,
2007 by the Saskatchewan Court of Queen's Bench. The Company has applied for
leave to appeal the certification decision. The Company believes that it has
good defences to the action.
Similar proceedings have been filed by, or on behalf of, plaintiffs'
counsel in other provincial jurisdictions, but are not expected to proceed
until the Saskatchewan action has been decided. 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; management's assessments and assumptions include that
a reliable estimate of the exposure cannot be made at this preliminary stage
of the lawsuit.
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 ended Nine-month periods
September 30 ended September 30
($ millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
Net income 409.9 319.6 857.8 886.3
Other expense (income) 8.0 4.0 30.3 17.9
Financing costs 86.2 116.6 331.0 371.1
Income taxes 78.6 126.5 251.6 261.3
Non-controlling interest 1.7 2.4 4.5 7.1
-------------------------------------------------------------------------
Operating income 584.4 569.1 1,475.2 1,543.7
Depreciation 332.5 325.8 968.5 1,000.2
Amortization of intangible
assets 70.1 57.5 192.2 168.3
-------------------------------------------------------------------------
EBITDA 987.0 952.4 2,635.9 2,712.2
Add back: Non-cash (recovery)
charge in 2007 for introducing
a net-cash settlement feature
for options granted prior
to 2005 (7.2) - 168.1 -
-------------------------------------------------------------------------
EBITDA (as adjusted) 979.8 952.4 2,804.0 2,712.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In addition to EBITDA, TELUS calculates EBITDA less capital expenditures
as a simple proxy for cash flow at a consolidated level and 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 ended Nine-month periods
September 30 ended September 30
($ millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
EBITDA 987.0 952.4 2,635.9 2,712.2
Capital expenditures (434.1) (423.9) (1,297.8) (1,203.2)
-------------------------------------------------------------------------
EBITDA less capital expenditures 552.9 528.5 1,338.1 1,509.0
Add back: Non-cash charge in
2007 for introducing a net-
cash settlement feature for
options granted prior to 2005 (7.2) - 168.1 -
-------------------------------------------------------------------------
EBITDA (as adjusted) less
capital expenditures 545.7 528.5 1,506.2 1,509.0
-------------------------------------------------------------------------
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 ended Nine-month periods
September 30 ended September 30
($ millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
Cash provided by operating
activities 831.8 570.4 2,354.3 2,056.5
Cash (used) by investing
activities (430.0) (451.0) (1,300.1) (1,253.2)
-------------------------------------------------------------------------
401.8 119.4 1,054.2 803.3
Net employee defined benefit
plans expense 24.0 1.5 69.0 4.4
Employer contributions to
employee defined benefit plans 18.9 28.8 67.5 104.3
Amortization of deferred gains
on sale-leaseback of buildings,
amortization of deferred
charges and other, net (5.9) (3.9) (1.1) (12.5)
Reduction (increase) in
securitized accounts receivable (50.0) 185.0 (50.0) 150.0
Non-cash working capital changes
(except changes in taxes,
interest, and securitized
accounts receivable) and other 118.2 161.9 3.5 246.9
Acquisition - 25.0 - 44.5
Proceeds from the sale of
property and other assets (4.1) (6.9) (5.4) (14.9)
Other investing activities - 9.0 7.7 20.4
-------------------------------------------------------------------------
Free cash flow 502.9 519.8 1,145.4 1,346.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following shows management's calculation of free cash flow.
-------------------------------------------------------------------------
Quarters ended Nine-month periods
September 30 ended September 30
($ millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
EBITDA 987.0 952.4 2,635.9 2,712.2
Restructuring costs net of
cash payments 3.3 (1.2) (21.0) 2.2
Share-based compensation (3.3) 14.2 126.4 35.3
Donations and securitization
fees included in Other expense (9.2) (8.5) (27.6) (20.6)
Cash interest paid (41.1) (13.0) (283.2) (297.6)
Cash interest received 1.4 0.6 8.9 23.9
Income taxes received (paid),
less investment tax credits
received that were previously
recognized in either EBITDA or
capital expenditures, and other (1.1) (0.8) 3.8 94.2
Capital expenditures (434.1) (423.9) (1,297.8) (1,203.2)
-------------------------------------------------------------------------
Free cash flow 502.9 519.8 1,145.4 1,346.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11.3 Definition of key operating indicators
These measures are industry metrics and are useful in assessing the
operating performance of a wireless company.
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.
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 is on a prospective basis, rather than on a trailing basis, and
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 $22.2 million and $95.4 million, respectively, for
the twelve-month periods ended September 30, 2007 and 2006.
EBITDA - excluding restructuring costs interest coverage is defined as
EBITDA excluding restructuring costs divided by Net interest cost.
Historically, this measure is substantially the same as the Coverage Ratio
covenant in TELUS' credit facilities.
Interest coverage on long-term debt is calculated on a 12-month trailing
basis as Net income before interest expense on long-term debt and income tax
expense divided by interest expense on long-term debt. Interest expense on
long-term debt for the 12-month trailing period ending September 30, 2006
includes losses on redemption of long-term debt. The 12-month periods ended
September 30, 2007 and 2006 also include accruals for estimated costs to
settle a lawsuit.
Net debt is a non-GAAP measure whose nearest GAAP measure is the sum of
Long-term debt and Current maturities of long-term debt, as reconciled below.
Net debt is one component of a ratio used to determine compliance with debt
covenants (refer to the description of Net debt to EBITDA below).
-------------------------------------------------------------------------
As at As at As at
Sept. 30, Dec. 31, Sept. 30,
($ millions) 2007 2006 2006
-------------------------------------------------------------------------
Long-term debt including current portion 4,502.6 4,908.2 4,764.5
Debt issuance costs netted against
long-term debt 31.5 19.9 21.5
Derivative liability 1,201.5 838.5 985.8
Accumulated other comprehensive income
amounts arising from financial
instruments used to manage interest
rate and currency risks associated
with U.S. Dollar denominated debt (163.2) - -
-------------------------------------------------------------------------
Debt 5,572.4 5,766.6 5,771.8
Deduct Cash and temporary investments (1.0) 11.5 25.4
Add proceeds from securitized accounts
receivable 550.0 500.0 350.0
-------------------------------------------------------------------------
Net debt 6,121.4 6,278.1 6,147.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The derivative 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 September 30, 2007, is in
respect of the US$1,925.0 million debenture maturing June 1, 2011. At
December 31, 2006 and September 30, 2006, the derivative liability was in
respect of the 2011 debenture and the US$1,166.5 million debenture that
matured June 1, 2007. Management believes that Net debt is a useful measure
because it incorporates the exchange rate impact of cross currency swaps put
into place that fix the value of U.S. Dollar denominated debt, and because it
represents the amount of long-term debt obligations that are not covered by
available cash and temporary investments.
Net debt to EBITDA - excluding restructuring costs is defined as Net debt
as at the end of the period divided by the 12-month trailing EBITDA excluding
restructuring costs. TELUS' guideline range for Net debt to EBITDA is from 1.5
to 2.0 times. Historically, Net debt to EBITDA - excluding restructuring costs
is substantially the same as the Leverage Ratio covenant in TELUS' new credit
facilities.
Net debt to total capitalization provides a measure of the proportion of
debt used in the Company's capital structure. The long-term target ratio for
Net debt to total capitalization is 45 to 50%.
Net interest cost is defined as Financing costs before gains on
redemption and repayment of debt, calculated on a 12-month trailing basis. No
gains on redemption and repayment of debt were recorded in the respective
periods. Losses recorded on the redemption of long-term debt are included in
net interest cost. Net interest costs for the 12-months ending September 30,
2007 and 2006 are equivalent to reported quarterly financing costs over those
periods.
Total capitalization - book value excludes Accumulated other
comprehensive income (loss) and is calculated as follows.
-------------------------------------------------------------------------
As at As at As at
Sept. 30 Dec. 31 Sept. 30
($ millions) 2007 2006 2006
-------------------------------------------------------------------------
Net debt 6,121.4 6,278.1 6,147.2
Non-controlling interests 23.8 23.6 22.3
Shareholders equity 6,679.6 6,928.1 6,987.9
Accumulated other comprehensive loss 118.6 - -
-------------------------------------------------------------------------
Total capitalization - book value 12,943.4 13,229.8 13,157.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 2, 2007
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary