management's discussion & analysis
4. capability to deliver results
A description of the factors that affect the capability to execute strategies, manage key performance drivers and deliver results
4.1 Operational capabilities – Wireline
Less than one-third of the Company’s revenues are from wireline segment regulated revenues. Wireline regulated services include residential and business wireline services in incumbent local exchange carrier (ILEC) regions, competitor services and payphone services. Services that are forborne from regulation include non-incumbent local exchange carrier (non-ILEC) services, long distance services, Internet services, international telecommunications services, inter-exchange private line services, certain data services, and the sale of customer premises equipment.
In 2005, ongoing industry-wide trends of increased competition and new technologies facilitated the decline in network access lines and reduced long distance prices. With agreements such as those with the Government of B.C. and the Calgary Board of Education, and growth initiatives in the business markets in Ontario and Quebec, TELUS endeavours to retain existing customers and position itself for future revenue growth, particularly in the areas of data and IP. Measures taken for consumer services include new Future Friendly Home services introduced in 2004, limited commercial launch of TELUS TV in 2005, and the introduction of a three-year contract option for consumer optional features bundles in 2005. This initiative was launched to help retain customers, lock in revenues over the contract period, and delay or reduce churn to competitors. In addition, TELUS expects to achieve further improvements in efficiency and productivity through the recently implemented five-year collective agreement, including office closures and contracting out of specified non-core functions, as well as integration of operations in the wireline and wireless segments. See Section 5.4 Wireline segment results – Restructuring and workforce reduction costs and Section 10.5 Business integration and internal reorganizations.
During 2005, the Company continued to develop a new billing system in the wireline segment, which will include re-engineering processes for order entry, pre-qualification, service fulfillment and assurance, customer care, collections/credit, customer contract and information management. The expected benefits of this project include streamlined and standardized processes and the elimination over time of multiple legacy information systems. The Company plans to implement this project in phases, beginning with a launch for consumer mass market accounts currently planned in 2006. See Section 10.6 Process risks.
The Company’s principal wireline geographic markets and competitors are:
| Canadian geographic market | TELUS wireline | Competition |
|---|---|---|
| National – business |
IP-based national network overlaying extensive switched network in incumbent territories in Western Canada and Eastern Quebec. Rate-regulated in incumbent territories of B.C., Alberta and Eastern Quebec for access and certain competitive digital network access services. Non-rate-regulated operations in non-incumbent areas of Ontario and Quebec. Focused on managed data solutions in the business market. |
BCE and Manitoba Tel (Allstream) competing with their own national infrastructures, and others such as Navigata (owned by SaskTel). System integrators of managed solutions, such as CGI, EDS and IBM. Substitution to wireless including to TELUS wireless offerings. |
| Western Canada (B.C. and Alberta) – consumer |
Access to virtually every home. Rate-regulated for local services. Significant investment in Internet infrastructure and innovative services. Plans to offer VoIP service. Has broadcasting distribution licences to offer digital television services in select communities across Alberta and B.C., as well as licences to offer commercial video-on-demand services. Began roll-out of service in Edmonton and Calgary following extensive employee trials. |
Substitution to wireless including to TELUS wireless offerings. Shaw Cable – access to most homes in market. Provides Internet, entertainment and VoIP-based telephony services. Not rate-regulated by the CRTC. Call-Net (owned by Rogers Communications), Navigata, Primus, Vonage, and various others – urban focus. Collectively offer local service on a resale basis and with VoIP offerings, Internet services sometimes on a resale basis, and long distance services. |
| Eastern Quebec – consumer | Access to virtually every home. Significant investment in Internet infrastructure and innovative services. Has broadcasting distribution licences and video-on-demand licences. |
Substitution to wireless including to TELUS wireless offerings. COGECO (cable-TV) – urban focus. Offers entertainment and VoIP-based telephony services. Sprint, Excel, Distributel, Sears and Caztel compete in the provision of long distance services. BCE and Vonage compete for VoIP-based services. |
4.2 Operational capabilities – Wireless
TELUS Mobility’s continued delivery of value-added solutions, excellent network quality, and an exceptional client service experience contributed to profitable growth despite new competitive pressures. Future profitability and cash flow growth are expected to be realized from continued subscriber growth and operating scale efficiencies through a well managed client-focused organization, as well as integration of operations with the wireline segment.
Wireless services are not rate-regulated by the CRTC. The Company’s principal wireless market and competitors are:
| Canadian geographic market | TELUS wireline | Competition |
|---|---|---|
| National, business and consumer | Facilities-based services with access to 94% of Canadian population, operating a CDMA network with state-of-the-art high-speed EVDO in major centres, and iDEN-based Push To Talk service focused on the commercial marketplace. |
Facilities-based competitors such as Rogers Wireless, nationally, and wireless offerings by various regional telcos including Bell Mobility, SaskTel, MTS Mobility and Aliant Telecom Wireless. Resellers of BCE and Rogers networks, such as the Virgin MobileGroup, 7-eleven and certain cable-TV companies. |
4.3 Liquidity and capital resources
TELUS generally achieved all of the objectives under its 2005 financing plan, as illustrated in the following table. With access to undrawn credit facilities of $1.4 billion at December 31, 2005, and expected cash flow from operations, the Company believes it has sufficient capability to fund its requirements in 2006. See Section 9.3 Financing plan for 2006 and the associated risks in Section 10.7 Financing and debt requirements.
2005 financing plan and results
TELUS’ 2005 financing plan was to use free cash flow generated by its business operations to:
- Maintain cash-on-hand in anticipation of the maturity
of $1.578 billion of 7.5% TELUS Corporation Notes in June of 2006
The Company exercised its right to early redeem, on December 1, 2005, the remaining $1.578 billion of 7.50%, Series CA, Notes outstanding. See Section 7.3 Cash used by financing activities.
- Repurchase Common Shares and Non-Voting Shares under the Normal Course Issuer Bid (NCIB)
Repurchased approximately 20.8 million TELUS shares for $892.1 million during 2005 under two NCIB programs.Purchased for cancellation 73% of the maximum 14.0 million Common Shares and 100% of the maximum 11.5 million Non-Voting Shares permitted under the first program, which was effective from December 20, 2004 to December 19, 2005, for a cumulative outlay of approximately $913 million.
A second program was approved that runs for a 12-month period ending December 19, 2006, for potential repurchase and cancellation of up to 12.0 million Common Shares and 12.0 million Non-Voting Shares. Approximately 634,000 Common Shares and 608,000 Non-Voting Shares were repurchased under this NCIB in December 2005 for $57.5 million. See Section 7.3 Cash used by financing activities.
- Pay dividends
Dividends of 20 cents per share were declared for each of the first three quarters. The declared dividend was increased to 27.5 cents per share for the fourth quarter dividend, which was paid on January 1, 2006. The target dividend payout ratio guideline continues to be in the range of 45 to 55% of sustainable earnings.
- Give consideration to redeeming or repurchasing debt in the open market
On May 9, 2005, the Company provided notice of redemption for its convertible debentures at par, plus accrued and unpaid interest, for redemption on June 16, 2005. Convertible debenture holders exercised conversion options resulting in $131.7 million of convertible debenture principal being converted into approximately 3.3 million Non-Voting Shares. The conversion option in respect of $17.9 million of convertible debenture principal was not exercised and this principal amount was redeemed. See Section 6 Financial condition – Shareholders’ equity.
Other financing objectives included:
- Preserve access to the capital markets at a reasonable cost by maintaining investment grade credit ratings and targeting improved credit ratings in the range of BBB+ to A– in the future
Investment grade credit ratings were maintained and improved ratings were received from all four rating agencies that cover TELUS. See Section 7.7 Credit ratings.
- Maintain position of fully hedging foreign exchange exposure for indebtedness
Maintained as planned.
- Renew the $800 million 364-day revolving credit facility in May 2005
TELUS arranged for new credit facilities in May 2005 to replace $1.6 billion of prior credit facilities. See Section 7.5 Credit facilities.
- Maintain a minimum $1 billion in unutilized liquidity
Maintained as planned throughout the year, with more than $1.4 billion of unused credit facilities at December 31, 2005, as well as availability under the accounts receivable securitization program and cash on hand.
4.4 Disclosure controls and procedures
Management’s responsibility for the financial reporting process that produces the financial statements is described in Management’s report in the Consolidated financial statements.
TELUS Corporation has a formal Policy on Corporate Disclosure and Confidentiality of Information, which sets out policies and practices including the mandate of the Disclosure Committee; the Policy was approved by the Board of Directors, and put into effect, in 2003.
The Chief Executive Officer and the Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as at the end of December 31, 2005. They have concluded that the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which the Management’s discussion and analysis and the Consolidated financial statements contained in this report were being prepared.
Certification
TELUS’ Chief Executive Officer and Chief Financial Officer expect to certify TELUS’ annual filing with the United States’ Securities and Exchange Commission on Form 40-F as required by the United States Sarbanes-Oxley Act. TELUS also expects the Chief Executive Officer and Chief Financial Officer to certify its annual filings, including its Annual Information Form, that are filed with Canadian securities regulatory authorities. For the year ending December 31, 2006, TELUS expects to comply with Section 404 of the Sarbanes-Oxley Act.