risks & risk management
10. risks & risk management
An update of risks and uncertainties facing TELUS and how it manages these risks
TELUS’ risk and control assessment process
TELUS utilizes a three-level enterprise risk and control assessment process that includes the expertise and insight of team members from all areas of the business. Level one is the annual risk and control assessment, which includes one-on-one interviews with key senior managers, an extensive risk and control assessment survey based on the COSO (the Committee of Sponsoring Organizations of the Treadway Commission) enterprise risk management and internal control frame-works, a review of issues from recent internal and external audits, the prioritization of key risks and the engagement of executive owners charged with risk mitigation. Results of the annual risk and control assessment drive the development of TELUS’ internal audit program, are presented to senior management and the Audit Committee of the Board of Directors and are used as an input into the Company’s strategic planning.
In level two, TELUS conducts a quarterly risk assessment review with key internal stakeholders to capture dynamically changing business risks, monitor the mitigation of key risks and provide ongoing assurance to the Audit Committee.
In level three, TELUS conducts granular risk assessments for specific audit engagements and various risk management initiatives (e.g. environmental management system, safety audits, business continuity planning assessments, physical property risk evaluations, network and IT vulnerability assessments, proactive fraud and ethics risk assessments). The results of the annual, quarterly and more detailed engagement level risk assessments are evaluated, prioritized and updated throughout the year.
TELUS definition of business risk
At TELUS, business risk is defined as the degree of exposure associated with the achievement of key strategic, financial, organizational and process objectives in relation to the effectiveness and efficiency of operations, the reliability of financial reporting, compliance with laws and regulations, and the safeguarding of assets within an ethical organizational culture.
The following sections summarize the principal risks and uncertainties that could affect TELUS’ future business results going forward.
10.1 Competition
Aggressive competition may adversely affect market shares, volumes and pricing in certain TELUS market segments
Many of TELUS’ key competitors, having either built or acquired their own network facilities in Western Canada over the past several years, are now focusing their efforts on marketing and revenue generation.
These efforts are particularly targeted at the small and medium-sized business market due to the size of this market, its concentrated geographic urban clustering and generally attractive margins. At the same time, competition remains very strong in the large enterprise market, where a small number of major customers can deliver a significant amount of revenue. In particular, vibrant competition in the residential high-speed Internet access (HSIA) and long distance (LD) markets continues. As a result, overall industry pricing remains very competitive, especially in business long distance and data and IP markets. Due to industry consolidation over the last few years, TELUS’ major competitors have sound financial strength, brand recognition and, for many, national scope. They are likely to continue to pose a significant competitive challenge to TELUS and there is no assurance that TELUS’ response to the competition will be properly timed or sufficient to maintain current financial performance.
Wireline voice and data
Competition is expected to remain intense, not only from traditional telephony and data and IP providers, but also from new entrants providing alternatives to traditional wireline local access and long distance through the use of voice over IP (VoIP) telephony.
TELUS expects local, long distance, and data and IP competitors – ranging from traditional facilities-based carriers to resellers, long distance dial-around and card providers – to continue to focus on both the business and residential markets. Various VoIP, customer premises equipment (CPE) and IP Centrex services have been available to the business market for several years now. In addition, an increasing number of new VoIP competitors, the cable-TV companies being most prominent, have begun combining residential local, long distance, HSIA and, in some cases, wireless services into one bundled or discounted monthly rate. Cable-TV operators now have the ability to offer the residential market a triple-play – local and long distance telephony, HSIA and video (cable and direct-to-home or DTH satellite) services. The cable-TV companies are also expected to increasingly target the small to medium-sized business market with their VoIP services. The result is that traditional and non-traditional competitors are now focused on providing the full range of telecommunications services across both the consumer and business markets, particularly in the major urban areas. Increased competition is causing traditional providers, such as TELUS, to experience accelerated declines in network access lines or NALs (for TELUS, NALs declined by 2.4% in 2005, compared to 1.3% in 2004). Accelerated NALs and attendant revenue declines, including long distance, can be expected as VoIP providers gain an increasing share of the local access market.
The industry transition from legacy voice infrastructure to IP telephony, and from legacy data platforms to multi-protocol label switching (MPLS) IP platforms and IP-based service delivery models, accelerated in 2005 and will continue to do so into 2006. Over the past few years, legacy data services in particular have been subject to increasing commoditization, aggressive price declines and the impact of regulatory decisions. Legacy data revenues and margins have declined and are expected to be only partially offset by increased demand and/or increased migration of customers to IP-based platforms, which is also subject to intense pricing pressure and lower margins.
As a result, TELUS’ competitors now offer varying arrays of long distance, local and advanced data and IP services across both the residential and business markets. In the business market in particular, in addition to bundling price-discounted local access, wireless and advanced data and IP services, competitors are also bundling web-based and e-commerce services, and other information technology services and support. With this increasing bundling of traditional telecom services with IT services, TELUS increasingly faces competition from pure Internet and information technology hardware, software and business process/consulting related companies. There can be no assurance that TELUS will be able to continue to compete effectively in the future.
Wireline Internet access
While the HSIA market continues to exhibit growth, the market is maturing, given Canada’s high penetration compared to many other countries. This is expected to result in reduced net additions for all industry competitors and pose a constraint on TELUS’ ability to increase its share of total high-speed Internet subscribers in the market. As well, differentiation through various access speed options and value-added features may lead to lower pricing by all competitors as the growth of the HSIA market slows and bundling options become more prevalent. Residential dial-up Internet access competition and growth have also declined dramatically, due in large part to increased high-speed Internet access availability and lower priced service options. Losses of existing TELUS dial-up subscribers to competitor high-speed services have been mitigated by TELUS’ efforts to transfer these customers to its own high-speed Internet services. However, there can be no assurance that the rate of loss of dial-up subscribers or market share retained by TELUS will be as expected, as TELUS continues to face significant competition from cable-TV high-speed Internet services.
Wireless
Competition in the Canadian wireless market is expected to remain intense in 2006 in all regions of the country. TELUS is targeting more than 550,000 wireless net subscriber additions in 2006, and there can be no assurance that it will achieve its objective given the level of competition or the possibility of declining growth rates in the Canadian wireless industry.
With the entry of the Virgin Group to provide wireless services under the Virgin Mobile brand name on a resale basis from Bell Mobility, competition within the Canadian wireless market further intensified in 2005, particularly in the prepaid and youth segments. TELUS’ two national wireless competitors are marketing discount brands to attract new subscribers. In addition, other competitors, including several cable-TV operators, may offer wireless services regionally or nationally on a resale basis. This increase in new brands and offers could lead to pricing pressures and higher costs of acquisition in the future, particularly in the prepaid market.
There is risk that increased competition could increase churn rates, cause marketing costs of acquisition per subscriber to be higher, and lower the average revenue per subscriber. Aggressive advertising and innovative marketing approaches are expected to remain the norm. Certain competitors continue to offer subsidized (low or zero-cost) handsets, and/or lowered airtime and wireless data prices. Furthermore, Aliant Telecom Wireless launched an unlimited cellular long distance plan in 2005, a wireless industry first. In addition, certain carriers have launched competitive Push To Talk (PTT) products in 2005, competing directly with TELUS’ Mike and new CDMA PTT services. (See Section 10.2 Technology.) TELUS’ wireless high-speed EVDO network currently provides certain competitive advantages – such as speeds of 400 to 700 kilobits per second (six times faster than previous TELUS mobile data offerings) – over GSM carriers, which may diminish as Rogers builds out and launches its higher-speed UMTS HSDPA (universal mobile telecommunications system, high-speed downlink packet access) network. (See Section 10.2 Technology.) While TELUS intends to manage these risks by continuing to focus on differentiated value-added services and profitable subscriber growth, there can be no assurance that these efforts will be successful.
Bell Mobility entered Western Canada in the fall of 2001, built its own network and operational capabilities, and launched its own 1X data network in urban centres in Alberta and B.C. in the fall of 2002. In addition, roaming/resale agreements among TELUS, Bell Mobility and affiliates, and Aliant Telecom Wireless, first operationalized in mid-2002, have allowed Bell Mobility to expand the availability and range of its wireless services to approximately 2.5 million incremental POPs throughout rural Alberta and B.C. This has allowed Bell Mobility to expand its Western Canadian footprint earlier and market services more cost-effectively, than if it had to wait to fully build out its own rural network coverage. The entry of Bell Mobility in these rural areas increased the effective number of competitors to three (including TELUS) in these regions. Roaming/resale agreements have similarly allowed TELUS, on a reciprocal basis, to expand its PCS network coverage and distribution primarily in Central and Atlantic Canada by approximately 7.5 million people, generally served by two other competitors, bringing TELUS’ national digital wireless coverage and addressable market to 30.6 million. There can be no assurance that TELUS’ marketing efforts will be as successful in the new markets going forward as in existing coverage areas.
The introduction of wireless number portability has been mandated for implementation by March 14, 2007 by TELUS and its major national competitors. (See Section 10.3 Regulatory.) This will remove a key barrier to customers switching from one carrier to another, and may increase the level of competition in the market. While TELUS has the smallest installed subscriber base and lowest churn rate of the major national carriers, which bodes well for the Company’s competitive position, there can be no assurance that TELUS will be able to achieve the same level of success at maintaining or winning customers as its national competitors.
Wireless competition is also expected from new digital wireless technologies, which may be offered from both traditional and non-traditional sources utilizing licensed and/or unlicensed spectrum, that deliver higher-speed data and Internet services over current and future wireless devices. Such availability may lead to increased re-subsidization costs related to the migration of existing subscribers to advanced feature handsets based on newer technologies. There can be no assurance that new services offered by TELUS wireless will be available on time, or that TELUS wireless will be able to charge incrementally for the services. (See Section 10.2 Technology.)
Fixed wireless
While the technology is generally in an early stage of development and the associated economic viability remains unproven, increased competition is expected from fixed wireless technologies offered by new or existing providers utilizing licensed and/or unlicensed spectrum to deliver higher-speed data and Internet services.
Inukshuk Internet Inc., owned jointly by Rogers Communications and BCE, has announced plans to build a high-speed fixed wireless network using licensed spectrum in the 2.5GHz band. In addition, certain non-traditional telecom players, such as municipalities, may contemplate building fixed wireless ventures in urban and suburban locations, as has been the case in the United States.
The build-out and availability of such networks may lead to the reduction of traffic on TELUS’ existing wireless mobile networks and/or increase competition for TELUS’ high-speed wireline Internet access service. There can be no assurance that new or existing services offered by TELUS will be competitive with such fixed wireless services, available on time, or that TELUS will be able to charge incrementally for the services.
10.2 Technology
Technology is a key enabler for TELUS and its customers, however, technology evolution brings risks and uncertainties. TELUS is vigorous in maintaining its short and long-term technology strategy to optimize TELUS’ selection and timely use of technology while minimizing the associated costs, risks and uncertainties. The following identifies the main technology risks and uncertainties and how TELUS is proactively managing them.
Evolving wired broadband access technology standards may outpace projected access infrastructure investment lifetimes
The technology standards for broadband access over copper loops to customer premises are rapidly evolving. This evolution is enabling higher broadband access speeds and is fuelled by user appetite for faster connectivity, the threat of increasing competitor capabilities and offerings, and the desire of service providers like TELUS to offer new services that require greater bandwidth such as TV services. In general, the evolution to higher broadband access speeds is achieved by deploying fibre further out from the central office, thus shortening the copper loop portion of the access, and using faster modem technologies on the shortened copper loop.
In 2005, TELUS began deploying ADSL2+, a second generation of asynchronous digital subscriber line (ADSL) technology that enables transfers at up to 15 megabits per second (Mbps) to the customer premises, compared with up to six Mbps for ADSL. ADSL2+ technology is compatible with ADSL and takes advantage of TELUS’ investments in extended reach access (ERA) copper/fibre access infrastructure improvement programs. Looking forward, the technology for ADSL2+ bonding (using multiple pairs to multiply the available bandwidth) and VDSL2 (which can provide up to 45 Mbps on very short copper loops) is anticipated to be available in the second half of 2006.
It is also anticipated that the first viable fibre to the home (FTTH) technology will emerge in the form of a standards-based gigabit passive optical network (GPON) and may be available for deployment by the end of 2006, enabling transfers at 80 Mbps to the home. FTTH is one of several competing proposed FTTx standards (where x stands for home, curb, pedestal, or neighbourhood) in development that TELUS is actively monitoring. Fibre to the curb (FTTC), with an Ethernet connection to the premises, which facilitates transfers of up to 100 Mbps, may be a more practical technology to deploy generally. TELUS will be trialing FTTx technologies in 2006.
These evolving standards, along with new techniques for quality of service (QoS) and network traffic engineering, all support the TELUS Future Friendly Home strategy to deliver IP-based Internet, voice and video services over a common broadband access system. However, these technologies are evolving faster than the traditional investment cycle for access infrastructure. The introduction of these new technologies and the pace of adoption could result in increased requirements for capital funding not currently envisaged or planned.
IP-based telephony as a replacement for legacy analog telephony is immature and cost savings are uncertain
TELUS continues to monitor the evolution of IP-based telephony technologies and service offerings and is developing and testing a consumer solution for IP-based telephony over broadband access that will meet TELUS’ standards for quality features and reliability. This solution could provide additional telephone services over the same line as legacy analog telephone service or could replace the legacy analog telephone service. However, the actual state of technology developed to inter-work telephony, video and Internet access on the same broadband infrastructure is in its infancy and there are risks and uncertainties to be addressed such as ensuring all services can be delivered simultaneously to the home (and to different devices within the home) with uncompromised quality.
A long-term technology strategy is to move all services to IP to simplify the network, reduce costs and enable advanced future friendly services. Pursuing this strategy to its full extent would involve transitioning TELUS’ standard telephone service offering to IP-based telephony and phasing out legacy analog-based telephone service. To this point, TELUS’ broadband access infrastructure could be simplified if regular analog telephone lines were discontinued in favour of digital-only broadband access lines supporting all services including telephony, Internet and video. This would, for example, allow inexpensive high-bandwidth conventional Ethernet to be used as the broadband access technology. However, digital-only broadband access may not be feasible or economical in many areas for some time, particularly in rural and remote areas. TELUS needs to support both legacy and broadband voice systems for some time and, therefore, will incur costs to maintain both systems. There is a risk that investments in broadband voice may not be accompanied by decreased costs of maintaining legacy voice systems.
The convergence in a common IP-based application environment for telephony, Internet and video is complex
Traditionally the technology and systems associated with telephony, Internet and video were different from each other and provided little opportunity for common platforms for cost savings and little flexibility to integrate media and services. The convergence in a common IP-based application environment carried over a common IP-based network provides opportunity for cost savings and for the rapid development of more advanced services, which are more flexible and easier to use. Further, the global standards for drawing together classic wireline and wireless services into a combined architecture using IP multimedia subsystem (IMS) are being actively ratified. However, the transformation from individual traditional silo systems and architectures to a common environment is very complex.
For example, TELUS has launched TELUS TV, one of the world’s first IPTV systems, using middleware designed for video delivery only. Middleware allows complex signaling communication between application software and system hardware in the network and in the set-top box in the home. As all services migrate to the IP-based infrastructure, technology roadmaps to converge the underlying infrastructure towards a single converged IP application and transport infrastructure are developmental in the short term due to lack of maturity of the technology, particularly IPTV middleware and delivery platforms.
This risk involves TELUS building more network-based service silos in the short term and then incurring the cost and time to migrate to the end solution of a converged network and application infrastructure. TELUS is proceeding in incremental stages to create “proof-of-concept” parallel systems to ensure the reliability and superiority of the new network prior to the removal of any part of the legacy platform.
Support systems will increasingly be critical to operational efficiency
TELUS currently has a very large number of interconnected operational support systems and business support systems and the complexity is increasing. This is typical of incumbent telecommunications providers that support a wide variety of legacy and emerging telephony, mobility, data and video services. The development and launch of a new service typically requires significant systems development and integration. The associated developmental and ongoing operational costs can be a significant factor in maintaining competitive position and profit margins. TELUS is proactive in evolving to next generation support systems, however, there is uncertainty with respect to the costs and effectiveness of the solutions and the evolution.
In line with industry best practice, TELUS’ approach is to separate the business support systems from the operational support systems and underlying network technology. The aim is to decouple the introduction of new network technologies from the services sold to customers. This should allow TELUS to optimize its network costs while not impacting customer services, and to facilitate the introduction of new services by removing, where possible, any development dependency on the operational support systems.
The CDMA and iDEN technologies supporting TELUS’ digital cellular/wireless services may become inferior
The wireless industry continues to expand the deployment of second (2G) and third generation (3G) technologies to deliver increased data speeds required for many new wireless, IP and data services. TELUS’ evolution to deploying 3G technologies involves technology paths for both CDMA technology-based services and iDEN technology-based services.
TELUS continues to support and market 1X protocol 3G wireless services on its digital CDMA PCS and cellular networks. TELUS began enhancing its wireless network in 2005 with the next evolution of CDMA 3G technology, namely EVDO (or 1X evolution data optimized) launched in November 2005. EVDO provides average speeds of 400 to 700 Kbps, compared to 100 Kbps for 1X. While EVDO has enjoyed commercial success in North America (launched by Verizon Wireless in 2004) and in Asia, there can be no assurance that EVDO will continue to enjoy success and that TELUS will be able to successfully market EVDO services in Canada. While the Company believes that its CDMA network has a reasonable and cost-effective migration path to future evolutions of higher-speed technologies beyond EVDO, there can be no assurance that it will be successful and timely.
TELUS’ Mike service uses the iDEN technology protocol and has operated 2.5G packet data capability and service offerings for more than three years. TELUS’ Mike network is in part differentiated by its wide-area, high-capacity, high-performing digital Push To Talk (PTT) 2-way radio dispatch services, which are marketed as Direct Connect service. TELUS is the largest Canadian PTT operator. Both TELUS and Bell Mobility launched PTT services over CDMA in 2005, and PTT capabilities continue to advance for other carriers using different technologies. TELUS Mike maintains superiority in PTT services in terms of speed of set-up and conversational latency. In the future, there can be no assurance that TELUS’ current market advantage of extensive product sales and marketing experience, large installed base of Mike iDEN users and work groups, and service superiority will be maintained.
TELUS’ CDMA-based PTT service, launched early in 2005 and marketed as Instant Talk, like other CDMA-based services, may with technological advancements be competitive at some time with the iDEN technology utilized by the Mike network. There can be no assurance that successful deployment and marketing of CDMA PPT or other competitive technology will not reduce or eliminate the competitive differentiation of TELUS’ Mike network. Work is ongoing to determine an optimal migration path for iDEN, but there can be no assurance on the availability of technology for migration, or a quantification of the associated costs.
In 2005, CDMA-operator Sprint and iDEN-operator Nextel merged their operations. It is expected that the Sprint-Nextel merger will promote greater seamless interoperability between the CDMA and iDEN networks. Although TELUS is well positioned to follow the lead of the major infrastructure developments in the U.S., there can be no assurance that interoperability or the infrastructure migration path will be successful or economical for TELUS or its customers.
Emerging wireless technologies represent both an opportunity and a competitive threat
Wireless technologies and protocols continue to be developed and extended for a variety of applications and circumstances, such as the Institute of Electrical and Electronics Engineers (IEEE) 802.xx suite of standards. A number of wireless technologies are capable of exploiting both licensed and unlicensed spectrum for both fixed and future mobile applications. While TELUS constantly reviews and examines such developments, and may from time to time choose to utilize a number of these technologies, there can be no assurance that these developments may not adversely impact TELUS in the future. In particular, the emergence of Wi-Fi-based handsets may have a significant impact on traditional CDMA PCS services, and this may trigger a movement to VoIP services on wireless and promote revenue per user erosion. Further, this may also trigger an accelerated incremental investment in next generation voice infrastructures.
As well, in recent years TELUS and certain of its current and potential competitors have acquired through auction regional radio spectrum licences in the 3.5GHz and 2.3GHz frequency bands. This spectrum may be used for the deployment of wireless services utilizing WiMax (802.16) wireless technology. WiMax is an emerging technology standard that will allow high bandwidth services to be offered over much wider geographic areas than Wi-Fi. A WiMax enabled service could attempt to compete against wireline services. At this time, WiMax does not support mobile services, although a standard (802.16e) that supports it has recently been ratified by the IEEE. Currently neither TELUS nor any significant competitors have deployed a meaningful WiMax enabled wireless service offering. In the third quarter of 2005, Bell Canada and Rogers Communications announced that they would merge some of their wireless spectrum resources under Inukshuk, a holder of a near national 2.5GHz spectrum licence, and expressed the intent of investing $200 million over the next three years to develop and deploy WiMax enabled services across Canada. There can be no assurance that these emerging wireless technologies will represent a greater opportunity than threat for TELUS.
10.3 Regulatory
Regulatory developments could have an adverse impact on TELUS’ operating procedures, costs and revenues
TELUS’ telecommunications and broadcasting services are regulated under federal legislation by the Canadian Radio-television and Telecommunications Commission (CRTC), Industry Canada and Canadian Heritage. The CRTC has taken steps to forbear from regulating prices for services offered in competitive markets, such as long distance and some data services, and does not regulate the pricing of wireless services. Local telecommunications services are regulated by the CRTC using a price cap mechanism. Major areas of regulatory review currently include the framework for forbearance from the regulation of residential and business local exchange services, the framework for forbearance from the regulation of high-speed intra-exchange digital services and the utilization of the funds in the incumbent local exchange carriers’ (ILEC) deferral accounts.
In 2005, the federal government undertook a review of Canada’s telecommunications policy and regulatory framework. The review panel, reporting to the Minister of Industry, was asked to provide recommendations by the end of 2005 on how to modernize Canada’s telecommunications framework in order to benefit Canadian industry and consumers.
The outcome of the regulatory reviews, proceedings and court or Federal Cabinet appeals discussed below and other regulatory developments could have a material impact on TELUS’ operating procedures, costs and revenues.
Price cap regulation
Price cap regulation continues to apply to a basket of local services provided by ILECs. TELUS is subject to price cap regulation as an ILEC in Alberta, B.C. and Eastern Quebec. On May 30, 2002, the CRTC issued Decision 2002-34 and established a second four-year price cap period. This four-year price cap period was extended by one year to May 31, 2007 by the CRTC in Decision 2005-69. The CRTC incorporated a deferral account into the second price cap period to which an amount equivalent to the cumulative annual productivity adjustments for residential services in non-high cost serving areas is added. The productivity adjustments are determined using the gross domestic product productivity index (GDP-PI) less the productivity offset for the second price cap period of 3.5%.
In Decision 2005-69, the CRTC stated that it will be initiating a proceeding to review the existing price regulation regime in the first half of 2006. There can be no assurance that the price regulation regime for TELUS beginning in June 2007 will be as or more favourable for TELUS than the current regime.
On February 16, 2006, the CRTC issued a long-awaited decision on the use of funds in the deferral account, Telecom Decision CRTC 2006-9. In its decision, the CRTC determined that initiatives to expand broadband services to rural and remote communities and initiatives to improve accessibility to telecommunications services for individuals with disabilities are an appropriate use of funds for the ILEC deferral accounts. To the extent that the accumulated deferral account exceeds approved initiatives, the remaining balance will be distributed in the form of a one-time rebate to local non-high cost serving area residential customers. Finally, the CRTC indicated that prospectively no further amounts are to be added to the deferral account and are to be dealt with via prospective residential local rate reductions. Given the complexity of this decision and remaining outstanding issues, management is currently analyzing the decision to determine what overall impact it may have on TELUS.
Quality of service penalties
The price cap decision also established a rate adjustment plan and associated penalties for ILECs that do not meet the quality of service standards approved by the CRTC. When the full impact of TELUS’ work stoppage and the flooding that occurred in Southern Alberta in 2005 is understood and quantified, TELUS plans to apply to the CRTC for these events to be recognized as adverse events and for their impact to be removed from TELUS’ quality of service results. Recognition of these adverse events by the CRTC would reduce the quality of service penalties paid by the Company in 2005. Nevertheless, TELUS has no assurance that these penalties will not affect earnings in the future.
Pricing safeguards
On April 29, 2005, the CRTC issued Review of price floor safeguards for retail services and related issues, Decision 2005-27 and modified selected pricing safeguards for retail tariff services. The CRTC maintained a cost-based imputation test to ensure services are not sold below cost, thereby providing an unfair competitive advantage. While the new pricing safeguards are somewhat more restrictive than the previous safeguards, the CRTC in Decision 2005-27 did not abandon the basic concept of an imputation test based on underlying costs. Decision 2005-27 did not approve the radical changes to the pricing safeguards put forward by the CRTC or proposals for guaranteed margins put forward by the competitors. However, there is no assurance that the new price floor safeguards will not hamper TELUS’ ability to compete effectively in the future.
TELUS’ broadcasting distribution undertakings
The CRTC has approved applications by TELUS to operate terrestrial broadcasting distribution undertakings to serve various communities in Alberta and British Columbia (August 2003) and Eastern Quebec (July 2005). In September 2003, the CRTC approved TELUS’ application for a video-on-demand undertaking licence with the same terms and conditions as previously licensed video-on-demand undertakings in Canada. The licence is national in scope and extends for a seven-year term. There can be no assurance that implementation costs or projected revenues and expenses for TELUS’ television service will be as planned.
Voice over Internet protocol
On May 12, 2005, the CRTC issued Regulatory framework for voice communication services using Internet protocol, Decision 2005-28. The CRTC determined that local VoIP services are functionally equivalent to local exchange service and that the current regulatory framework governing local competition will apply to local VoIP service providers. The CRTC determined that ILECs may only provide VoIP services in their incumbent territories in accordance with approved tariffs. There can be no assurance that this CRTC decision will not significantly impact TELUS’ future ability to compete.
On July 28, 2005, TELUS, Aliant Telecom Inc., Bell Canada, Saskatchewan Telecommunications and others petitioned the Governor in Council to intervene and eliminate the economic regulation of VoIP services. In addition, TELUS, Bell Canada and Saskatchewan Telecommunications have appealed Decision 2005-28 to the Federal Court to eliminate the application of the winback rule (a 12-month marketing restriction for customers lost to competitors) on VoIP services. There can be no assurance that these actions will be successful.
Radiocommunication licences regulated by Industry Canada
All wireless communications depend on the use of radio transmissions and, therefore, require access to radio spectrum. Under the Radiocommunication Act, Industry Canada regulates, manages and controls the allocation of spectrum in Canada and licenses frequency bands and/or radio channels within various frequency bands to service providers and private users. Voice and data wireless communications via cellular, SMR, ESMR and PCS systems, among others, require such licences. TELUS’ PCS and cellular licences include various terms and conditions, such as: meeting certain performance levels, meeting Canadian ownership requirements, obligations regarding coverage and build-out, spending at least 2% of certain PCS and cellular revenues on research and development, annual reporting and resale to competitors. While TELUS believes that it is substantially in compliance with its licence conditions, there can be no assurance that it will be found to comply with all licence conditions, or if found not to be compliant that a waiver will be granted, or that the costs to be incurred to achieve compliance will not be significant. Initial licence fees and annual renewal fees are payable for licences that have not been obtained via spectrum auction. There can be no assurance that Industry Canada will not seek to increase these fees in the future.
Implementation of wireless number portability (WNP) – Telecom Decision CRTC 2005-72
On December 20, 2005, the CRTC issued Decision 2005-72 and directed Bell Mobility, Rogers Wireless Inc. and the wireless division of TELUS to implement wireless number portability in British Columbia, Alberta, Ontario and Quebec where local exchange carrier-to-local exchange carrier (LEC-to-LEC) local number portability is currently in place by March 14, 2007. In other areas and for other wireless carriers, wireless number portability (where LEC-to-LEC local number portability is currently in place) for porting-out must be implemented by March 14, 2007 and for porting-in must be implemented by September 12, 2007. There is no assurance that TELUS and the other Canadian wireless carriers will be able to implement wireless number portability in the required timeframe without incurring significant additional costs and/or ongoing administration costs. Implementation of wireless number portability may result in increased migration of network access lines to wireless services, increased wireless subscriber monthly churn or additional customer retention costs for TELUS.
WNP when instituted in the U.S. in 2003 did not cause a large increase in churn as was initially anticipated. In addition, TELUS believes that WNP may open up an opportunity to more effectively market into the business/enterprise market in Central Canada where TELUS has a lower market share than our wireless competitors and lack of WNP is believed to have decreased its sales effectiveness. However, there can be no assurance that this will be the case.
Foreign ownership restrictions
TELUS and its subsidiaries are subject to the foreign ownership restrictions imposed by the Telecommunications Act, the Radiocommunication Act and the Broadcasting Act. Although TELUS believes that TELUS Corporation and its subsidiaries are in compliance with the relevant legislation, there can be no assurance that a future CRTC, Industry Canada or Heritage Canada determination, or events beyond TELUS’ control, will not result in TELUS ceasing to comply with the relevant legislation. If such a development were to occur, the ability of TELUS’ subsidiaries to operate as Canadian carriers under the Telecommunications Act or to maintain, renew or secure licences under the Radiocommunication Act and Broadcasting Act could be jeopardized and TELUS’ business could be materially adversely affected.
10.4 Human resources
The outcome of outstanding collective bargaining at TELUS Québec may result in increased costs, reduced productivity or work disruptions
Two collective agreements in the TELUS Québec region are open for renewal negotiations in 2006. On December 31, 2005, the collective agreement expired between TELUS Québec and the Syndicat Québecois des employés de TELUS, covering approximately 993 office, clerical and technical employees. A second agreement, affecting approximately 523 professional and supervisory employees, between TELUS Québec and the Syndicat des agents de maîtrise de TELUS expires on March 31, 2006. There can be no assurance that the negotiated compensation expenses will be as planned, or that reduced productivity and work disruptions will not occur as a result of or following these negotiations.
Reliance on key personnel
The success of TELUS is largely dependent on the abilities and experience of its key employees. Competition for highly skilled and entrepreneurial management and other key employees is intense in the communications industry. There can be no assurance that TELUS can retain its current key employees or attract and retain additional executive officers or key employees as needed. The loss of certain key employees, or deterioration in employee morale resulting from organizational changes, unresolved collective agreements or ongoing cost reductions could have an adverse impact upon TELUS’ growth, business and profitability.
Compensation at TELUS is designed to support its high-performance culture and is both market-driven and performance-based. This includes medium and long-term performance incentives including variable incentive pay based on performance at an individual, business unit and organizational level; stock options, restricted stock units (RSUs) and the TELUS Employee Share Purchase Plan; as well as a benefits program, which allows the tailoring of personal benefits plans to suit individual needs. Long-term performance incentives for certain key personnel include primarily three-year vesting periods for options and RSUs. By striving to ensure TELUS’ compensation remains competitive, TELUS is focusing on maintaining the ability to attract and retain key personnel.
10.5 Business integration and internal reorganizations
On November 24, 2005, TELUS Corporation announced the integration of the wireline and wireless segments of the business – formerly the TELUS Communications and TELUS Mobility segments – into a single operating structure. This integration incorporates TELUS’ customer-facing business units, technology infrastructure, operations and shared services. There is no assurance that this integration will provide the benefits and efficiencies that are planned and/or that there will not be significant difficulties in combining the two structures, which could result in a negative impact on operating and financial results.
10.6 Process risks
TELUS systems and processes could negatively impact financial results and customer service – Billing/revenue assurance
TELUS continues to develop a new billing system for the wireline segment of our business, which includes re-engineering processes for order entry, pre-qualification, service fulfillment and assurance, customer care, collections/credit, customer contract and information management. This customer-focused project requires extensive system development and, in itself, presents implementation risks due to the complexity of the implementation task and resource constraints. TELUS plans to implement this project in phases beginning with the implementation of consumer accounts in Alberta, currently scheduled in 2006, and followed by implementation of consumer customer accounts in B.C. There can be no assurance that this undertaking will not negatively impact TELUS’ customer service levels, competitive position and financial results. As well, significant time delays in implementing this system could negatively impact TELUS’ competitive ability to quickly and effectively launch new products and services; achieve and maintain a competitive cost structure; and deliver better information and analytics to management.
Also, as a result of system changes, staff reduction and training requirements associated with TELUS’ ongoing efficiency improvement efforts, there is potential for further impact on the operations of TELUS’ internal processes involved with billing that could negatively affect TELUS’ earnings.
Cost and availability of services
The availability of various data, video and voice services in competitive local exchange carrier (CLEC) regions where TELUS’ wireline network is only partly available represents a significant challenge in terms of delivery deadlines, quality and cost of services. The lease of facilities from other telecommunications companies and rebilling for the use of their networks may prove to be costly and unprofitable.
10.7 Financing and debt requirements
TELUS’ business plans and growth could be negatively affected if existing financing is not sufficient to cover funding requirements
TELUS may finance future capital requirements with internally generated funds as well as, from time to time, borrowings under the unutilized portion of its bank credit facility or through the issuance of debt or equity securities. Disruptions in the capital markets, increased bank capitalization regulations, reduced lending to the telecom sector, or a reduced number of active Canadian chartered banks as a result of reduced activity or consolidation, could reduce capital available for investment grade corporate credits such as TELUS.
In May 2005, TELUS entered into C$1.6 billion of new bank credit facilities, which will partially mitigate this risk. The new credit facilities consist of a C$800 million (or U.S. dollar equivalent) revolving three-year credit facility and a C$800 million (or U.S. dollar equivalent) five-year revolving credit facility.
On July 26, 2002, TELUS Communications Inc. (TCI), a wholly owned subsidiary of TELUS, entered into an agreement with an arm’s-length securitization trust under which it is able to sell an interest in certain of its trade receivables up to a maximum of $650 million. As at December 31, 2005, TCI had received aggregate cash proceeds of $500 million. Under the program, TCI is required to maintain at least a BBB(low) credit rating by Dominion Bond Rating Service – currently A(low). In the event this rating is not maintained, the Company may be required to wind down the program prior to the June 2007 termination date of the agreement.
TELUS’ financial policies include a target net debt to EBITDA ratio of 1.5 to 2.0 times (1.7 times as at December 31, 2005) and a target net debt to total capitalization ratio of approximately 45 to 50% (45.7% as at December 31, 2005). TELUS thereby seeks to achieve, over time, debt credit ratings in the range of BBB+ to A-, or equivalent. Three of the four credit rating agencies that rate TELUS now have ratings that are in line with this target. A reduction in TELUS credit ratings could impact TELUS’ cost of and access to capital. There can be no assurance that TELUS can maintain or improve current credit ratings.
On December 16, 2005, TELUS announced a new Normal Course Issuer Bid (NCIB) for 24 million shares. This follows the previous NCIB that expired on December 19, 2005 under which the Company purchased 21.8 million shares for $912.6 million. While anticipated cash flow is expected to be more than sufficient to meet current requirements and remain in compliance with TELUS’ financial policy, these intentions could constrain TELUS’ ability to invest in its operations for future growth or to complete share repurchases.
Quarterly, the TELUS Board reviews the dividend based on a number of factors including a target dividend payout ratio guideline of 45 to 55% of sustainable net earnings. This review prompted a 37.5% increase in the quarterly dividend payout rate from 20 cents to 27.5 cents effective with the dividend paid on January 1, 2006. At the January 1, 2006 level of dividend and shares outstanding, this would total approximately $387 million in dividends in 2006.
TELUS expects to generate material free cash flow in 2006, which would be available to, among other things, repurchase shares and pay dividends to shareholders. However, if actual results are different from TELUS’ expectations, there can be no assurance that TELUS will not need to change its financing plans, including its intention to repurchase a significant amount of shares, or pay dividends according to the target payout guideline.
10.8 Tax matters
Income tax amounts, including tax expense, may be materially different than expected
The operations of TELUS are complex and related tax interpretations, regulations and legislation pertaining to TELUS’ activities are continually subject to change. The Company has significant amounts of income taxes receivable, future income tax assets, including tax loss carry forwards, and future income tax liabilities. These amounts are based on estimates by TELUS management and potential changes to them and the timing of realizing such amounts can materially affect the determination of net income or realization of cash in future periods.
Timing surrounding the monetization or realization of future income tax assets is uncertain, since timing is dependent on future earnings of the Company and other events. The amounts of future income tax assets and future income tax liabilities are also uncertain, since the amounts are based upon substantially enacted future income tax rates in effect at the time, which can be changed by governments. The amount of future income tax assets is also based upon the Company’s anticipated mix of revenues among the jurisdictions in which it operates, which is also subject to change.
The review activities of the Canada Revenue Agency and other jurisdictions’ tax authorities affect the ultimate determination of the actual amounts of income taxes receivable, income taxes payable, future income tax assets and future income tax liabilities. Therefore, there can be no assurance that income taxes will be payable as anticipated and/or the amount and timing of receipt or use of the tax-related assets will be as currently expected.
10.9 Health, safety and environment
Team member health, wellness and safety
Lost work time, resulting from the illness or injury of a TELUS team member, can negatively impact organizational productivity and employee benefit health care costs. To minimize absence in the workplace, TELUS supports a holistic and proactive approach to team member health by providing comprehensive wellness, disability, ergonomic and employee assistance programs.
TELUS has long-standing programs to provide training and orientation to team members, and contractors and suppliers who access TELUS facilities, in regards to TELUS' safe work practices and expectations. However, there can be no assurance that these practices will be effectively followed in all situations.
Radio frequency emission concerns
Some studies have asserted that radio frequency emissions from wireless handsets may be linked to certain adverse health effects. However, the overwhelming evidence in the scientific community, as determined and published in numerous studies worldwide, supports the conclusion that there is no demonstrated public health risk associated with the use of wireless phones. Government agencies in Canada responsible for establishing safe limits for signal levels of radio devices also support the conclusion that wireless telephones are not a health risk. TELUS believes that the handsets sold by TELUS comply with all applicable Canadian and U.S. government safety standards.
There can be no assurance that future health studies, government regulations or public concerns about the health effects of radio frequency emissions would not have an adverse effect on the business and prospects for TELUS. For example, public concerns could reduce customer growth and usage or increase costs as a result of modifying handsets and product liability lawsuits.
Responsible driving
Some studies, including reports released by the Insurance Corporation of B.C. and the University of Montreal, have shown an increase in distraction levels for drivers using wireless phones while driving.
In July 2004, New Jersey and Washington, D.C. followed a precedent set by New York in 2001 by enacting bans on handheld wireless phone use by drivers. In 2002, Newfoundland & Labrador became the only Canadian jurisdiction to ban drivers’ use of handheld wireless phones (as with similar bans on handheld phone use while driving, the province allows the use of hands-free wireless kits).
TELUS promotes responsible driving and recommends that driving safely should be every wireless customer’s first responsibility. TELUS believes that current laws adequately address all forms of careless and negligent driving, and laws that are specific to mobile phones are unnecessary and counterproductive.
There can be no assurance that additional laws against using wireless phones while driving will not be passed and that, if passed, such laws will not have a negative effect on subscriber growth rates, usage levels or wireless revenues.
Concerns about environmental issues, particularly related to contaminated property and the associated risk to human health or wildlife
To conduct its business operations, TELUS owns or leases a large number of properties. To enable reliable service, many TELUS sites house fuel systems for back-up power generation. In addition, several hazardous chemicals (e.g. battery acid, treated wood poles, fire suppression/retardant) are commonly used at many sites and within the telecommunications industry in general. As well, certain hazardous materials are found at selected locations (e.g. asbestos as insulation or fire retardant, beryllium in radio equipment). Based on the volume of fuel stored and the nature of some of the specific chemicals handled, there is a risk to the Company and its directors and officers posed by the potential for spills and releases of hazardous chemicals into the environment. A significant portion of this risk is associated with the clean-up of sites contaminated by historic TELUS practices or by previous owners. Although these are immaterial to TELUS’ financial results, poorly executed environmental risk mitigation could have negative legal, brand or community relations impacts. Further detail on TELUS’ environmental risks can be found in the TELUS corporate social responsibility report (telus.com/socialresponsibility). Although TELUS takes proactive measures to identify and mitigate environmental exposures and employs a robust environmental management system, there can be no assurance that specific environmental incidents will not impact TELUS operations in the future.
10.10 Litigation and legal matters
Investigations, claims and lawsuits
Given the size of TELUS, investigations, claims and lawsuits seeking damages and other relief are regularly threatened or pending against the Company and its subsidiaries. TELUS cannot predict with any certainty the outcome of such investigations, claims and lawsuits and as such, there can be no assurance that results will not be negatively impacted. See Note 16(f) of the Consolidated financial statements of TELUS.
TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan
Two statements of claim were filed in the Alberta Court of Queen’s Bench on December 31, 2001, and January 2, 2002, respectively, by plaintiffs alleging to be either members or business agents of the Telecommunications Workers Union. In one action, the three plaintiffs alleged to be suing on behalf of all current or future beneficiaries of the TELUS Corporation Pension Plan and in the other action, the two plaintiffs allege to be suing on behalf of all current or future beneficiaries of the TELUS Edmonton Pension Plan. The statement of claim in the TELUS Corporation Pension Plan related action named the Company, certain of its affiliates and certain present and former trustees of the TELUS Corporation Pension Plan as defendants, and claims damages in the sum of $445 million. The statement of claim in the TELUS Edmonton Pension Plan related action named the Company, certain of its affiliates and certain individuals who are alleged to be trustees of the TELUS Edmonton Pension Plan and claims damages in the sum of $15.5 million. On February 19, 2002, the Company filed statements of defence to both actions and also filed notices of motion for certain relief, including an order striking out the actions as representative or class actions. On May 17, 2002, the statements of claim were amended by the plaintiffs and include allegations, inter alia, that benefits provided under the TELUS Corporation Pension Plan and the TELUS Edmonton Pension Plan are less advantageous than the benefits provided under the respective former pension plans, contrary to applicable legislation, that insufficient contributions were made to the plans and contribution holidays were taken and that the defendants wrongfully used the diverted funds, and that administration fees and expenses were improperly deducted. The Company filed statements of defence to the amended statements of claim on June 3, 2002. The Company believes that it has good defences to the actions. As a term of the settlement reached between TELUS Communications Inc. and the Telecommunications Workers Union that resulted in a collective agreement effective November 20, 2005, the Telecommunications Workers Union has agreed to not provide any direct or indirect financial or other assistance to the plaintiffs in these actions, and to communicate to the plaintiffs the Telecommunications Workers Union’s desire and recommendation that these proceedings be dismissed or discontinued. The Company has been advised by the Telecommunications Workers Union that the plaintiffs have not agreed to dismiss or discontinue these actions. Should the lawsuits continue because of the actions of the court, the plaintiffs or for any other reason, and their ultimate resolution differ from management’s assessment and assumptions, a material adjustment to the Company’s financial position and the results of its operations could result.
Ontario Court of Appeal ruling in 2005
In June 2005, the Ontario Court of Appeal unanimously overturned a 2003 trial court decision and ruled that when TCI’s predecessor BC TEL redeemed $125 million of Series AL Bonds in December 1997, it was in breach of a covenant contained in the deed of trust and mortgage under which the Bonds were issued. The Ontario Court of Appeal returned the case to the trial courts to determine damages and TELUS accrued an estimate of damages, which is included in financing costs for the second quarter of 2005. Should the assessed damages be significantly different than management’s expectations, a material adjustment could be recorded in the Company’s Consolidated statements of income. The Company sought leave to appeal to the Supreme Court of Canada, which was dismissed in January 2006. This ruling relates to a matter prior to the 1999 merger of BC TELECOM and TELUS Corporation (Alberta), and does not impact TELUS’ current debt instruments.
Bill 198
On December 31, 2005, provisions announced by the Government of Ontario came into force, creating liability for misrepresentations by public companies in written disclosure and oral statements. These amendments also created liability for fraud and market manipulation.
The amendments create a right of action for damages against TELUS, its directors and certain of its officers in the event that TELUS or a person with actual, implied or apparent authority to act or speak on behalf of TELUS releases a document or makes a public oral statement that contains a misrepresentation or TELUS fails to make timely disclosure of a material change.
This new legislation permits action to be taken by any person or company that acquires or disposes of TELUS securities in the secondary market during the period of time that the misrepresentation remains uncorrected in the public or, in the case of an omission, until such time as the material change has been disclosed. It is not necessary for the person or company to establish that they relied on the misrepresentation in making the acquisition or disposition.
TELUS has conducted a review of its disclosure practices and procedures and the extent to which they are documented. As part of that review, TELUS consulted external advisors. This review indicated that TELUS has well-documented and fulsome processes in place, including a corporate disclosure policy that restricts spokespersons to specifically designated senior management, provides a protocol for dealing with analysts and oral presentations, and creates a disclosure committee to review and determine material facts and changes for disclosure. However, there can be no assurance that TELUS’ processes will be followed by all team members at all times.
In December 2005, the Canadian Institute of Chartered Accountants recognized TELUS with the Award of Excellence for Best Corporate Governance Disclosure across all industry sectors. As well, in January 2006, IR Magazine Canada Awards 2006 recognized TELUS for having the best disclosure policy. The IR award was based on a survey of 250 Canadian investment professionals. TELUS’ corporate disclosure policy is publicly available at telus.com/governance.
Legal and regulatory compliance
TELUS relies on its employees, officers, Board of Directors, key suppliers and partners to demonstrate reasonable legal and ethical standards. TELUS has instituted for its employees, officers and directors an ethics policy and a toll-free EthicsLine for anonymous reporting by anyone who has issues or complaints.
TELUS employs a designated compliance officer, whose role is to work across the enterprise to ensure that the business has the appropriate controls and measurements in place to facilitate legal and regulatory compliance, including compliance under privacy legislation. The compliance officer reports jointly to the Audit Committee of the Board of Directors, and to the Executive Vice-President of Corporate Affairs. This dual reporting status provides a direct line-of-sight reporting to the Audit Committee to address identified risks.
Notwithstanding these initiatives and processes, situations might occur where individuals do not adhere to TELUS policies, or where personal information of a TELUS customer or employee is inadvertently collected, used or disclosed in a manner that is not fully compliant with privacy legislation, thereby exposing TELUS to the possibility of damages, sanctions and fines, or negatively affecting financial or operating results. Although management cannot predict outcomes with certainty, management believes it has appropriate policies, processes and awareness in place for proper compliance.
10.11 Manmade and natural threats
Concerns about natural disasters and intentional threats to TELUS’ infrastructure and operations
Recognizing that TELUS, as a communications company, is a key provider of critical infrastructure to Canada, there exists ongoing exposure of natural disasters and intentional threats to TELUS’ network, information technology (IT), physical assets and team members. Although TELUS has robust and ongoing business continuity planning processes, there can be no assurance that specific events will not impact TELUS operations and results.
Security
Electronic attack
Electronic attacks are the intentional acts of individuals or organized groups to gain unauthorized access to TELUS information or to prevent legitimate users from gaining access. These acts employ a number of methods ranging from social engineering – a non-technical kind of intrusion that relies heavily on human interaction and the tricking of people into breaking normal security procedures – to the use of sophisticated malicious software. TELUS, using a layered security approach, has implemented a number of proactive, reactive and containment processes and systems to safeguard its IT infrastructure, information repositories and information distribution. Information security policies and procedures are in place governing the duties of those responsible for information confidentiality and integrity. Intrusion detection systems, access controls and incident response procedures are in place to provide continuous monitoring of the TELUS IT infrastructure. Although TELUS has robust and ongoing IT and network security planning processes, there can be no assurance that specific events will not impact TELUS operations and results.
TELUS faces potential exposure and risk when sharing information with external business partners and these business partner systems are compromised. TELUS reviews this risk when entering into new agreements.
Vandalism
TELUS has a number of publicly situated physical assets ranging from public payphones to network and telephone switch centres that could be subjected to vandalism. Using such factors as the importance of the asset, the exposure risks and the potential costs incurred should the asset be damaged, TELUS has implemented an array of physical and electronic barriers, and controls and monitoring systems to protect its assets.
As an additional level of risk management, TELUS has a corporate security group that continually investigates and evaluates the risks and, in co-operation with law enforcement and other external agencies, adjusts its protection to meet changing risks. Although TELUS has thorough physical asset security planning processes, there can be no assurance that specific events will not impact TELUS operations and results.
10.12 Economic growth and fluctuations
Significant economic downturns or recessions may adversely impact TELUS
Canadian real gross domestic product (GDP) was recently estimated by the Conference Board of Canada to have grown at 2.8% during 2005. Consumer price index (CPI) inflation has been very volatile due to fluctuations in gasoline prices. However, there is little indication that this price pressure is spilling over into other prices as core inflation remains within the Bank of Canada core inflation target bands. The Canadian economy is currently operating at full capacity and continues to adjust to the significant appreciation of the Canadian dollar, higher commodity prices and increased competition, especially from newly industrialized economies such as China and India. The principal risk to Canadian economic growth may occur when the U.S. government and U.S. households begin to address their twin deficits in a meaningful way through significant reductions in fiscal spending and household consumption. The longer the U.S. delays in addressing the deficit issues, the greater the risk of an abrupt and disorderly adjustment, which would therefore negatively impact the demand for Canadian produced goods and services.
In an uncertain economy, residential and business telecommunications customers may delay new service purchases, reduce volumes of use and/or discontinue use of services. Significant economic down-turns or recessions could adversely impact TELUS’ profitability and free cash flow, realization of income tax losses carried forward and bad debt expense, and/or require the Company to record impairments to the carrying value of its assets including, but not limited to, its intangible assets with indefinite lives (spectrum licences) and its goodwill. Impairments to the carrying value of assets would result in a charge to earnings and a reduction in shareholders’ equity, but would not affect cash flow.
TELUS, as it has expanded nationally in recent years and gained exposure to the more diversified manufacturing based economies in Ontario and Quebec, has become somewhat more immune to any regional economic weaknesses in B.C. and Alberta due to their different government policies or cyclical resource based economies.
Pension funding risks
Economic fluctuations could also adversely impact the funding and expense associated with the defined benefit pension plans that TELUS sponsors. In 2005 TELUS made cash contributions of $160 million to its pension plans (including $119 million to its defined benefit plans) and similar levels are expected in 2006. Defined benefit funding risks may occur if total pension liabilities exceed the total value of the respective trust funds. Unfunded differences may arise from lower than expected investment returns, reductions in the discount rate used to value pension liabilities, and actuarial loss experiences. TELUS seeks to mitigate this risk through the implementation of policies and procedures designed to control investment risk and ongoing monitoring of its funding position. There can be no assurance that TELUS pension expense and funding of its defined benefit pension plans will not need to increase in the future and thereby negatively impact earnings and liquidity.