/SECOND AND FINAL ADD - TO191 - TELUS Corporation Earnings/

----------------------------------------------------------------------- Quarters ended Years ended ($ millions) December 31 December 31 2005 2004 Change 2005 2004 Change ------------------------------------------------------------------------- 805.0 613.8 31.2 % 2,914.6 2,538.1 14.8 % ------------------------------------------------------------------------- Cash provided by operating activities increased by $191.2 million and$376.5 million, respectively, in the fourth quarter and full year of 2005,when compared with the same periods in 2004. Changes in cash provided byoperating activities were mainly due to the following in the fourth quarterand full year of 2005, when compared with the same periods in 2004: - Cash was provided by a $350 million increase in proceeds from securitized accounts receivable in fourth quarter and full year of 2005, compared to no change in the fourth quarter of 2004, and a $150 million reduction in full year of 2004 - Income tax recoveries net of installment payments for the fourth quarter of 2005 increased by 50.1 million - EBITDA decreased by $32.2 million in the fourth quarter of 2005, but increased by $204.7 million for the full year of 2005, when compared with the same periods in 2004 - Restructuring and workforce reduction payments decreased by $4.9 million and $52.3 million, respectively - Interest received increased by $8.9 million and $20.0 million, respectively - Employer contributions to employee defined benefit plans increased by $4.5 million in the fourth quarter and decreased by $18.0 million for the full year. The increase for the quarter was due to earlier timing of funding in 2004. The decrease for the full year was due to updated actuarial valuations and net acceleration of funding in 2004. The Pension Plan for Management and Professional Employees of TELUS Corporation ceased accepting new participants on January 1, 2006. Partly offsetting the above were: - Income tax recoveries net of installment payments for the full year of 2005 decreased by 125.1 million - In the fourth quarter of 2004, TELUS received $33.3 million from Verizon, recorded as a reduction of prepaid and deferred services. The $33.3 million was part of the $148.1 million (US $125 million) received when the independent Directors of TELUS agreed to facilitate the divestiture by Verizon of its entire 20.5% equity interest in TELUS - Interest paid increased by $26.0 million and $5.4 million, respectively, due to the $30.9 million paid in respect of early redemption of 7.50%, Series CA, Notes on December 1, 2005, partly offset by lower interest due to conversion and redemption of Convertible debentures in 2005, and debt repayments in 2004 - Other changes in non-cash working capital in 2005 including an increase in accruals for capital expenditures, a reduction in payroll and employee-related liabilities and the payment of lump sum amounts to bargaining unit employees. 7.2 Cash used by investing activities ------------------------------------------------------------------------- Quarters ended Years ended ($ millions) December 31 December 31 2005 2004 Change 2005 2004 Change ------------------------------------------------------------------------- 375.7 342.8 9.6 % 1,355.2 1,299.5 4.3 % ------------------------------------------------------------------------- Cash used by investing activities increased by $32.9 million and$55.7 million, respectively, in the fourth quarter and full year of 2005, whencompared with the same periods in 2004. The increase for the fourth quarterwas primarily due to higher capital expenditures. The increase for the fullyear was primarily from the $29.4 million investment in Ambergris in the firstquarter of 2005 (compared with the acquisition of ADCOM for $12.2 million inthe fourth quarter of 2004) and lower proceeds from the sale of non-coreassets. Assets under construction increased to $516.4 million at December 31,2005, compared with $329.6 million at December 31, 2004, due to delays incompleting capital projects caused by the labour disruption, as well ascapitalized costs related to a new billing system in the wireline segment. ------------------------------------------------------------------------- Capital expenditures by segment ($ millions, except Quarters ended Years ended capital expenditure December 31 December 31 intensity) 2005 2004 Change 2005 2004 Change ------------------------------------------------------------------------- Wireline segment 230.2 220.8 4.3 % 914.2 964.3 (5.2)% Wireless segment 143.9 122.6 17.4 % 404.8 354.7 14.1 % ------------------------------------------------------------------------- TELUS consolidated 374.1 343.4 8.9 % 1,319.0 1,319.0 0.0 % ------------------------------------------------------------------------- Capital expenditure intensity (1)(%) 17.9 17.5 0.4pts 16.2 17.4 (1.2)pts ------------------------------------------------------------------------- (1) 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. ------------------------------------------------------------------------- - Wireline segment ILEC capital expenditures decreased by 3.8% to approximately $194 million in the fourth quarter of 2005, and decreased by 3.3% to approximately $799 million for the full year of 2005, when compared with the same periods in 2004. The decrease included some deferral of capital expenditures due to the work stoppage. Greater investment in internal systems and processes was more than offset by lower expenditures on network infrastructure and other projects. Wireline non-ILEC capital expenditures increased by 88.7% to approximately $37 million in the fourth quarter of 2005, when compared with the fourth quarter of 2004, primarily due to different timing of investments in the IP infrastructure expansion. For the full year of 2005, non-ILEC capital expenditures decreased by 16.6% to $115 million, when compared with 2004, as spending in 2004 required up-front investment to support certain major enterprise customers. The wireline segment capital expenditure intensity ratios of 18.7% and 18.5%, respectively, for the fourth quarter and full year of 2005, compared with 17.9% and 19.8%, respectively, in the same periods in 2004. The work stoppage delayed expenditures into the fourth quarter of 2005, but were lower than originally planned for the full year. Cash flow (EBITDA less capital expenditures) decreased by 4.7% to $938.1 million in 2005, when compared to 2004, due to lower EBITDA. - Wireless segment capital expenditures increased by $21.3 million in the fourth quarter of 2005, when compared with the same period in 2004, as the third quarter of 2005 included a deferral of network capital expenditures related to the labour disruption. Increased capital expenditures of $50.1 million for the full year of 2005 were attributed to strategic investments in next-generation EVDO-capable wireless network technology and continued enhancement of digital wireless capacity and coverage. Capital expenditure intensity for the wireless segment was 16.3% in the fourth quarter of 2005 and 16.1% in the fourth quarter of 2004 due to high quarterly expenditure levels in both periods. Capital expenditure intensity for the full year of 2005 was 12.2% as compared with 12.5% for the same period in 2004 as growth capital expenditures paralleled growth in revenues. Wireless segment EBITDA generated cash flows (EBITDA less capital expenditures) were $181.6 million in the fourth quarter of 2005. Wireless cash flow in 2005 exceeded wireline cash flow for the first time on a full year basis, increasing by 31.8% over 2004 to a wireless segment record $1,038.2 million. For the fourth quarter of 2005, TELUS' EBITDA less capital expenditures(see Section 11.1 EBITDA for the calculation) decreased by 14.9% to$360.3 million, when compared with 2004 due to increased capital expendituresand lower EBITDA. For the full year of 2005, TELUS' EBITDA less capitalexpenditures increased by 11.6% to $1,976.3 million in 2005, when comparedwith 2004, as a result of higher EBITDA. 7.3 Cash provided (used) by financing activities ------------------------------------------------------------------------- Quarters ended Years ended ($ millions) December 31 December 31 2005 2004 Change 2005 2004 Change ------------------------------------------------------------------------- (1,742.8) 3.3 n. m. (2,447.3) (348.3) n. m. ------------------------------------------------------------------------- Cash used by financing activities increased significantly in the fourthquarter and full year of 2005, when compared with the same periods in 2004,primarily due to the early redemption on December 1, 2005, of the remaining$1.578 billion of 7.50%, Series CA, Notes, as well as purchases of sharesunder Normal Course Issuer Bids. Financing activities included: - Proceeds from Common Shares and Non-Voting Shares issued were $19.1 million and $219.4 million, respectively for the fourth quarter and full year of 2005, a decrease of $58.9 million from the fourth quarter of 2004 and an increase of $70.6 million when compared with full year of 2004. The decrease for the quarter was mainly due to lower proceeds from share purchases for employee share plans, as TELUS now purchases these shares in the market, rather than issue shares from treasury. The increase for the full year was mainly due to the exercise of options and warrants in 2005, partly offset by lower proceeds from share purchases for employee share plans. In addition, during the second quarter of 2005, convertible debentures with a principal value of $131.7 million were converted into approximately 3.3 million Non-Voting Shares. Due to the non-cash nature of these transactions, the conversions are shown as balance sheet adjustments and are not included in the financing activities of the cash flow statements. - Cash dividends paid to shareholders were $96.6 million and $312.2 million, respectively, for the fourth quarter and full year of 2005, representing a decrease of $16.1 million from the fourth quarter of 2004 and an increase of $63.5 million when compared with the full year of 2004. The primary reason for the decrease in the quarter was due to the fact that in 2004, both third quarter and fourth quarter declared dividends were remitted in the fourth quarter period, while in 2005, only the fourth quarter declared dividend was remitted in the fourth quarter period. The increase for the full year arose principally from the declaration of higher per share dividends in 2005 when compared with 2004, as well as the purchase of dividend reinvestment plan shares in the market rather than issuing shares from treasury. Dividends declared were 27.5 cents per share and 87.5 cents per share, respectively, for the fourth quarter and full year of 2005, compared with 20 cents per share and 65 cents per share, respectively, in the same periods in 2004. - Under the first Normal Course Issuer Bid (NCIB) program that was initiated on December 20, 2004 and expired on December 19, 2005, TELUS purchased for cancellation approximately 73% of the maximum 14 million Common Shares permitted and 100% of the maximum 11.5 million Non-Voting Shares permitted. The $912.6 million total outlay under this program was comprised of a $369.5 million reduction to share capital representing the book value of shares repurchased, and a $543.1 million reduction to retained earnings representing the amount in excess of book value. During the fourth quarter 2005 until expiry of the program, TELUS purchased for cancellation approximately 1.9 million Common Shares and approximately 1.9 million Non-Voting Shares for an outlay of $171.1 million, which was comprised of a $65.0 million reduction to share capital and a $106.1 million reduction to retained earnings. On December 16, 2005, TELUS announced that a new NCIB program was accepted by the Toronto Stock Exchange (TSX). Under the new program, TELUS may purchase for cancellation over a 12-month period up to 12 million of its outstanding Common Shares and up to 12 million of its outstanding Non-Voting Shares, representing approximately 6.5% and 7.2%, respectively, of the public float on the date of the announcement. The new program became effective on December 20, 2005, and will expire on December 19, 2006. By December 31, 2005, TELUS had purchased for cancellation under this new program approximately 634,000 Common Shares and 608,000 Non-Voting Shares. The $57.5 million outlay under the new program was comprised of a $20.9 million reduction to share capital and a $36.6 million reduction to retained earnings. The following tables enumerate the shares repurchased and costs underthese programs for 2005 and cumulatively. ------------------------------------------------------------------------- Normal Course Issuer Bid Programs - shares ------------------------------------------------------------------------- Shares First program repurchased for beginning Dec. 20, 2004 and cancellation ending Dec. 19, 2005 ------------------------------------------------------------------------- In 2005 Total for Percentage program of duration maximum permitted ------------------------------------------------------------------------- Common 9,503,300 10,259,011 73.3 % Non-Voting 10,048,600 11,500,000 100.0 % ------------------------------------------------------------------------- 19,551,900 21,759,011 85.3 % ------------------------------------------------------------------------- ------------------------------------------------------------------------- Normal Course Issuer Bid Programs - shares ------------------------------------------------------------------------- Shares Second program repurchased for beginning Dec. 20, 2005 cancellation ------------------------------------------------------------------------- In 2005 Maximum Percentage shares of permitted maximum for permitted repurchase ------------------------------------------------------------------------- Common 634,469 12,000,000 5.3 % Non-Voting 607,700 12,000,000 5.1 % ------------------------------------------------------------------------- 1,242,169 24,000,000 5.2 % ------------------------------------------------------------------------- ------------------------------------------------------------- Normal Course Issuer Bid Programs - shares ------------------------------------------------------------- Shares Total of both programs repurchased for cancellation ------------------------------------------------------------- In 2005 Cumulative (1) ------------------------------------------------------------- Common 10,137,769 10,893,480 Non-Voting 10,656,300 12,107,700 ------------------------------------------------------------- 20,794,069 23,001,180 ------------------------------------------------------------- ------------------------------------------------------------------------- Normal Course Issuer Bid programs - cost ------------------------------------------------------------------------- Outlay First program ($ millions) beginning Dec. 20, 2004 and ending Dec. 19, 2005 ------------------------------------------------------------------------- In 2005 Total for program duration ------------------------------------------------------------------------- Reduction of: Share capital 330.1 369.5 Retained earnings 504.5 543.1 ------------------------------------------------------------------------ 834.6 912.6 ------------------------------------------------------------------------ ------------------------------------------------------------------------- Normal Course Issuer Bid programs - cost ------------------------------------------------------------------------- Outlay Second program ($ millions) beginning Dec. 20, 2005 ------------------------------------------------------------------------ In 2005 ------------------------------------------------------------------------ Reduction of: Share capital 20.9 Retained earnings 36.6 ------------------------------------------------------------------------ 57.5 ------------------------------------------------------------------------ ------------------------------------------------------------- Normal Course Issuer Bid programs - cost ------------------------------------------------------------- Outlay Total of both programs ($ millions) ------------------------------------------------------------- In 2005 Cumulative (1) ------------------------------------------------------------- Reduction of: Share capital 351.0 390.4 Retained earnings 541.1 579.7 ------------------------------------------------------------- 892.1 970.1 ------------------------------------------------------------- (1) From December 20, 2004 to December 31, 2005 ------------------------------------------------------------- - Long-term debt issued in the fourth quarter of 2005 was comprised of a draw of $142 million against TELUS' three-year facility. The balance of long-term debt issued during the year was capital leases. Repayments consisted of the early redemption of $1.578 billion Canadian dollar Notes described earlier, and the June 16, 2005 redemption of convertible debentures not converted into Non-Voting Shares, of $17.9 million. - In 2004, the redemption of all of the publicly held TELUS Communications Inc. Preference and Preferred Shares was completed in the third quarter for an outlay of $72.8 million. - In 2004, TELUS received $114.8 million from Verizon, part of the $148.1 million (US $125 million) received when the independent Directors of TELUS agreed to facilitate the divestiture by Verizon of its entire 20.5% equity interest in TELUS. - Long-term debt issues in 2004 were primarily bank facilities that were repaid. Debt redemptions in 2004 included $189.5 million of TELUS Communications Inc. Series A Debentures and $20 million of TELUS Communications Inc. Medium-term Notes. 7.4 Liquidity and capital resource measures ------------------------------------------------------------------------- Years ended December 31 2005 2004 Change ------------------------------------------------------------------------- Components of debt and coverage ratios (1) --------------------- Net debt ($ millions) 5,794.4 6,477.7 (683.3) Total capitalization - book value ($ millions) 12,690.0 13,516.4 (826.4) EBITDA excluding restructuring ($ millions) 3,349.2 3,143.2 206.0 Net interest cost ($ millions) 623.1 613.3 (9.8) Debt ratios ------------ Fixed rate debt as a proportion of total indebtedness (%) 97.6 93.2 4.4 Average term to maturity of debt (years) 5.4 5.4 - Net debt to total capitalization (%)(1) 45.7 47.9 (2.2) Net debt to EBITDA (1) 1.7 2.1 (0.4) Coverage ratios (1) ------------------- Interest coverage on long-term debt 2.5 2.3 0.2 EBITDA interest coverage 5.4 5.1 0.3 Other measures -------------- Free cash flow ($ millions)(2) 1,465.5 1,297.3 168.2 Dividend payout ratio (%)(1) 56 51 5 ------------------------------------------------------------------------- (1) See Section 11.4 Definition of liquidity and capital resource measures. (2) See Section 11.2 Free cash flow. ------------------------------------------------------------------------- Net debt decreased at the end of 2005, when compared to 2004, due toearly redemption of Notes and the conversion and redemption of convertibledebentures in 2005, partly offset by the use of cash and temporary investments(cash is netted against debt for the purposes of this calculation). Theproportion of fixed-rate debt increased when TELUS terminated swap agreementsconcurrent with the early redemption of Notes. Total capitalization alsodecreased for these reasons as well as a decrease in common equity dueprimarily to share repurchases under normal course issuer bids. The net debtto EBITDA ratio measured at December 31, 2005 improved significantly, whencompared with one year earlier, as a result of debt reduction and an increasein 12-month trailing EBITDA excluding restructuring. Interest coverage on long-term debt improved because of increased incomebefore interest and taxes, partly offset by higher interest expense. TheEBITDA interest coverage ratio improved by 0.3 as a result of higher EBITDAexcluding restructuring, and decreased by 0.1 due to higher interest. Freecash flow measure for 2005 increased, when compared with 2004, primarilybecause of improved EBITDA, lower payments under restructuring programs andhigher interest received, partly offset by lower cash tax recoveries andhigher interest paid. The dividend payout ratio for 2005 exceeded the targetguideline of 45 to 55% of reported net earnings primarily as a result of thetemporary expenses associated with the work stoppage and the loss on debtredemption. The dividend payout ratio for 2005, excluding these two items, wasapproximately 48%. Long-term guidelines for certain TELUS' liquidity measures, as defined inSection 11.4 Definition of liquidity and capital resource measures, are: - Net debt to total capitalization of 45 to 50% - Net debt to EBITDA of 1.5:1 to 2.0:1 - Dividend payout ratio of 45 to 55% of sustainable net earnings. 7.5 Credit facilities TELUS arranged new credit facilities in May 2005 to replace $1.6 billionof prior credit facilities. The prior 364-day facility, which was due toexpire, and a term facility with three years remaining to maturity werereplaced with a new three-year facility due in May 2008 and a longer maturityfive-year term facility due in May 2010. The new credit facilities have nosubstantial changes in terms and conditions, other than reduced pricing andthe extension of term, which reflect favourable market conditions and TELUS'strong financial position. TELUS had unutilized available liquidity in excess of $1.4 billion atDecember 31, 2005. ------------------------------------------------------------------------- Credit Facilities Outstanding At December 31, 2005 undrawn letters ($ in millions) Expiry Size Drawn of credit ------------------------------------------------------------------------- Five-year revolving facility(1) May 4, 2010 800.0 - - Three-year revolving facility(1) May 7, 2008 800.0 142.0 100.6 Other bank facilities - 74.0 - 7.3 ------------------------------------------------------------------------- Total - 1,674.0 142.0 107.9 ------------------------------------------------------------------------- (1) Canadian dollars or U.S. dollar equivalent. ------------------------------------------------------------------------- TELUS' credit facilities contain customary covenants including arequirement that TELUS not permit its consolidated Leverage Ratio (Funded Debtto trailing 12-month EBITDA) to exceed 4.0:1 (approximately 1.7:1 atDecember 31, 2005) and not permit its consolidated Coverage Ratio (EBITDA toInterest Expense on a trailing 12-month basis) to be less than 2.0:1(approximately 5.6:1 at December 31, 2005) at the end of any financialquarter. There are certain minor differences in the calculation of theLeverage Ratio and Coverage Ratio under the credit agreement as compared withthe calculation of net debt to EBITDA and EBITDA interest coverage. Thecalculations are not materially different. The covenants are not impacted byrevaluation of capital assets, intangible assets and goodwill for accountingpurposes, and continued access to TELUS' credit facilities is not contingenton the maintenance by TELUS of a specific credit rating. 7.6 Accounts receivable sale TELUS Communications Inc., a wholly owned subsidiary of TELUS, is able tosell an interest in certain of its receivables up to a maximum of $650 millionand is required to maintain at least a BBB (low) credit rating by DominionBond Rating Service (DBRS), or the purchaser may require the sale program tobe wound down. The necessary credit rating was exceeded by three levels atA (low) as of February 15, 2006. The proceeds of securitized receivablesincreased from $150 million to $500 million on November 30, 2005. The balanceof proceeds from securitized receivables was reduced on January 31, 2006 to$325 million. 7.7 Credit ratings During 2005, each of the four credit rating agencies that cover TELUSincreased their investment grade ratings for the Company's debt instruments.On June 27, Moody's Investors Services Inc. increased its rating for TELUSCorporation Notes from Baa3 with a positive outlook to Baa2 with a stableoutlook. On September 27, Standard and Poors (S&P) raised its ratings forlong-term corporate credit and senior unsecured debt of TELUS Corporation andTCI from BBB to BBB+, while revising the outlook to stable. On October 18,Fitch Ratings upgraded its long-term BBB ratings for TELUS and TCI to BBB+with a stable outlook. On October 24, DBRS upgraded its BBB rating for TELUSCorporation Notes and its BBB (high) ratings for TCI to BBB (high) andA (low), respectively, while the trend was revised to stable. TELUS has an objective to preserve access to capital markets at areasonable cost by maintaining and improving investment grade credit ratingsin the range of BBB+ to A-, or the equivalent. ------------------------------------------------------------------------- Credit rating summary DBRS(1) S&P(1) Moody's(1) Fitch(1) ------------------------------------------------------------------------- TELUS Corporation Senior bank debt - - - BBB+ Notes BBB (high) BBB+ Baa2 BBB+ TELUS Communications Inc. Debentures A (low) BBB+ - BBB+ Medium-term Notes A (low) BBB+ - BBB+ First mortgage bonds A (low) A- - - ------------------------------------------------------------------------- (1) Outlook or trend stable ------------------------------------------------------------------------- 7.8 Off-balance sheet arrangements, commitments and contingent liabilities Financial instruments The Company's financial instruments consist of cash and temporaryinvestments, accounts receivable, investments accounted for using the costmethod, accounts payable, restructuring and workforce reduction accountspayable, dividends payable, short-term obligations, long-term debt, interestrate swap agreements, restricted stock unit compensation cost hedges, andforeign exchange hedges. The Company uses various financial instruments, the fair values of somewhich are not reflected on the balance sheets, to reduce or eliminate exposureto interest rate and foreign currency risks and to reduce or eliminateexposure to increases in the compensation cost arising from specified grantsof restricted stock units. These instruments are accounted for on the samebasis as the underlying exposure being hedged. The majority of theseinstruments, from a notional amount view, which were newly added during 2001,pertain to TELUS' U.S. dollar borrowing. Use of these instruments is subjectto a policy, which requires that no derivative transaction be effected for thepurpose of establishing a speculative or a levered position, and sets criteriafor the credit worthiness of the transaction counterparties. Counterparties to the Company's interest rate swap agreements and foreignexchange hedges are major financial institutions that have all been accordedinvestment grade ratings by a primary rating agency. The dollar amount ofcredit exposure under contracts with any one financial institution is limitedand counterparties' credit ratings are monitored. The Company does not give orreceive collateral on swap agreements and hedges due to its credit rating andthose of its counterparties. While the Company is exposed to credit losses dueto the nonperformance of its counterparties, the Company considers the risk ofthis remote; if all counterparties were not to perform, the pre-tax effectwould be limited to the value of any deferred hedging asset. Price risk - currency: The Company is exposed to currency risks arisingfrom fluctuations in foreign exchange rates on its U.S. Dollar denominatedlong-term debt. Currency hedging relationships have been established for therelated semi-annual interest payments and principal payments at maturity. The Company's foreign exchange risk management also includes the use offoreign currency forward contracts to fix the exchange rates on short-termforeign currency transactions and commitments. Hedge accounting is applied tothese short-term foreign currency forward contracts on an exception basisonly. As at December 31, 2005, the Company had entered into foreign currencyforward contracts that have the effect of fixing the exchange rates onU.S. $47.0 million of fiscal 2006 purchase commitments; hedge accounting hasbeen applied to these foreign currency forward contracts, all of which relateto the wireless segment. Fair value: The carrying value of cash and temporary investments,accounts receivable, accounts payable, restructuring and workforce reductionaccounts payable, dividends payable and short-term obligations approximatestheir fair values due to the immediate or short-term maturity of thesefinancial instruments. The carrying values of the Company's investmentsaccounted for using the cost method would not exceed their fair values. The fair values of the Company's long-term debt are estimated based onquoted market prices for the same or similar issues or on the current ratesoffered to the Company for debt of the same maturity as well as the use ofdiscounted future cash flows using current rates for similar financialinstruments subject to similar risks and maturities. The fair values of theCompany's derivative financial instruments used to manage exposure to interestrate and currency risks are estimated similarly. The carrying amount and fairvalue of long-term debt are as follows: ------------------------------------------------------------------------- As at As at December 31, 2005 December 31, 2004 Carrying Fair Carrying Fair ($ millions) amount value amount value ------------------------------------------------------------------------- Long-term debt Principal 4,644.9 5,371.6 6,345.3 7,342.3 Derivative financial instruments used to manage interest rate and currency risks associated with U.S. dollar denominated debt (Hedging item maximum maturity date: June 2011) 1,154.3 1,470.5 1,032.6 1,299.5 Derivative financial instruments used to manage interest rate risk associated with Canadian dollar denominated debt - - - 1.3 ------------------------------------------------------------------------- 5,799.2 6,842.1 7,377.9 8,643.1 ------------------------------------------------------------------------- Commitments and contingent liabilities The Company has $57.1 million in outstanding commitments for itsrestructuring programs as at December 31, 2005, of which $15.1 million relatesto programs initiated prior to 2005. In addition, the Company disclosed in itstargets for 2006 that it expected to record approximately $100 million ofrestructuring and employee reduction costs in 2006. See Forward-lookingstatements at the beginning of Management's discussion and analysis. In accordance with CRTC Price Cap Decisions 2002-34 and 2002-43, theCompany defers a portion of revenues in a deferral account, which atDecember 31, 2005 was $158.7 million. Due to the Company's use of theliability method of accounting for the deferral account, the CRTC Decision2005-6, as it relates to the Company's provision of Competitor Digital Networkservices, is not expected to affect the Company's revenues. To the extent thatthe CRTC Decision 2005-6 requires the Company to provide discounts onCompetitor Digital Network services, both for current and prior periods, theCompany draws down the deferral account by an offsetting amount. For the yearended December 31, 2005, the Company drew down the deferral account by$50.5 million in respect of discounts on Competitor Digital Network services. The Company's known contractual obligations at December 31, 2005, arequantified in the following table. ------------------------------------------------------------------------- Long-term debt maturities ------------------- Other All except long-term Purchase capital Capital liabil- Operating obliga- ($ millions) leases leases ities leases tions Total ------------------------------------------------------------------------- 2006 1.8 3.2 17.9 177.2 380.1 580.2 2007 1,869.9 3.5 28.4 155.7 160.1 2,217.6 2008 144.2 3.3 17.8 139.3 106.1 410.7 2009 0.7 0.8 17.1 126.7 44.9 190.2 2010 80.0 1.7 16.9 112.7 10.1 221.4 Thereafter 3,716.5 - 140.1 476.7 34.6 4,367.9 ------------------------------------------------------------------------- Total 5,813.1 12.5 238.2 1,188.3 735.9 7,988.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Canadian generally accepted accounting principles require the disclosureof certain types of guarantees and their maximum, undiscounted amounts. Themaximum potential payments represent a "worst-case scenario" and do notnecessarily reflect results expected by the Company. Guarantees requiringdisclosure are those obligations that require payments contingent on specifiedtypes of future events. In the normal course of its operations, the Companyenters into obligations that GAAP may consider to be guarantees. As defined byCanadian GAAP, guarantees subject to these disclosure guidelines do notinclude guarantees that relate to the future performance of the Company. As atDecember 31, 2005, the Company has no liability recorded in respect ofperformance guarantees, and $0.5 million (December 31, 2004 - $1.0 million)recorded in respect of lease guarantees. The maximum undiscounted guaranteeamounts as at December 31, 2004, without regard for the likelihood of havingto make such payment, were not significant. In the normal course of operations, the Company may provideindemnification in conjunction with certain transactions. The term of theseindemnification obligations range in duration and often are not explicitlydefined. Where appropriate, an indemnification obligation is recorded as aliability. In many cases, there is no maximum limit on these indemnificationobligations and the overall maximum amount of the obligations under suchindemnification obligations cannot be reasonably estimated. Other thanobligations recorded as liabilities at the time of the transaction,historically the Company has not made significant payments under theseindemnifications. In connection with its 2001 disposition of TELUS' directory business, theCompany agreed to bear a proportionate share of the new owner's increaseddirectory publication costs if the increased costs were to arise from a changein the applicable CRTC regulatory requirements. The Company's proportionateshare would be 80% through May 2006, declining to 40% in the next five-yearperiod and then to 15% in the final five years. As well, should the CRTC takeany action that would result in the owner being prevented from carrying on thedirectory business as specified in the agreement, TELUS would indemnify theowner in respect of any losses that the owner incurred. As at December 31,2005, the Company has no liability recorded in respect of indemnificationobligations. A number of claims and lawsuits seeking damages and other relief arepending against the Company. It is impossible at this time for the Company topredict with any certainty the outcome of such litigation. However, managementis of the opinion, based upon legal assessment and information presentlyavailable, that it is unlikely that any liability, to the extent not providedfor through insurance or otherwise, would be material in relation to theCompany's consolidated financial position, excepting items disclosedpreviously. Pay equity As a term of the settlement between TELUS Communications Inc. and theTelecommunications Workers Union (TWU) that resulted in the collectiveagreement effective November 20, 2005, and subject to acceptance by theCanadian Human Rights Commission of the settlement and closure of its file onthis complaint, the parties have agreed to settle this complaint without anyadmission of liability, on the basis that the Company will establish a payequity fund of $10 million to be paid out during the term of the newcollective agreement and the TWU will withdraw and discontinue this complaint.On December 21, 2005, the TWU withdrew and discontinued this complaint. OnJanuary 10, 2006, the Canadian Human Rights Commission advised the Companythat its investigator had recommended no further proceedings in thiscomplaint; however, the Company is awaiting the Canadian Human RightsCommission's decision in this regard. Should the Canadian Human RightsCommission refuse consent or the complaint continue for any other reason andits ultimate resolution differ from management's assessment and assumptions, amaterial adjustment to the Company's financial position and the results of itsoperations could result. 7.9 Outstanding share information The following is a summary of the outstanding shares for each class ofequity at December 31, 2005 and at January 31, 2006. In addition, forJanuary 31, 2006, the total number of outstanding and issuable shares ispresented, assuming full conversion of options. Issuable shares at January 31,2006 include shares held in reserve, but not issued. ------------------------------------------------------------------------- Class of equity security Common Non-Voting Total Shares Shares Shares (millions of shares) outstanding outstanding outstanding ------------------------------------------------------------------------- At December 31, 2005 Common equity - Common Shares outstanding 183.5 - 183.5 Common equity - Non-Voting Shares outstanding - 166.6 166.6 ---------- ---------- ---------- 183.5 166.6 350.1(1) ---------- ---------- ---------- At January 31, 2006 Common equity - Common Shares outstanding 183.5 - 183.5 Common equity - Non-Voting Shares outstanding - 166.9 166.9 ---------- ---------- ---------- 183.5 166.9 350.4 ---------- ---------- ---------- Outstanding and issuable shares(2) at January 31, 2006 Common Shares and Non-Voting Shares outstanding 183.5 166.9 350.4 Options 1.5 21.8 23.3 ---------- ---------- ---------- 185.0 188.7 373.7 ---------- ---------- ---------- ---------- ---------- ---------- ------------------------------------------------------------------------- (1) For the purposes of calculating diluted earnings per share for the fourth quarter of 2005, the number of shares was 358.1 million. (2) Assuming full conversion and ignoring exercise prices. ------------------------------------------------------------------------- 8. Critical accounting estimates and accounting policy developments 8.1 Critical accounting estimates TELUS' significant accounting policies are described in Note 1 of itsannual Consolidated financial statements. The preparation of financialstatements in conformity with generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amountsof revenues and expenses during the reporting period. Actual results coulddiffer from those estimates. In 2005, as a result of reaching a new five-yearcollective agreement with the TWU, the Company revised estimates that had beenmade over a period of years, resulting in a revision of accruals for payrolland other employee-related liabilities. 8.2 Accounting policy developments Possibly, commencing with the Company's 2006 fiscal year, proposedamendments to the recommendations of the Canadian Institute of CharteredAccountants (CICA) for the calculation and disclosure of earnings per share(CICA Handbook Section 3500) may apply to the Company. The proposed amendmentsare not expected to materially impact the Company. Commencing with the Company's 2006 fiscal year, the amendedrecommendations of the CICA for measurement of non-monetary transactions (CICAHandbook Section 3830) will apply to the Company. The amended recommendationswill result in non-monetary transactions normally being measured at their fairvalues, unless certain criteria are met. The Company's current operations arenot materially affected by the amended recommendations. In early 2006, Canada's Accounting Standards Board ratified a strategicplan that will result in Canadian GAAP, as used by public companies, beingconverged with International Financial Reporting Standards over a transitionalperiod. During 2006, the Accounting Standards Board is expected to develop andpublish a detailed implementation plan with a transition period expected to beapproximately five years. As this convergence initiative is very much in itsinfancy as of the date of these Consolidated financial statements, it would bepremature to currently assess the impact of the initiative on the Company. 9. Looking forward to 2006 The following discussion is qualified in its entirety by theForward-looking statements at the beginning of Management's discussion andanalysis. 9.1 Financial and operating targets for 2006 The following targets for 2006 were announced to the public onDecember 16, 2005. The Company has a practice of reaffirming or adjustingannual guidance on a quarterly basis. ------------------------------------------------------------------------- Targets for 2006 Results for 2005 Change ------------------------------------------------------------------------- Consolidated Revenues $8.6 to $8.7 billion $8.14 billion 6 to 7% ------------------------------------------------------------------------- EBITDA(1) $3.5 to $3.6 billion $3.30 billion 6 to 9% ------------------------------------------------------------------------- Earnings per share - basic $2.40 to $2.60 $1.96 22 to 33% ------------------------------------------------------------------------- Capital expenditures $1.5 to $1.55 billion $1.32 billion 14 to 17% ------------------------------------------------------------------------- Free cash flow(2) $1.55 to $1.65 billion $1.47 billion 5 to 12% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Wireline segment Revenue (external) $4.825 to $4.875 billion $4.85 billion (1) to 1% ------------------------------------------------------------------------- Non-ILEC revenue $650 to $700 million $632 million 3 to 11% ------------------------------------------------------------------------- EBITDA $1.8 to $1.85 billion $1.85 billion (3) to 0% ------------------------------------------------------------------------- Non-ILEC EBITDA $25 to $40 million $21 million 18 to 89% ------------------------------------------------------------------------- Capital expenditures $1.05 to $1.1 billion $914 million 15 to 20% ------------------------------------------------------------------------- High-speed Internet net additions More than 100,000 73,400 More than 36% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Wireless segment Revenue (external) $3.775 to $3.825 billion $3.30 billion 14 to 17% ------------------------------------------------------------------------- EBITDA $1.7 to $1.75 billion $1.44 billion 18 to 22% ------------------------------------------------------------------------- Capital expenditures Approx. $450 million $405 million Approx. 11% ------------------------------------------------------------------------- Wireless subscriber net additions More than 550,000 584,300 (6)% or better ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) See Section 11.1 Earnings before interest, taxes, depreciation and amortization (EBITDA) for the definition, calculation and reconciliation of 2004 EBITDA. (2) See Section 11.2 Free cash flow for the definition, calculation and reconciliation of 2004 Free cash flow. ------------------------------------------------------------------------- For the wireline segment, 2006 EBITDA is expected to be flat to a declineof $50 million, resulting from increased restructuring costs partially offsetby continued operating efficiencies. Wireline revenue growth in thenon-incumbent territory in Central Canada is expected to increase in the rangeof $18 million to $68 million in 2006, while targeting another strong increasein EBITDA. For the wireless segment, 2006 EBITDA is expected to increase by $260 to$310 million as a result of a 14 to 17% increase in revenues, continuedeconomies of scale, cost containment and continued strong growth in wirelesssubscribers. The 22 to 33% growth rate for earnings per share is being generated notonly by higher operating profitability, but also by lower financing costs as aconsequence of reduced debt levels. The significant growth in earnings pershare is despite expectations for higher restructuring costs in 2006. Inaddition, the 2005 earnings included 18 cents of positive impacts from thesettlement of prior year tax matters, which are not projected to reoccur in2006 to the same magnitude. Key assumptions and sensitivities for 2006 targets For 2006 target purposes, a number of assumptions were made including: - Economic growth consistent with recent provincial and national estimates by the Conference Board of Canada that were available in 2005, including gross domestic product growth of 3.1% in Canada - Increased wireline competition in both business and consumer markets - A wireless industry market penetration gain similar to the approximately five percentage point gain in 2005 - Approximately $100 million restructuring and workforce reduction expenses ($53.9 million in 2005) - Effective tax rate of approximately 35% - No prospective significant acquisitions or divestitures are reflected - No change in foreign ownership rules - Maintenance or improvement of investment-grade credit ratings. Earnings per share, cash balances, net debt and common equity may beaffected by the potential purchases of up to 24 million TELUS shares under theNormal Course Issuer Bid that was accepted by the Toronto Stock Exchange andcommenced December 20, 2005. There is no assurance that these assumptions orthe 2006 financial and operating targets and projections will turn out to beaccurate. 9.2 Financing plan for 2006 TELUS has no significant amount of debt maturing in 2006. TELUS'financing plan is to use free cash flow generated by its business operationsin 2006 to: (i) repurchase TELUS Common Shares and Non-Voting Shares under theNormal Course Issuer Bid; (ii) pay dividends; and (iii) retain cash-on-handfor corporate purposes. The balance of $142 million of utilized bankfacilities was repaid on January 9, 2006. The balance of proceeds fromsecuritized receivables was reduced by $175 million on January 31, 2006 to$325 million. The Company expects to increase and reduce the balance ofproceeds from securitized receivables and use bank facilities, as needed, tomeet any other cash requirements. TELUS also expects to maintain its current position of fully hedging itsforeign exchange exposure for indebtedness and generally expects to maintain aminimum of $1 billion in unutilized liquidity. At the end of 2005, almost allof TELUS' total debt was borrowed on a fixed-rate basis. TELUS may also consider refinancing all or a portion of its Notes dueJune 1, 2007 in advance of the regularly scheduled maturity date. These USdollar denominated liabilities were fully hedged into Canadian dollarliabilities at the time of issue and TELUS may also terminate or restructurethese swap arrangements prior to maturity. Potential sources for therefinancing of these Notes may include retained cash from operations as wellas public long-term debt and short-term debt such as commercial paper. For therelated risk and risk management discussion, see Section 10.7 Financing anddebt requirements. 10. Risks and risk management The following are significant updates to the risks and uncertaintiesdescribed in TELUS' 2004 Annual Report and the first, second and third quarterinterim 2005 Management's discussions and analysis. 10.1 Regulatory Disposition of funds in the deferral accounts (Telecom Decision CRTC 2006-9) On February 16, 2006, the CRTC issued a long-awaited decision on the useof funds in the deferral account. In its decision, the CRTC determined thatinitiatives to expand broadband services to rural and remote communities andinitiatives to improve accessibility to telecommunications services forindividuals with disabilities are an appropriate use of funds for the ILECdeferral accounts. To the extent that the accumulated deferral account exceedsapproved initiatives, the remaining balance will be distributed in the form ofa one-time rebate to local non-high cost serving area residential customers.Finally, the CRTC indicated that prospectively no further amounts are to beadded to the deferral account and are to be dealt with via prospectiveresidential local rate reductions. Given the complexity of this decision and remaining outstanding issues,management is currently analyzing the decision to determine what overallimpact it may have to TELUS. Extension of the price regulation regime (Telecom Decisions CRTC 2005-69 and CRTC 2005-70) In Decisions 2005-69 and 2005-70, the Commission extended the currentprice cap period, which was scheduled to end in May 2006 (July 2006 for TELUSQuebec), by one year so that it will now end on May 31, 2007 (July 2007 forTELUS Quebec). The CRTC intends to undertake a price regulation review in2006. Leading up to the price regulation review, the CRTC is expected to issuedecisions on local regulatory forbearance and the deferral account, which areexpected to influence the price regulation review. The outcome of anyregulatory reviews, proceedings and other regulatory developments could have amaterial impact on TELUS' operating procedures, costs and revenues in thefuture. Implementation of wireless number portability (WNP) - Telecom Decision CRTC 2005-72 On December 20, 2005, the CRTC issued an implementation timetable forwireless number portability. The CRTC directed TELUS, Rogers Communicationsand Bell Canada to implement full number portability by March 14, 2007, in theprovinces of B.C., Alberta, Ontario and Quebec wherever wireline local numberportability is currently available. In other areas of the country wherewireline number portability is currently available, including the cities ofRegina and Saskatoon, TELUS, Rogers and Bell must implement porting-out byMarch 14, 2007, and porting-in no later than September 12, 2007. All otherwireless carriers must implement porting-out where wireline number portabilityis currently available by the March 14, 2007 date, and porting-in afterMarch 14, but before September 12, 2007. The implementation timetable inDecision 2005-72 is six months earlier than the implementation timetableproposed in an independent report from PricewaterhouseCoopers LLP. ThePricewaterhouseCoopers report was commissioned by the Canadian WirelessTelecommunications Association (CWTA), of which TELUS is a member. TELUS will do its best to meet the required implementation timetable;however, there can be no guarantee of achieving full implementation by thedates set out in the CRTC decision, despite the Company's best intention to doso. Implementation of wireless number portability may result in significantimplementation costs and administration costs, increased migration of networkaccess lines to wireless services, increased wireless subscriber monthlychurn, and additional wireless customer retention costs. TELUS believes thatsuch risks will be reduced by the Company's Future Friendly initiatives,commitment to exceptional client service, a strong brand and superior wirelineand wireless network quality. 10.2 Human Resources The outcome of outstanding collective bargaining in TELUS Quebec may result in increased costs, reduced productivity or work disruptions Two collective agreements in the TELUS Quebec region are open for renewalnegotiations in 2006. On December 31, 2005, the collective agreement betweenTELUS Quebec and the Syndicat Quebecois des employes de TELUS, coveringapproximately 993 office, clerical and technical and employees, expired. Asecond agreement, affecting approximately 523 professional and supervisoryemployees, between TELUS Quebec and the Syndicat des agents de maitrise deTELUS expires on March 31, 2006. There can be no assurance that the negotiatedcompensation expenses will be as planned, or that reduced productivity andwork disruptions will not occur as a result of or following thesenegotiations. Reliance on key personnel The success of TELUS is largely dependent on the abilities and experienceof its key employees. Competition for highly skilled and entrepreneurialmanagement and other key employees is intense in the communications industry.There can be no assurance that TELUS can retain its current key employees orattract and retain additional executive officers or key employees as needed.The loss of certain key employees, or deterioration in employee moraleresulting from organizational changes, unresolved collective agreements orongoing cost reductions could have an adverse impact upon TELUS' growth,business and profitability. Compensation at TELUS is designed to support its high performance cultureand is both market driven and performance based. This includes medium andlong-term performance incentives including variable incentive pay based onperformance at an individual, business unit, and organizational level; stockoptions, Restricted Share Units (RSUs), and the TELUS Employee Share Plan; aswell as a leading-edge benefits program which allows the tailoring of personalbenefits plans to suit individual needs. Long-term performance incentives forcertain key personnel include three-year vesting periods for options and RSUs.By ensuring TELUS' compensation remains competitive, TELUS is focusing onmaintaining the ability to attract and retain key personnel. 10.3 Business integration and internal reorganizations On November 24, 2005 TELUS Corporation announced the integration of thewireline and wireless segments of the business - formerly the TELUSCommunications and TELUS Mobility segments - into a single operatingstructure. This integration incorporates TELUS' customer facing businessunits, technology infrastructure and operations and shared services. There isno assurance that this integration will provide the benefits and efficienciesthat are planned and/or that there will not be significant difficulties incombining the two structures, which could result in a negative impact onoperating and financial results. 10.4 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 segmentof 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. Thiscustomer-focused project requires extensive system development and in itselfpresents implementation risks due to the complexity of the implementation taskand resource constraints. TELUS plans to implement this project in phases,beginning with the implementation of consumer accounts in Alberta, currentlyscheduled in the first half of 2006, followed by implementation of consumercustomer accounts in B.C. at a later date. There can be no assurance that thisundertaking will not negatively impact TELUS' customer service levels,competitive position and financial results. 10.5 Manmade and natural threats Vandalism TELUS has a number of publicly situated physical assets ranging frompublic payphones to network and telephone switch centres that could besubjected to vandalism. Using such factors as the importance of the asset, theexposure risks and the potential costs incurred should the asset be damaged,TELUS has implemented an array of physical and electronic barriers, andcontrols and monitoring systems to protect its assets. As an additional level of risk management, TELUS has a corporate securitygroup that continually investigates and evaluates the risks and, in co-operation with law enforcement and other external agencies, adjusts itsprotection to meet changing risks. Although TELUS has thorough physical assetsecurity planning processes, there can be no assurance that specific eventswill not impact TELUS operations and results. 10.6 Litigation and legal matters TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan Two statements of claim were filed in the Alberta Court of Queen's Benchon December 31, 2001, and January 2, 2002, respectively, by plaintiffsalleging to be either members or business agents of the TelecommunicationsWorkers Union. In one action, the three plaintiffs alleged to be suing onbehalf of all current or future beneficiaries of the TELUS Corporation PensionPlan and in the other action, the two plaintiffs allege to be suing on behalfof all current or future beneficiaries of the TELUS Edmonton Pension Plan. Thestatement of claim in the TELUS Corporation Pension Plan related action namedthe Company, certain of its affiliates and certain present and former trusteesof the TELUS

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