Strong data and wireless results with record wireless additions
VANCOUVER, Aug. 8 /PRNewswire-FirstCall/ - TELUS Corporation today
reported its financial results for the second quarter of 2008, including
revenue of $2.4 billion, an eight per cent increase from a year ago. The
performance was driven by nine per cent growth in wireless revenue and 20
per cent growth in wireline data revenue. Wireless net additions were a
second quarter record at 175,600. Earnings before interest, taxes,
depreciation and amortization (EBITDA) as adjusted increased by 3.5 per
cent when compared to the same period a year ago.
Net income in the quarter was $267 million and earnings per share (EPS)
were $0.83, up 5.5 per cent and nine percent, respectively, compared to the
same period in 2007. The second quarter of 2007 included favourable
tax-related adjustments of $10 million or three cents a share while there
were no tax-related adjustments in 2008. Free cash flow of $302 million
increased 87 per cent, driven primarily by lower capital expenditures,
improved EBITDA and lower interest expense.
FINANCIAL HIGHLIGHTS
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C$ in millions,
except per share amounts 3 months ended
June 30
(unaudited) 2008 2007 % Change
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Operating revenues 2,398.7 2,228.1 7.7
EBITDA(1) 917.6 884.6 3.7
EBITDA (as adjusted)(2) 917.3 886.4 3.5
Income before income taxes and
non-controlling interest 381.4 348.1 9.6
Net income(3) 267.0 253.1 5.5
Earnings per share (EPS), basic(3) 0.83 0.76 9.2
Cash provided by operating activities 461.0 1,061.9 (56.6)
Capital expenditures 435.6 481.8 (9.6)
Free cash flow(4) 302.3 161.7 87.0
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring costs. See Section 11.1 of Management's discussion
and analysis.
(2) Excludes a charge (recovery) of $(0.3) million and $1.8 million to
Operations expense in 2008 and 2007, respectively, for introducing a
net-cash settlement feature for share option awards granted prior to
2005.
(3) Net income and EPS for the three month period in 2008 included no
favourable tax related adjustments compared to $10 million or 3 cents
for the same period in 2007.
(4) See Section 11.2 of Management's discussion and analysis.
Darren Entwistle, TELUS president and CEO said, "On strategy growth
continued in data and wireless this quarter with solid operational
execution on multiple fronts. This included strong second quarter wireless
customer additions and increased momentum on high-speed Internet additions.
We are updating annual guidance to reflect this positive performance,
including increased guidance for revenue. We are also pleased with the
initial success in converting more than one million residential customers
in British Columbia from various legacy systems to our recently developed
integrated billing and client care system."
"We continue to urge the federal government to pursue its stated goal
of making Canada the most connected country in the world by investing a
portion of the $4.25 billion raised in the recently concluded wireless
spectrum auction," said Mr. Entwistle. "Canada has an unprecedented
opportunity to enhance our global competitiveness by bringing broadband
Internet services to hundreds of rural communities."
Robert McFarlane, executive vice president and CFO, noted, "as a result
of good operational execution year to date, we have made upward revisions
to full year 2008 revenue guidance, as well as narrowing the ranges for
EBITDA and EPS guidance, while maintaining existing guidance for
non-spectrum capital expenditures."
Mr. McFarlane also stated, "the 50 per cent expansion of our commercial
paper program to $1.2 billion announced today enhances our flexibility and
access to financing at attractive rates."
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This news release contains statements about expected future events and
financial and operating results of TELUS that are forward-looking. By
their nature, forward-looking statements require the Company to make
assumptions and are subject to inherent risks and uncertainties. There is
significant risk that the forward-looking statements will not prove to be
accurate. Readers are cautioned not to place undue reliance on forward-
looking statements as a number of factors could cause actual future
results and events to differ materially from that expressed in the
forward-looking statements. Accordingly this news release is subject to
the disclaimer and qualified by the assumptions (including assumptions
for 2008 guidance and share purchases), qualifications and risk factors
referred to in the Management's discussion and analysis - August 6, 2008.
Except as required by law, TELUS disclaims any intention or obligation to
update or revise forward-looking statements, and reserves the right to
change, at any time at its sole discretion, its current practice of
updating annual guidance.
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OPERATING HIGHLIGHTS
TELUS wireless
- External revenues increased by $94 million or 9% to $1.14 billion in
the second quarter of 2008, compared with the same period in 2007
- Wireless data revenue increased $55 million or 54% due to the
continued adoption of full function smartphones and increased
adoption of data services such as text messaging, web browsing and
downloads
- ARPU (average revenue per subscriber unit per month) declined by 1.4%
to $62.73 compared to the same quarter a year ago. The fast-growing
data component of $9.17, represented 15% of ARPU, while the voice
component continued to decline as a result of the increased prepaid
subscriber base, lower pricing, including use of included-minute rate
plans and lower inbound roaming
- Net subscriber additions increased 37% to 175,600 from the same
quarter in 2007, a TELUS second quarter record. Postpaid net
additions were 157,200, an increase of 59%, while net prepaid loading
decreased 37% to 18,400. These results include those from TELUS'
postpaid value brand and service which was launched in late March
2008
- EBITDA as adjusted of $486 million is an increase of $34 million over
the second quarter of 2007 representing 7% growth, due to increased
network revenue and lower cost of acquisition (COA) expense,
partially offset by increased customer retention costs and network
and other expenses to support the 11% growth in the wireless
subscriber base, data revenue and the launch of a value brand
- Cost of acquisition per gross addition decreased 22% year-over-year
to $332 reflecting slightly higher advertising and promotions costs
spread over the 19% increase in gross additions, a higher proportion
of new subscribers from lower cost distribution channels and lower
equipment subsidies
- Blended monthly subscriber churn decreased slightly to 1.43% from
1.45% a year ago due to lower postpaid churn supported by successful
retention activities. The second quarter of 2008 and 2007 reflect the
first full comparable quarters with wireless number portability (WNP)
in place
- Cash flow (EBITDA as adjusted less capital expenditures) increased
$92 million or 33% to $371 million in the quarter due to an increase
in EBITDA and lower capital spending.
TELUS wireline
- External revenues increased by $76 million or 6.5% to $1.26 billion
in the second quarter of 2008, when compared with the same period in
2007, as data growth more than offset the declines in local revenues
- Data revenues increased by $87 million or 20% due to revenues from
the two January acquisitions (Emergis and Fastvibe), increased
enhanced data and hosting services, as well as high-speed Internet
subscriber growth. When adjusted for the two acquisitions and a
regulatory adjustment in the second quarter of 2007, underlying data
growth was approximately 7%
- Long distance revenues increased by $7 million due to a one-time
negative adjustment of $13 million recorded in the same period a year
ago with the implementation of a new converged billing and client
care system in Alberta
- TELUS added 23,600 net high-speed Internet subscribers, a 70%
increase from a year ago. The prior year's additions were temporarily
constrained by the implementation of a new billing and client care
system in Alberta that temporarily reduced order processing
capability
- EBITDA as adjusted of $431 million declined by $2.6 million or 0.6%
due primarily to increased cost of sales, including TELUS TV, and
initial costs for implementing enterprise customer contracts
- Network access lines (NALs) declined by 40,000 in the quarter, and
3.4% from a year ago, reflecting a slight sequential improvement.
Consistent with experience in recent years, residential NAL losses
were due to ongoing competitive activity and wireless substitution,
partially mitigated by an increase in business access lines
- Cash flow (EBITDA as adjusted less capital expenditures) decreased
$15 million or 12% to $110 million in the quarter due to slightly
lower EBITDA as adjusted and a small increase in capital
expenditures.
Corporate Developments
B.C. billing and client care system conversion
In mid-July, following a large trial, TELUS successfully converted more
than one million wireline residential customers in British Columbia to a
new billing and client care system. This converges to the system in
Alberta, and for the first time most customers in Alberta and B.C. are now
on the same billing and client care system. During the B.C. conversion,
TELUS has applied learnings from the Alberta conversion in 2007 and the
early experience has been positive. 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.
AWS spectrum auction concludes
Industry Canada's Advanced Wireless Services (AWS) spectrum auction
concluded on July 21, 2008 raising more than $4.25 billion dollars for the
government with 282 licences conditionally assigned to 15 companies.
Successful bidders will be eligible to receive licences after making their
final payments and showing compliance with Canadian ownership and control
requirements.
In line with TELUS' national growth strategy focused on wireless, data
and IP, the company bid to acquire additional spectrum across Canada for a
cost of approximately $880 million. AWS spectrum increases the depth of
TELUS' strong spectrum position, and is expected to provide capacity for
the introduction of future 4G (fourth generation) service offerings.
TELUS expects to face new competition in the future as a result of the
recent auction. However, the number and long-term viability of all new
entrants in various markets remain uncertain because of build-out
requirements, spectrum and start-up costs, capital market conditions, and
restrictions on foreign investment.
TELUS is encouraging the Government of Canada to invest a portion of
the $4.25 billion raised in the wireless spectrum auction to pursue its
stated goal of making Canada the most connected country in the world. The
auction raised almost three times the anticipated $1.5 billion, giving
Canada an unprecedented opportunity to bring broadband Internet services to
thousands of rural communities.
TELUS expands commercial paper program by $400 million
On August 7th, DBRS provided credit rating support for a 50 per cent
increase in TELUS' commercial paper (CP) program to $1.2 billion. This
provides increased flexibility and more attractive short term rates for
TELUS, including future funding of commitments related to the AWS wireless
spectrum from the recently concluded auction. At the end of the second
quarter, there was $800 million outstanding on TELUS' commercial paper
program, demonstrating strong demand for TELUS debt in the Canadian market.
TELUS appeals deferral account decision
TELUS filed appeals with the CRTC and the federal cabinet asking them
to consider allowing TELUS to connect more remote Canadian communities to
broadband Internet services using Deferral Account funds. TELUS believes
this is an opportunity to work with governments, rural and First Nations
communities to bring the benefits of broadband Internet to Canadians who
live and work in remote areas.
TELUS believes all Canadians benefit when our nation's rural
communities have access to broadband Internet service and all of the
business, economic and educational opportunities it creates. TELUS
continues to work with the CRTC to find a way to place new communities on
its deferral account list so TELUS' entire $163 million fund is used for
the purposes the CRTC determined in 2006. TELUS has also filed a petition
to the federal cabinet to ensure we will retain the ability to ask the
government to intervene should the CRTC not reopen the process for new
applications.
Business Solutions
TELUS enhances suite of GPS services for business
TELUS launched three new Global Positioning System (GPS) services for
businesses - TELUS Asset Tracker, TELUS Resource Tracker, and TELUS Track
and Dispatch. TELUS Asset Tracker enables businesses to keep track of
assets large and small. TELUS Resource Tracker allows businesses to
increase safety and productivity through real-time location monitoring of
workers. TELUS Track and Dispatch gives head-office the ability to
determine the closest mobile worker to a new job assignment or to
immediately dispatch help if a worker needs assistance. The new solutions
are part of TELUS' comprehensive suite of wireless GPS services that also
features TELUS Fleet Tracker, a fleet monitoring and tracking solution, and
TELUS Navigator, a GPS turn-by-turn navigation solution.
CritiCall Ontario selects TELUS iScheduler and CallCentreAnywhere
CritiCall Ontario selected TELUS' iScheduler and CallCentreAnywhere to
provide the foundation of their integrated patient electronic referral
services. The five-year contract with Ontario's 24-hour emergency referral
service for hospital-based physicians is valued at $2.3 million. It is the
first implementation of TELUS iScheduler in Canada.
The contract combines TELUS' CallCentreAnywhere application with the
TELUS iScheduler referral and waitlist capabilities. The joint service
provides CritiCall agents with a simplified patient referral process that
ensures the right information follows the patient wherever they travel to
receive medical attention. The solution also provides CritiCall with
advanced reporting capabilities to help organizations better understand
their operational needs and performance to help with business planning.
TELUS Unified Communications make business easier
TELUS enhanced its suite of Unified Communications solutions by
launching a new service enabling clients to use Outlook Voice Access to
access email, contacts and calendars over the phone to stay connected to
the office anywhere, anytime. The upgrade also provides business-class
email and group document sharing tools that can be securely accessed from a
PC, web browser, mobile device or a phone. Using Microsoft SharePoint,
employees can share documents, find company resources, search for experts
and corporate information, manage content and workflow, and make
better-informed decisions in a single, integrated location.
Products and Services
Smartphones do it all
In May, TELUS launched its "the ultimate do-it-all" smartphone
campaign. With the handiest wireless functions available, TELUS' new
generation of smartphones are the ultimate communication devices to
do-it-all. Whether it's for texting Saturday night's latest hip party
location, browsing the web to know where this week's blockbuster movie is
running, or using GPS location services, TELUS smartphones are perfect for
consumers looking for a phone that gives them the ultimate freedom in the
palm of their hand.
One of the new smartphones is the HTC Touch Diamond. TELUS will be the
first carrier to bring this new handset to Canadians. The Diamond will
allow users to browse the Web, check out videos on YouTube and make plans
on Facebook with a simple one-touch interface. In addition, customers will
be able to store and listen to thousands of songs with the media player and
4GB internal memory. TELUS also launched the Pink BlackBerry Curve 8330
smartphone and the Sierra Wireless Compass 597 USB modem.
TELUS sponsors Canadian Idol
TELUS is bringing a new approach to product placement to season six of
Canadian Idol. As CTV's mobility sponsor, TELUS is introducing viewers to
Ron Ronn, a 23-year-old aspiring singer/songwriter character who relies on
a lucky dolphin, his best friend Mueller and a TELUS smartphone to manage
his burgeoning career. TELUS and TAXI created Ron Ronn specifically for
"Canadian Idol" as part of TELUS' sponsorship of the very popular show.
Under terms of the sponsorship agreement, each of the 30-second Ron Ronn
clips will run at the end of an "Idol" segment and before the regular
commercial break. In addition to the Ron Ronn content, TELUS is again
running its award-winning nature based campaign during Canadian Idol's
scheduled commercial breaks.
Alberta and B.C. embrace 10-digit dialing
To meet growing demand for phone numbers, the telecommunications
industry has added new area codes to B.C. and Alberta - 778 in B.C.'s
current 250 area code region and 587 across Alberta. A second area code in
these regions means that people must add the area code and dial 10 digits
for local calls. Just a week into the first phase of the new area code
introduction on June 23, a sample of several million calls found that
nearly 90 per cent were already being placed using 10 digits.
Existing customers are not required to change their current telephone
numbers, nor will the geographic boundaries that govern long-distance
calling be affected. All three-digit numbers, including 211, 311, 411, 611,
and 911 emergency service (where applicable) remain the same and do not
require the inclusion of an area code.
Awards and Community
TELUS honoured for innovative learning and development
TELUS received a prestigious Industry Achievement Award for global
leadership in supporting team member growth and professional development.
SkillSoft, the international leader in eLearning, presented the award to
TELUS at its 2008 Global Perspectives Awards gala. The award is presented
to organizations that have maintained a long-standing leadership role in
training and development. The judging panel reviewed the internal learning
programs and resources submitted by more than 100 companies around the
world, and selected only five companies as being true innovators. TELUS
ranked first, with UPS, Verizon, FedEx and Hitachi also taking home awards
as well.
Annual report recognized by international communicators
For the fourth consecutive year, the TELUS annual report was recognized
by the International Association of Business Communications (IABC) with its
prestigious Gold Quill Award. The Gold Quill Awards are the mark of global
distinction and a hallmark of excellence in business communications. The
awards are the communication professional's equivalent of the Oscars and
recognize programs with clear strategies that demonstrate a full range of
planning and management such as research, analysis and evaluation as well
as the highest level of technical and creative skill.
TELUS receives IT Hero Award
The Information Technology Association of Canada (ITAC) handed TELUS
the Corporate IT Hero Award for its involvement with Upopolis - a secure
online social network designed exclusively for hospitalized children.
Upopolis empowers kids to learn about their illness and have access to
their homework while helping them stay connected with friends, teachers and
family during a challenging time in their lives. The website was created by
the Kids' Health Links Foundation (KHLF) using development and technology
services donated by TELUS. Through Upopolis, not only can children stay
connected to friends and family, they can connect with other children with
the same condition. Upopolis also provides young patients with a personal
profile, secure mail, instant chat, discussion boards, personal blogs and
links to child-friendly games, as well as a homework site, and kid-friendly
health and wellness information.
BC Children's Hospital Foundation hits the "green" with Skins caddie
auction
Five Canadian golf fans had the chance of a lifetime to caddie for the
PGA pros at the TELUS World Skins Game in support of BC Children's Hospital
Foundation. This year's caddie auction brought in $45,000 for BC Children's
Hospital Foundation, adding up to a total of more than $126,000 that has
now been raised from TELUS World Skins Game caddie auctions in support of
local charities since the fundraiser was created. The annual charity caddie
auction allowed golf fans to bid at eBay.ca for the chance to caddie for
one of their favourite professional golfers. The five highest bidders were
given the opportunity to caddie at Predator Ridge June 16-17 for PGA golf
stars Mike Weir who represented Canada, Fred Couples - United States, Greg
Norman - Australia, Colin Montgomerie - Scotland, and rising young star
Camilo Villegas who represented Colombia. The TELUS Skins Game raised
$185,000 for the hospital foundation this year, which was increased to
$250,000 by TELUS and its team members.
Thousands come out for TELUS Day of Service
On May 31, more than 8,600 TELUS team members, alumni, family and
friends took a day out of their busy schedules to give where they live
during the TELUS Day of Service - a nation-wide volunteer drive designed to
make a difference in the communities where team members live and work. Team
members participated in more than 200 volunteer activities through 137
charitable organizations in 23 regions across the country and the
Phillipines. This included Victoria, Vancouver, Prince George, Kamloops,
Kelowna, Calgary, Lethbridge, Red Deer, Edmonton, Grande Prairie, Toronto,
Barrie, Ottawa, Montreal, Quebec City, Rimouski and Manila. Participants
logged more than 27,000 volunteer hours on this one special day to support
worthwhile causes. Volunteer efforts included ecological face lifts to city
parks, sorting thousands of pounds of food bank donations and planting
dozens of trees.
TELUS sponsors Walk to Cure Diabetes
The TELUS Walk to Cure Diabetes took place across Canada between May
and June. TELUS' sponsorship of the Juvenile Diabetes Research Foundation's
(JDRF) biggest fundraising event underscores the commitment TELUS has made
to this partnership and to funding research to help the more than 200,000
Canadians affected by Type 1 diabetes. This was the first year of a three
year partnership with JDRF. More than 2,100 TELUS team members took part,
raising $460,000 for this worthwhile cause.
Dividend Declaration
The Board of Directors has declared a quarterly dividend of forty-five
cents ($0.45) Canadian per share on the issued and outstanding Common
shares and forty-five cents ($0.45) Canadian per share on the issued and
outstanding Non-Voting shares of the Company payable on October 1, 2008 to
holders of record at the close of business on September 10, 2008.
This quarterly dividend represents a 20 per cent increase from the
$0.375 quarterly dividend paid in 2007.
About TELUS
TELUS (TSX: T, T.A; NYSE: TU) is a leading national telecommunications
company in Canada, with $9.4 billion of annual revenue and 11.4 million
customer connections including 5.8 million wireless subscribers, 4.3
million wireline network access lines and 1.2 million Internet subscribers.
TELUS provides a wide range of communications products and services
including data, Internet protocol (IP), voice, entertainment and video.
Committed to being Canada's premier corporate citizen, we give where we
live. Since 2000, TELUS and our team members have contributed $113 million
to charitable and not-for-profit organizations and volunteered more than
2.1 million hours of service to local communities. Eight TELUS Community
Boards across Canada lead our local philanthropic initiatives. For more
information about TELUS, please visit telus.com.
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TELUS CORPORATION
Management's discussion and analysis
2008 Q2
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Caution regarding forward-looking statements
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--
This document and Management's discussion and analysis contain forward-
looking statements about expected future events and financial and operating
results of TELUS Corporation (TELUS or the Company, and where the context
of the narrative permits or requires, its subsidiaries). 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
assumptions (see below), predictions and other forward-looking statements
will not prove to be accurate. Readers are cautioned not to place undue
reliance on forward- looking statements as a number of factors could cause
actual future results, conditions, actions or events to differ materially
from the targets, expectations, estimates or intentions expressed in the
forward-looking statements. The Company disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required
by law. In the case of annual guidance, it is the current practice of the
Company to evaluate and, where it deems appropriate, provide updates (see
Section 9). Subject to legal requirements, this practice may be changed at
any time at the Company's sole discretion.
Assumptions for 2008 guidance include:
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Economic growth consistent with recent provincial and national
estimates by the Conference Board of Canada, including revised Canadian
gross domestic product (GDP) growth of 1.7% and above average growth in the
provinces of Alberta and British Columbia; forecast exchange rate between
the Canadian dollar and U.S. dollar at or near parity; increased wireline
competition in both business and consumer markets, particularly from
cable-TV and VoIP (voice over Internet protocol) companies; impact from the
acquisition of Emergis in mid-January; Canadian wireless industry market
penetration gain of 4.5 to 5%; the target for consolidated capital
expenditures explicitly excluded the purchase of wireless spectrum in the
advanced wireless services (AWS) spectrum auction; in addition to capital
expenditures, AWS auction expenditures of approximately $880 million are
expected to be recognized in the third quarter of 2008; no new wireless
competitive entrants are assumed for 2008; approximately $30 million
restructuring expenses (up from $20.4 million in 2007); a blended statutory
tax rate of approximately 30.5 to 31.5%; a discount rate of 5.5% (50 basis
points higher than 2007) and expected long-term return of 7.25% for pension
accounting (unchanged from 2007); and average shares outstanding of
approximately 320 million (down from 331.7 million in 2007). Earnings per
share (EPS), cash balances, net debt and common equity may be affected by
purchases of up to 20 million TELUS shares over a 12-month period under the
normal course issuer bid that commenced December 20, 2007.
Factors that could cause actual results to differ materially include,
but
are not limited to:
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Competition (including more active price competition and the likelihood
of new wireless competitors beginning to offer services in 2009 following
the AWS spectrum auction); economic growth and fluctuations (including
pension performance, funding and expenses); capital expenditure levels
(increased in 2008 by purchases of wireless spectrum in the AWS auction);
financing and debt requirements (including funding share repurchases and
debt financings); tax matters (including acceleration or deferral of
required payments of significant amounts of cash taxes); human resource
developments; business integrations and internal reorganizations (including
post-acquisition integration of Emergis); technology (including reliance on
systems and information technology, evolving wireline broadband and
wireless next generation technology options and the possible need for
prospective wireless sharing arrangements to achieve cost efficiencies and
reduce deployment risks); regulatory approvals and developments (including
interpretation and application of tower sharing and roaming rules, the
design and impact of future spectrum auctions, the new media proceeding and
possible changes to foreign ownership restrictions); process risks
(including 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' reports and
public disclosure documents, including its annual report, annual
information form, and other filings with securities commissions in Canada
(on http://www.sedar.com) and in its filings in the United States, including Form
40-F (on EDGAR at http://www.sec.gov).
For further information, see Section 10: Risks and risk management of
TELUS' 2007 annual and first quarter 2008 Management's discussions and
analyses, as well as updates in Section 10 of this document.
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Management's discussion and analysis
August 6, 2008
The following is a discussion of the consolidated financial condition
and results of operations of TELUS Corporation for the three-month and
six-month periods ended June 30, 2008 and 2007, 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 Caution 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. The principal differences
between Canadian and U.S. GAAP, as they relate to TELUS, are summarized in
Note 20 of the interim Consolidated financial statements. Management's
discussion and analysis and the interim Consolidated financial statements
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
used by management to evaluate performance of business units, segments and
the Company. Non-GAAP measures are also used to determine compliance with
debt covenants and 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 reader's reference, the definition,
calculation and reconciliation of consolidated non-GAAP measures are
provided in Section 11: Reconciliation of non-GAAP measures and
definitions.
Management's discussion and analysis contents
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Section Contents
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1. Introduction Introduction and summary of TELUS'
consolidated results for the second
quarter and first six months of 2008
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2. Core business, vision A discussion of activities in support of
and strategy TELUS' six strategic imperatives
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3. Key performance drivers A listing of corporate priorities for 2008
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4. Capability to deliver A description of the factors that affect
results the capability to execute strategies,
manage key performance drivers and
deliver results
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5. Results from operations A detailed discussion of operating results
for the second quarter and first six
months of 2008
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6. Financial condition A discussion of significant changes in
TELUS' balance sheets for the six-month
period ended June 30, 2008
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7. Liquidity and capital A discussion of cash flow, liquidity,
resources credit facilities and other disclosures
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8. Critical accounting A description of accounting estimates that
estimates and accounting are critical to determining financial
policy developments results, and changes to accounting
policies
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9. Annual guidance for 2008 TELUS' revised annual guidance
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10. Risks and risk management An update on certain risks and
uncertainties facing TELUS and how the
Company manages these risks
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11. Reconciliation of A description, calculation and
non-GAAP measures and reconciliation of certain measures used by
definitions management
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1. Introduction
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
Key industry development
On June 30, 2007, Canada's largest telecommunications service provider
BCE Inc. 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 several co-
investors, recently confirmed by BCE to be the U.S.-based Providence Equity
Partners, Madison Dearborn Partners, LLC and Merrill Lynch Global Private
Equity. The BCE Board recommended that their common shareholders accept the
consortium's offer at an all-cash price of $42.75 per common share or
approximately $34 billion. On September 21, 2007, BCE shareholders
overwhelmingly approved the acquisition. In June 2008, the CRTC (Canadian
Radio-television and Telecommunications Commission) approved the change in
control of BCE's broadcasting licences. Industry Canada also approved the
acquisition. A challenge before the Supreme Court of Canada by certain BCE
bond holders was also dismissed in June. BCE has indicated that it expects
the transaction to close on or before December 11, 2008.
Wireless developments - advanced wireless service (AWS) and other
spectrum auction in the 2 GHz range
Industry Canada conducted a wireless spectrum licence auction between
May 27 and July 21, 2008 for 90 MHz of AWS spectrum (including 40 MHz set
aside for new entrants), 10 MHz for personal communications network (PCS)
service extension, and 5 MHz for another small band. The auction concluded
after 331 rounds with Industry Canada reporting total proceeds of $4,255
million (average of $1.55/MHz/POP for AWS and PCS spectrum, where POP
refers to person of population).
TELUS was advised that it was the provisionally successful bidder on 59
spectrum licences of 20 MHz or 10 MHz in the 1700/2100 MHz ranges,
providing additional spectrum depth nationally in markets TELUS already
covers. The cost of spectrum licences won was approximately $880 million.
TELUS expects to receive the licences after final payment and after
demonstrating compliance with Canadian ownership requirements, both
expected to occur in the third quarter of 2008. Each of the other AWS
spectrum auction provisional winners must also comply with both Canadian
ownership and payment requirements. The average spectrum acquired by TELUS
was 16.2 MHz at an average cost of $1.82/MHz/POP. See also Building
national capabilities in Section 2, as well as Section 4.1 Principal
markets addressed and competitors and Section 10.1 Regulatory.
In the third quarter of 2008, in accordance with the terms of the
auction, the Company expects that the amount of successful bids will be
paid through a combination of drawing on its credit facilities and
utilization of cash on hand.
-------------------------------------------------------------------------
Licences acquired by TELUS in the May 27 to July 21, 2008 Industry
Canada spectrum auction
-------------------------------------------------------------------------
Number of
licences
Bandwidth acquired Geographic areas
-------------------------------------------------------------------------
20 MHz comprised of 10 MHz 32 Quebec, SW Ontario, Ottawa
in the 1700 MHz range paired Region, Manitoba,
with 10 MHz in the 2100 MHz Saskatchewan, Alberta and
range B.C.
10 MHz comprised of 5 MHz in 27 Yukon, Northwest
the 1700 MHz range paired with Territories & Nunavut,
5 MHz in the 2100 MHz range Newfoundland & Labrador,
Nova Scotia, New Brunswick,
P.E.I., N. Ontario, Central
Ontario, and Toronto
-------------------------------------------------------------------------
1.3 Consolidated highlights
The chief executive officer, who is the chief operating decision-maker,
regularly receives TELUS' consolidated reports on two bases: including and
excluding (as shown in the "as adjusted" calculations) an incremental charge
for introducing a net-cash settlement feature for share option awards granted
prior to 2005. The highlights table below presents both views.
-------------------------------------------------------------------------
Consolidated highlights
($ millions, except shares,
per-share amounts, Quarters ended June 30
subscribers and ratios) 2008 2007 Change
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated statements of income
-------------------------------------------------------------------------
Operating revenues 2,398.7 2,228.1 7.7 %
Operating income 498.1 493.8 0.9 %
Net-cash settlement feature (recovery)
expense (0.3) 1.8 n.m.
--------- --------- ---------
Operating income (as adjusted) 497.8 495.6 0.4 %
Income before income taxes 381.4 348.1 9.6 %
Net-cash settlement feature (recovery)
expense (0.3) 1.8 n.m.
--------- --------- ---------
Income before income taxes (as adjusted) 381.1 349.9 8.9 %
Net income 267.0 253.1 5.5 %
Net-cash settlement feature, after tax (0.2) 1.3 n.m.
--------- --------- ---------
Net income (as adjusted) 266.8 254.4 4.9 %
Earnings per share, basic ($) 0.83 0.76 9.2 %
Net-cash settlement feature per share - - - %
--------- --------- ---------
Earnings per share, basic (as adjusted) ($) 0.83 0.76 9.2 %
Earnings per share, diluted ($) 0.83 0.75 10.7 %
Cash dividends declared per share ($) 0.45 0.375 20.0 %
-------------------------------------------------------------------------
Consolidated statements of cash flows
-------------------------------------------------------------------------
Cash provided by operating activities 461.0 1,061.9 (56.6)%
Cash used by investing activities 436.7 477.8 (8.6)%
Capital expenditures 435.6 481.8 (9.6)%
Cash (used) provided by financing
activities (27.7) (1,115.9) 97.5 %
-------------------------------------------------------------------------
Subscribers and other measures
-------------------------------------------------------------------------
Subscriber connections(1) (thousands) 11,363 10,885 4.4 %
EBITDA(2) 917.6 884.6 3.7 %
Net-cash settlement feature expense (0.3) 1.8 n.m.
--------- --------- ---------
EBITDA (as adjusted) 917.3 886.4 3.5 %
Free cash flow(3) 302.3 161.7 87.0 %
-------------------------------------------------------------------------
Debt and payout ratios(4)
-------------------------------------------------------------------------
Net debt to EBITDA - excluding
restructuring costs 1.7 1.8 (0.1)
Dividend payout ratio (%) 52 48 4 pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated highlights
($ millions, except shares,
per-share amounts, Six-month periods ended June 30
subscribers and ratios) 2008 2007 Change
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated statements of income
-------------------------------------------------------------------------
Operating revenues 4,749.3 4,433.7 7.1 %
Operating income 1,025.5 890.8 15.1 %
Net-cash settlement feature (recovery)
expense (0.1) 175.3 n.m.
--------- --------- ---------
Operating income (as adjusted) 1,025.4 1,066.1 (3.8)%
Income before income taxes 782.6 623.7 25.5 %
Net-cash settlement feature (recovery)
expense (0.1) 175.3 n.m.
--------- --------- ---------
Income before income taxes (as adjusted) 782.5 799.0 (2.1)%
Net income 558.0 447.9 24.6 %
Net-cash settlement feature, after tax (0.1) 109.0 n.m.
--------- --------- ---------
Net income (as adjusted) 557.9 556.9 0.2 %
Earnings per share, basic ($) 1.73 1.34 29.1 %
Net-cash settlement feature per share - 0.33 (100.0)%
--------- --------- ---------
Earnings per share, basic (as adjusted) ($) 1.73 1.67 3.6 %
Earnings per share, diluted ($) 1.72 1.32 30.3 %
Cash dividends declared per share ($) 0.90 0.75 20.0 %
-------------------------------------------------------------------------
Consolidated statements of cash flows
-------------------------------------------------------------------------
Cash provided by operating activities 1,086.2 1,522.5 (28.7)%
Cash used by investing activities 1,437.1 870.1 65.2 %
Capital expenditures 755.3 863.7 (12.6)%
Cash (used) provided by financing
activities 376.7 (638.7) n.m.
-------------------------------------------------------------------------
Subscribers and other measures
-------------------------------------------------------------------------
Subscriber connections(1) (thousands)
EBITDA(2) 1,867.1 1,648.9 13.2 %
Net-cash settlement feature expense (0.1) 175.3 n.m.
--------- --------- ---------
EBITDA (as adjusted) 1,867.0 1,824.2 2.3 %
Free cash flow(3) 882.1 642.5 37.3 %
-------------------------------------------------------------------------
Debt and payout ratios(4)
-------------------------------------------------------------------------
Net debt to EBITDA - excluding
restructuring costs
Dividend payout ratio (%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
pt; pts - percentage point(s)
(1) The sum of wireless subscribers, network access lines and Internet
access subscribers measured at the end of the respective periods
based on information in billing and other systems.
(2) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(3) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash
flow.
(4) See Section 7.4 Liquidity and capital resource measures and Section
11.4 Definitions of liquidity and capital resource measures.
-------------------------------------------------------------------------
Highlights for the second quarter and first six months of 2008, as
discussed in Section 5: Results from operations, include the following:
- Subscriber connections increased by 478,000 in the twelve-month
period ended June 30, 2008. The number of wireless subscribers grew
by 10.6% to 5.83 million, the number of Internet subscribers grew by
6.3% to 1.21 million and the number of network access lines decreased
by 3.4% to 4.33 million.
- Wireless gross subscriber additions increased to a TELUS second
quarter record of 422,200, or up 19%, when compared to the same
period in 2007, and were positively influenced by the introduction of
a new brand. Wireless average revenue per subscriber unit per month
(ARPU) was $62.73 in the second quarter of 2008, up $0.85 from the
first quarter of 2008, but $0.92 lower than the second quarter of
2007.
- Operating revenues increased by $170.6 million and $315.6 million,
respectively, in the second quarter and first six months of 2008,
when compared to the same periods in 2007. The increases were due
primarily to growth in wireless network revenues and wireline data
revenues (including revenues from Emergis), which more than offset
revenue declines in wireline voice local and long distance.
- Operating income adjusted to exclude the net-cash settlement feature
increased by $2.2 million in the second quarter of 2008, when
compared to the same period in 2007, as the increase in EBITDA (as
adjusted) exceeded higher depreciation and amortization expenses.
Operating income (as adjusted) decreased by $40.7 million for the
first six months of 2008, primarily due to an additional three months
amortization for a new billing system and increased depreciation,
which partly offset increased EBITDA (as adjusted).
- Excluding the effect of the net-cash settlement feature, Income
before income taxes (as adjusted) increased by $31.2 million in the
second quarter and decreased by $16.5 million in the first six months
of 2008, due to changes in operating income (as adjusted) noted above
and lower financing and other expenses.
- Net income increased by $13.9 million or seven cents per share in the
second quarter of 2008 when compared to the same period in 2007. For
the first six months of 2008, Net income increased by $110.1 million
or 39 cents per share when compared to the same period in 2007.
-------------------------------------------------------------------------
Net income changes Quarters ended Six-month periods
($ millions) June 30 ended June 30
-------------------------------------------------------------------------
2007 Net income 253.1 447.9
Tax-effected changes:
Lower net-cash settlement feature 1.5 109.1
Higher EBITDA as adjusted(1) 21.4 29.6
Higher depreciation and
amortization(1), excluding
investment tax credits in 2007 (19.8) (54.4)
Lower interest expenses(1) 10.8 17.1
Tax-related adjustments
(see Section 5.2) (10.0) 3.0
Other 10.0 5.7
-------------------------------------------------------------------------
2008 Net income 267.0 558.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) at 2008 blended statutory tax rates
-------------------------------------------------------------------------
- Average shares outstanding during the first six months of 2008 were
4% lower than the same period in 2007, due to repurchases under
normal course issuer bid (NCIB) programs. The Company purchased
0.95 million Common Shares and 3.69 million Non-Voting Shares for a
total outlay of $199.2 million in the first half of 2008.
Highlights for the second quarter and first six months of 2008, as
discussed in Section 7: Liquidity and capital resources, include the
following:
- Cash provided by operating activities decreased by $600.9 million and
$436.3 million, respectively, in the second quarter and first six
months of 2008, when compared to the same periods in 2007. For the
second quarter period, a $350 million reduction in proceeds from
securitized receivables during 2008 compared to a $350 million
increase in proceeds in 2007, for a comparative reduction in cash
flow of $700 million. For the six-month period, a $350 million
reduction in proceeds from securitized receivables in 2008 compared
to no change in 2007.
- Cash used by investing activities decreased by $41.1 million in the
second quarter of 2008 and increased by $567.0 million during the
first six months of 2008, when compared to the same periods in 2007.
The decrease for the second quarter was mainly from higher wireless
capital expenditures in the prior year to extend higher speed EVDO
(evolution data optimized) coverage. The increase for the first six
months of 2008 was due mainly to the January 2008 acquisition of
Emergis, partly offset by lower wireless capital expenditures.
- Net cash used by financing activities decreased by $1,088.2 million
during the second quarter of 2008, when compared to the same period
in 2007, due to a number of factors, including repayment of
$1.5 billion maturing Notes in June 2007, net of the April 2008 issue
of $500 million Notes (see next paragraph). Net Cash provided by
financing activities for the first six months of 2008 increased by
$1,015.4 million when compared to the same period in 2007, due mainly
to the April 2008 debt issue, increases in net amounts drawn from the
2012 credit facility and commercial paper in 2008, as well as lower
share purchases under NCIB programs.
On April 9, 2008, TELUS successfully closed an offering of 5.95%,
Series CE, Notes due April 15, 2015, for aggregate gross proceeds of
approximately $500 million. The net proceeds of the offering were
used for general corporate purposes including repayment of amounts
under the 2012 credit facility, and to refinance short-term financing
sources, which had been utilized in January for purchase of the then
issued and outstanding Emergis common shares for $743 million.
- Free cash flow increased by $140.6 million and $239.6 million,
respectively, in the second quarter and first six months of 2008,
when compared to the same periods in 2007. The increases were mainly
due to lower capital expenditures, improved EBITDA (as adjusted), and
lower paid interest. Free cash flow was supplemented in the first
half of 2008 by financing activities to complete acquisitions
totalling $691.3 million, net of acquired cash.
- Net debt to EBITDA at June 30, 2008 was 1.7, unchanged from the
measure at December 31, 2007, continuing the achievement of the
Company's long-term target policy range of 1.5 to 2.0 times.
- The dividend payout ratio, based on the annualized second quarter
dividend and earnings for the 12-month trailing period ended June 30,
2008 (excluding favourable tax-related adjustments), was 52%, within
the Company's guideline.
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' 2007 annual and 2008 first quarter Management's
discussion and analyses, as well as updates reported in Section 10 of this
document.
TELUS' core business, vision and strategy were detailed in its 2007
Management's discussion and analysis. Activities that supported the
Company's six strategic imperatives during the second quarter of 2008
include the following:
Building national capabilities across data, IP, voice and wireless
TELUS successfully bid on 20 MHz and 10 MHz blocks of advanced wireless
services (AWS) spectrum in the 1700 MHz/2100 MHz ranges in the Industry
Canada auction concluded July 21. The average spectrum won by TELUS was
16.2 MHz nationally, which increases TELUS' strong spectrum position, and
is expected to provide capacity for the introduction of future 4G (fourth
generation) service offerings.
Focusing relentlessly on the growth markets of data, IP and wireless
The second quarter of 2008 is the first full period including the
operations of TELUS' wireless postpaid value brand. In March, TELUS
launched this new brand and service to better address segments of the
wireless market and complement the fully featured TELUS brand service. The
expected benefits include more flexibility in serving various market
segments, increasing postpaid customer additions, protecting revenue on the
premium TELUS brand, and improving client retention programs.
Building integrated solutions that differentiate TELUS from its
competitors
In June, the Company launched three new global positioning system (GPS)
solutions for businesses with mobile workers. TELUS Asset Tracker enables
businesses to keep track of assets, whether large or small. TELUS Resource
Tracker allows businesses to increase safety and productivity through real-
time location monitoring of workers. TELUS Track and Dispatch gives
businesses the ability to determine the closest mobile worker to a new job
assignment or to immediately dispatch help if a worker needs assistance.
These new solutions are part of the Company's suite of wireless GPS
solutions on the PCS network that also features TELUS Fleet Tracker, a
fleet monitoring and tracking solution, and TELUS Navigator, a GPS
turn-by-turn navigation solution.
Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy and focus TELUS' resources on core business
TELUS Ventures received a very positive return from its 2001 minority
investment in Hostopia (TSX: H), a provider of private-branded web hosting,
email and e-commerce solutions to telecommunications and cable TV
companies, Internet service providers, domain registrars, and other Web
service providers. This arose from Deluxe Corporation's (NYSE: DLX) all
cash offer for Hostopia in June, which was recommended for approval by
Hostopia's Board of Directors. Shareholder approval was obtained in late
July and the deal closed in early August. TELUS Ventures invested in
Hostopia to complement TELUS' existing services and to be its key supplier,
as part of TELUS' strategy to benefit from emerging technologies that fill
the Company's capability gaps.
Going to the market as one team under a common brand, executing a
single strategy
Acquired in January 2008 and re-branded "Emergis, a TELUS company," the
post-merger integration process continued into the second quarter in order
to ensure a seamless transition for team members and customers, while
ensuring a focus on achieving strategic business goals. This included the
identification of top joint-sales opportunities and working together to
close multi-million dollars of new contracts. The teams also initiated an
update to the three-year strategic business plans for healthcare and
financial services. In addition, during the quarter certain business
functions were aligned, including Finance, Human Resources and Marketing.
Investing in internal capabilities to build a high-performance
culture and efficient operations
In mid-July, following a large trial, TELUS successfully converted more
than one million wireline residential customers in British Columbia to a
new billing and client care system. This converges to the system in
Alberta, and for the first time most customers in Alberta and B.C. are now
on the same billing and client care system. During the B.C. conversion,
TELUS has applied learnings from the Alberta conversion in 2007 and early
experience has been positive. The expected customer service and cost
benefits of this project include streamlined and standardized processes and
the elimination over time of multiple legacy information systems. See
Section 4.2 for additional information on the July conversion.
3. Key performance drivers
The following 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' 2007 annual and 2008 first quarter Management's discussions and
analyses, as well as updates reported in Section 10 of this document.
Management sets new corporate priorities each year to advance TELUS'
strategy, focus on the near-term opportunities and challenges, and create
value for shareholders.
-------------------------------------------------------------------------
2008 corporate priorities
-------------------------------------------------------------------------
Drive profit from strategic services with a focus on data
-------------------------------------------------------------------------
Build scale in vertical markets and leverage the Emergis acquisition
-------------------------------------------------------------------------
Exact productivity gains from efficiency improvement initiatives
-------------------------------------------------------------------------
Elevate the client experience and build enhanced loyalty
-------------------------------------------------------------------------
Execute technology initiatives, including broadband and IT platforms
-------------------------------------------------------------------------
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. It is also qualified by Section 10: Risks and risk
management of TELUS' 2007 annual and 2008 first quarter Management's
discussions and analyses, as well as updates reported in Section 10 of this
document.
4.1 Principal markets addressed and competitors
At June 30, 2008, the principal markets addressed and competitors have
not changed significantly from those described in TELUS' 2007 Management's
discussion and analysis. Wireless competition is expected to increase in
the future, as several potential entrants have provisionally acquired
spectrum regionally in the AWS spectrum auction concluded in July 2008, as
summarized below. Under the auction rules, successful bidders are subject
to confirmation of eligibility and must complete payments within 30
business days of the auction close. Potential new entrants are expected to
begin offering services in 2009 or later, as they establish operations, and
build wireless networks in areas where they have won spectrum. Some new
entrants may form alliances with one another. See Section 10.1 Regulatory,
-------------------------------------------------------------------------
Existing and potential competitors acquiring licences in the May 27 to
July 21, 2008 Industry Canada spectrum auction
-------------------------------------------------------------------------
Competitor Primary geographic focus
-------------------------------------------------------------------------
Incumbent national facilities-
based competitors
Rogers Communications Inc. Expansion of existing national capacity
Bell Mobility Inc. Expansion of existing national capacity
TELUS Expansion of existing national capacity
-------------------------------------------------------------------------
Incumbent provincial facilities-
based competitors
MTS Allstream Expansion of existing Manitoba capacity
SaskTel Expansion of existing Saskatchewan
capacity
-------------------------------------------------------------------------
Potential new entrants(1)
Globalive Wireless LP Spectrum in most regions, but excluding
most of Quebec
Data & Audio-Visual Enterprises Spectrum in most major centres, except
in Quebec and Atlantic Canada
6934579 Canada Inc. Spectrum in S. and E. Ontario and S.
and E. Quebec
Quebecor (9193-2962 Quebec Inc.) Regional spectrum in Quebec and parts
of Ontario
Shaw Communications Inc. Regional spectrum in Western Canada and
N. Ontario
Bragg Communications Inc. Regional spectrum in Atlantic Canada
and SW Ontario; Grande Prairie,
Alberta
Novus Wireless Inc. Provincial spectrum in B.C. and Alberta
Blue Canada Wireless Inc. Provincial spectrum in Nova Scotia and
P.E.I.
Others 3 local areas in total
-------------------------------------------------------------------------
(1) Subject to building a wireless network in the geographic areas where
they elect to complete.
-------------------------------------------------------------------------
4.2 Operational capabilities
Development of a new billing and client care system in the wireline
segment
A pilot implementation for approximately 150,000 residential customers
in B.C. began in May 2008 and a subsequent system conversion for more than
one million B.C. residential customers was completed in mid-July 2008. The
Company applied key learnings from the Alberta conversion in 2007 and
initial indications are that the cutover went well. The critical billing
function performed as expected, while billing cycles were maintained. The
order entry system also performed well, without capacity and stability
issues experienced initially with the Alberta conversion in 2007. Service
levels have not been materially impacted following the 2008 conversion. See
Section 10.2 Process risks.
4.3 Liquidity and capital resources
Capital structure financial policies (Note 3 of the Consolidated
financial statements)
The Company's objectives when managing capital are: (i) to maintain a
flexible capital structure that optimizes the cost of capital at an
acceptable risk level; 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 in the definition of
capital: 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.
The Company manages the capital structure and makes adjustments to it
in 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 utilizing a number of measures, including:
net debt to EBITDA - excluding restructuring costs; and dividend payout
ratio of sustainable net earnings. For further discussion, see Section 7.4
Liquidity and capital resource measures.
Liquidity and financing
-----------------------------------------------------------------------
--
TELUS' 2008 financing plan and results to-date
-----------------------------------------------------------------------
--
Repurchase TELUS Common Shares and TELUS Non-Voting Shares under the
normal course issuer bid (NCIB)
In the first six months of 2008, the Company repurchased for
cancellation, 0.95 million Common Shares and 3.69 million Non-Voting
Shares for a total outlay of $199.2 million. See Section 7.3 Cash used
by
financing activities.
Pay dividends
Dividends declared for the second quarter of 2008 were 45 cents per
share, up by 20% from 37.5 cents per share in the same period in 2007.
Use proceeds from securitized receivables and bank facilities, as
needed,
to supplement free cash flow and meet other cash requirements
At June 30, 2008, the balance of proceeds from securitized accounts
receivable was $150 million, a reduction of $350 million from March 31,
2008 and December 31, 2007. The reduction in securitized accounts
receivable in the current quarter was completed following the closing
of
the public debt issue described below. In January 2008, the Company
increased utilization of its existing $2 billion credit facility. The
proceeds were used for general corporate purposes, including the
purchase
of Emergis. At June 30, 2008, $162.0 million was drawn on the 2012
revolving credit facility, down from $320.9 million at March 31, 2008,
and up from the nil amount drawn at the beginning of the year.
Maintain compliance with financial objectives, policies and guidelines
Maintain a minimum $1 billion in unutilized liquidity - On March 3,
2008,
the Company closed a new $700 million, 364-day credit facility with a
select group of Canadian banks. This new facility provides incremental
liquidity to TELUS and allows the Company to continue to meet one of
its
financial objectives, which is to generally maintain $1 billion in
available liquidity. The Company had unutilized credit facilities
exceeding $1.5 billion at June 30, 2008, including the 364-day
facility.
See Section 7.5 Credit facilities.
Net debt to EBITDA excluding restructuring costs ratio of 1.5 to 2.0
times - actual result of 1.7 times at June 30, 2008.
Dividend payout ratio of 45 to 55% of sustainable net earnings - the
ratio was 43%, based on the annualized second quarter dividend rate and
actual earnings for the 12-month trailing period ended June 30, 2008.
The
ratio was 52% when calculated to exclude the impacts of favourable tax-
related adjustments from earnings for the 12-month trailing period
ended
June 30, 2008.
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 accessing the public debt markets in 2008 to
refinance short-term financing sources with long-term financing
On April 9, TELUS successfully closed its offering of 5.95%, Series CE,
Notes due April 15, 2015, for aggregate gross proceeds of approximately
$500 million. The net proceeds of the offering were used for general
corporate purposes including repayment of amounts under the 2012 credit
facility, and to refinance short-term financing sources.
Preserve access to the capital markets at a reasonable cost by
maintaining investment grade credit ratings and targeting improved
credit
ratings in the range of BBB+ to A-, or the equivalent, in the future
At August 6, 2008, investment grade credit ratings from the four rating
agencies that cover TELUS were in the desired range. TELUS' April 2008
debt issue was assigned credit ratings of: A (low) by DBRS Ltd., Baa1
by
Moody's Investors Service, BBB+ by Fitch Ratings, and BBB+ by Standard
and Poor's, all with a stable trend or outlook and all consistent with
the agencies' existing ratings for TELUS debt securities. See Section
7.7
Credit ratings.
-----------------------------------------------------------------------
--
4.4 Disclosure controls and procedures and internal control over
financial reporting
Changes in internal control over financial reporting
There were no changes in internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
5. Results from operations
5.1 General
The Company has two reportable segments: wireline and wireless.
Segmentation is based on similarities in technology, the technical
expertise required to deliver the products and services, customer
characteristics, the distribution channels used and regulatory treatment.
Intersegment sales are recorded at the exchange value. Segmented
information is regularly reported to the Company's Chief Executive Officer,
who is the chief operating decision- maker. See Note 5 of the interim
Consolidated financial statements.
5.2 Quarterly results summary
-------------------------------------------------------------------------
($ in millions, except per
share amounts) 2008 Q2 2008 Q1 2007 Q4 2007 Q3
-------------------------------------------------------------------------
Operating revenues 2,398.7 2,350.6 2,330.8 2,309.9
Operations expense,
excluding net-cash
settlement feature 1,476.9 1,394.2 1,370.7 1,323.7
Net-cash settlement feature (0.3) 0.2 0.6 (7.2)
Restructuring costs 4.5 6.7 6.1 6.4
-------------------------------------------------------------------------
EBITDA(1) 917.6 949.5 953.4 987.0
Depreciation 343.5 345.7 386.2 332.5
Amortization of intangible
assets 76.0 76.4 68.1 70.1
-------------------------------------------------------------------------
Operating income 498.1 527.4 499.1 584.4
Other expense (income) 2.4 16.8 5.8 8.0
Financing costs 114.3 109.4 109.1 86.2
-------------------------------------------------------------------------
Income before income taxes
and non-controlling interest 381.4 401.2 384.2 490.2
Income taxes 113.5 109.4 (18.0) 78.6
Non-controlling interests 0.9 0.8 2.1 1.7
-------------------------------------------------------------------------
Net income 267.0 291.0 400.1 409.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income per Common Share and
Non-Voting Share - basic 0.83 0.90 1.23 1.24
- diluted 0.83 0.90 1.22 1.23
Dividends declared per Common
Share and Non-Voting Share 0.45 0.45 0.45 0.375
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in millions, except per
share amounts) 2007 Q2 2007 Q1 2006 Q4 2006 Q3
-------------------------------------------------------------------------
Operating revenues 2,228.1 2,205.6 2,254.6 2,210.7
Operations expense,
excluding net-cash
settlement feature 1,338.5 1,263.1 1,362.4 1,239.7
Net-cash settlement feature 1.8 173.5 - -
Restructuring costs 3.2 4.7 7.9 12.5
-------------------------------------------------------------------------
EBITDA(1) 884.6 764.3 884.3 958.5
Depreciation 318.3 317.7 353.2 325.8
Amortization of intangible
assets 72.5 49.6 53.9 57.5
-------------------------------------------------------------------------
Operating income 493.8 397.0 477.2 575.2
Other expense (income) 18.5 3.8 10.1 4.0
Financing costs 127.2 117.6 133.6 116.6
-------------------------------------------------------------------------
Income before income taxes
and non-controlling interest 348.1 275.6 333.5 454.6
Income taxes 93.7 79.3 91.6 128.3
Non-controlling interests 1.3 1.5 1.4 2.4
-------------------------------------------------------------------------
Net income 253.1 194.8 240.5 323.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income per Common Share and
Non-Voting Share - basic 0.76 0.58 0.71 0.95
- diluted 0.75 0.57 0.70 0.94
Dividends declared per Common
Share and Non-Voting Share 0.375 0.375 0.375 0.275
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
-------------------------------------------------------------------------
Trends
The consolidated revenue trend continues to reflect growth in wireless
network revenues generated from an increasing subscriber base. Wireless
ARPU (average revenue per subscriber unit per month) for the second quarter
of 2008 was up $0.85 from the first quarter of 2008, but declined $0.92 on
a year-over- year basis. The decrease is a result of declining voice ARPU
more than offsetting strong data growth. The voice ARPU decline reflects a
shifting product mix, pricing competition and increased use of in-bucket,
or included- minute service plans.
The trend in consolidated revenues also reflects strong growth in
wireline data revenue, including new revenues from two January 2008
acquisitions. For the 2007 and 2006 periods shown above, growth in data
revenue was fully offset by declining wireline voice local and long
distance revenues due to substitution for wireless and Internet services,
as well as competition from VoIP service providers, resellers and
facilities-based competitors. Second quarter 2008 residential network
access line losses improved when compared to the same period one-year
earlier - the first quarterly improvement year-over-year since the fourth
quarter of 2004. Partially offsetting the continuing line losses on the
residential side were gains in business network access lines.
Historically, there is significant fourth quarter seasonality with
higher wireless subscriber additions and related acquisition costs and
equipment sales, resulting in lower wireless EBITDA. There is a less
pronounced fourth quarter seasonal effect for wireline high-speed Internet
subscriber additions and related costs.
The sequential increase in Operations expenses beginning with the first
quarter 2008 (excluding the net-cash settlement feature) included expenses
from January acquisitions. As described in Section 1.3, beginning with the
first quarter of 2007, quarterly Operations expenses include expenses or
recoveries for introducing a net-cash settlement feature for share option
awards granted prior to 2005.
The downward trend in depreciation expense ended in the second half of
2007 with a reduction in estimated useful service lives for certain circuit
switching and network management assets, resulting in write-downs of
approximately $20 million and $47 million, respectively, in the third and
fourth quarters of 2007. The previous downward trend was interrupted by 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. Depreciation is expected to increase
slightly for the full year of 2008 as compared to 2007, due to a planned
increase in capital assets and a reduction in the estimated useful lives
for certain circuit-switching and other assets. See Caution regarding
forward-looking statements.
The sequential increase in amortization of intangible assets in the
first quarter of 2008 was due mainly to acquisitions. A major new wireline
billing and client care system was put into service for Alberta residential
customers in March 2007, resulting in $18 million of additional
amortization each period beginning in the second quarter of 2007. In
addition, amortization expenses in the fourth quarter of 2006 and the first
quarter of 2007 were each reduced by approximately $5 million for
investment tax credits relating to assets capitalized in prior years that
are now fully amortized, following a determination of eligibility by a
government tax authority. Amortization is expected to increase
significantly for the full year of 2008 as compared to 2007, due to the
Emergis acquisition and the July 2008 implementation of new phases of
converged client care and billing system. See Caution regarding
forward-looking statements.
Within Financing costs shown in the preceding table, interest expenses
trended lower as financing activities have lowered the effective interest
rate. The sequential decline in financing costs in the third quarter of
2007 was due to lower effective interest rates and debt balances plus
increased interest income from tax refunds. Financing costs in the eight
periods shown are net of varying amounts of interest income.
The generally upward trends in Net income and earnings per share (EPS)
reflect the items noted above, as well as adjustments arising from
legislated income tax changes, settlements and tax reassessments for prior
years, including any related interest on reassessments. EPS has been
positively impacted by decreased shares outstanding from ongoing share
re-purchases.
-------------------------------------------------------------------------
Tax-related adjustments
($ in millions, except
EPS amounts) 2008 Q2 2008 Q1 2007 Q4 2007 Q3
-------------------------------------------------------------------------
Approximate Net income impact - 17 143 93
Approximate EPS impact - 0.05 0.44 0.28
Approximate basic EPS
excluding tax-related impacts 0.83 0.85 0.79 0.96
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Tax-related adjustments
($ in millions, except
EPS amounts) 2007 Q2 2007 Q1 2006 Q4 2006 Q3
-------------------------------------------------------------------------
Approximate Net income impact 10 4 20 30
Approximate EPS impact 0.03 0.01 0.06 0.09
Approximate basic EPS
excluding tax-related impacts 0.73 0.57 0.65 0.86
-------------------------------------------------------------------------
5.3 Consolidated results from operations
-------------------------------------------------------------------------
($ in millions except EBITDA margin Quarters ended June 30
in % and employees) 2008 2007 Change
-------------------------------------------------------------------------
Operating revenues 2,398.7 2,228.1 7.7 %
Operations expense 1,476.6 1,340.3 10.2 %
Restructuring costs 4.5 3.2 40.6 %
-------------------------------------------------------------------------
EBITDA(1) 917.6 884.6 3.7 %
Depreciation 343.5 318.3 7.9 %
Amortization of intangible assets 76.0 72.5 4.8 %
-------------------------------------------------------------------------
Operating income 498.1 493.8 0.9 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense (as adjusted)(2) 1,476.9 1,338.5 10.3 %
EBITDA (as adjusted)(2) 917.3 886.4 3.5 %
Operating income (as adjusted)(2) 497.8 495.6 0.4 %
EBITDA margin(3) 38.3 39.7 (1.4)pts
EBITDA margin (as adjusted)(3) 38.2 39.8 (1.6)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in millions except EBITDA margin Six-month periods ended June 30
in % and employees) 2008 2007 Change
-------------------------------------------------------------------------
Operating revenues 4,749.3 4,433.7 7.1 %
Operations expense 2,871.0 2,776.9 3.4 %
Restructuring costs 11.2 7.9 41.8 %
-------------------------------------------------------------------------
EBITDA(1) 1,867.1 1,648.9 13.2 %
Depreciation 689.2 636.0 8.4 %
Amortization of intangible assets 152.4 122.1 24.8 %
-------------------------------------------------------------------------
Operating income 1,025.5 890.8 15.1 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense (as adjusted)(2) 2,871.1 2,601.6 10.4 %
EBITDA (as adjusted)(2) 1,866.9 1,824.2 2.3 %
Operating income (as adjusted)(2) 1,025.4 1,066.1 (3.8)%
EBITDA margin(3) 39.3 37.2 2.1 pts
EBITDA margin (as adjusted)(3) 39.3 41.1 (1.8)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) Excluding net-cash settlement feature (recoveries) expenses of
$(0.3) million and $(0.1) million, respectively, in the second
quarter and first six months of 2008 and $1.8 million and
$175.3 million, respectively, in the second quarter and first six
months of 2007.
(3) EBITDA or EBITDA (as adjusted) divided by Operating revenues.
-------------------------------------------------------------------------
The following discussion is for the consolidated results of TELUS.
Segmented discussion is provided 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
Operating revenues increased by $170.6 million and $315.6 million,
respectively, in the second quarter and first six months of 2008, when
compared to the same periods in 2007. Revenue and subscriber growth
continued to occur in wireless operations and wireline data services.
Wireline data revenue was also positively impacted by two acquisitions
completed in January 2008. Voice long distance revenues continued to erode,
while voice local revenue showed a year-over-year decrease due to the
effects of local competition and technological substitution.
Operations expense
Consolidated Operations expense increased by $136.3 million and $94.1
million, respectively, in the second quarter and first six months of 2008,
when compared to the same periods in 2007. Operations expense adjusted to
exclude the net-cash settlement feature expense increased by $138.4 million
and $269.5 million, respectively. Wireline expense increases were due to
acquisitions, increased cost of sales, and initial implementation costs for
new wireline enterprise customers, partly offset by absence of system
conversion expenses recorded in the second quarter of 2007 for a new
Alberta wireline billing and client care system. Wireless expenses
increased to support the 10.6% year-over-year growth in the wireless
subscriber base and 9% growth in wireless network revenue, and the
continued start up costs associated with the launch of a new brand. TELUS'
defined benefit pension plan net amortization did not change significantly.
Restructuring costs
Restructuring costs increased by $1.3 million and $3.3 million,
respectively, in the second quarter and first six months of 2008, when
compared to the same periods in 2007. An aggregate annual expense of
approximately $30 million is expected for several small efficiency
initiatives in 2008.
EBITDA
Consolidated EBITDA increased by $33.0 million and 218.2 million,
respectively, in the second quarter and first six months of 2008 when
compared to the same periods in 2007. Excluding the net-cash settlement
feature, consolidated EBITDA (as adjusted) increased by $30.9 million and
$42.8 million, respectively, due mainly to increased wireless EBITDA (as
adjusted).
Depreciation
Depreciation increased by $25.2 million and $53.2 million,
respectively, in the second quarter and first six months of 2008, when
compared to the same periods in 2007. The increases were due primarily to
the reduction in estimated useful service lives for certain digital circuit
switching and other assets, as well as growth in capital assets, partly
offset by an increase in other fully depreciated assets.
Amortization of intangible assets
Amortization increased by $3.5 million and $30.3 million, respectively,
in the second quarter and first six months of 2008, when compared to the
same periods in 2007. The increases included $13 million and $24 million,
respectively, for new acquisitions, partly offset by a lower expense due to
other software and subscriber base assets becoming fully amortized, as well
as accelerated amortization for Amp'd Mobile in the second quarter of 2007
following discontinuation of Amp'd services.
The increase for the first six months also includes: (i) $18 million
additional amortization for a new wireline billing and client care system
for Alberta residential customers that was put into service in March 2007;
and (ii) the effect of amortization in the first quarter of 2007 being
reduced by approximately $5 million to recognize investment tax credits,
then determined eligible by the tax authority, for assets capitalized in
prior years that were fully amortized. Amortization is expected to increase
significantly for the full year of 2008 as compared to 2007, due to the
Emergis acquisition and the July 2008 implementation of the new converged
client care and billing system for residential wireline customers in B.C.
See Caution regarding forward- looking statements.
Operating income
Operating income increased by $4.3 million and $134.7 million,
respectively, in the second quarter and first six months of 2008, when
compared to the same periods in 2007. Excluding net-cash settlement feature
expenses in both years, operating income (as adjusted) increased by $2.2
million in the second quarter of 2008, when compared to the same period in
2007, as the $30.9 million increase in EBITDA (as adjusted) exceeded higher
depreciation and amortization expenses. Operating income (as adjusted)
decreased by $40.7 million for the first six months of 2008, primarily due
to an additional three months amortization for a new billing system and
increased depreciation, partly offset by the $42.8 million increase in
EBITDA (as adjusted).
Other income statement items
-------------------------------------------------------------------------
Six-month periods
Other expense, net Quarters ended June 30 ended June 30
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
2.4 18.5 (87.0)% 19.2 22.3 (13.9)%
-------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense,
charitable donations, gains and losses on disposal of real estate, and
income (loss) or impairments in equity or portfolio investments. Accounts
receivable securitization expenses were $1.0 million and $6.9 million,
respectively, in the second quarter and first six months of 2008, or
decreases of $3.9 million and $1.2 million from the same periods in 2007,
which were caused by the reduction in proceeds from securitized accounts
receivable by June 30, 2008 (see Section 7.6 Accounts receivable sale). Net
gains and losses on investments in 2008, including valuation adjustments on
investments held for trading, were gains of $3.3 million in the second
quarter and losses of $6.2 million for the first six months. An $11.8
million write-off of an equity investment in AMP'D Mobile, Inc. was
recorded in the second quarter of 2007.
-------------------------------------------------------------------------
Six-month periods
Financing costs Quarters ended June 30 ended June 30
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Interest on long-term
debt, short-term
obligations and other 116.6 126.8 (8.0)% 228.4 246.1 (7.2)%
Foreign exchange losses
(gains) 0.2 5.7 (96.5)% 0.5 7.6 (93.4)%
Capitalized interest
during construction (1.3) - n.m. (2.6) - n.m.
Interest income (1.2) (5.3) 77.4 % (2.6) (8.9) 70.8 %
-------------------------------------------------------------------------
114.3 127.2 (10.1)% 223.7 244.8 (8.6)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n.m. - not meaningful
-------------------------------------------------------------------------
Interest expenses decreased $10.2 million and $17.7 million,
respectively, in the second quarter and first six months of 2008 when
compared to the same periods in 2007. Decreased interest expenses were due
primarily to financing activities that lowered the effective interest rate.
For the first six months, lower interest was partly offset by the initial
application in 2007 of the effective rate method for issue costs.
Interest income decreased $4.1 million and $6.3 million, respectively,
in second quarter and first six months of 2008, when compared to the same
periods in 2007. Lower interest income was due primarily to lower average
temporary investment and bank balances.
-------------------------------------------------------------------------
Six-month periods
Income taxes Quarters ended June 30 ended June 30
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Basic blended federal
and provincial tax at
statutory income tax
rates 117.8 116.9 0.8 % 241.8 209.2 15.6 %
Revaluation of future
income tax liability
to reflect future
statutory income tax
rates (7.9) (24.2) - (26.1) (27.9) -
Share option award
compensation 1.5 1.2 - 2.9 (6.5) -
Other 2.1 (0.2) - 4.3 (1.8) -
-------------------------------------------------------------------------
113.5 93.7 21.1 % 222.9 173.0 28.8 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Blended federal and
provincial statutory
tax rates (%) 30.9 33.6 (2.7)pts 30.9 33.5 (2.6)pts
Effective tax rates (%) 29.8 26.9 2.9 pts 28.5 27.7 0.8 pts
-------------------------------------------------------------------------
The blended federal and provincial statutory income tax expense
increased in the second quarter and first six months of 2008 when compared
to the same periods in 2007, due to the respective 9.6% and 25.5% increases
in income before taxes, partly offset by the lower blended statutory tax
rates. A one per cent reduction in B.C. provincial income tax rates
beginning July 1, 2008 was substantively enacted in the first quarter of
2008. Reductions to federal income tax rates for 2008 to 2012 were enacted
in the second and fourth quarters of 2007. The effective tax rates were
lower than the statutory tax rates due to revaluations of future income tax
liabilities resulting from enacted reductions to future provincial and
federal income tax rates, 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 currently expects cash income tax payments
to be relatively low in 2008 with expected cash collections exceeding
expected payments. In 2009, income tax payments are expected to increase
substantially. The blended statutory income tax rate is expected to be 30.5
to 31.5% in 2008. See Caution regarding forward-looking statements at the
beginning of Management's discussion and analysis.
-------------------------------------------------------------------------
Non-controlling Six-month periods
interests Quarters ended June 30 ended June 30
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
0.9 1.3 (30.8)% 1.7 2.8 (39.3)%
-------------------------------------------------------------------------
Non-controlling interests represents minority shareholders' interests in
several small subsidiaries.
Comprehensive income
Currently, the concept of comprehensive income for purposes of Canadian
GAAP, in the Company's specific instance, is primarily to include changes in
shareholders' equity arising from unrealized changes in the fair values of
financial instruments. The 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 - Six-month periods
wireline segment Quarters ended June 30 ended June 30
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Voice local(1) 496.9 515.6 (3.6)% 998.6 1,047.7 (4.7)%
Voice long distance(2) 174.7 167.7 4.2 % 353.8 355.3 (0.4)%
Data(3) 521.5 434.6 20.0 % 1,027.7 859.4 19.6 %
Other 63.2 62.2 1.6 % 126.8 123.3 2.8 %
-------------------------------------------------------------------------
External operating
revenue(4) 1,256.3 1,180.1 6.5 % 2,506.9 2,385.7 5.1 %
Intersegment revenue 32.3 28.7 12.5 % 63.1 53.8 17.3 %
-------------------------------------------------------------------------
Total operating
revenues(4) 1,288.6 1,208.8 6.6 % 2,570.0 2,439.5 5.3 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Voice local revenue decreased by approximately 3.5% in the first
six months of 2008 when the impact of first quarter regulatory
adjustments are excluded from both 2008 and 2007.
(2) Voice long distance revenue decreased by 3.5% and 4.0%, respectively,
in the second quarter and first six months of 2008 when the impact of
the second quarter 2007 adjustment is excluded.
(3) Data revenue increased by approximately 7% and 8%, respectively, in
the second quarter and first six months of 2008, when revenues from
acquisitions are excluded from 2008 and the impact of first quarter
mandated retroactive competitor price reductions are excluded from
both 2008 and 2007.
(4) External and total operating revenue increased by approximately 1% in
the second quarter and first six months of 2008, when excluding
revenues from acquisitions and regulatory adjustments.
-------------------------------------------------------------------------
Wireline revenues increased $79.8 million and $130.5 million in the second
quarter and first six months of 2008, when compared with the same period in
2007, due to the following:
- Voice local revenue decreased by $18.7 million and $49.1 million,
respectively, in the second quarter and first six months of 2008,
when compared with the same periods in 2007. The decreases were
mainly due to two factors: (i) lower revenues from basic access and
optional enhanced service revenues caused by increased competition
for residential subscribers, offset in part by growth in business
local services; and (ii) for the six-month periods, approximately
$13 million lower recoveries from the price cap deferral account. The
2007 deferral account recovery of approximately $14.5 million
included previously incurred amounts associated with mandated local
number portability and start-up costs, and it offset unfavourable
mandated retroactive rate adjustments in the same period for basic
data revenue pursuant to two CRTC decisions (see the discussion for
wireline data revenue below).
-------------------------------------------------------------------------
Network access lines As at June 30
(000s) 2008 2007 Change
-------------------------------------------------------------------------
Residential network access lines 2,497 2,685 (7.0)%
Business network access lines 1,828 1,793 2.0 %
------- ------- --------
Total network access lines 4,325 4,478 (3.4)%
Six-month periods
Quarters ended June 30 ended June 30
(000s) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Change in residential
network access lines (48) (56) 14.3 % (99) (90) (10.0)%
Change in business
network access lines 8 8 - % 20 20 - %
------- ------- -------- ------- ------- --------
Change in total network
access lines (40) (48) 16.7 % (79) (70) (12.9)%
-------------------------------------------------------------------------
Residential line losses include the effect of increased competition from
resellers and VoIP competitors (including cable-TV companies), as well as
technological substitution to wireless services. The increase in business
lines was experienced in incumbent areas as well as Ontario and Quebec urban
non-incumbent areas.
- Voice long distance revenues increased by $7.0 million in the second
quarter of 2008, and decreased by $1.5 million for the first six
months of 2008, when compared with the same periods in 2007. Long
distance revenue in the second quarter of 2007 included a $13 million
negative one-time adjustment associated with implementation of a new
billing system for Alberta residential customers. Excluding the one-
time adjustment last year, revenue decreased by $6.0 million and
$14.5 million, respectively, due mainly to lower average per-minute
rates from industry-wide price competition and a lower base of
residential subscribers, partly offset by higher minute volumes.
- Wireline segment data revenues increased by $86.9 million and
$168.3 million, respectively, in the second quarter and first six
months of 2008, when compared with the same periods in 2007. Data
revenue increased primarily due to: (i) revenues from two
acquisitions in January 2008; (ii) increased Internet, enhanced data
and hosting service revenues from growth in business services and
high-speed Internet subscribers; (iii) increased broadcast,
videoconferencing and data equipment sales; (iv) mandatory
retroactive rate reductions recorded in 2007 (see next paragraph);
and (v) increased provision of digital entertainment services to
consumers in urban incumbent markets. The underlying growth absent
acquisitions and regulatory adjustments was approximately 8%.
Retroactive rate reductions of approximately $11 million were recorded in
the first quarter of 2007, pursuant to CRTC Decision 2007-6 (digital network
access link charges) and CRTC Decision 2007-10 (relating to basic service
extension feature charges).
-------------------------------------------------------------------------
Internet subscribers As at June 30
(000s) 2008 2007 Change
-------------------------------------------------------------------------
High-speed Internet subscribers 1,064.1 962.7 10.5 %
Dial-up Internet subscribers 142.0 172.2 (17.5)%
------- ------- --------
Total Internet subscribers 1,206.1 1,134.9 6.3 %
Six-month periods
Quarters ended June 30 ended June 30
(000s) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
High-speed Internet net
additions 23.6 13.9 69.8 % 43.9 46.0 (4.6)%
Dial-up Internet net
reductions (4.4) (9.4) 53.2 % (13.3) (21.9) 39.3 %
------- ------- -------- ------- ------- --------
Total Internet
subscriber net
additions 19.2 4.5 n.m. 30.6 24.1 27.0 %
-------------------------------------------------------------------------
High-speed Internet subscriber net additions increased during the
second quarter of 2008, when compared to the same period in 2007, as the
prior year's net additions were temporarily constrained by reduced order
processing capability after the March 2007 implementation of a new billing
and client care system for Alberta residential customers. High-speed
Internet subscriber net additions decreased slightly for the first six
months of 2008, when compared to the same period in 2007, due to
competitive activity and a maturing market.
- Other revenue increased by $1.0 million and $3.5 million,
respectively, in the second quarter and first six months of 2008,
when compared with the same periods in 2007. The increase was due
mainly to increased voice equipment sales.
- Intersegment revenues increased for services provided by the wireline
segment to the wireless segment. These revenues are eliminated upon
consolidation together with the associated expense in the wireless
segment.
-------------------------------------------------------------------------
Operating expenses -
wireline segment Six-month periods
($ millions, except Quarters ended June 30 ended June 30
employees) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Salaries, benefits and
other employee-related
costs, before net-cash
settlement feature 480.7 428.0 12.3 % 940.4 856.9 9.7 %
Net-cash settlement
feature (1.3) - n.m. (0.7) 153.1 n.m.
Other operations
expenses 372.5 344.1 8.3 % 740.2 667.5 10.9 %
-------------------------------------------------------------------------
Operations expense 851.9 772.1 10.3 % 1,679.9 1,677.5 0.1 %
Restructuring costs 4.1 2.8 46.4 % 10.6 7.2 47.2 %
-------------------------------------------------------------------------
Total operating
expenses 856.0 774.9 10.5 % 1,690.5 1,684.7 0.3 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense
(as adjusted)(1) 853.2 772.1 10.5 % 1,680.6 1,524.4 10.2 %
Total operating
expenses
(as adjusted)(1) 857.3 774.9 10.6 % 1,691.2 1,531.6 10.4 %
-------------------------------------------------------------------------
(1) Excluding net-cash settlement feature expenses.
-------------------------------------------------------------------------
Total operating expenses adjusted to exclude the net-cash settlement
feature expense increased by $82.4 million and $159.6 million,
respectively, in the second quarter and first six months of 2008, when
compared with the same periods in 2007. The increases were mainly due to
acquisitions, compensation increases, increased cost of sales, and initial
costs incurred to implement services for several new enterprise customers,
partly offset by system conversion expenses recorded in 2007 for an Alberta
wireline billing and client care system. The billing conversion expenses in
the second quarter of 2007 were approximately $16 million for temporary
labour to perform system fixes and maintain service levels.
- Salaries, benefits and employee-related costs increased by
$52.7 million and $83.5 million, respectively, in the second quarter
and first six months of 2008, when compared with the same periods in
2007. The increase resulted from more staff for the provision of
outsourcing services to customers, including Emergis operations
beginning in 2008, and compensation increases.
- Other operations expenses increased by $28.4 million and
$72.7 million, respectively, in the second quarter and first six
months of 2008, when compared with the same periods in 2007. The
increases were due to higher costs of sales for increased data
equipment sales with lower margins, expenses in acquired companies,
increased advertising and promotions expenses, and higher costs for
the provision of digital entertainment services, partly offset by
higher capitalized labour. In addition, regulated revenue-based
contribution expenses in 2008 do not include a recovery recorded in
the second quarter of 2007. External labour costs increased to
maintain higher service levels and to implement services for new
enterprise customers, but were offset by the absence in the second
quarter of 2008 of system conversion expenses recorded in 2007 for
the new Alberta wireline billing and client care system. Offnet
facility costs also increased to support new enterprise customers.
- Restructuring costs increased by $1.3 million and $3.4 million,
respectively, in the second quarter and first six months of 2008,
when compared with the same periods in 2007. Restructuring charges in
2008 were for a number of smaller initiatives under the Company's
competitive efficiency program.
-------------------------------------------------------------------------
EBITDA ($ millions) and Six-month periods
EBITDA margin (%) Quarters ended June 30 ended June 30
Wireline segment 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
EBITDA 432.6 433.9 (0.3)% 879.5 754.8 16.5 %
EBITDA (as adjusted)(1) 431.3 433.9 (0.6)% 878.8 907.9 (3.2)%
EBITDA margin 33.6 35.9 (2.3)pts 34.2 30.9 3.3 pts
EBITDA margin
(as adjusted) 33.5 35.9 (2.4)pts 34.2 37.2 (3.0)pts
-------------------------------------------------------------------------
(1) Excluding net-cash settlement feature (recoveries) expenses of
$(1.3) million and $(0.7) million, respectively, in the second
quarter and first six months of 2008 and $nil and $153.1 million,
respectively, in the second quarter and first six months of 2007.
-------------------------------------------------------------------------
Wireline segment EBITDA decreased by $1.3 million and in the second
quarter of 2008 and increased by $124.7 million for the first six months of
2008, when compared with the same periods in 2007. The increase for the
six- month period was mainly due to the net-cash settlement feature expense
recorded in 2007. Wireline EBITDA (as adjusted) decreased by $2.6 million
and $29.1 million, respectively, due to lower margins on increased data
equipment sales, initial costs to implement services for new enterprise
customers, increased advertising and promotions, and higher costs for the
provision of digital entertainment services.
5.5 Wireless segment results
-------------------------------------------------------------------------
Operating revenues - Six-month periods
wireless segment Quarters ended June 30 ended June 30
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Network revenue 1,076.7 989.8 8.8 % 2,113.9 1,934.3 9.3 %
Equipment revenue 65.7 58.2 12.9 % 128.5 113.7 13.0 %
-------------------------------------------------------------------------
External operating
revenue 1,142.4 1,048.0 9.0 % 2,242.4 2,048.0 9.5 %
Intersegment revenue 7.2 6.7 7.5 % 14.2 13.0 9.2 %
-------------------------------------------------------------------------
Total operating
revenues 1,149.6 1,054.7 9.0 % 2,256.6 2,061.0 9.5 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Key wireless operating indicators As at June 30
(000s) 2008 2007 Change
-------------------------------------------------------------------------
Subscribers - postpaid 4,670.1 4,236.0 10.2 %
Subscribers - prepaid 1,161.8 1,036.0 12.1 %
------- ------- ---------
Subscribers - total 5,831.9 5,272.0 10.6 %
Proportion of subscriber base that is
postpaid (%) 80.1 80.3 (0.2)pts
Digital POPs(1) covered including
roaming/resale (millions)(2) 32.4 31.5 2.9 %
Six-month periods
Quarters ended June 30 ended June 30
2008 2007 Change 2008 2007 Change
-------------------------------------------------
Subscriber gross
additions - postpaid 278.9 219.2 27.2 % 483.1 392.5 23.1 %
Subscriber gross
additions - prepaid 143.3 134.8 6.3 % 284.3 257.5 10.4 %
------ ------ -------- ------ ------ --------
Subscriber gross
additions - total 422.2 354.0 19.3 % 767.4 650.0 18.1 %
Subscriber net
additions - postpaid 157.2 99.2 58.5 % 229.6 160.0 43.5 %
Subscriber net
additions - prepaid 18.4 29.0 (36.6)% 34.4 58.7 (41.4)%
------ ------ -------- ------ ------ --------
Subscriber net
additions - total 175.6 128.2 37.0 % 264.0 218.7 20.7 %
ARPU ($)(3) 62.73 63.65 (1.4)% 62.31 62.85 (0.9)%
Churn, per month (%)(3) 1.43 1.45 (0.02)pts 1.48 1.40 0.08 pts
COA(4) per gross
subscriber
addition ($)(3) 332 425 (21.9)% 326 431 (24.4)%
Average minutes of use
per subscriber per
month (MOU) 420 411 2.2 % 408 397 2.8 %
EBITDA (as adjusted)(5)
to network revenue (%) 45.1 45.7 (0.6)pts 46.7 47.4 (0.7)pts
Retention spend to
network revenue(3) (%) 9.4 8.2 1.2 pts 9.1 7.8 1.3 pts
EBITDA (as adjusted)
excluding COA(3)
($ millions) 626.0 602.9 3.8 % 1,238.2 1,196.2 3.5 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
pts - percentage points
(1) 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.
(2) At June 30, 2008, 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).
(3) See Section 11.3 Definitions of key wireless 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.
(4) Cost of acquisition.
(5) EBITDA excluding net-cash settlement feature expenses of $1.0 million
and $0.6 million, respectively, in the second quarter and first six
months of 2008 and $1.8 million and $22.2 million, respectively, in
the second quarter and first six months of 2007.
-------------------------------------------------------------------------
Wireless segment revenues increased by $94.9 million and $195.6 million,
respectively, in the second quarter and first six months of 2008 when compared
with the same period in 2007, due to the following:
- Network revenue increased by $86.9 million and $179.6 million,
respectively, in the second quarter and first six months of 2008 when
compared to the same periods in 2007. Network revenue increased due
primarily to the 10.6% expansion in the subscriber base over the past
twelve months. Wireless data revenues were $158.6 million in the
second quarter of 2008, up 54% from the same period in 2007, and now
represent 14.6% of network revenue. This compares to 10.4% of network
revenue in the same period in 2007. For the first six months of 2008,
wireless data revenues were $305.8 million, up 53% from the previous
year. This growth reflects strength in text messaging and
RIM/BlackBerry service revenues driven by increased usage and data
roaming, as well as continued migration of existing subscribers to
full function smartphones and EVDO-capable handsets.
Blended ARPU of $62.73 in the second quarter of 2008 was down by
$0.92, when compared to the same period in 2007. Data ARPU increased
$2.59 or 39% to $9.17 in the second quarter of 2008, as compared to
the same period in 2007, but was more than offset by declining Voice
ARPU. Voice ARPU decreased $3.51 or 6.2% to $53.56 in the second
quarter of 2008, as compared to the same period in 2007, as the
cumulative subscriber base shifted slightly to prepaid, increased use
of included-minute rate plans, pricing competition, and lower inbound
voice roaming. Lower volume non-push-to-talk-centric Mike(R)
subscribers and higher-value prepaid subscribers continue to be
actively migrated to PCS smartphones for the enhanced data
applications, contributing to future revenue growth prospects.
Gross and net subscriber additions this quarter include the results
of TELUS' postpaid value brand launch in March 2008. Consistent with
industry practice, the Company does not breakout the results for this
service for competitive reasons. Gross subscriber additions of
422,200 in the second quarter of 2008 were a TELUS second quarter
record, increasing 19% from the same period in 2007, and were
positively affected by the introduction of the new brand. The
proportion of postpaid gross subscriber additions was 66.1% in the
second quarter of 2008, up 4.2 percentage points when compared to the
second quarter of 2007. For the first six months of 2008, gross
subscriber additions were 767,400, up 18% when compared to the same
period in 2007. The proportion of postpaid gross additions for the
first half of 2008 was 63.0%, up 2.6 percentage points when compared
to the same period in 2007.
Net additions of 175,600 in the second quarter of 2008 were a TELUS
second quarter record, increasing 37% from the same period in 2007.
Postpaid subscriber net additions for the same period represented
89.5% of total net additions as compared with 77% of total net
additions for the second quarter of 2007. Net additions for the first
six months of 2008 were 264,000, up almost 21% from the same period
in 2007 and were comprised of 87% postpaid subscribers, up from 73%
in the same period in 2007.
The blended churn rate of 1.43% in the second quarter decreased
slightly from 1.45% in the same period in 2007, and improved from the
1.53% in the first quarter of 2008. These blended churn improvements
were driven by lower postpaid churn that was supported by successful
retention activities. The blended churn rate of 1.48% for the first
six months of 2008 increased from 1.40% in the same period in 2007,
reflecting increased prepaid churn and absence of the wireless number
portability impact in the first quarter of 2007. Total deactivations
were 246,600 and 503,400, respectively, in the second quarter and
first six months of 2008 as compared to 225,800 and 431,300,
respectively, for the same periods in 2007. The increase in
deactivations primarily reflects higher prepaid churn rate and a
larger subscriber base.
- Equipment sales, rental and service revenue increased by $7.5 million
and $14.8 million, respectively, in the second quarter and first six
months of 2008 when compared to the same periods in 2007. Equipment
sales were up due to the increase in gross subscriber additions and
incremental handset migrations to full function smartphones to
support data revenue growth.
- Intersegment revenues increased for services provided by the wireless
segment to the wireline segment. Intersegment revenues are eliminated
upon consolidation along with the associated expense in the wireline
segment.
-------------------------------------------------------------------------
Operating expenses -
wireless segment(1) Six-month periods
($ millions, except Quarters ended June 30 ended June 30
employees) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Equipment sales expenses 176.7 166.6 6.1 % 329.3 312.0 5.5 %
Network operating
expenses 149.4 126.7 17.9 % 290.1 241.3 20.2 %
Marketing expenses 121.3 114.6 5.8 % 224.5 215.4 4.2 %
General and
administration expenses 216.8 195.7 10.8 % 424.5 397.5 6.8 %
-------------------------------------------------------------------------
Operations expense 664.2 603.6 10.0 % 1,268.4 1,166.2 8.8 %
Restructuring costs 0.4 0.4 - 0.6 0.7 (14.3)%
-------------------------------------------------------------------------
Total operating expenses 664.6 604.0 10.0 % 1,269.0 1,166.9 8.7 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense
(as adjusted)(1) 663.2 601.8 10.2 % 1,267.8 1,144.0 10.8 %
Total operating expenses
(as adjusted)(1) 663.6 602.2 10.2 % 1,268.4 1,144.7 10.8 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excluding net-cash settlement feature expenses of $1.0 million and
$0.6 million, respectively, in the second quarter and first six
months of 2008 and $1.8 million and $22.2 million, respectively, in
the second quarter and first six months of 2007.
-------------------------------------------------------------------------
Wireless segment total operating expenses increased by $60.6 million and
$102.1 million, respectively, in the second quarter and first six months of
2008 when compared with the same period in 2007. Total operating expenses
adjusted to exclude the net-cash settlement feature increased by $61.4 million
and $123.7 million, respectively, to promote, acquire, support and retain the
10.6% year-over-year growth in the subscriber base, as well as the 9% growth
in Network revenue.
- Equipment sales expenses increased by $10.1 million and
$17.3 million, respectively, in the second quarter and first six
months of 2008, when compared to the same periods in 2007, due to
higher gross subscriber additions and incremental handset migrations
to full function smartphones to support the more than 50% increase
data revenues, partly offset by lower handset costs from a stronger
Canadian dollar.
- Network operating expenses increased by $22.7 million and
$48.8 million, respectively, in the second quarter and first six
months of 2008 when compared with the same periods in 2007. The
increases resulted from a combination of higher roaming, content and
licensing costs in support of the strong increase in data revenues.
- Marketing expenses increased by $6.7 million and $9.1 million,
respectively, in the second quarter and first six months of 2008,
when compared to the same periods in 2007. The increases were due to
higher advertising and promotion costs in support of successful gross
subscriber loading and the March introduction of new postpaid value
brand in the market. COA per gross subscriber addition decreased by
$93 or 21.9% in the second quarter of 2008, and decreased by $105 or
24.4% for the first six months of 2008, when compared to the same
periods in 2007, in part due to lower advertising and promotion costs
on a per unit basis, the mix of gross subscriber loading towards
lower variable costs channels, and lower equipment subsidies.
Retention costs as a percentage of network revenue were 9.4% and 9.1%
in the second quarter and first six months of 2008, respectively, up
from 8.2% and 7.8%, respectively, in the same periods in 2007. The
increase was due primarily to handset upgrades to full function
smartphones to support data revenue growth and the continued
migration of non-push-to-talk-centric Mike service clients and high-
value prepaid clients to PCS postpaid services, with an emphasis on
smartphones.
- General and administration increased by $21.1 million and
$27.0 million, respectively, in the second quarter and first six
months of 2008 when compared with the same periods in 2007. General
and administration expenses adjusted to exclude the net-cash
settlement feature, increased by $21.9 million and $48.6 million,
respectively, due to employee and contracted labour costs to support
increasingly complex data products and service offerings, growth in
the subscriber base, expansion of company-owned retail stores, and to
a lesser extent, an increase in bad debt expense.
- Restructuring costs were for a number of smaller initiatives under
the Company's competitive efficiency program.
-------------------------------------------------------------------------
EBITDA ($ millions) and Six-month periods
EBITDA margin (%) Quarters ended June 30 ended June 30
Wireless segment 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
EBITDA 485.0 450.7 7.6 % 987.6 894.1 10.5 %
EBITDA (as adjusted)(1) 486.0 452.5 7.4 % 988.2 916.3 7.8 %
EBITDA margin 42.2 42.7 (0.5)pts 43.8 43.4 0.4 pts
EBITDA margin
(as adjusted) 42.3 42.9 (0.6)pts 43.8 44.5 (0.7)pts
-------------------------------------------------------------------------
(1) Excluding net-cash settlement feature expenses of $1.0 million and
$0.6 million, respectively, in the second quarter and first six
months of 2008 and $1.8 million and $22.2 million, respectively, in
the second quarter and first six months of 2007.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Wireless segment EBITDA increased by $34.3 million and $93.5 million,
respectively, in the second quarter and first six months of 2008, when
compared with the same periods in 2007. Wireless EBITDA adjusted to exclude
the net-cash settlement feature, increased by $33.5 million and $71.9
million, respectively. The increase in EBITDA (as adjusted) was due to
higher Network revenue and a lower COA expense, partially offset by higher
retention spend (supporting smartphone upgrades), increased network costs
related to data usage, and higher general and administrative costs to
support business growth.
6. Financial condition
The following are changes in the Consolidated balance sheets in the
six- month period ended June 30, 2008.
-------------------------------------------------------------------------
June 30, Dec. 31, Changes Explanation of the
As at -------------------- change in balance
($ millions) 2008 2007
-------------------------------------------------------------------------
Current Assets
Cash and 45.7 19.9 25.8 129.6 % See Section 7:
temporary Liquidity and
investments, capital resources
net
Short-term - 42.4 (42.4) (100.0)% Liquidation of
investments short-term
investments
Accounts 1,007.4 710.9 296.5 41.7 % Mainly due to a
receivable $350 million
reduction in
proceeds from
securitized accounts
receivable and an
increase from
acquisitions, partly
offset by a seasonal
decrease in accounts
receivable turnover
(approximately 46
days versus 49 days)
Income and 80.4 120.9 (40.5) (33.5)% Mainly due to
other taxes current income tax
receivable expense booked
during the first
half of 2008
Inventories 262.5 243.3 19.2 7.9 % Mainly increased
wireless handset
inventory for new
handset launches
Prepaid 295.0 199.5 95.5 47.9 % Primarily prepayment
expenses of annual wireless
and other licence fees,
employee benefits,
property taxes, and
maintenance
contracts, net of
amortization
Current 5.1 3.8 1.3 34.2 % Fair value
portion of adjustments to
derivative handset, restricted
assets share units and
other operational
hedges
-------------------------------------------------------------------------
Current Liabilities
Accounts 1,384.7 1,476.6 (91.9) (6.2)% Mainly lower
payable and payables for handset
accrued purchases, as well
liabil- as lower payroll and
ities other employee-
related liabilities,
net of liabilities
for acquisitions
Income and 11.8 7.3 4.5 61.6 % Mainly due to income
other taxes payable from
taxes acquisitions
payable
Restructuring 30.2 34.9 (4.7) (13.5)% Payments under
accounts previous and current
payable programs exceeded
and accrued new obligations
liabilities
Advance 634.7 631.6 3.1 0.5 % -
billings
and customer
deposits
Current 6.5 5.4 1.1 20.4 % An increase in
maturities capital leases,
of long-term primarily from the
debt acquisition of
Emergis
Current 50.0 26.6 23.4 88.0 % Fair value
portion of adjustments for
derivative share option hedges
liabilities
Current 638.3 503.6 134.7 26.7 % An increase in
portion of temporary
future differences for
income current assets and
taxes liabilities, as well
as changes in
partnership taxable
income that will be
allocated in the
next 12 months
-------------------------------------------------------------------------
Working (1,060.1) (1,345.3) 285.2 21.2 % Includes a reduction
capital(1) in proceeds from
securitized accounts
receivable following
the second quarter
$500 million Note
issue
-------------------------------------------------------------------------
Capital 11,379.4 11,122.0 257.4 2.3 % Includes
Assets, $326.2 million for
Net acquired software,
customer contracts
and related customer
relationships and
other capital
assets, plus capital
expenditures for the
first half of 2008,
net of depreciation
and amortization.
See also Section 5.3
Consolidated results
from operations -
Depreciation,
Amortization of
intangible assets,
as well as Section
7.2 Cash used by
investing activities
-------------------------------------------------------------------------
Other Assets
Deferred 1,418.1 1,318.0 100.1 7.6 % Primarily related to
charges pension plan
funding, favourable
cumulative returns
on plan assets and
continued
amortization of
transitional pension
assets
Investments 32.4 38.9 (6.5) (16.7)% Mainly the value of
Emergis shares
purchased in the
open market in
December 2007 that
were exchanged at
the close of
acquisition in
January 2008, partly
offset by other
sales, purchases and
revaluation of
investments
Goodwill 3,540.4 3,168.0 372.4 11.8 % Primarily January
2008 acquisitions of
Emergis and Fastvibe
-------------------------------------------------------------------------
Long-Term 5,512.3 4,583.5 928.8 20.3 % Includes the April
Debt 2008 publicly issued
$500 million, seven-
year Notes, a
$212.8 million
increase in
commercial paper,
draws of
$162.0 million from
the 2012 credit
facility, as well as
an increase in the
Canadian dollar
value of 2011 U.S.
dollar Notes
-------------------------------------------------------------------------
Other 1,680.7 1,717.9 (37.2) (2.2)% Primarily changes in
Long-Term U.S. dollar exchange
Liabil- rates and a fair
ities value adjustment of
the derivative
liabilities
associated with 2011
U.S. dollar Notes
-------------------------------------------------------------------------
Future 1,100.8 1,048.1 52.7 5.0 % An increase in
Income temporary
Taxes differences for
long-term assets and
liabilities, partly
offset by a
revaluation
resulting from
reductions in future
provincial income
tax rates
-------------------------------------------------------------------------
Non- 22.0 25.9 (3.9) (15.1)% Primarily payment of
Controlling dividends by a
Interests subsidiary to a non-
controlling
interest, net of
non-controlling
interests' share of
earnings
-------------------------------------------------------------------------
Shareholders'
Equity
Common 6,994.4 6,926.2 68.2 1.0 % Primarily Net income
equity of $558 million,
less dividends
declared of
$289.5 million and
NCIB purchases of
$199.2 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
In 2008, the balance of Cash and temporary investments decreased by $3.4
million during the second quarter and increased by $25.8 million during the
first six months.
In 2007, the balance of Cash and temporary investments decreased by $531.8
million during the second quarter and increased slightly during the first six
months, primarily due to repayment of $1.5 billion of maturing Notes on June
1, funded by $1 billion of debt issues in the first quarter and initiation of
a commercial paper program in the second quarter.
-------------------------------------------------------------------------
Six-month periods
Quarters ended June 30 ended June 30
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Cash provided by
operating activities 461.0 1,061.9 (56.6)% 1,086.2 1,522.5 (28.7)%
Cash used by investing
activities (436.7) (477.8) 8.6 %(1,437.1) (870.1) (65.2)%
Cash (used) provided
by financing
activities (27.7)(1,115.9) 97.5 % 376.7 (638.7) n.m.
-------------------------------------------------------------------------
Increase (decrease) in
cash and temporary
investments, net (3.4) (531.8) 99.4 % 25.8 13.7 88.3 %
Cash and temporary
investments, net,
beginning of period 49.1 534.0 (90.8)% 19.9 (11.5) n.m.
Cash and temporary
investments, net,
end of period 45.7 2.2 n.m. 45.7 2.2 n.m.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7.1 Cash provided by operating activities
Cash provided by operating activities decreased by $600.9 million and
$436.3 million, respectively, in the second quarter and first six months of
2008 when compared with the same periods in 2007, mainly due to the following:
- A reduction in proceeds from securitized accounts receivable of
$350 million for the second quarter and first six month of 2008, as
compared to a $350 million increase in proceeds during the second
quarter of 2007 and no change for the first six months of 2007. The
year-over-year comparative reductions in cash flow from changes in
securitized accounts receivables were $700 million in the second
quarter and $350 million for the first six months.
- Increases in EBITDA of $33.0 million and $218.2 million,
respectively, as described in Section 5.3 Consolidated results from
operations;
- An increase in share-based compensation expense in excess of payments
of $19.0 million for the second quarter, which adds to increased
EBITDA for the same period;
- A decrease of $113.3 million in share-based compensation expense in
excess of payments for the first six months, which partly offsets the
increase in EBITDA for the same period;
- A decrease of interest paid of $42.7 million and $21.3 million,
respectively, due to financing activities that lowered the effective
interest rate, net of repayment of forward starting interest rate
swaps in the first quarter of 2007;
- Cash provided from liquidation of Short-term investments was
$116.0 million and $42.4 million, respectively, during the second
quarter and first six months of 2008, compared with approximately
$55 million for the second quarter and first six months of 2007; and
- Other changes in non-cash working capital including reduced accounts
payable and accrued liabilities for the six-month period ended
June 30, 2008.
7.2 Cash used by investing activities
Cash used by investing activities decreased by $41.1 million in the
second quarter of 2008 and increased by $567.0 million in the first six
months of 2008, when compared with the same periods in 2007. The decrease
for the quarter was mainly due to lower capital expenditures. The increase
for the six- month period was due to acquisitions for a total of $691.3
million, net of acquired cash. This was partly offset by lower capital
expenditures, as discussed further below.
Assets under construction were $722.4 million at June 30, 2008, up by
$163.4 million from December 31, 2007, reflecting increases in property,
plant and equipment under construction and new phases of the converged
wireline billing and client care system.
-------------------------------------------------------------------------
Capital expenditures Six-month periods
($ in millions, Quarters ended June 30 ended June 30
ratios in %) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Wireline segment 320.9 308.7 4.0 % 576.1 579.4 (0.6)%
Wireless segment 114.7 173.1 (33.7)% 179.2 284.3 (37.0)%
-------------------------------------------------------------------------
TELUS consolidated 435.6 481.8 (9.6)% 755.3 863.7 (12.6)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditure
intensity ratio(1) 18.2 21.6 (3.4)pts 15.9 19.5 (3.6)pts
EBITDA (as adjusted)
less capital
expenditures(2) 481.7 404.6 19.1 % 1,111.7 960.5 15.7 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 for the calculation and description.
-------------------------------------------------------------------------
The consolidated capital intensity for the first six months of 2008
reflects a Wireline capital intensity level of 22% (versus 24% in the same
period in 2007) and a Wireless capital intensity level of 8% (versus 14% in
the same period in 2007). TELUS' EBITDA (as adjusted) less capital
expenditures increased by $77.1 million and $151.2 million, respectively, in
the second quarter and first six months of 2008 when compared to the same
periods in 2007, mainly due to the lower total capital spending and higher
Wireless EBITDA (as adjusted).
- Wireline segment capital expenditures increased by $12.2 million in
the second quarter of 2008 and decreased by $3.3 million in the first
six months of 2008, when compared to the same periods in 2007. The
increase for the second quarter was primarily for upfront
expenditures to support new enterprise customers. The decrease for
the first six months was due primarily to the high-speed broadband
(ADSL2+) network builds in 2007, as well as lower demand in 2008 for
network access builds resulting from more moderate residential
construction activity in B.C. and Alberta, partly offset by an
increase in upfront expenditures to support new enterprise customers.
Wireline cash flows (EBITDA as adjusted less capital expenditures)
were $110.4 million and $302.7 million, respectively, in the second
quarter and first six months of 2008, or decreases of 11.8% and 7.9%,
when compared to the same periods in 2007. The decreases were due to
lower adjusted EBITDA, as well as higher capital expenditures in the
second quarter.
- Wireless segment capital expenditures decreased by $58.4 million and
$105.1 million, respectively, in the second quarter and first six
months of 2008 when compared to the same periods in 2007.
Expenditures in 2007 were higher than in 2008 due to cell site
capacity and coverage spending, including network upgrades for
higher-speed EVDO RevA service, as well as expenditures to implement
wireless number portability in March 2007. Wireless cash flows
(EBITDA as adjusted less capital expenditures) were $371.3 million
and $809.0 million, respectively, in the second quarter and first six
months of 2008, or increases of 32.9% and 28.0%, respectively, when
compared to the same periods in 2007. The increases resulted from
lower capital spending and increased adjusted EBITDA.
Subsequent to quarter-end on July 21, the Company provisionally
acquired 59 licences in Industry Canada's wireless spectrum auction for
approximately $880 million that is expected to be reflected as a third
quarter capital expenditure. The Company expects that the amount of
successful bids will be paid through a combination of drawing on its credit
facilities and utilization of cash on hand.
7.3 Cash (used) provided by financing activities
Net cash used by financing activities decreased by $1,088.2 million
during the second quarter of 2008, when compared to the same period in
2007, while net Cash provided by financing activities for the first six
months of 2008 increased by $1,015.4 million when compared to the same
period in 2007. Changes in financing activities included:
- Cash dividends paid were $289.5 million for both the second quarter
and first six months of 2008, and were in respect of the first
quarter dividend paid April 1 and the second quarter dividend
remitted June 30. Cash dividends paid in during the second quarter
and first six months of 2007 were $125.0 million and $250.9 million,
respectively. Increased dividend payments for the six-month period
reflected a higher quarterly dividend rate (45 cents per share in
2008 compared to 37.5 cents per share in 2007), partly offset by
lower shares outstanding from NCIB share repurchase programs.
- Purchases of shares under NCIB programs decreased by $92.8 million
and $171.0 million, respectively, in the second quarter and first six
months of 2008, when compared to the same periods in 2007. Fewer
shares were repurchased at a lower average price.
The Company's renewed NCIB program (Program 4) came into effect on
December 20, 2007 and is set to expire on December 19, 2008. At June 30,
2008, the Company has repurchased 12% of the maximum eight million Common
Shares and 32% of the maximum 12 million Non-Voting Shares under Program 4.
Since December 20, 2004, TELUS has repurchased 20.2 million of its Common
Shares and 37.4 million of its Non-Voting Shares for $2.7 billion under
four NCIB programs, consistent with the Company's intent to return cash to
shareholders.
Shares repurchased for cancellation under normal course issuer bid
programs
-------------------------------------------------------------------------
Purchase cost
Shares repurchased ($ millions)
------------------------------- --------------------------
Charged Charged
to to
Non- Share Retained
Common Voting capi- earn-
Shares Shares Total tal(1) ings(2) Paid
---------------------------------------------- --------------------------
2007 -
Program 3
First
quarter 1,975,000 1,530,000 3,505,000 57.8 142.9 200.7
Second
quarter 330,000 2,367,300 2,697,300 55.0 114.5 169.5
---------------------------------------------- --------------------------
Six months
ended
June 30 2,305,000 3,897,300 6,202,300 112.8 257.4 370.2
---------------------------------------------- --------------------------
2008 -
Program 4
First
quarter 950,000 1,968,900 2,918,900 54.3 68.2 122.5
Second
quarter - 1,716,300 1,716,300 36.8 39.9 76.7
-------------------------------------------------------------------------
Six months
ended
June 30 950,000 3,685,200 4,635,200 91.1 108.1 199.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Represents the book value of shares repurchased.
(2) Represents the cost in excess of the book value of shares
repurchased.
-------------------------------------------------------------------------
- In April 2008, the Company publicly issued $500 million, 5.95%,
Series CE, Canadian dollar Notes at a price of $998.97 per $1,000.00
of principal. The Notes mature in April 2015. The net proceeds of the
offering were used for general corporate purposes, including
repayment of amounts under the 2012 revolving credit facility, and to
refinance short-term financing sources, which had been utilized in
January for purchase of the then issued and outstanding Emergis
common shares for $743 million.
The Series CE 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 66 basis points, 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.
The Series CE Notes require that the Company make an offer to
repurchase the Notes at a price equal to 101% of their principal plus
accrued and unpaid interest to the date of repurchase upon the
occurrence of a change in control triggering event, as defined in the
supplemental trust indenture.
- During the first quarter, the Company increased utilization of the
2012 bank facility from $nil to $320.9 million and increased
commercial paper by $212.8 million for general corporate
purposes, including acquisitions in January. During the second
quarter of 2008, the Company reduced the amount drawn from the 2012
bank facility to $162.0 million at June 30, 2008. Commercial paper
outstanding was $800 million at June 30, unchanged from March 31,
2008.
- In comparison, debt financing activities in the first half of 2007
included the March issue of Series CC and CD Notes totalling
$1 billion, establishment of a commercial paper program in May, and
repayment of approximately $1.5 billion of maturing Notes in June.
These activities contributed to a lower effective interest rate in
subsequent periods.
- On August 6, 2008, the Board of Directors approved an increase in the
currently authorized commercial paper program from $800 million to
$1.2 billion.
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
Liquidity and capital resource measures
As at, or 12-month periods ended,
June 30 2008 2007 Change
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Components of debt and coverage ratios(1)
($ millions)
-------------------------------------------------------------------------
Net debt 6,644.4 6,239.7 404.7
Total capitalization - book value 13,775.0 13,122.3 652.7
EBITDA - excluding restructuring costs 3,831.2 3,520.0 311.2
Net interest cost 419.0 495.0 (76.0)
-------------------------------------------------------------------------
Debt ratios
-------------------------------------------------------------------------
Fixed-rate debt as a proportion of total
indebtedness (%) 83.4 81.4 2 pts
Average term to maturity of debt (years) 4.8 5.7 (0.9)
Net debt to total capitalization (%)(1) 48.2 47.6 0.6 pts
Net debt to EBITDA - excluding
restructuring costs(1) 1.7 1.8 (0.1)
-------------------------------------------------------------------------
Coverage ratios(1)
-------------------------------------------------------------------------
Interest coverage on long-term debt 4.7 3.8 0.9
EBITDA - excluding restructuring costs
interest coverage 9.1 7.1 2.0
-------------------------------------------------------------------------
Other measures
-------------------------------------------------------------------------
Free cash flow ($ millions)(2) 1,812.8 1,399.5 413.3
Dividend payout ratio(3), excluding
tax-related adjustments and the net-cash
settlement feature (%) 52 48 4 pts
Dividend payout ratio (%)(3) 43 50 (7)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 11.4 Definitions of liquidity and capital resource
measures.
(2) Twelve-month trailing measurement. See Section 11.2 Free cash flow
for the definition.
(3) Twelve-month trailing measurement. See Section 11.4 Definitions of
liquidity and capital resource measures.
-------------------------------------------------------------------------
Net debt at June 30, 2008 increased from one year earlier due to the
$500 million debt issue in April 2008, as well as increased use of
commercial paper and amounts drawn on the 2012 credit facility, net of
lower proceeds from securitized accounts receivable and a higher cash
balance. Total capitalization increased because of higher net debt,
retained earnings and accumulated other comprehensive income, partly offset
by lower share capital due to share repurchases.
The average term to maturity of debt of 4.8 years at June 30, 2008
decreased from 5.7 years at June 30, 2007 due to shorter average long-term
debt maturity, increased commercial paper and amounts drawn against the
2012 credit facility, partly offset by the issuance in April 2008 of $500
million, Series CE, seven-year Notes. The proportion of debt on a fixed
rate basis increased mainly due to the April 2008 Note issue, as increased
commercial paper and drawn amounts against the 2012 credit facility were
offset by a decrease in proceeds from securitized accounts receivable.
When compared to one year earlier, the interest coverage on long-term
debt ratio increased by 0.9, of which, 0.6 resulted from lower long-term
interest and 0.3 resulted from higher income before income taxes and
long-term interest. The EBITDA interest coverage ratio increased by 2.0, of
which, 1.3 resulted from a lower net interest cost and 0.7 resulted from
higher EBITDA before restructuring. Free cash flow for the 12-month period
ended June 30, 2008, increased by 29.5% when compared to the measure one
year earlier, due to higher income tax recoveries and interest income,
higher EBITDA after share- based compensation and restructuring payments,
lower paid interest and lower capital expenditures.
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 guidelines and policies are:
- Net debt to EBITDA - excluding restructuring costs of 1.5 to 2.0
times
The ratio was 1.7 times at June 30, 2008, or a decrease of 0.1 from
one year earlier, as higher net debt was more than offset by improved
12-month trailing EBITDA before restructuring costs. The ratio
remained within the long- term target range.
- Dividend payout ratio of 45 to 55% of sustainable net earnings.
The ratio calculated to exclude favourable tax-related adjustments
and the net-cash settlement feature from earnings for the 12-month
period ended June 30, 2008 was 52%, as compared to 48% one year
earlier. The adjusted ratios are more representative of a sustainable
calculation. The ratios based on actual earnings were 43% and 50%,
respectively.
7.5 Credit facilities
On March 3, 2008, TELUS Corporation closed a new $700 million, 364-day
credit facility with a select group of Canadian banks. This new facility
provides incremental liquidity to TELUS and allows the Company to continue
to meet one of its financial objectives, which is to generally maintain $1
billion in available liquidity. The financial ratio tests in the new
facility are substantially the same as those in the 2012 $2 billion
syndicated facility, which states that the borrower will not permit its net
debt to operating cash flow ratio to exceed 4 to 1 and may not permit its
operating cash flow to interest expense ratio to be less than 2 to 1, each
as defined. The new credit facility is unsecured and bears interest at
Canadian prime and Canadian bankers' acceptance rates, plus applicable
margins.
At June 30, 2008, TELUS had available liquidity exceeding $1.5 billion
from unutilized credit facilities, consistent with the Company's objective
of maintaining at least $1 billion of available liquidity.
TELUS Credit Facilities at June 30, 2008
-------------------------------------------------------------------------
Out- Backstop
standing for
undrawn commer-
letters cial
of paper Available
($ in millions) Expiry Size Drawn credit program liquidity
-------------------------------------------------------------------------
Five-year
revolving
facility(1) May 1, 2012 2,000.0 (162.0) (272.3) (800.0) 765.7
364-day
revolving
facility(2) March 2, 2009 700.0 - - - 700.0
Other bank
facilities - 137.2 - (65.5) - 71.7
-------------------------------------------------------------------------
Total - 2,837.2 (162.0) (337.8) (800.0) 1,537.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Canadian dollars or U.S. dollar equivalent.
(2) Canadian dollars only.
-------------------------------------------------------------------------
TELUS' revolving credit facilities contain customary covenants,
including a requirement that TELUS not permit its consolidated Leverage
Ratio (debt to trailing 12-month EBITDA) to exceed 4 to 1 (approximately
1.7 to 1 at June 30, 2008) and not permit its consolidated Coverage Ratio
(EBITDA to Interest Expense on a trailing 12-month basis) to be less than 2
to 1 (approximately 9.1 to 1 at June 30, 2008) 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 agreements 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 facilities is not contingent on the maintenance by TELUS of a
specific credit rating.
7.6 Accounts receivable sale
On July 26, 2002, TELUS Communications Inc. (TCI), a wholly owned
subsidiary of TELUS, entered into an agreement, which was amended September
30, 2002, March 1, 2006, November 30, 2006 and March 31, 2008, 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 $650 million. As a result of selling the
interest in certain of the trade receivables on a fully serviced basis, a
servicing liability is recognized on the date of sale and is, in turn,
amortized to earnings over the expected life of the trade receivables. The
March 31, 2008 amendment resulted in the term being extended to July 17,
2009, for this revolving-period securitization agreement.
TCI is required to maintain at least a BBB (low) credit rating by DBRS
Ltd. (DBRS) or the securitization trust may require the sale program to be
wound down. The necessary credit rating was exceeded by three levels at A
(low) as of August 6, 2008.
-------------------------------------------------------------------------
Balance of proceeds from
securitized receivables 2008, 2008, 2007, 2007,
($ millions) June 30 Mar. 31 Dec. 31 Sept. 30
-------------------------------------------------------------------------
150.0 500.0 500.0 550.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance of proceeds from
securitized receivables 2007, 2007, 2006, 2006,
($ millions) June 30 Mar. 31 Dec. 31 Sept. 30
-------------------------------------------------------------------------
500.0 150.0 500.0 350.0
-------------------------------------------------------------------------
7.7 Credit ratings
There were no changes to the Company's investment grade credit ratings
since TELUS' 2007 Management's discussion and analysis. On March 27, 2008,
DBRS confirmed its credit ratings and trend for TELUS and TCI, and on April
7, assigned a rating and trend of A (low), stable, to TELUS' new $500
million, 5.95%, seven-year unsecured Note issue. On April 2, Moody's
Investors Service (Moody's) assigned a Baa1 rating with a stable outlook to
TELUS' new debt issue, while confirming the same for TELUS' existing senior
unsecured Notes. On April 3, FitchRatings assigned a BBB+ rating with a
stable outlook to the new TELUS debt issue. Standard and Poor's assigned a
BBB+ rating with a stable outlook to new Series CE Notes.
-------------------------------------------------------------------------
Credit rating summary DBRS S&P Moody's FitchRatings
-------------------------------------------------------------------------
Trend or outlook Stable Stable Stable Stable
-------------------------------------------------------------------------
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- - -
-------------------------------------------------------------------------
7.8 Financial instruments, commitments and contingent liabilities
Financial instruments
The Company's financial instruments, and the nature of risks that they
may be subject to, were described in the Company's 2007 Management's
discussion and analysis. Commencing with the Company's 2008 fiscal year,
the new recommendations of the CICA for financial instrument disclosures
(CICA handbook section 3862) apply to the Company and result in incremental
disclosures, relative to those previously, 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. This information is in Note 4 of the
interim Consolidated financial statements.
Commitments and contingent liabilities (Note 18 of the interim
Consolidated financial statements)
Price cap deferral accounts
On January 17, 2008, the CRTC issued Decision Telecom 2008-1 Use of
deferral account funds to improve access to telecommunications services for
persons with disabilities and to expand broadband services to rural and
remote communities. This decision approved TELUS' use of its deferral
account for expansion of broadband services to an additional 119 rural and
remote communities (cumulatively 234 rural and remote communities), and
confirmed approximately five per cent of the deferral account balance was
to be used to enhance accessibility to telecommunications services for
individuals with disabilities. The decision also confirmed that the
remaining balance of accumulated balance of TELUS' deferral account was to
be rebated to local residential customers in non-high cost serving areas.
On April 16, 2008, the Company petitioned to the Federal Cabinet
seeking to rescind those parts of Decision 2008-1 that prevent the use of
the remaining deferral account funds for broadband expansion. The petition
also seeks to vary the decision to allow incumbent local exchange carriers
to file additional proposals to use all of the available remaining deferral
account for the purpose of broadband extension in their respective areas
where it would otherwise be uneconomic to do so, except for the five per
cent of the deferral account designated to improve access for persons with
disabilities. On February 11, 2008, Bell Canada applied to the Federal
Court of Appeal for leave to appeal, and for a stay of, Decision 2008-1.
The stay was granted on April 23, 2008, and applies to the rebate and
broadband expansion determinations in Decision 2008-1.
The Federal Court of Appeal heard two appeals of the CRTC's initial
decision on disposition of funds in the deferral account (Decision 2006-9)
in January 2008. The Consumers Association of Canada and the National Anti-
Poverty Organization sought rebates from the deferral account direct to
consumers rather than have the account used for purposes designated by the
CRTC. Bell Canada's appeal grounds were that the CRTC exceeded its
jurisdiction to the extent that the CRTC approved rebates from the deferral
account. Within that hearing, the Federal Court of Appeal further granted
Bell Canada a motion for a stay of Decision 2006-9 in so far as it requires
the disposition of funds in the deferral accounts for any purpose other
than improvement of accessibility to communications services for
individuals with disabilities. In March 2008, the Federal Court of Appeal
dismissed both appeals. On May 6, 2008, TELUS applied to the Supreme Court
of Canada for leave to appeal Decision 2006-9, in so far as the decision
requires rebates of funds in the deferral accounts. The Company argued that
the Federal Court of Appeal erred in upholding the CRTC's jurisdiction to
order rebates of the funds in the ILEC deferral accounts. Bell Canada and
the Consumer Groups also applied to the Supreme Court for leave to appeal
the Federal Court of Appeal's ruling alleging various jurisdictional
errors.
Claims and lawsuits
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, other than as
disclosed in Note 18(d) of the interim Consolidated financial statements
and Section 10.3 Litigation and legal matters.
7.9 Outstanding share information
The table below contains a summary of the outstanding shares for each
class of equity at June 30, 2008. The total number of outstanding and
issuable shares is also presented, assuming full conversion of outstanding
options and shares reserved for future option grants. The number of
issuable shares at July 31, 2008 was not materially different from June 30.
-------------------------------------------------------------------------
Non-
Outstanding shares Common Voting Total
(millions of shares) Shares Shares shares
-------------------------------------------------------------------------
Common equity (1)
Outstanding shares at June 30, 2008 174.8 145.0 319.8
Options outstanding and issuable(2)
at June 30, 2008 0.4 15.4 15.8
-------------------------------------------------------------------------
175.2 160.4 335.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share, the
number of shares was 322.0 million for the three-month period ended
June 30, 2008.
(2) Assuming full conversion and ignoring exercise prices.
-------------------------------------------------------------------------
8. Critical accounting estimates and accounting policy developments
8.1 Critical accounting estimates
Critical accounting estimates are described in Section 8.1 of TELUS'
2007 Management's discussion and analysis. The preparation of financial
statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
8.2 Accounting policy developments (Note 2 of the interim Consolidated
financial statements)
Accounting policies are consistent with those described in Note 1 of
TELUS' 2007 Consolidated financial statements, other than for developments
set out below.
Convergence with International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board (IASB)
In 2006, Canada's Accounting Standards Board ratified a strategic plan
that will result in Canadian GAAP, as used by publicly accountable
enterprises, being fully converged with International Financial Reporting
Standards as issued by the International Accounting Standards Board (IFRS-
IASB) over a transitional period to be complete by 2011. TELUS will be
required to report using the converged standards effective for interim and
annual financial statements relating to fiscal years beginning no later
than on or after January 1, 2011, the date that the Company has selected
for adoption.
Canadian GAAP will be fully converged with IFRS-IASB through a
combination of two methods: (i) 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 publicly accountable enterprises' transition date to
IFRS-IASB; and (ii) standards not subject to a joint-convergence project
will be exposed in an omnibus manner for introduction at the time of the
publicly accountable enterprises' transition date to IFRS-IASB. The first
convergence method may, or will, result in the Company either having the
option to, or being required to, effectively, change over certain
accounting policies to IFRS-IASB prior to 2011.
The International Accounting Standards Board currently, and expectedly,
has projects underway that are expected to result in new pronouncements
that continue to evolve IFRS-IASB, and, as a result, IFRS-IASB as at the
transition date is expected to differ from its current form. There are
several phases that the Company will have to complete on the path to
changing over to IFRS-IASB:
-------------------------------------------------------------------------
Implementation phase Description and status
-------------------------------------------------------------------------
Initial impact This phase includes the identification of
assessment and scoping significant differences between existing
Canadian GAAP and IFRS-IASB, as relevant to the
Company's specific instance.
Based upon the current state of IFRS-IASB, this
phase identified a modest number of topics
possibly impacting either the Company's
financial results and/or the Company's effort
necessary to change over to IFRS-IASB. The IASB
has activities currently underway which may, or
will, change IFRS-IASB and such change may, or
will, impact the Company. The Company will
assess any such change as a component of its key
elements phase.
-------------------------------------------------------------------------
Key elements This phase includes identification, evaluation
and selection of accounting policies necessary
for the Company to change over to IFRS-IASB. As
well, this phase includes other operational
elements such as information technology,
internal control over financial reporting and
training.
Currently underway are the identification,
evaluation and selection of accounting policies
necessary for the Company to changeover to IFRS-
IASB; consideration of impacts on operational
elements, such as information technology and
internal control over financial reporting, are
integral to this process. Targeted training
activities, which leveraged both internal and
external resources, occurred during the current
reporting period.
Although its impact assessment activities are
underway and progressing according to plan,
continued progress is necessary before the
Company can prudently increase the specificity
of the disclosure of pre- and post-IFRS-IASB
changeover accounting policy differences.
-------------------------------------------------------------------------
Embedding This phase will integrate the solutions into the
Company's underlying financial system and
processes that are necessary for the Company to
change over to IFRS-IASB.
-------------------------------------------------------------------------
The Company is required to qualitatively disclose its implementation
impacts in conjunction with its 2008 and 2009 financial reporting. As
activities progress, disclosure on pre- and post-IFRS-IASB implementation
accounting policy differences is expected to increase.
The Company will present its results for fiscal 2010 using contemporary
Canadian GAAP. The Company will also present supplementary disclosure for
fiscal 2010 according to IFRS-IASB. To accomplish this, in 2010 the Company
will effectively maintain two parallel books of account: one using the
contemporary version of Canadian GAAP and the other using the contemporary
IFRS-IASB.
Financial instruments - disclosure; presentation
As an activity consistent with Canadian GAAP being evolved and
converged with IFRS-IASB, the existing recommendations for financial
instrument disclosure were replaced with new recommendations (CICA Handbook
Section 3862); the existing recommendations for financial instrument
presentation were carried forward, unchanged (as CICA Handbook Section
3863).
Commencing with the Company's 2008 fiscal year, the new recommendations
of the CICA for financial instrument disclosures apply to the Company. As
set out in Note 4 of the interim Consolidated financial statements, the new
recommendations result in incremental disclosures, relative to those
previously, 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 transitional provisions provide that certain of the incremental
disclosures need not be provided on a comparative basis in the year of
adoption.
Inventories
Commencing with the Company's 2008 fiscal year, the new, IFRS-IASB
converged recommendations of the CICA for accounting for inventories (CICA
Handbook Section 3031) 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's results of operations
and financial position are not materially affected by the new
recommendations.
9. Annual guidance for 2008
The following discussion is qualified in its entirety by the Caution
regarding forward-looking statements at the beginning of Management's
discussion and analysis, Section 10: Risks and risk management of TELUS'
2007 and first quarter 2008 Management's discussions and analyses, as well
as updates reported in Section 10 of this document. The Company has revised
its full year guidance for 2008. The revised guidance for the full year
considers the Company's performance for the first half of 2008, including
strong wireless subscriber growth. The revised guidance is in compliance
with the Company's long-term policy guidelines for Net debt to EBITDA and
dividend payout, as described in Section 7.4.
------------------------------------------------
Expected
change
Annual from 2007
guidance Original Revised for revised
for 2008 target guidance guidance
-------------------------------------------------------------------------
Consolidated
Revenues $9.6 to $9.675 to 7 to 8%
$9.8 billion $9.825 billion
EBITDA(1) (2007 as $3.8 to $3.8 to
adjusted(2)) $3.95 billion $3.9 billion 1 to 4%
EPS - basic (2007
as adjusted(3)) $3.50 to $3.80 $3.50 to $3.70 (10) to (15)%
EPS - basic (2007
as adjusted),
excluding
favourable tax-
related impacts $3.50 to $3.80 $3.50 to $3.70 4 to 10%
Capital
expenditures,
excluding Approx. Approx.
spectrum auction $1.9 billion $1.9 billion 7%
-------------------------------------------------------------------------
Wireline segment
Revenue $4.975 to $5.025 to
(external) $5.075 billion $5.1 billion 4 to 6%
EBITDA (2007 as $1.725 to $1.75 to
adjusted(2)) $1.8 billion $1.8 billion (4) to (2)%
-------------------------------------------------------------------------
Wireless segment
Revenue $4.625 to $4.65 to
(external) $4.725 billion $4.725 billion 9 to 11%
EBITDA (2007 as $2.075 to $2.05 to
adjusted(2)) $2.15 billion $2.1 billion 6 to 9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest, taxes, depreciation and
amortization (EBITDA) for the definition.
(2) EBITDA for 2007 adjusted to exclude an incremental pre-tax charge of
$168.7 million that related to the introduction of a net-cash
settlement feature for share option awards granted prior to 2005. Of
the total amount, $145.1 million was recorded in wireline and
$23.6 million was recorded in wireless.
(3) Basic EPS for 2007 adjusted to exclude an incremental after-tax
charge of $0.32 per share for the introduction of a net-cash
settlement feature.
-------------------------------------------------------------------------
The following key assumptions were made at the time the original 2008
targets were announced in December 2007. Expectations for GDP growth and the
expected statutory tax have been revised and actual or expected results to
date are reported for each assumption as follows:
-------------------------------------------------------------------------
Assumptions for 2008 original Actual result to-date or revised
targets expectation for 2008
-------------------------------------------------------------------------
Canadian real GDP growth The Summer Outlook of the Conference
estimate of 2.8% and above Board of Canada (CBOC) revised the 2008
average growth in the provinces Canadian GDP growth estimate to 1.7%,
of Alberta and B.C. down from the Spring Outlook of 2.2%.
The CBOC provincial outlook published
early this year predicted above average
growth in Alberta and B.C.
-------------------------------------------------------------------------
Canadian dollar at or near The Canadian dollar closing exchange
parity with the U.S. dollar rate varied between U.S. $0.972 and
U.S. $1.016 during the three-month
period ended June 30, 2008 (between
U.S. $0.968 and U.S. $1.024 during the
first six months of 2008). The average
close was approximately U.S. $0.99 for
both periods. (Source: the Bank of
Canada.)
-------------------------------------------------------------------------
Increased wireline competition Confirmed by: (i) a Western cable-TV
in both business and consumer competitor reporting strong high-speed
markets, particularly from Internet and telephone net additions
cable-TV and VoIP companies for their quarter ended February 2008;
and (ii) TELUS' network access line
losses of 3.4% for the 12-month period
ended June 30, 2008
-------------------------------------------------------------------------
The impact from the acquisition The transaction closed in mid-January
of Emergis was assumed to begin 2008 instead of the beginning of March
in March 2008 and is expected to have a minor impact
on TELUS' 2008 targets
-------------------------------------------------------------------------
Canadian wireless industry No change
market penetration gain
estimate is 4.5 to five
percentage points for the year
-------------------------------------------------------------------------
The capital expenditures target No change to capital expenditure
explicitly excluded potential guidance excluding the spectrum
purchases of wireless spectrum auction. The AWS spectrum auction costs
in the AWS spectrum auction of approximately $880 million are
expected to be recorded in the third
quarter
-------------------------------------------------------------------------
No new wireless competitive Several regional competitive entrants
entrant assumed for 2008 have provisionally acquired spectrum in
the AWS auction concluded July 2008,
but it is expected that entrants are
not likely to offer services until
2009. See Section 10.1 Regulatory
-------------------------------------------------------------------------
Restructuring expenses of Assumption is revised to approximately
approximately $50 million $30 million
include the integration of
Emergis
-------------------------------------------------------------------------
A blended statutory income tax The blended statutory rate is expected
rate of 31 to 32% to be approximately 30.5 to 31.5% as a
result of enacted British Columbia tax
rate changes
-------------------------------------------------------------------------
A discount rate of 5.5% (50 Assumptions are set at the beginning of
basis points higher than 2007) the year for pension accounting
and expected long-term return
of 7.25% for pension accounting
(unchanged from 2007)
-------------------------------------------------------------------------
Average shares outstanding of Average shares for the six-month period
approximately 320 million (down ended June 30, 2008 were 322.3 million,
3.5% from 331.7 million in or 3.9% lower than the same period in
2007). 2007, consistent with the assumption
for the full year
-------------------------------------------------------------------------
10. Risks and risk management
The following are updates to the risks and risk management discussions in
Section 10 of TELUS' annual 2007 and first quarter 2008 Management's
discussions and analyses.
10.1 Regulatory
Advanced wireless service (AWS) and other spectrum auction in the 2
GHz range
Industry Canada conducted a spectrum auction between May 27 and July
21, 2008, for 90 MHz of AWS spectrum in 1.7/2.1 GHz ranges, of which 40 MHz
was set aside for new entrants. Also auctioned were 10 MHz for PCS service
extension, and 5 MHz in the 1670-1675 MHz range. Licence terms: The rules
for the spectrum auction were released February 29, 2008, by Industry
Canada in Conditions of Licence for Mandatory Roaming and Antenna Tower and
Site Sharing and to Prohibit Exclusive Site Arrangements. The rules
endorsed a continued facilities-based regulatory orientation and included
the following:
- licence terms began at the conclusion of the auction;
- entrants shall be entitled to roam on incumbents' networks within
their licensed areas for five years and outside their licensed areas
for 10 years on commercial terms;
- entrants shall be entitled to utilize incumbents' towers at
commercial rates (and subject to space availability);
- new entrants must build facilities in areas where they have won
spectrum (no roaming on competitors' networks within their own areas
until they have built their own networks);
- no mandatory resale of incumbents' services outside new entrants'
coverage areas;
- a subscriber cannot roam unless he or she is already served on
another radio access network;
- new entrants have no right to roam through incumbents' international
roaming agreements;
- data service roaming need only be provided at a comparable quality to
a new entrant's service;
- mandated roaming is not available to incumbents if they have licences
in the service area;
- there are 90-day time limits to respond to tower/site sharing
requests; and
- where there are disputes between service providers, a binding
arbitration process will apply, with arbitrators appointed from a
list of retired judges and lawyers.
While TELUS successfully acquired additional spectrum to facilitate its
own long-term growth, the availability of AWS spectrum to competitors, as
well as mandatory roaming and tower and site sharing rules may increase
competitive intensity. Several apparent new regional competitors have
acquired spectrum, as summarized in Section 4.1. The long-term viability of
all new entrants in the market remains uncertain because of network
build-out and spectrum costs, capital market conditions, and restrictions
on foreign investment. The presence of new regional entrants in the
marketplace may negatively affect the future market share of wireless
incumbents such as TELUS and may impact pricing of services.
TELUS Communications Company (TCC) - Network access charge (Telecom
Decision 2008-33)
In late 2007, TCC introduced a $2.95 monthly long distance network
access fee for the Company's long distance subscribers who were not on a
rate plan (basic toll subscribers). Subscribers could avoid the charge by
subscribing free of charge to a toll restrict service (subject to a $10
termination fee), or enrolling in a TCC long distance rate plan.
On April 17, 2008, Decision 2008-33 stated that TCC should not have
imposed this monthly charge in certain circumstances. For basic toll
subscribers who had not used TCC's long distance network during the
applicable period, the CRTC found that the network access charge was
equivalent to an unauthorized residential local rate increase. TCC was
directed to reimburse or credit those affected customers. Basic toll
subscribers who did use TCC's long distance network in a particular month
continue to be subject to the charge for that month. The CRTC also directed
that customers who subscribed to a toll restrict service since TCC
implemented the long distance network access charge, and who wished to be
removed that service, should be allowed to do so without charge, within
three months of April 17, 2008.
The Company is configuring its billing systems to reflect this charge
only when long distance services were used in the service period. The
Company has started issuing credits where charges were applied and no long
distance services were used. The amounts to be reimbursed are not material
to TELUS' financial results.
Additional forbearance decisions
In 2008, the CRTC continues to take steps to forbear from regulating
prices, particularly for services offered in competitive markets. Recent
decisions include forbearance from regulation of certain local exchange
services, promotions, and high capacity inter-exchange private line routes.
Residential and business local exchange services: In the first seven
months of 2008, the CRTC approved TELUS' forbearance applications for
residential local services in 26 exchanges in B.C., Alberta and Eastern
Quebec. The CRTC also determined that the competitor presence test was not
met in nine Eastern Quebec exchanges and denied applications for
forbearance in those communities. In July 2008, the CRTC approved TELUS'
forbearance applications for business local exchange services in Langley
and West Vancouver, B.C., but denied two other applications for smaller
centres. Cumulatively, TELUS has received approval for deregulation of
local phone services for residential markets covering approximately 80% of
its residential lines in non-high cost serving areas, and for approximately
two-thirds of its business lines.
Promotions for residential and business local wireline services in non-
forborne areas: The CRTC decided to forbear from regulation of residential
and business promotions offered in non-forborne areas when three criteria
are met. The three criteria are: the combined enrolment and benefit period
of the promotion does not exceed 12 months; there is a cooling-off period
of at least one-half of the combined enrolment and benefit period; and
there are no existing or recently elapsed promotions that involve any of
the same tariffed services or underlying services in the same geographic
areas.
High capacity/digital data services inter-exchange private lines: In
May 2008, following a semi-annual review, the CRTC forbore from regulating
more than 70 additional TELUS inter-exchange private line routes, where
competitor presence tests were met.
10.2 Process risks
TELUS continues to develop new phases of a wireline billing and
customer care system. In 2007, TELUS converted its wireline consumer
customers in Alberta to the new integrated billing and client care system.
Initial system difficulties were experienced, which temporarily reduced
order processing capability and caused increased installation backlogs and
higher costs, such as extra call centre resources to maintain service
levels.
Building on the experience gained with the 2007 conversion, a pilot
implementation for approximately 150,000 residential customers in B.C.
began in the second quarter of 2008, followed by a system conversion for
more than one million B.C. residential customers in mid-July. While it is
early in the post-conversion period, the billing and order entry functions
have performed well and service levels have not been materially impacted.
However, there can be no assurance that system difficulties will not occur
over the next few months of billing experience.
10.3 Litigation and legal matters
Uncertified class action: A class action was brought on June 26, 2008
in the Saskatchewan Court of Queen's Bench alleging that, among other
things, Canadian telecommunications carriers, including the Company, have
failed to provide proper notice of 9-1-1 charges to the public and have
been deceitfully passing them off as a government charge. The plaintiffs
seek restitution and direct and punitive damages in an unspecified amount.
The Company is assessing the merits of this claim, but the potential for
liability and magnitude of potential loss cannot be reliably determined at
this time.
11. Reconciliation of non-GAAP measures and definitions
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 charge 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.
-------------------------------------------------------------------------
Six-month periods
Quarters ended June 30 ended June 30
-------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Net income 267.0 253.1 558.0 447.9
Other expense (income) 2.4 18.5 19.2 22.3
Financing costs 114.3 127.2 223.7 244.8
Income taxes 113.5 93.7 222.9 173.0
Non-controlling interest 0.9 1.3 1.7 2.8
-------------------------------------------------------------------------
Operating income 498.1 493.8 1,025.5 890.8
Depreciation 343.5 318.3 689.2 636.0
Amortization of intangible
assets 76.0 72.5 152.4 122.1
-------------------------------------------------------------------------
EBITDA 917.6 884.6 1,867.1 1,648.9
Net-cash settlement feature
(recovery) expense (0.3) 1.8 (0.1) 175.3
-------------------------------------------------------------------------
EBITDA (as adjusted) 917.3 886.4 1,867.0 1,824.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
Six-month periods
Quarters ended June 30 ended June 30
-------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
EBITDA 917.6 884.6 1,867.1 1,648.9
Capital expenditures (435.6) (481.8) (755.3) (863.7)
-------------------------------------------------------------------------
EBITDA less capital expenditures 482.0 402.8 1,111.8 785.2
Net-cash settlement feature
(recovery) expense (0.3) 1.8 (0.1) 175.3
-------------------------------------------------------------------------
EBITDA (as adjusted) less
capital expenditures 481.7 404.6 1,111.7 960.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11.2 Free cash flow
TELUS 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
acquisitions, 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:
-------------------------------------------------------------------------
Six-month periods
Quarters ended June 30 ended June 30
-------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided by operating
activities 461.0 1,061.9 1,086.2 1,522.5
Cash (used) by investing
activities (436.7) (477.8) (1,437.1) (870.1)
-------------------------------------------------------------------------
24.3 584.1 (350.9) 652.4
Net employee defined benefit
plans expense 24.6 21.0 49.5 45.0
Employer contributions to
employee defined benefit plans 24.3 14.7 51.3 48.6
Amortization of deferred gains
on sale-leaseback of buildings,
amortization of deferred
charges and other, net 4.5 (4.3) 5.6 4.8
Reduction (increase) in
securitized accounts receivable 350.0 (350.0) 350.0 -
Non-cash working capital
changes except changes from
income tax payments (receipts),
interest payments (receipts)
and securitized accounts
receivable, and other (126.5) (99.8) 94.8 (114.7)
Acquisitions 4.4 - 691.3 -
Proceeds from the sale of
property and other assets (3.3) (1.3) (3.3) (1.3)
Other investing activities - (2.7) (6.2) 7.7
-------------------------------------------------------------------------
Free cash flow 302.3 161.7 882.1 642.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following shows management's calculation of free cash flow.
-------------------------------------------------------------------------
Six-month periods
Quarters ended June 30 ended June 30
-------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
EBITDA 917.6 884.6 1,867.1 1,648.9
Restructuring costs net of
cash payments (1.5) (7.3) (4.7) (24.3)
Share-based compensation 10.1 (8.9) 16.4 129.7
Donations and securitization
fees included in Other expense (7.3) (9.1) (17.1) (18.4)
Cash interest paid (175.8) (218.5) (220.8) (242.1)
Cash interest received 0.7 5.6 2.0 7.5
Income taxes received (paid),
less investment tax credits
received that were previously
recognized in either EBITDA
or capital expenditures, and
other (5.9) (2.9) (5.5) 4.9
Capital expenditures (435.6) (481.8) (755.3) (863.7)
-------------------------------------------------------------------------
Free cash flow 302.3 161.7 882.1 642.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11.3 Definitions of key wireless 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.
EBITDA excluding COA is a measure of operational profitability
normalized for the period costs of adding new customers.
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 Definitions 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 $23.7 million and $28.3 million,
respectively, for the 12-month periods ended June 30, 2008 and 2007.
EBITDA - excluding restructuring costs interest coverage is defined as
EBITDA excluding restructuring costs divided by Net interest cost.
Historically, this measure is substantially the same as the Coverage Ratio
covenant in TELUS' credit facilities.
Interest coverage on long-term debt is calculated on a 12-month
trailing basis as Net income before interest expense on long-term debt and
income tax expense, divided by interest expense on long-term debt.
Net debt is a non-GAAP measure whose nearest GAAP measure is Long-term
debt, including Current maturities of long-term debt, as reconciled below.
Net debt is one component of a ratio used to determine compliance with debt
covenants (refer to the description of Net debt to EBITDA below).
-------------------------------------------------------------------------
As at June 30
---------------------
($ millions) 2008 2007
-------------------------------------------------------------------------
Long-term debt including current portion 5,518.8 4,806.9
Debt issuance costs netted against long-term debt 30.8 32.5
Derivative liability 1,137.0 1,081.8
Accumulated Other comprehensive income amounts
arising from financial instruments used to manage
interest rate and currency risks associated with
U.S. dollar denominated debt (146.5) (179.3)
Cash and temporary investments (45.7) (2.2)
Proceeds from securitized accounts receivable 150.0 500.0
-------------------------------------------------------------------------
Net debt 6,644.4 6,239.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 is in respect of
the US$1,925.0 million debenture maturing June 1, 2011. Management believes
that Net debt is a useful measure because it incorporates the exchange rate
impact of cross currency swaps put into place that fix the value of U.S.
dollar denominated debt, and because it represents the amount of long-term
debt obligations that are not covered by available cash and temporary
investments.
Net debt to EBITDA - excluding restructuring costs is defined as Net
debt as at the end of the period divided by the 12-month trailing EBITDA
excluding restructuring costs. TELUS' guideline range for Net debt to
EBITDA is from 1.5 to 2.0 times. Historically, Net debt to EBITDA excluding
restructuring costs is substantially the same as the Leverage Ratio
covenant in TELUS' credit facilities.
Net debt to total capitalization provides a measure of the proportion
of debt used in the Company's capital structure.
Net interest cost is defined as Financing costs before gains on
redemption and repayment of debt, calculated on a 12-month trailing basis.
No gains on redemption and repayment of debt were recorded in the
respective periods. Losses recorded on the redemption of long-term debt are
included in net interest cost. Net interest costs for the 12-months ended
June 30, 2008 and 2007 are the same as reported quarterly financing costs
over those periods.
Total capitalization - book value excludes accumulated Other
comprehensive income or loss and is calculated as follows:
-------------------------------------------------------------------------
As at June 30
---------------------
($ millions) 2008 2007
-------------------------------------------------------------------------
Net debt 6,644.4 6,239.7
Non-controlling interests 22.0 22.1
Shareholders equity 6,994.4 6.734.7
Accumulated other comprehensive loss 114.2 125.8
-------------------------------------------------------------------------
Total capitalization - book value 13,775.0 13,122.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
interim consolidated statements of income and other comprehensive income
(unaudited)
Periods ended June 30 Three months Six months
(millions except per
share amounts) 2008 2007 2008 2007
-------------------------------------------------------------------------
OPERATING REVENUES $ 2,398.7 $ 2,228.1 $ 4,749.3 $ 4,433.7
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,476.6 1,340.3 2,871.0 2,776.9
Restructuring costs 4.5 3.2 11.2 7.9
Depreciation 343.5 318.3 689.2 636.0
Amortization of
intangible assets 76.0 72.5 152.4 122.1
-------------------------------------------------------------------------
1,900.6 1,734.3 3,723.8 3,542.9
-------------------------------------------------------------------------
OPERATING INCOME 498.1 493.8 1,025.5 890.8
Other expense, net 2.4 18.5 19.2 22.3
Financing costs 114.3 127.2 223.7 244.8
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES
AND NON-CONTROLLING
INTEREST 381.4 348.1 782.6 623.7
Income taxes 113.5 93.7 222.9 173.0
Non-controlling interests 0.9 1.3 1.7 2.8
-------------------------------------------------------------------------
NET INCOME AND COMMON
SHARE AND NON-VOTING
SHARE INCOME 267.0 253.1 558.0 447.9
OTHER COMPREHENSIVE INCOME
Change in unrealized
fair value of
derivatives designated
as cash flow hedges (13.8) 27.9 (10.3) 55.8
Foreign currency
translation adjustment
arising from translating
financial statements of
self-sustaining foreign
operations (2.3) (6.2) (3.9) (3.8)
Change in unrealized
fair value of
available-for-sale
financial assets 4.6 (0.1) 3.5 (0.1)
-------------------------------------------------------------------------
(11.5) 21.6 (10.7) 51.9
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 255.5 $ 274.7 $ 547.3 $ 499.8
-------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
AND NON-VOTING SHARE
- Basic $ 0.83 $ 0.76 $ 1.73 $ 1.34
- Diluted $ 0.83 $ 0.75 $ 1.72 $ 1.32
DIVIDENDS DECLARED PER
COMMON SHARE AND
NON-VOTING SHARE $ 0.45 $ 0.375 $ 0.90 $ 0.75
TOTAL WEIGHTED AVERAGE
COMMON SHARES AND
NON-VOTING SHARES
OUTSTANDING
- Basic 321.0 333.5 322.3 335.3
- Diluted 322.0 336.9 323.7 338.3
TELUS Corporation
interim consolidated balance sheets (unaudited)
June 30, December 31,
As at (millions) 2008 2007
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ 45.7 $ 19.9
Short-term investments - 42.4
Accounts receivable 1,007.4 710.9
Income and other taxes receivable 80.4 120.9
Inventories 262.5 243.3
Prepaid expenses and other 295.0 199.5
Derivative assets 5.1 3.8
-------------------------------------------------------------------------
1,696.1 1,340.7
-------------------------------------------------------------------------
Capital Assets, Net
Property, plant, equipment and other 7,124.0 7,196.1
Intangible assets subject to amortization 1,288.9 959.4
Intangible assets with indefinite lives 2,966.5 2,966.5
-------------------------------------------------------------------------
11,379.4 11,122.0
-------------------------------------------------------------------------
Other Assets
Deferred charges 1,418.1 1,318.0
Investments 32.4 38.9
Goodwill 3,540.4 3,168.0
-------------------------------------------------------------------------
4,990.9 4,524.9
-------------------------------------------------------------------------
$ 18,066.4 $ 16,987.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 1,384.7 $ 1,476.6
Income and other taxes payable 11.8 7.3
Restructuring accounts payable and accrued
liabilities 30.2 34.9
Advance billings and customer deposits 634.7 631.6
Current maturities of long-term debt 6.5 5.4
Current portion of derivative liabilities 50.0 26.6
Current portion of future income taxes 638.3 503.6
-------------------------------------------------------------------------
2,756.2 2,686.0
-------------------------------------------------------------------------
Long-Term Debt 5,512.3 4,583.5
-------------------------------------------------------------------------
Other Long-Term Liabilities 1,680.7 1,717.9
-------------------------------------------------------------------------
Future Income Taxes 1,100.8 1,048.1
-------------------------------------------------------------------------
Non-Controlling Interests 22.0 25.9
-------------------------------------------------------------------------
Shareholders' Equity 6,994.4 6,926.2
-------------------------------------------------------------------------
$ 18,066.4 $ 16,987.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
interim consolidated statements of cash flows (unaudited)
Periods ended June 30 Three months Six months
(millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 267.0 $ 253.1 $ 558.0 $ 447.9
Adjustments to reconcile
net income to cash
provided by operating
activities:
Depreciation and
amortization 419.5 390.8 841.6 758.1
Future income taxes 179.2 92.5 176.9 170.7
Share-based
compensation 10.1 (8.9) 16.4 129.7
Net employee defined
benefit plans expense (24.6) (21.0) (49.5) (45.0)
Employer contributions
to employee defined
benefit plans (24.3) (14.7) (51.3) (48.6)
Restructuring costs,
net of cash payments (1.5) (7.3) (4.7) (24.3)
Amortization of deferred
gains on sale-leaseback
of buildings,
amortization of deferred
charges and other, net (4.5) 4.3 (5.6) (4.8)
Net change in non-cash
working capital (359.9) 373.1 (395.6) 138.8
-------------------------------------------------------------------------
Cash provided by operating
activities 461.0 1,061.9 1,086.2 1,522.5
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (435.6) (481.8) (755.3) (863.7)
Acquisitions (4.4) - (691.3) -
Proceeds from the sale of
property and other assets 3.3 1.3 3.3 1.3
Change in non-current
materials and supplies,
purchase of investments
and other - 2.7 6.2 (7.7)
-------------------------------------------------------------------------
Cash used by investing
activities (436.7) (477.8) (1,437.1) (870.1)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and
Non-Voting Shares issued 0.2 0.2 0.3 0.6
Dividends to shareholders (289.5) (125.0) (289.5) (250.9)
Purchase of Common Shares
and Non-Voting Shares for
cancellation (76.7) (169.5) (199.2) (370.2)
Long-term debt issued 2,862.0 993.8 6,574.3 2,091.6
Redemptions and repayment
of long-term debt (2,523.7) (1,811.1) (5,704.6) (2,104.6)
Dividends paid by a
subsidiary to
non-controlling
interests - (4.3) (4.6) (4.3)
Other - - - (0.9)
-------------------------------------------------------------------------
Cash provided (used) by
financing activities (27.7) (1,115.9) 376.7 (638.7)
-------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in
cash and temporary
investments, net (3.4) (531.8) 25.8 13.7
Cash and temporary
investments, net,
beginning of period 49.1 534.0 19.9 (11.5)
-------------------------------------------------------------------------
Cash and temporary
investments, net, end of
period $ 45.7 $ 2.2 $ 45.7 $ 2.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS
Interest (paid) $ (175.8) $ (218.5) $ (220.8) $ (242.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest received $ 0.7 $ 5.6 $ 2.0 $ 7.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income taxes (inclusive
of Investment Tax
Credits (paid) received,
net $ (5.9) $ (3.6) $ (6.6) $ 2.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
segmented information (unaudited)
Three-month periods ended
June 30 Wireline Wireless
(millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating revenues
External revenue $ 1,256.3 $ 1,180.1 $ 1,142.4 $ 1,048.0
Intersegment revenue 32.3 28.7 7.2 6.7
-------------------------------------------------------------------------
1,288.6 1,208.8 1,149.6 1,054.7
-------------------------------------------------------------------------
Operating expenses
Operations expense 851.9 772.1 664.2 603.6
Restructuring costs 4.1 2.8 0.4 0.4
-------------------------------------------------------------------------
856.0 774.9 664.6 604.0
-------------------------------------------------------------------------
EBITDA(1) $ 432.6 $ 433.9 $ 485.0 $ 450.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 320.9 $ 308.7 $ 114.7 $ 173.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 111.7 $ 125.2 $ 370.3 $ 277.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses (as
adjusted)(3)
Operations expense (as
adjusted)(3) 853.2 772.1 663.2 601.8
Restructuring costs 4.1 2.8 0.4 0.4
-------------------------------------------------------------------------
857.3 774.9 663.6 602.2
-------------------------------------------------------------------------
EBITDA (as adjusted)(3) $ 431.3 $ 433.9 $ 486.0 $ 452.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 320.9 $ 308.7 $ 114.7 $ 173.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted) less
CAPEX $ 110.4 $ 125.2 $ 371.3 $ 279.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three-month periods ended
June 30 Eliminations Consolidated
(millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 2,398.7 $ 2,228.1
Intersegment revenue (39.5) (35.4) - -
-------------------------------------------------------------------------
(39.5) (35.4) 2,398.7 2,228.1
-------------------------------------------------------------------------
Operating expenses
Operations expense (39.5) (35.4) 1,476.6 1,340.3
Restructuring costs - - 4.5 3.2
-------------------------------------------------------------------------
(39.5) (35.4) 1,481.1 1,343.5
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 917.6 $ 884.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 435.6 $ 481.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 482.0 $ 402.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses (as
adjusted)(3)
Operations expense (as
adjusted)(3) (39.5) (35.4) 1,476.9 1,338.5
Restructuring costs - - 4.5 3.2
-------------------------------------------------------------------------
(39.5) (35.4) 1,481.4 1,341.7
-------------------------------------------------------------------------
EBITDA (as adjusted)(3) $ - $ - $ 917.3 $ 886.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 435.6 $ 481.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted) less
CAPEX $ - $ - $ 481.7 $ 404.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted)
(from above) $ 917.3 $ 886.4
Incremental charge(3) (0.3) 1.8
---------------------------------------------
EBITDA (from above) 917.6 884.6
Depreciation 343.5 318.3
Amortization 76.0 72.5
---------------------------------------------
Operating income 498.1 493.8
Other expense, net 2.4 18.5
Financing costs 114.3 127.2
---------------------------------------------
Income before income
taxes and
non-controlling
interests 381.4 348.1
Income taxes 113.5 93.7
Non-controlling
interests 0.9 1.3
---------------------------------------------
Net income $ 267.0 $ 253.1
---------------------------------------------
---------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is a measure that does not have any standardized meaning
prescribed by GAAP and is therefore unlikely to be comparable to
similar measures presented by other issuers; EBITDA is defined by the
Company as operating revenues less operations expense and
restructuring costs. The Company has issued guidance on, and reports,
EBITDA because it is a key measure used by management to evaluate
performance of its business segments and is utilized in measuring
compliance with certain debt covenants.
(2) Total capital expenditures ("CAPEX").
(3) Substantially all of the Company's share option awards that were
granted prior to January 1, 2005, and which were outstanding on
January 1, 2007, were amended by adding a net-cash settlement
feature; such amendment resulted in an incremental charge to
(recovery from) operations of $(0.3) (2007 - $1.8) and did not result
in an immediate cash outflow. In respect of 2008 and 2007 results
provided to the Company's chief operating decision maker, operations
expense and EBITDA are being presented both with, and without, the
impact of such amendment.
TELUS Corporation
segmented information (unaudited)
Six-month periods ended
June 30 Wireline Wireless
(millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating revenues
External revenue $ 2,506.9 $ 2,385.7 $ 2,242.4 $ 2,048.0
Intersegment revenue 63.1 53.8 14.2 13.0
-------------------------------------------------------------------------
2,570.0 2,439.5 2,256.6 2,061.0
-------------------------------------------------------------------------
Operating expenses
Operations expense 1,679.9 1,677.5 1,268.4 1,166.2
Restructuring costs 10.6 7.2 0.6 0.7
-------------------------------------------------------------------------
1,690.5 1,684.7 1,269.0 1,166.9
-------------------------------------------------------------------------
EBITDA(1) $ 879.5 $ 754.8 $ 987.6 $ 894.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 576.1 $ 579.4 $ 179.2 $ 284.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 303.4 $ 175.4 $ 808.4 $ 609.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses (as
adjusted)(3)
Operations expense (as
adjusted)(3) 1,680.6 1,524.4 1,267.8 1,144.0
Restructuring costs 10.6 7.2 0.6 0.7
-------------------------------------------------------------------------
1,691.2 1,531.6 1,268.4 1,144.7
-------------------------------------------------------------------------
EBITDA (as adjusted)(3) $ 878.8 $ 907.9 $ 988.2 $ 916.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 576.1 $ 579.4 $ 179.2 $ 284.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted) less
CAPEX $ 302.7 $ 328.5 $ 809.0 $ 632.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six-month periods ended
June 30 Eliminations Consolidated
(millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 4,749.3 $ 4,433.7
Intersegment revenue (77.3) (66.8) - -
-------------------------------------------------------------------------
(77.3) (66.8) 4,749.3 4,433.7
-------------------------------------------------------------------------
Operating expenses
Operations expense (77.3) (66.8) 2,871.0 2,776.9
Restructuring costs - - 11.2 7.9
-------------------------------------------------------------------------
(77.3) (66.8) 2,882.2 2,784.8
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 1,867.1 $ 1,648.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 755.3 $ 863.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 1,111.8 $ 785.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses (as
adjusted)(3)
Operations expense (as
adjusted)(3) (77.3) (66.8) 2,871.1 2,601.6
Restructuring costs - - 11.2 7.9
-------------------------------------------------------------------------
(77.3) (66.8) 2,882.3 2,609.5
-------------------------------------------------------------------------
EBITDA (as adjusted)(3) $ - $ - $ 1,867.0 $ 1,824.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 755.3 $ 863.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted) less
CAPEX $ - $ - $ 1,111.7 $ 960.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted)
(from above) $ 1,867.0 $ 1,824.2
Incremental charge(3) (0.1) 175.3
---------------------------------------------
EBITDA (from above) 1,867.1 1,648.9
Depreciation 689.2 636.0
Amortization 152.4 122.1
---------------------------------------------
Operating income 1,025.5 890.8
Other expense, net 19.2 22.3
Financing costs 223.7 244.8
---------------------------------------------
Income before income
taxes and
non-controlling
interests 782.6 623.7
Income taxes 222.9 173.0
Non-controlling
interests 1.7 2.8
---------------------------------------------
Net income $ 558.0 $ 447.9
---------------------------------------------
---------------------------------------------
(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 $(0.1) (2007 - $175.3) and did not
result in an immediate cash outflow. In respect of 2008 and 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.
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