EX-99.2 3 a17-12213_1ex99d2.htm EX-99.2

Exhibit 99.2

 



 

TELUS CORPORATION

 

Management’s discussion and analysis

 

2017 Q1

 

 



 

Caution regarding forward-looking statements

 

This document contains forward-looking statements about expected events and the financial and operating performance of TELUS Corporation. The terms TELUS, the Company, we, us and our refer to TELUS Corporation and, where the context of the narrative permits or requires, its subsidiaries.

 

Forward-looking statements include any statements that do not refer to historical facts. They include, but are not limited to, statements relating to our objectives and our strategies to achieve those objectives, our targets, outlook, updates, our multi-year dividend growth program, and our multi-year share purchase program. Forward-looking statements are typically identified by the words assumption, goal, guidance, objective, outlook, strategy, target and other similar expressions, or future or conditional verbs such as aim, anticipate, believe, could, expect, intend, may, plan, predict, seek, should, strive and will.

 

By their nature, forward-looking statements are subject to inherent risks and uncertainties and are based on assumptions, including assumptions about future economic conditions and courses of action. These assumptions may ultimately prove to have been inaccurate and, as a result, our actual results or events may differ materially from our expectations expressed in or implied by the forward-looking statements. An update to our assumptions for 2017 is presented in Section 9 Update to assumptions in this Management’s discussion and analysis (MD&A).

 

Risks and uncertainties that could cause actual performance or events to differ materially from the forward-looking statements made herein and in other TELUS filings include, but are not limited to, the following:

 

·                  Competition including: our ability to continue to retain customers through an enhanced customer service experience, including through the deployment and operation of new wireless networks; the ability of industry competitors to successfully launch their respective platforms and to combine a mix of residential local voice over Internet protocol (VoIP), long distance, high-speed Internet access (HSIA) and, in some cases, wireless services under one bundled and/or discounted monthly rate, along with their existing broadcast or satellite-based TV services, the success of new products, new services and supporting systems, such as Internet of Things (IoT) services for Internet-connected devices; continued intense rivalry across all services among wireless and wireline telecommunications companies including new or rebranded entrants, cable-TV providers, other communications companies and over-the-top (OTT) services, which, among other things, places pressures on average revenue per subscriber unit per month (ARPU), cost of acquisition, cost of retention and churn for all services (wireless and wireline), as do customer usage patterns, flat-rate pricing trends for voice and data, inclusive rate plans for voice and data and increasing availability of Wi-Fi networks for data; mergers and acquisitions of industry competitors; pressures on high-speed Internet and TV ARPU and churn resulting from market conditions, government actions and customer usage patterns; residential and business network access line (NAL) losses; subscriber additions and retention volumes, and associated costs for wireless, TV and high-speed Internet services; and our ability to obtain and offer content on a timely basis across multiple devices on wireless and TV platforms at a reasonable cost.

 

·                  Technological substitution including: reduced utilization and increased commoditization of traditional wireline voice local and long distance services from impacts of OTT applications and wireless substitution, a declining overall market for paid TV services; the increasing number of households that have only wireless and/or Internet-based telephone services; continuation of wireless voice ARPU declines as a result of, among other factors, substitution to messaging and OTT applications; substitution to increasingly available Wi-Fi services from wireless services; and disruptive technologies such as OTT IP services that may displace our services.

 

·                  Technology including: subscriber demand for data that may challenge wireless networks and spectrum capacity levels in the future; our reliance on information technology and our need to understand and streamline our legacy systems; technology options, evolution paths and roll-out plans for wireless and wireline networks (including broadband initiatives, such as fibre to the premises (FTTP), wireless small-cell deployment, 5G wireless and availability of resources and ability to build out adequate broadband capacity); our reliance on wireless network access agreements, which have facilitated our deployment of wireless technologies; choice of suppliers and those suppliers’ ability to maintain and service their product lines, which could affect the success of upgrades to and evolution of technology that we offer (such as TELUS TV®, including Optik TV® and TELUS Satellite TV®); supplier concentration and market power for network equipment, TELUS TV and wireless handsets; the performance of wireless technology; our expected long-term need to acquire additional spectrum capacity through future spectrum auctions and from third parties to address increasing demand for data; deployment and operation of new wireline broadband networks at a reasonable cost and availability, and success of new products and services to be rolled out on such networks; network reliability and change management; and uncertainties around our strategy to replace certain legacy wireline networks, systems and services to reduce operating costs.

 

·                  Capital expenditure levels and potential outlays for spectrum licences in spectrum auctions or from third parties, due to: our broadband initiatives, including connecting more homes and businesses directly to fibre; our ongoing deployment of newer wireless technologies such as 5G; utilizing newly acquired spectrum; investments in network resiliency and reliability; subscriber demand for data; evolving systems and business processes; implementing efficiency initiatives; supporting large complex deals; and future wireless spectrum auctions held by Innovation, Science and Economic Development Canada (ISED). Our capital expenditure levels could be impacted if we do not achieve our targeted operational and financial results.

 

 

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·                  Regulatory decisions and developments including: the potential of government intervention to further increase wireless competition; the Canadian Radio-television and Telecommunications Commission (CRTC) review of the Wireless Code; the CRTC wireless wholesale services review, in which it was determined that the CRTC will regulate wholesale GSM-based domestic roaming rates and the setting of such rates charged to wireless service providers; future spectrum auctions (including limitations on established wireless providers, spectrum set-aside that favours certain carriers and other advantages provided to new and foreign participants, and the amount and cost of spectrum acquired); restrictions on the purchase, sale and transfer of spectrum licences; the undetermined long-term impact of the CRTC’s wireline wholesale services review; the potential impacts from the CRTC’s decision to require pro-rated refunds when customers terminate their services; the CRTC’s examination of the competitor quality of service regime; the CRTC’s examination of the regulatory framework for message relay service; the CRTC’s examination of next generation 9-1-1 services; the CRTC’s proposed phase-out of the local service subsidy regime and corresponding establishment of a broadband funding regime to support the enhancement of high speed Internet services focusing on underserved areas in Canada; the impact from the review of Canada’ cultural policies by the Minister of Canadian Heritage; vertical integration in the broadcasting industry resulting in competitors owning broadcast content services and timely and effective enforcement of related regulatory safeguards; the federal government’s stated intention to review the Broadcasting Act and Telecommunications Act as announced in the March 22, 2017 federal budget; and restrictions on non-Canadian ownership of TELUS Common Shares and the ongoing monitoring and compliance with such restrictions.

 

·                  Human resource matters including: recruitment, retention and appropriate training in a highly competitive industry, and the level of employee engagement.

 

·                  Process and business combination risks including: our reliance on legacy systems and ability to implement and support new products and services and business operations; our ability to implement effective change management for system replacements and upgrades, process redesigns and business integrations (such as our ability to successfully integrate acquisitions, complete divestitures or establish partnerships in a timely manner, and realize expected strategic benefits including following compliance with any regulatory orders), the risk that Manitoba Telecom Services Inc.’s postpaid wireless customers and dealers acquired by us from BCE Inc. may not be successfully migrated; the implementation of complex large enterprise deals that may be adversely impacted by available resources, system limitations and degree of co-operation from other service providers; our ability to successfully manage operations in foreign jurisdictions; information security and privacy breaches, including data loss or theft of data; intentional threats to our infrastructure and business operations; and real estate joint venture re-development risks.

 

·                  Ability to successfully implement cost reduction initiatives and realize planned savings, net of restructuring and other costs, without losing customer service focus or negatively affecting business operations. Examples of these initiatives are: our operating efficiency and effectiveness program to drive improvements in earnings before interest, income taxes, depreciation and amortization (EBITDA), including the expected benefits of the immediately vesting transformative compensation initiative; business integrations; business process outsourcing; offshoring and reorganizations, including any full-time equivalent (FTE) employee reduction programs; procurement initiatives; and real estate rationalization. Additional revenue and cost efficiency and effectiveness initiatives will continue to be assessed and implemented, as required.

 

·                  Financing and debt requirements including our ability to carry out financing activities and our ability to maintain investment grade credit ratings in the range of BBB+ or the equivalent.

 

·                  Ability to sustain our dividend growth program through 2019 and ability to sustain and complete our multi-year share purchase program through 2019. These programs may be affected by factors such as the competitive environment, economic performance in Canada, our earnings and free cash flow, our levels of capital expenditures and spectrum licence purchases, and regulatory decisions and developments. Quarterly dividend decisions are subject to assessment and determination by our Board of Directors (Board) based on the Company’s financial position and outlook. The share purchase program may be affected by a change in our intention to purchase shares, and the assessment and determination of our Board from time to time, based on the Company’s financial position and outlook, and the market price of TELUS shares. Consequently, there can be no assurance that these programs will be maintained through 2019.

 

·                  Taxation matters including: interpretation of complex tax laws by the tax authorities that may differ from our interpretations; changes in tax laws, including tax rates; tax expenses being materially different than anticipated; elimination of income tax deferrals through the use of different tax year-ends for operating partnerships and corporate partners; and tax collection authorities adopting more aggressive auditing practices.

 

·                  Litigation and legal matters including: our ability to successfully defend against investigations, regulatory proceedings, claims and lawsuits, including intellectual property infringement claims and class actions pending against us, as well as possible proceedings, intellectual property infringement claims and class actions based on consumer claims, data, privacy or security breaches and secondary market liability; and the complexity of legal compliance in domestic and foreign jurisdictions.

 

·                  Health, safety and the environment, including lost employee work time resulting from illness or injury, public concerns related to radio frequency emissions, environmental issues affecting our business including climate change, waste and waste recycling, risks relating to fuel systems on our properties, and changing government and public expectations regarding environmental matters and our responses.

 

·                  Business continuity events including: our ability to maintain customer service and operate our networks in the event of human error or human-caused threats, such as cyber attacks and equipment failures that could cause various degrees of network outages; supply chain disruptions; natural disaster threats; epidemics; pandemics; and the completeness and effectiveness of business continuity and disaster recovery plans and responses.

 

 

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·                  Economic growth and fluctuations including: the state of the economy in Canada, which may be influenced by economic and other developments outside of Canada including potential outcomes of yet unknown policies and actions of the incoming U.S. administration; future interest rates; inflation; unemployment levels; effects of low oil prices; effects of low business spending (such as reducing investments and cost structure); pension investment returns, funding and discount rates; and Canadian/U.S. dollar exchange rates.

 

These risks are described in additional detail in Section 9 General trends, outlook and assumptions and Section 10 Risks and risk management in our 2016 annual MD&A. That description is incorporated by reference in this cautionary statement but is not intended to be a complete list of the risks that could affect the Company.

 

Many of these factors are beyond our control or our current expectations or knowledge. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also have a material adverse effect on our financial position, financial performance, cash flows, business or reputation. Except as otherwise indicated in this document, the forward-looking statements made herein do not reflect the potential impact of any non-recurring or special items or any mergers, acquisitions, dispositions or other business combinations or transactions that may be announced or that may occur after the date of this document.

 

Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements in this document describe our expectations and are based on our assumptions as at the date of this document and are subject to change after this date. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements.

 

This cautionary statement qualifies all of the forward-looking statements in this document.

 

 

4



 

Management’s discussion and analysis

 

May 11, 2017

 

Contents

 

Section

 

Description

1. Introduction

 

1.1 Preparation of the MD&A
1.2 The environment in which we operate
1.3 Consolidated highlights

2. Core business and strategy

 

 

3. Corporate priorities for 2017

 

 

4. Capabilities

 

4.1 Principal markets addressed and competition
4.2 Operational resources
4.3 Liquidity and capital resources
4.4 Changes in internal control over financial reporting

5. Discussion of operations

 

5.1 General
5.2 Summary of consolidated quarterly results and trends
5.3 Consolidated operations
5.4 Wireless segment
5.5 Wireline segment

6. Changes in financial position

 

 

7. Liquidity and capital resources

 

7.1 Overview
7.2 Cash provided by operating activities
7.3 Cash used by investing activities
7.4 Cash provided by financing activities
7.5 Liquidity and capital resource measures
7.6 Credit facilities
7.7 Sale of trade receivables
7.8 Credit ratings
7.9 Financial instruments, commitments and contingent liabilities
7.10 Outstanding share information
7.11 Transactions between related parties

8. Accounting matters

 

8.1 Critical accounting estimates
8.2 Accounting policy developments

9. Update to assumptions

 

9.1 Telecommunications industry regulatory developments and proceedings

10. Risks and risk management

 

 

11. Definitions and reconciliations

 

11.1 Non-GAAP and other financial measures
11.2 Operating indicators

 

 

5



 

1.              Introduction

 

The forward-looking statements in this section, including estimates regarding economic growth, are qualified by the Caution regarding forward-looking statements at the beginning of this Management’s discussion and analysis (MD&A).

 

1.1 Preparation of the MD&A

 

The following sections are a discussion of the consolidated financial position and financial performance of TELUS for the three-month period ended March 31, 2017, and should be read together with TELUS’ March 31, 2017, condensed interim consolidated financial statements (subsequently referred to as the interim consolidated financial statements). The generally accepted accounting principles (GAAP) we use are the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Our interim consolidated financial statements comply with IFRS-IASB and Canadian GAAP and have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. Our use of the term IFRS in this MD&A is a reference to these standards. In our discussion, we also use certain non-GAAP financial measures to evaluate our performance, monitor compliance with debt covenants and manage our capital structure. These measures are defined, qualified and reconciled with their nearest GAAP measures in Section 11.1. All currency amounts are in Canadian dollars, unless otherwise specified.

 

Additional information relating to the Company, including our annual information form and other filings with securities commissions or similar regulatory authorities in Canada, is available on SEDAR (sedar.com). Our filings with the Securities and Exchange Commission in the United States, including Form 40-F, are available on EDGAR (sec.gov).

 

Our disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management on a timely basis, so that appropriate decisions can be made regarding public disclosure. This MD&A and the interim consolidated financial statements were reviewed by our Audit Committee and approved by our Board of Directors (our Board) for issuance on May 11, 2017.

 

In this MD&A, unless otherwise indicated, results for the first quarter of 2017 (three-month period ended March 31, 2017) are compared with results from the first quarter of 2016 (three-month period ended March 31, 2016).

 

1.2 The environment in which we operate

 

The success of our business and the challenges we face can best be understood with reference to the environment in which we operate, including broader economic factors that affect our customers and us, and the competitive industry in which we operate. Our estimates regarding our environment also form an important part of the assumptions on which our targets are based.

 

Economic growth

 

We currently estimate that the annual rate of economic growth in Canada in 2017 will be 2.2%, based on a composite of estimates from Canadian banks and other sources. For our incumbent local exchange carrier (ILEC) provinces in Western Canada, we currently estimate that annual rates of economic growth in British Columbia (B.C.) will be 2.3% in 2017 and in Alberta will be 2.4% in 2017. The Bank of Canada’s April 2017 Monetary Policy Report estimated annual economic growth in Canada will be 2.6% in 2017.

 

In respect of the national unemployment rate, Statistics Canada’s Labour Force Survey reported a rate of 6.7% for March 2017 (6.9% for December 2016 and 7.1% for March 2016). The unemployment rate for B.C. was 5.4% for March 2017 (5.8% for December 2016 and 6.5% for March 2016), while the unemployment rate for Alberta was 8.4% for March 2017 (8.5% in December 2016 and 7.1% for March 2016).

 

1.3 Consolidated highlights

 

Agreement with BCE Inc. regarding Manitoba Telecom Services Inc.

 

In May 2016, the Company announced an agreement with BCE Inc. (BCE), pursuant to which it would acquire a portion of Manitoba Telecom Services Inc.’s (MTS) postpaid wireless subscribers and dealer locations in Manitoba, dependent on the successful completion of BCE’s acquisition of MTS and subject to regulatory approvals. On March 17, 2017, BCE completed its transaction with MTS. The transaction with TELUS closed on April 1, 2017, and customers will be actively migrated to TELUS over several months in a customer-friendly manner. We acquired approximately one-quarter of MTS’ postpaid wireless subscribers, certain network assets and rights to 15 MTS retail locations in Manitoba for cash consideration of approximately $300 million; our total price of the transaction with BCE will vary depending upon the actual number of qualifying postpaid wireless subscribers who migrate from MTS.

 

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Long-term debt issue

 

On March 6, 2017, we issued U.S.$500 million of senior unsecured notes with a 10.5-year maturity at 3.70% and $325 million of senior unsecured notes with a 31-year maturity at 4.70%. The proceeds were used to fund the repayment, on maturity, of $700 million of the principal amount outstanding on TELUS’ Series CD Notes due March 2017, to repay a portion of outstanding commercial paper and for general corporate purposes. For the U.S. issuance, we have fully hedged the principal and interest obligations of the notes against fluctuations in the Canadian dollar foreign exchange rate for the entire term of the notes by entering into foreign exchange derivatives (cross currency interest rate exchange agreements) that effectively converted the principal payments and interest obligations to Canadian dollar obligations with an effective fixed interest rate of 3.41% and an effective issued and outstanding amount of $667 million (reflecting a fixed exchange rate of $1.3348). Our average term to maturity of long-term debt (excluding commercial paper and the revolving component of the TELUS International (Cda.) Inc. (TELUS International) credit facility) has increased to approximately 11.3 years at March 31, 2017, from approximately 10.4 years at December 31, 2016. Our weighted average interest rate on long-term debt (excluding commercial paper and the revolving component of the TELUS International credit facility) decreased to 4.16% at March 31, 2017, as compared to 4.22% at December 31, 2016 and 4.32% at March 31, 2016.

 

Consolidated highlights

 

Three-month periods ended March 31 ($ millions, unless noted otherwise)

 

2017

 

2016

 

Change

 

Consolidated statements of income

 

 

 

 

 

 

 

Operating revenues

 

3,198

 

3,108

 

2.9

%

Operating income

 

729

 

640

 

13.9

%

Income before income taxes

 

591

 

517

 

14.3

%

Net income

 

441

 

378

 

16.7

%

Net income attributable to Common Shares

 

433

 

378

 

14.6

%

 

 

 

 

 

 

 

 

Earnings per share (EPS) ($)

 

 

 

 

 

 

 

Basic EPS

 

0.73

 

0.64

 

14.1

%

Adjusted basic EPS1

 

0.74

 

0.70

 

5.7

%

Diluted EPS

 

0.73

 

0.64

 

14.1

%

Dividends declared per Common Share ($)

 

0.48

 

0.44

 

9.1

%

 

 

 

 

 

 

 

 

Basic weighted-average Common Shares outstanding (millions)

 

591

 

593

 

(0.5

)%

Consolidated statements of cash flows

 

 

 

 

 

 

 

Cash provided by operating activities

 

709

 

563

 

25.9

%

 

 

 

 

 

 

 

 

Cash used by investing activities

 

(822

)

(660

)

(24.5

)%

Capital expenditures

 

(724

)

(618

)

(17.2

)%

 

 

 

 

 

 

 

 

Cash provided by financing activities

 

475

 

352

 

34.9

%

Other highlights

 

 

 

 

 

 

 

Subscriber connections2 (thousands)

 

12,683

 

12,443

 

1.9

%

EBITDA (earnings before interest, income taxes, depreciation and amortization)1

 

1,261

 

1,140

 

10.6

%

Restructuring and other costs1

 

4

 

48

 

(91.7

)%

Adjusted EBITDA3

 

1,265

 

1,188

 

6.4

%

Adjusted EBITDA margin4 (%)

 

39.5

 

38.2

 

1.3

pts.

Free cash flow1

 

217

 

108

 

100.9

%

Net debt to EBITDA — excluding restructuring and other costs1 (times)

 

2.73

 

2.74

 

(0.01

)

 


Notations used in MD&A: n/m — not meaningful; pts. — percentage points.

(1)         Non-GAAP and other financial measures. See Section 11.1.

(2)         The sum of active wireless subscribers, residential network access lines (NALs), high-speed Internet access subscribers and TELUS TV subscribers (Optik TV and TELUS Satellite TV subscribers), measured at the end of the respective periods based on information in billing and other systems. In relation to an acquisition and a divestiture both undertaken during the first quarter of 2017, beginning of period residential NALs, high-speed Internet and TELUS TV subscriber balances have been increased by a net 1,000, 4,000 and 5,000 respectively and are not included in subscriber connection net additions metrics in Section 5.5.

(3)         Adjusted EBITDA excludes restructuring and other costs.

(4)         Adjusted EBITDA margin is Adjusted EBITDA divided by Operating revenues.

 

Operating highlights

 

·                  Consolidated operating revenues increased by $90 million in 2017:

 

Service revenues increased by $103 million in 2017, mainly due to growth in wireless network revenue and wireline data services revenue, partly offset by the ongoing decline in legacy wireline voice revenue.

 

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Equipment revenues decreased by $14 million in 2017, reflecting a combination of higher wireless per-unit subsidies, lower wireless retention volumes and wireless competitive intensity.

 

Other operating income increased by $1 million in 2017.

 

For additional details on operating revenues, see Section 5.4 Wireless segment and Section 5.5 Wireline segment.

 

·                  During the 12-month period ending on March 31, 2017, our total subscriber connections increased by 240,000, reflecting a 3.8% increase in wireless postpaid subscribers, a 5.3% increase in TELUS TV subscribers and a 5.4% increase in high-speed Internet subscribers, partly offset by an 8.4% decline in wireless prepaid subscribers and a 6.2% decline in wireline residential NALs.

 

Our postpaid wireless subscriber net additions were 44,000 in 2017, up 36,000 from 2016, as higher gross additions due to the success of targeted promotions, focus on higher-value loading, and prepaid migrations were partly offset by competitive intensity. Our monthly postpaid subscriber churn rate was 0.93% in 2017, as compared to 0.97% in 2016. (See Section 5.4 Wireless segment for additional details.)

 

Net additions of high-speed Internet subscribers were 24,000 in 2017, up 12,000 from 2016. The increase resulted from the continued expansion of our high-speed broadband footprint, including fibre to the premises (FTTP) and our HSIA over LTE offering. Net additions of TELUS TV subscribers were 7,000 in 2017, down 4,000 from 2016. The decrease reflects lower gross additions and a decline in satellite-TV subscribers due to a declining overall market for paid TV services resulting from a high rate of market penetration and the effects of heightened competitive intensity, including over-the-top (OTT) services. These pressures were partly offset by the continued focus on expanding our addressable high-speed Internet and Optik TV footprint, connecting more homes and business directly to fibre, and bundling these services together. This contributed to combined Internet and TV subscriber growth of 141,000 or 5.4% compared to the prior year. (See Section 5.5 Wireline segment for additional details.)

 

·                  Operating income increased by $89 million in 2017, reflecting growth in EBITDA, partially offset by increases in total depreciation and amortization expenses resulting from higher expenditures associated with both the capital asset base and intangible asset base and the impact of our continuing program of asset life studies.

 

EBITDA includes restructuring and other costs. EBITDA increased by $121 million in 2017, reflecting growth in wireless network revenues, increased wireline data revenues, lower employee benefits expense and lower restructuring and other costs, partly offset by continued declines in legacy voice services.

 

Adjusted EBITDA excludes restructuring and other costs. It increased by $77 million in 2017. (See Section 5.4 Wireless segment and Section 5.5 Wireline segment for additional details.)

 

·                  Income before income taxes increased by $74 million in 2017, reflecting higher Operating income as noted above, partly offset by an increase in Financing costs. The increase in Financing costs resulted from lower capitalized long-term debt interest costs for spectrum licences that are now being deployed and higher average long-term debt outstanding. These were partly offset by foreign exchange gains. (See Financing costs in Section 5.3.)

 

·                  Income taxes increased by $11 million in 2017, primarily due to higher Income before income taxes, partly offset by reductions in foreign income taxes.

 

·                  Net income attributable to Common Shares increased by $55 million in 2017, reflecting higher Operating income, partly offset by higher Financing costs and higher Income taxes. Excluding restructuring and other costs, and income tax-related adjustments, adjusted Net income increased by $23 million or 5.6% in 2017.

 

Analysis of Net income

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016

 

Change

 

Net income attributable to Common Shares

 

433

 

378

 

55

 

Add back:

 

 

 

 

 

 

 

Restructuring and other costs, after income taxes

 

4

 

35

 

(31

)

Unfavourable income tax-related adjustments

 

 

1

 

(1

)

Adjusted net income

 

437

 

414

 

23

 

 

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8



 

·                  Basic EPS increased by $0.09 or 14.1% in 2017. Excluding the effects of restructuring and other costs, basic EPS increased by $0.04.

 

Analysis of basic EPS

 

Three-month periods ended March 31 ($)

 

2017

 

2016

 

Change

 

Basic EPS

 

0.73

 

0.64

 

0.09

 

Add back:

 

 

 

 

 

 

 

Restructuring and other costs, after income taxes, per share

 

0.01

 

0.06

 

(0.05

)

Adjusted basic EPS

 

0.74

 

0.70

 

0.04

 

 

·                  Dividends declared per Common Share were $0.48 in the first quarter of 2017, reflecting an increase of 9.1%. This is consistent with our announced intention of sustained dividend growth in the range of 7 to 10% per annum through 2019. On May 10, 2017, the Board declared a second quarter dividend of $0.4925 per share on the issued and outstanding Common Shares, payable on July 4, 2017, to shareholders of record at the close of business on June 9, 2017. The second quarter dividend reflects a cumulative increase of $0.0325 per share or 7.1% from the $0.46 per share dividend declared one year earlier.

 

Liquidity and capital resource highlights

 

·                  Net debt to EBITDA — excluding restructuring and other costs was 2.73 times at March 31, 2017, down slightly from 2.74 times at March 31, 2016, as the increase in net debt was approximately offset by growth in EBITDA — excluding restructuring and other costs. (See Section 4.3 Liquidity and capital resources and Section 7.5 Liquidity and capital resource measures.)

 

·                  Cash provided by operating activities increased by $146 million in 2017 due to growth in Adjusted EBITDA and lower income taxes instalments paid, partly offset by increased interest paid.

 

·                  Cash used by investing activities increased by $162 million in 2017 attributed to higher capital expenditures. Capital expenditures increased by $106 million in 2017, mainly due to continued generational capital investments in broadband infrastructure and our network enhancement investments in Manitoba to improve coverage, capacity and speeds to significantly enhance our customer experience and supplement the business acquisition of MTS subscribers, dealers and network. Investments in our broadband infrastructure include our fibre-optic network, which supports our small-cell technology strategy to improve coverage and prepare for a more efficient and timely evolution to 5G, as well as connect more homes and businesses directly to our fibre-optic network. (See Section 7.3 Cash used by investing activities.)

 

·                  Cash provided by financing activities was $475 million in 2017, an increase of $123 million from 2016. This was mainly attributed to the issues of U.S.$500 million of senior unsecured notes at 3.70% and $325 million of senior unsecured notes at 4.70%, partly offset by the repayment of Series CD Notes at 4.95%. (See Section 7.4 Cash provided by financing activities.)

 

·                  Free cash flow increased by $109 million in 2017, resulting from increased Adjusted EBITDA and lower income taxes paid, partially offset by an increase in capital expenditures. (See calculation in Section 11.1 Non-GAAP and other financial measures.)

 

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2.              Core business and strategy

 

Our core business was described in our 2016 annual MD&A. The following are business updates grouped under the applicable strategic imperatives.

 

Focusing relentlessly on growth markets of data, IP and wireless

 

External wireless revenues and wireline data revenues totalled $2.8 billion in 2017, up $123 million or 4.6%, while remaining revenues totalled $380 million in 2017, down $33 million or 8.0%. Combined wireless revenues and wireline data revenues represented 88% of our consolidated revenues for 2017, as compared to 87% in the same period in 2016.

 

Providing integrated solutions that differentiate TELUS from our competitors

 

In March 2017, TELUS Health’s Med Access electronic medical record (EMR) solution, versions 4.9 and 5.0, successfully achieved Canada Health Infoway’s EMR national class recertification. Med Access is a web-based, configurable EMR solution that adapts to individual clinic and user preferences and can be implemented in a clinical practice. It was originally certified in August 2012 and continues to conform to national and international standards for privacy, security and interoperability.

 

Through our TELUS Mobility for Good pilot program, we are working with the Government of B.C.’s Ministry of Children and Family Development to support young adults transitioning from foster care into independent living by providing these youth with a smartphone and subsidized TELUS Mobility rate plan. The pilot program will start in B.C. and expand to Ontario later in 2017. TELUS Mobility for Good builds on our TELUS Internet for Good program introduced in the fourth quarter of 2016, which provides low-income, single parents on income or disability assistance with TELUS-subsidized home Internet service and access to a low-cost computer and free digital literacy training including TELUS WISE.

 

Building national capabilities across data, IP, voice and wireless

 

During the quarter, we announced $250 million and $55 million fibre-optic investments in the cities of Surrey, B.C. and Chilliwack, B.C., respectively, to connect more than 90% of homes and businesses to the TELUS PureFibre TM network before the end of 2018. Additionally, we announced a $150 million investment to connect the TELUS PureFibre network to the city of Burnaby, B.C. before the end of 2019 and announced a $12 million investment to connect the network to the city of Kitimat, B.C. before the end of 2017. Subsequent to March 31, 2017, we announced fibre-optic investments in the province of Quebec including $80 million in the Quebec City region, $30 million in the Lower St-Lawrence region, $30 million in the Gaspe Peninsula and $15 million in the North Shore region.

 

Partnering, acquiring and divesting to accelerate the implementation of our strategy and focus our resources on core business

 

As discussed in Section 1.3, BCE has divested approximately one-quarter of MTS’ postpaid wireless subscribers, certain network assets and 15 MTS retail locations to TELUS. We look forward to actively migrating these subscribers and dealers to TELUS over several months in a customer-friendly manner. Additionally, we expanded and enhanced our network in Manitoba as described in Section 7.3. We also officially launched our TELUS Manitoba Community Board as described within the following strategic imperative.

 

TELUS Health and Groupe DOmedic, Inc., have announced a partnership to provide better health monitoring and medication management for seniors. xPill PHARMA, offered by DOmedic to retirement homes and connected by TELUS Health to pharmacists through TELUS Health’s pharmacy management solution, is an integrated medication management platform technology allowing a continuous, real-time flow of information between retirement homes and Canadian pharmacists to enable an optimized administering and dispensing medication cycle.

 

Going to market as one team under a common brand, executing a single strategy

 

In February 2017, we officially launched our TELUS Manitoba Community Board which will provide $500,000 in funding to local charities each year focused on improving the lives of youth and families, concentrating on projects in health, education, and the environment. This contribution is part of TELUS’ total $1 million commitment in 2017 for community investment in Manitoba.

 

Our team works together to implement our top corporate priority: putting customers first, as we strive to consistently deliver exceptional client experiences and become the most recommended company in the markets we serve. In April 2017, the Commissioner for Complaints for Telecommunications Services (CCTS) issued its mid-year report and TELUS continued to receive the fewest customer complaints of the national carriers while Koodo continued to receive the fewest customer complaints of the national flanker brands. TELUS, Koodo and Public Mobile received 7.0%, 2.9% and 1.4% of total customer complaints accepted by the CCTS, respectively, or 11.3% of total customer complaints, in aggregate, when we have approximately 28.0% of Canadian wireless customers.

 

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3.              Corporate priorities for 2017

 

Our 2017 corporate priorities are provided in the table below.

 

·                  Delivering on TELUS’ future friendly® brand promise by putting customers first

·                  Elevating our winning culture for sustained competitive advantage

·                  Generating profitable top-line revenue growth while enhancing our operational efficiency

·                  Increasing our competitive advantage through advanced, client-centric technology, networks and systems that lead the world in reliability

·                  Driving TELUS’ leadership position in our chosen business, public sector and international markets

·                  Advancing TELUS’ leadership in healthcare information management for better human outcomes.

 

4.              Capabilities

 

The forward-looking statements in this section, including statements regarding our dividend growth program and our financial objectives in Section 4.3, are qualified by the Caution regarding forward-looking statements at the beginning of this MD&A.

 

4.1 Principal markets addressed and competition

 

For a discussion of our principal markets and an overview of competition, please refer to Section 4.1 of our 2016 annual MD&A.

 

4.2 Operational resources

 

For a discussion of our operational resources, please refer to Section 4.2 of our 2016 annual MD&A.

 

Wireless segment

 

In the first quarter of 2017, we continued to deliver leading blended customer churn on a national basis. Our monthly postpaid churn rate was 0.93% in the first quarter of 2017 and has now been below 1% for 14 of the past 15 quarters despite strong competitive and economic pressures and higher churn from our CDMA customers as we approach the national shutdown date in the second quarter of 2017. Our monthly blended churn, defined in Section 11.2, was 1.18% in the first quarter of 2017, which represented our lowest first quarter churn rate since we became a national carrier 17 years ago. This further exemplifies the success of our differentiated customers first culture, our ongoing focus on delivering an outstanding customer experience, combined with attractive new products and services, and our retention programs.

 

Since mid-2013, we have invested more than $3.6 billion to acquire wireless spectrum licences in spectrum auctions and other transactions, which has more than doubled our national spectrum holdings in support of our top corporate priority of putting customers first. Wireless data consumption has been increasing rapidly and we have responded by investing to extend the capacity of our network to support the additional data consumption and growth in our wireless customer base.

 

As at March 31, 2017, our 4G long-term evolution (LTE) network covered 98% of Canada’s population, up from nearly 97% at March 31, 2016. Furthermore, we have continued to invest in our LTE advanced network roll-out, which covered more than 80% of Canada’s population at March 31, 2017. Outside of LTE advanced and LTE coverage areas, and for voice services, the LTE devices we offer also operate on our HSPA+ network, which covered 99% of Canada’s population at March 31, 2017.

 

Wireline segment

 

We have continued to invest in urban and rural communities with commitments to deliver broadband network capabilities to as many Canadians as possible. We are expanding our fibre footprint by connecting more homes and businesses directly to fibre. Throughout 2016 and 2017, we have made announcements regarding investments to bring our fibre-optic network to cities across B.C., Alberta and Eastern Quebec. We have also increased broadband Internet speeds, expanded our IP TV video-on-demand library and high-definition content, including 4K TV, and enhanced marketing of data products and bundles.

 

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As at March 31, 2017, our high-speed broadband coverage reached approximately 3 million households and businesses in B.C., Alberta and Eastern Quebec, including approximately 1.15 million homes and businesses covered by fibre-optic cable, up from 0.75 million homes and businesses in the first quarter of 2016, which provides these premises with immediate access to our gigabit-capable fibre-optic network.

 

4.3 Liquidity and capital resources

 

Capital structure financial policies

 

Our objective when managing capital is to maintain a flexible capital structure that optimizes the cost and availability of capital at acceptable risk.

 

In the management of capital and in its definition, we include Common Share equity (excluding Accumulated other comprehensive income), Long-term debt (including long-term credit facilities, commercial paper backstopped by long-term credit facilities and any associated hedging assets or liabilities, net of amounts recognized in Accumulated other comprehensive income), Cash and temporary investments, and securitized trade receivables.

 

We manage our capital structure and make adjustments to it in light of changes in economic conditions and the risk characteristics of our telecommunications infrastructure. In order to maintain or adjust our capital structure, we may change the amount of dividends paid to holders of Common Shares, purchase shares for cancellation pursuant to our normal course issuer bid (NCIB) programs, issue new debt, issue new debt to replace existing debt with different characteristics, issue new shares, and/or increase or decrease the amount of trade receivables sold to an arm’s-length securitization trust.

 

We monitor capital by utilizing a number of measures, including net debt to EBITDA — excluding restructuring and other costs ratio and the dividend payout ratio. (See definitions in Section 11.1.)

 

Financing and capital structure management plans

 

Report on financing and capital structure management plans

 

Pay dividends to the holders of Common Shares under our multi-year dividend growth program

 

·                  In May 2016, we announced our intention to target ongoing semi-annual dividend increases, with the annual increase in the range of 7 to 10% from 2017 through to the end of 2019, thereby extending the policy first announced in May 2011. Notwithstanding this target, dividend decisions will continue to be subject to our Board’s assessment and the determination of our financial position and outlook on a quarterly basis. Our long-term dividend payout ratio guideline is 65 to 75% of prospective net earnings per share. There can be no assurance that we will maintain a dividend growth program through 2019. (See Caution regarding forward-looking statements — Ability to sustain our dividend growth program through 2019 and ability to sustain and complete our multi-year share purchase program through 2019 and Section 10.7 Financing, debt requirements and returning cash to shareholders in our 2016 Annual MD&A.)

 

·                  On May 10, 2017, a second quarter dividend of $0.4925 per share was declared on our issued and outstanding Common Shares, payable on July 4, 2017, to shareholders of record at the close of business on June 9, 2017. The second quarter dividend for 2017 reflects a cumulative increase of $0.0325 per share or 7.1% from the $0.46 per share dividend paid in July 2016.

 

·                  In connection with the dividend declared in the first quarter of 2017, the dividend reinvestment and share purchase plan trustee purchased shares for the dividend reinvestment and share purchase plan from treasury. The trustee purchased approximately 350,000 Common Shares for approximately $15 million, with no discount applicable.

 

Purchase of Common Shares

 

·                  During the three-month period ended March 31, 2017, we did not have any transactions pursuant to our normal course issuer bid.

 

Use proceeds from securitized trade receivables (Short-term borrowings), bank facilities and commercial paper as needed, to supplement free cash flow and meet other cash requirements

 

·                  Our issued and outstanding commercial paper was $1,122 million at March 31, 2017, all of which was denominated in U.S. dollars (U.S.$844 million), compared to $613 million at December 31, 2016, and $891 million at March 31, 2016.

 

·                  Proceeds from securitized trade receivables were $100 million at March 31, 2017, (March 31 and December 31, 2016 — $100 million).

 

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Report of financing and capital structure management plans

 

Maintain compliance with financial objectives

 

Certain of our current financial objectives will be reviewed in 2017 for possible revision due to changes arising from the adoption of new accounting standards, IFRS 15, Revenue from Contracts with Customers and IFRS 16, Leases. (See Section 8.2 Accounting policy developments in our 2016 annual MD&A.)

 

·                  Maintain investment grade credit ratings in the range of BBB+ or the equivalent — On May 11, 2017, investment grade credit ratings from the four rating agencies that cover TELUS were in the desired range. (See Section 7.8 Credit ratings.)

 

·                  Net debt to EBITDA — excluding restructuring and other costs ratio of 2.00 to 2.50 times — As measured at March 31, 2017, the ratio was 2.73 times, outside of the range, primarily due to the funding of spectrum licences acquired in wireless spectrum auctions held during 2014 and 2015. We will endeavour to return the ratio to within this objective range in the medium term, as we believe that this range is supportive of our long-term strategy. (See Section 7.5 Liquidity and capital resource measures.)

 

·                  Dividend payout ratio of 65 to 75% of net earnings per share on a prospective basis — Our target ratio is on a prospective basis. The dividend payout ratio we present in this MD&A is a historical measure utilizing the last four quarters of dividends declared and earnings per share, and is disclosed for illustrative purposes in evaluating our target guideline. As at March 31, 2017, the historical ratio of 87% and the adjusted historical ratio of 76% exceeded the objective range, however we estimate that we are within our target guideline when considered on a prospective basis. (See Section 7.5 Liquidity and capital resource measures.)

 

·                  Generally maintain a minimum of $1 billion in unutilized liquidity — As at March 31, 2017, our unutilized liquidity was more than $1 billion. (See Section 7.6 Credit facilities.)

 

4.4 Changes in internal control over financial reporting

 

There were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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5.              Discussion of operations

 

This section contains forward-looking statements, including those with respect to our deployment of wireless spectrum licences, average revenue per subscriber unit per month (ARPU) growth, wireless retention spending, high-speed Internet subscriber growth, cash tax payments and restructuring and other costs trends as they relate to the future. There can be no assurance that we have accurately identified the trends based on past results or that these trends will continue. See Caution regarding forward-looking statements at the beginning of this MD&A.

 

5.1 General

 

Our operating segments and reportable segments are wireless and wireline. Segmented information in Note 5 of the interim consolidated financial statements is regularly reported to our Chief Executive Officer (CEO) (the chief operating decision-maker).

 

5.2 Summary of consolidated quarterly results and trends

 

Summary of quarterly results

 

($ millions, except per share amounts)

 

2017 Q1

 

2016 Q4

 

2016 Q3

 

2016 Q2

 

2016 Q1

 

2015 Q4

 

2015 Q3

 

2015 Q2

 

Operating revenues

 

3,198

 

3,305

 

3,238

 

3,148

 

3,108

 

3,217

 

3,155

 

3,102

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goods and services purchased1

 

1,313

 

1,574

 

1,426

 

1,331

 

1,300

 

1,482

 

1,394

 

1,372

 

Employee benefits expense1

 

624

 

962

 

681

 

628

 

668

 

757

 

693

 

649

 

Depreciation and amortization

 

532

 

533

 

515

 

499

 

500

 

518

 

471

 

464

 

Total operating expenses

 

2,469

 

3,069

 

2,622

 

2,458

 

2,468

 

2,757

 

2,558

 

2,485

 

Operating income

 

729

 

236

 

616

 

690

 

640

 

460

 

597

 

617

 

Financing costs

 

138

 

134

 

129

 

134

 

123

 

114

 

106

 

110

 

Income before income taxes

 

591

 

102

 

487

 

556

 

517

 

346

 

491

 

507

 

Income taxes

 

150

 

15

 

132

 

140

 

139

 

85

 

126

 

166

 

Net income

 

441

 

87

 

355

 

416

 

378

 

261

 

365

 

341

 

Net income attributable to Common Shares

 

433

 

81

 

348

 

416

 

378

 

261

 

365

 

341

 

Net income per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share (basic EPS)

 

0.73

 

0.14

 

0.59

 

0.70

 

0.64

 

0.44

 

0.61

 

0.56

 

Adjusted basic EPS2

 

0.74

 

0.53

 

0.65

 

0.70

 

0.70

 

0.54

 

0.66

 

0.66

 

Diluted EPS

 

0.73

 

0.14

 

0.59

 

0.70

 

0.64

 

0.44

 

0.61

 

0.56

 

Dividends declared per Common Share

 

0.48

 

0.48

 

0.46

 

0.46

 

0.44

 

0.44

 

0.42

 

0.42

 

Additional information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA2

 

1,261

 

769

 

1,131

 

1,189

 

1,140

 

978

 

1,068

 

1,081

 

Restructuring and other costs2

 

4

 

348

 

60

 

23

 

48

 

99

 

51

 

59

 

Gains on the exchange of wireless spectrum licences

 

 

 

 

15

 

 

 

 

 

Net gains and equity income from real estate joint venture developments

 

 

7

 

10

 

9

 

 

 

 

 

Adjusted EBITDA 

 

1,265

 

1,110

 

1,181

 

1,188

 

1,188

 

1,077

 

1,119

 

1,140

 

Cash provided by operating activities

 

709

 

732

 

1,032

 

892

 

563

 

870

 

1,025

 

943

 

Free cash flow2

 

217

 

(191

)

98

 

126

 

108

 

197

 

310

 

300

 

 


(1)         Goods and services purchased and Employee benefits expense amounts include restructuring and other costs.

(2)         See Section 11.1 Non-GAAP and other financial measures.

 

Trends

 

The consolidated revenue trend reflects year-over-year increases in: (i) wireless network revenue generated from growth in both our ARPU and subscriber base; and (ii) wireline data service revenue, driven by Internet and enhanced data, business process outsourcing, TELUS TV services and TELUS Health revenues. Increased Internet and TV service revenues are being generated by subscriber growth. Consolidated revenue growth was partially offset by the continued decline in wireline voice revenues and the decline in wireless equipment revenues. For additional information on wireless and wireline revenue and subscriber trends, see Section 5.4 Wireless segment and Section 5.5 Wireline segment.

 

The general trend in Goods and services purchased expense reflects increasing equipment expenses associated with higher-value smartphones in the sales mix and increased handset costs (which includes the effect of the decline in

 

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the Canadian dollar exchange rate compared to the U.S. dollar); increasing wireless customer service, administrative, external labour and distribution channel expenses to support growth in our subscriber base; and increased wireline TV costs of sales associated with a growing subscriber base. These were partly offset by lower wireline equipment costs.

 

The general trend in Employee benefits expense reflects moderating wages and salaries resulting from a decrease in the number of full-time equivalent (FTE) domestic employees and the impact of the immediately vesting transformative compensation described in our 2016 annual MD&A, partly offset by increases in TELUS International compensation and in the number of TELUS International employees to support increased business process outsourcing revenue growth.

 

The general trend in Depreciation and amortization historically reflected increases due to the impact of our continuing program of asset life studies and growth in capital assets supporting the expansion of our broadband footprint and enhanced long-term evolution (LTE) network coverage. The investments in our fibre-optic network also support our small-cell technology strategy to improve coverage and prepare for a more efficient and timely evolution to 5G.

 

The general trend in Financing costs reflects an increase in long-term debt outstanding, mainly associated with significant investments in wireless spectrum licences acquired during wireless spectrum licence auctions in 2014 and 2015 and our generational investments in fibre to homes and businesses. However, Financing costs are net of capitalized interest related to spectrum licences acquired during the wireless spectrum licence auctions and capitalization of interest has ceased in the first quarter of 2017, as cell sites are now capable of being built to utilize those spectrum frequencies. Financing costs also include the Employee defined benefit plans net interest expense. Additionally for the eight periods shown, Financing costs included varying amounts of foreign exchange gains or losses and varying amounts of interest income, including $20 million of interest income in the second quarter of 2015 resulting from the settlement of prior years’ income tax-related matters.

 

The trend in Net income reflects the items noted above, as well as non-cash adjustments arising from legislated income tax changes and adjustments recognized in the current periods for income tax of prior periods, including any related after-tax interest on reassessments. Historically, the trend in basic EPS was also impacted by share purchases under our normal course issuer bid (NCIB) programs.

 

The trend in Cash provided by operating activities reflects generally higher consolidated Adjusted EBITDA offset by increased interest payments. Both income tax payments and restructuring and other costs have generally increased in 2016 but we have assumed that cash tax payments will decrease in fiscal 2017, as described in Section 9.3 of our 2016 annual MD&A. The trend in free cash flow reflects the factors affecting Cash provided by operating activities, as well as increases in capital expenditures. For further discussion on trends, see Section 5.4 Wireless segment and Section 5.5 Wireline segment.

 

5.3 Consolidated operations

 

The following is a discussion of our consolidated financial performance. Segment information in Note 5 of the interim consolidated financial statements is regularly reported to our CEO. We discuss the performance of our segments in Section 5.4 Wireless segment, Section 5.5 Wireline segment and Section 7.3 Cash used by investing activities.

 

Operating revenues

 

Three-month period ended March 31 ($ millions)

 

2017

 

2016

 

Change

 

Service

 

3,027

 

2,924

 

3.5 

%

Equipment

 

158

 

172

 

(8.1

)%

Revenues arising from contracts with customers

 

3,185

 

3,096

 

2.9 

%

Other operating income

 

13

 

12

 

8.3 

%

 

 

3,198

 

3,108

 

2.9 

%

 

Consolidated operating revenues increased by $90 million in 2017.

 

·                  Service revenues increased by $103 million in 2017, primarily reflecting growth in wireless network revenue and wireline data services, partly offset by the continuing decline in wireline voice revenues. Wireless network revenue reflects growth in blended ARPU and a higher wireless subscriber base. Wireline data service revenue reflect increases in: Internet and enhanced data service revenues; business process outsourcing revenues; TELUS TV revenues; and TELUS Health revenues. Both Internet and TV revenues reflect subscriber growth in addition to higher Internet revenue per customer.

 

·                  Equipment revenues decreased by $14 million in 2017, primarily reflecting a $15 million decrease in wireless equipment revenue from a combination of higher per-unit subsidies, lower wireless retention volumes and wireless competitive intensity, partly offset by increased postpaid gross additions.

 

·                  Other operating income increased by $1 million in 2017.

 

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Operating expenses

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016

 

Change

 

Goods and services purchased

 

1,313

 

1,300

 

1.0

%

Employee benefits expense

 

624

 

668

 

(6.6

)%

Depreciation

 

402

 

385

 

4.4

%

Amortization of intangible assets

 

130

 

115

 

13.0

%

 

 

2,469

 

2,468

 

 

 

Consolidated operating expenses increased by $1 million in 2017.

 

·                  Goods and services purchased increased by $13 million in 2017, reflecting increased roaming costs, increased external labour and higher handset costs (partially due to the decline in the Canadian dollar exchange rate versus the U.S. dollar over the last two years), partly offset by ongoing cost management efficiency initiatives and a decrease in advertising and promotions expenses.

 

·                  Employee benefits expense decreased by $44 million in 2017, mainly due to the non-recurrence of labour-related restructuring expenses from 2016, lower compensation and benefits costs resulting from a decrease in the number of domestic FTE employees, benefits from certain contract concessions associated with our transformational compensation agreement that are yielding productivity improvements and continue to support our customer service track record, partly offset by an increase in TELUS International employees and compensation to support growth in business process outsourcing revenue.

 

·                  Depreciation increased by $17 million in 2017 due to the impact of our continuing program of asset life studies, higher asset retirements related to divestitures and increased expenditures associated with capital assets.

 

·                  Amortization of intangible assets increased by $15 million in 2017, reflecting increased expenditures associated with the intangible asset base.

 

Operating income

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016

 

Change

 

Wireless EBITDA (see Section 5.4)

 

820

 

756

 

8.6

%

Wireline EBITDA (see Section 5.5)

 

441

 

384

 

14.6

%

Depreciation and amortization (discussed above)

 

(532

)

(500

)

(6.4

)%

 

 

729

 

640

 

13.9

%

 

Operating income increased by $89 million in 2017.

 

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Financing costs

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016

 

Change

 

Gross interest expense

 

142

 

137

 

3.6

%

Capitalized long-term debt interest

 

 

(17

)

n/m

 

Interest expense

 

142

 

120

 

18.3

%

Employee defined benefit plans net interest

 

1

 

1

 

 

Foreign exchange (gains) losses

 

(5

)

2

 

n/m

 

 

 

138

 

123

 

12.2

%

 

Financing costs increased by $15 million in 2017, mainly due to the following factors:

 

·                  Gross interest expense, prior to capitalization of long-term debt interest, increased by $5 million in 2017, primarily due to the increase in average long-term debt balances outstanding, partly offset by a reduction in the effective interest rate. Our weighted average interest rate on long-term debt (excluding commercial paper and the revolving component of the TELUS International credit facility) was 4.16% at March 31, 2017, as compared to 4.32% one year earlier. (See Long-term debt issues and repayments in Section 7.4.)

 

·                  Capitalized long-term debt interest is in respect of debt incurred for the purchase of spectrum licences during spectrum auctions held by Innovation, Science and Economic Development Canada (ISED), which we deploy in our existing network. Capitalization of long-term debt interest occurs until substantially all of the activities necessary to prepare the spectrum for its intended use are complete, effectively when cell sites are ready to be put into service. The capitalization of interest ceased in the first quarter of 2017.

 

·                  Employee defined benefit plans net interest remained consistent in 2017, as there was minimal change in the defined benefit plan deficit at December 31, 2016, compared to December 31, 2015, and minimal change in the discount rate.

 

·                  Foreign exchange (gains) losses have fluctuated as a result of the weakening of the Canadian dollar relative to the U.S. dollar in 2017 combined with the impact of our hedging activities.

 

Income taxes

 

Three-month periods ended March 31 ($ millions, except tax rates)

 

2017

 

2016

 

Change

 

Income taxes computed at applicable statutory rates

 

157

 

137

 

14.6

%

Revaluation of deferred income tax liability to reflect future statutory income tax rates

 

 

1

 

(100.0

)%

Other

 

(7

)

1

 

n/m

 

Income taxes

 

150

 

139

 

7.9

%

Income taxes computed at applicable statutory rates (%)

 

26.6

 

26.6

 

 

Effective tax rates (%)

 

25.4

 

26.9

 

(1.5

) pts.

 

Total income tax expense increased by $11 million in 2017, primarily due to higher Income before income taxes, partly offset by reductions in foreign income taxes.

 

Comprehensive income

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016

 

Change

 

Net income

 

441

 

378

 

16.7

%

Other comprehensive income (loss) (net of income taxes):

 

 

 

 

 

 

 

Items that may be subsequently reclassified to income

 

(8

)

(14

)

(42.9

)%

Item never subsequently reclassified to income — Employee defined benefit plans re-measurements

 

68

 

(77

)

n/m

 

Comprehensive income

 

501

 

287

 

74.6

%

 

Comprehensive income increased by $214 million in 2017, primarily due to changes in employee defined benefit plan re-measurement amounts and higher Net income. Items that may be subsequently reclassified to income are composed of changes in the unrealized fair value of derivatives designated as cash flow hedges, foreign currency translation adjustments arising from translating financial statements of foreign operations, and changes in the unrealized fair value of available-for-sale investments.

 

5.4 Wireless segment

 

Wireless trends and seasonality

 

The historical trend in wireless network revenue reflects growth in both ARPU and subscriber base. This growth, coupled with higher-value smartphones in the sales mix, was partially offset by the decline in wireless equipment revenues, reflecting higher per-unit subsidies and lower retention volumes. Retention volumes declined due to the effects on contract renewals of higher handset prices (including the effect of higher handset acquisition costs due to depreciation of

 

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the Canadian dollar relative to the U.S. dollar over the last two years and a shorter renewal cycle from the impact of two-year rate plans), and an increasing number of customers choosing to stay on month-to-month service.

 

The wireless ARPU growth trend increased in 2017 due to a higher mix of data share plans and an emphasis on the marketing and increased mix of higher-rate plans, including the new Premium Plus plans launched in June 2016. This was partly offset by competitive pressures driving larger allotments of data provided in rate plans, including data sharing and international data roaming features and plans, consumer response to increased frequency of customer data usage notifications and offloading of data traffic to increasingly available Wi-Fi hotspots. ARPU is expected to continue to increase modestly throughout 2017, as a result of the continued growth in data usage and the ongoing shift in our subscriber base towards higher-value postpaid customers. However, the level of ARPU is highly dependent on competition, the economic environment, consumer behaviour, the regulatory environment, device selection and other factors, and, as a consequence, there cannot be assurance that ARPU growth will continue to materialize.

 

We may experience pressure on our postpaid subscriber churn if competitive intensity continues, in part due to an increase in customers on expired contracts, as well as customers bringing their own devices and therefore not entering into new contracts. Accordingly, our wireless segment historical operating results and trends may not be reflective of results and trends for future periods.

 

Historically, there have been significant third and fourth quarter seasonal effects reflected in higher wireless subscriber additions, an increase in related acquisition costs and equipment sales, and higher retention costs due to contract renewals in those quarters. These impacts can be more pronounced around popular device launches and seasonal events such as back to school, Black Friday and Christmas. The costs associated with higher seasonal loading volumes have typically resulted in sequential decreases in wireless EBITDA from the second quarter through to the fourth quarter, typically followed by sequential increases in wireless EBITDA from the fourth quarter through to the second quarter. Subscriber additions have generally been lowest in the first quarter. Historically, wireless ARPU has experienced seasonal sequential increases in the second and third quarters, reflecting higher levels of usage and roaming in the spring and summer, followed by seasonal sequential declines in the fourth and first quarters. This seasonal effect on ARPU has moderated, as unlimited nationwide voice plans have become more prevalent and chargeable voice and long distance spikes become less pronounced. In addition, customers are opting for higher-capacity data plans resulting in less variability in chargeable data usage. The trends in revenue and revenue-based operating metrics will be impacted by our adoption of IFRS 15, Revenue from Contracts with Customers, as discussed further in Section 8.2 Accounting policy developments of our 2016 annual MD&A.

 

Wireless operating indicators

 

At March 31

 

2017

 

2016

 

Change

 

Subscribers (000s):

 

 

 

 

 

 

 

Postpaid

 

7,594

 

7,315

 

3.8

%

Prepaid

 

982

 

1,072

 

(8.4

)%

Total

 

8,576

 

8,387

 

2.3

%

Postpaid proportion of subscriber base (%)

 

88.5

 

87.2

 

1.3 pts.

 

HSPA+ population coverage1 (millions)

 

36.1

 

35.7

 

1.1

%

LTE population coverage1 (millions)

 

36.0

 

35.0

 

2.9

%

 

Periods ended March 31

 

2017

 

2016

 

Change

 

Subscriber gross additions (000s):

 

 

 

 

 

 

 

Postpaid

 

225

 

212

 

6.1

%

Prepaid

 

70

 

79

 

(11.4

)%

Total

 

295

 

291

 

1.4

%

Subscriber net additions (000s):

 

 

 

 

 

 

 

Postpaid

 

44

 

8

 

n/m

 

Prepaid

 

(53

)

(33

)

(60.6

)%

Total

 

(9

)

(25

)

64.0

%

Blended ARPU, per month2 ($)

 

65.53

 

63.08

 

3.9

%

Churn, per month2 (%)

 

 

 

 

 

 

 

Blended

 

1.18

 

1.26

 

(0.08

) pts.

Postpaid

 

0.93

 

0.97

 

(0.04

) pts.

 


(1)         Including network access agreements with other Canadian carriers.

(2)         See Section 11.2 Operating indicators. These are industry measures useful in assessing operating performance of a wireless company, but are not measures defined under IFRS-IASB.

 

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Operating revenues — Wireless segment

 

Three-month periods ended March 31 ($ millions, except ratios)

 

2017

 

2016

 

Change

 

Network revenue

 

1,673

 

1,573

 

6.4

%

Equipment and other service revenues

 

108

 

124

 

(12.9

)%

Revenues arising from contracts with customers

 

1,781

 

1,697

 

4.9

%

Other operating income

 

2

 

5

 

(60.0

)%

External operating revenues

 

1,783

 

1,702

 

4.8

%

Intersegment network revenue

 

11

 

14

 

(21.4

)%

Total operating revenues

 

1,794

 

1,716

 

4.6

%

 

Network revenue from external customers increased $100 million in the first quarter of 2017. Data network revenue increased by 12.2% in 2017, reflecting: (i) a larger proportion of higher-rate plans in the revenue mix, including the Premium Plus plans launched in June 2016; (ii) a larger proportion of customers selecting plans with larger data buckets or periodically topping up their data buckets; (iii) growth in the subscriber base; (iv) a higher postpaid subscriber mix; and (v) higher data-related roaming revenues. Voice network revenue decreased by 1.2% in 2017 due to the increased adoption of unlimited nationwide voice plans and continued but moderating substitution to data services and lower voice-related roaming revenues, partly offset by growth in the subscriber base.

 

·                  Monthly blended ARPU was $65.53 in 2017, reflecting an increase of $2.45 or 3.9% from 2016. The increase was primarily driven by effects of higher data network revenue (as described above), partly offset by the continued decline in voice revenue.

 

·                  Gross subscriber additions increased by 4,000 in 2017. Postpaid gross additions increased by 13,000 due to the success of targeted promotions and our marketing efforts focused on higher-value postpaid loading, partly offset by competitive intensity. Prepaid gross activations decreased by 9,000 mainly from competitive intensity, lower-priced postpaid offers and our marketing efforts focused on higher-value postpaid loading.

 

·                  Our average monthly postpaid subscriber churn rate was 0.93% in 2017, as compared to 0.97% in 2016. The continuing low postpaid subscriber churn rates during 2017 reflect our focus on executing customers first initiatives and retention programs, even with higher churn from our CDMA customers as we approach the national shutdown date in the second quarter of 2017. Our blended monthly subscriber churn rate was 1.18% in 2017, as compared to 1.26% in 2016. The improvement in our blended subscriber churn rate in 2017 reflects the changes in the postpaid churn rate as described above and improvements in prepaid churn rates, as well as an increase in the mix of postpaid subscribers.

 

·                  Net subscriber losses reflect postpaid net additions of 44,000 in 2017 compared to 8,000 in 2016, attributed to the factors as described above affecting gross subscriber additions as well as our marketing efforts focused on cost-effective prepaid to postpaid migrations. Prepaid subscribers decreased by 53,000 in 2017, as compared to a decrease of 33,000 in 2016 and reflect our focus on higher-value postpaid loading, increased competition for prepaid services, and conversions to postpaid services as described above. Net subscriber losses were 9,000 in 2017, compared to net subscriber losses of 25,000 from the same period in 2016, reflecting a year-over-year improvement of 16,000 due to lower blended monthly churn and higher postpaid gross additions.

 

Equipment and other service revenues decreased by $16 million in 2017, mainly from a combination of higher per-unit subsidies, lower retention volumes and competitive intensity, partly offset by increased postpaid gross additions.

 

Other operating income decreased by $3 million in 2017, mainly due to lower gains from sales of property, plant and equipment.

 

Intersegment revenue represents network services that are eliminated upon consolidation along with the associated wireline expenses.

 

Operating expenses — Wireless segment

 

Three-month periods ended March 31 ($ in millions)

 

2017

 

2016

 

Change

 

Goods and services purchased:

 

 

 

 

 

 

 

Equipment sales expenses

 

366

 

363

 

0.8

%

Network operating expenses

 

196

 

185

 

5.9

%

Marketing expenses

 

86

 

91

 

(5.5

)%

Other1

 

170

 

155

 

9.7

%

Employee benefits expense1

 

156

 

166

 

(6.0

)%

Wireless operating expenses

 

974

 

960

 

1.5

%

 


(1)         Includes restructuring and other costs. See Section 11.1 Non-GAAP and other financial measures.

 

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Wireless operating expenses increased by $14 million in 2017.

 

Equipment sales expenses increased by $3 million in 2017, reflecting an increase in higher-value smartphones in the sales mix, including premium devices on Premium Plus plans, increasing handset costs (including the effect of higher supplier costs due to depreciation of the Canadian dollar relative to the U.S. dollar over the last two years) and increased postpaid gross additions, partly offset by lower retention volumes.

 

Network operating expenses increased by $11 million in 2017, mainly due to increased roaming rates.

 

Marketing expenses declined by $5 million in 2017, primarily due to lower advertising and promotions expenses.

 

Other goods and services purchased increased by $15 million in 2017, primarily due to an increase in external labour and higher administrative costs supporting the higher customer base, and higher non-labour restructuring and other costs.

 

Employee benefits expense decreased by $10 million in 2017, primarily due to the non-recurrence of significant labour-related restructuring costs from efficiency initiatives in 2016, lower compensation and benefits costs resulting from a decrease in the number of domestic FTE employees and higher capitalized labour costs.

 

EBITDA — Wireless segment

 

Three-month periods ended March 31 ($ millions, except margins)

 

2017

 

2016

 

Change

 

EBITDA

 

820

 

756

 

8.6

%

Restructuring and other costs included in EBITDA

 

1

 

9

 

(88.9

)%

Adjusted EBITDA1

 

821

 

765

 

7.4

%

EBITDA margin (%)

 

45.7

 

44.1

 

1.6 pts.

 

Adjusted EBITDA margin2 (%)

 

45.8

 

44.6

 

1.2 pts.

 

 


(1)         See description under EBITDA in Section 11.1.

(2)         The calculation of the Adjusted EBITDA margin excludes restructuring and other costs from EBITDA.

 

Wireless EBITDA increased by $64 million in 2017. Wireless Adjusted EBITDA increased by $56 million in 2017, reflecting network revenue growth driven by higher ARPU and a larger customer base and lower employee benefits expense, partly offset by increased network operating, external labour and administrative expenses.

 

5.5 Wireline segment

 

Wireline trends

 

The trend of increasing wireline data service revenue reflects growth in high-speed Internet and enhanced data services, business process outsourcing services, TELUS TV revenues and TELUS Health revenues, and is partly offset by declining wireline voice revenues and equipment revenues. The increases in Internet and TV service revenues are being generated by subscriber growth and higher Internet revenue per customer. The trend of declining wireline voice revenues is due to technological substitution, greater use of inclusive long distance and lower wholesale volumes competition from voice over IP (VoIP) service providers (including cable-TV competitors), resellers and facilities-based competitors, as well as technological substitution to wireless and IP-based services and applications, continuing increased competition in the small and medium-sized business market, and the lingering impacts of the economic slowdown, particularly in Alberta, which remain more prominent in the business markets.

 

We expect continued high-speed Internet subscriber base growth in 2017, as the economy recovers and as we continue our investments in expanding our fibre-optic network. The TELUS TV subscriber base growth has moderated due to a declining overall market for paid TV services resulting from the high rate of market penetration and increased competition, including from over-the-top (OTT) services. Residential network access line (NAL) losses continue to reflect the ongoing trend of substitution to wireless and Internet-based services.

 

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Wireline operating indicators

 

At March 31 (000s)

 

2017

 

2016

 

Change

 

Subscriber connections:

 

 

 

 

 

 

 

High-speed Internet subscribers1

 

1,686

 

1,599

 

5.4

%

TELUS TV subscribers1

 

1,070

 

1,016

 

5.3

%

Residential network access lines (NALs)1

 

1,351

 

1,441

 

(6.2

)%

Total wireline subscriber connections1

 

4,107

 

4,056

 

1.3

%

 

Three-month periods ended March 31 (000s) 

 

2017

 

2016

 

Change

 

Subscriber connection net additions (losses):

 

 

 

 

 

 

 

High-speed Internet

 

24

 

12

 

n/m

 

TELUS TV

 

7

 

11

 

(36.4

)%

Residential NALs

 

(23

)

(26

)

11.5

%

Total wireline subscriber connection net additions (losses)

 

8

 

(3

)

n/m

 

 


(1)         In relation to an acquisition and a divestiture both undertaken during the first quarter of 2017, beginning of period residential NALs, high-speed Internet and TELUS TV subscriber balances have been increased by a net 1,000, 4,000 and 5,000 respectively.

 

Operating revenues — Wireline segment

 

Three-month periods ended March 31 ($ in millions)

 

2017

 

2016

 

Change

 

Data services and equipment

 

1,035

 

993

 

4.2

%

Voice services

 

320

 

348

 

(8.0

)%

Other services and equipment

 

49

 

58

 

(15.5

)%

Revenues arising from contracts with customers

 

1,404

 

1,399

 

0.4

%

Other operating income

 

11

 

7

 

57.1

%

External operating revenues

 

1,415

 

1,406

 

0.7

%

Intersegment revenue

 

52

 

47

 

10.6

%

Total operating revenues

 

1,467

 

1,453

 

1.0

%

 

·                  Data services and equipment revenues increased by $42 million in 2017. The increase was primarily due to: (i) increased Internet and enhanced data service revenues resulting from a 5.4% increase in our high-speed Internet subscribers over 12 months, higher revenue per customer from upgrades to faster Internet speeds and larger usage Internet rate plans, subscribers coming off of promotional offers and certain rate increases; (ii) growth in business process outsourcing revenues; (iii) increased TELUS TV revenues resulting from a 5.3% subscriber growth over 12 months and certain rate increases; and (iv) increased TELUS Health revenues. This growth was partly offset by the ongoing decline in legacy data services, as well as a decline in equipment revenues in the business market.

 

·                  Voice services revenues decreased by $28 million in 2017. The decrease reflects the ongoing decline in legacy revenues from technological substitution, increased competition, greater use of inclusive long distance plans and lower long distance minutes of use, including lower wholesale volumes, partially offset by certain rate increases. We experienced a 6.2% decline in residential NALs in 2017 compared to the prior year, unchanged from the prior year.

 

·                  Wireline subscriber connection net additions were 8,000 in 2017, or an increase of 11,000 from 2016.

 

Net additions of high-speed Internet subscribers of 24,000 increased by 12,000 in 2017. The increase was due to the success of recently launched innovative product offerings and the continued expansion of our high-speed broadband footprint, including fibre to the premises. Net additions of TELUS TV subscribers were down 4,000 in 2017. The decrease reflects lower gross additions and satellite-TV subscriber losses due to a declining overall market for paid TV services resulting from a high rate of market penetration and the effects of heightened competitive intensity, including OTT services. These pressures were partly offset by the continued focus on expanding our addressable high-speed Internet and Optik TV footprint, connecting more homes and businesses directly to fibre, and bundling these services together. This contributed to combined Internet and TV subscriber growth of 141,000 or 5.4% compared to the prior year.

 

Residential NAL losses were 23,000 in 2017, as compared to NAL losses of 26,000 in 2016, reflecting the ongoing trend of substitution to wireless and Internet-based services, and increased competition, partially mitigated by the success of our bundled service offerings and our customers first initiatives.

 

·                  Other services and equipment revenues decreased by $9 million in 2017, mainly due to declines in voice equipment sales.

 

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Other operating income increased by $4 million in 2017, mainly due to the non-recurrence of a provision related to written put options in respect of non-controlling interests in 2016, and gains on the sale of investments, partly offset by a decrease in amounts recognized from the regulatory price cap deferral account for provisioning broadband Internet services to eligible rural and remote communities.

 

 

Intersegment revenue represents services provided to the wireless segment. Such revenue is eliminated upon consolidation together with the associated expenses in wireless.

 

Operating expenses — Wireline segment

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016

 

Change

 

Goods and services purchased1

 

558

 

567

 

(1.6

)%

Employee benefits expense1

 

468

 

502

 

(6.8

)%

Wireline operating expenses

 

1,026

 

1,069

 

(4.0

)%

 


(1)         Includes restructuring and other costs. See Section 11.1 Non-GAAP and other financial measures.

 

Total wireline operating expenses decreased by $43 million in 2017, primarily due to the following factors:

 

Goods and services purchased decreased by $9 million in 2017, due to cost management and lower product costs related to decreases in data equipment revenues, partly offset by higher TV content costs which were driven by higher TV subscribers.

 

Employee benefits expense decreased by $34 million in 2017, primarily due to the non-recurrence of significant labour-related restructuring costs from efficiency initiatives in 2016, lower compensation and benefits costs resulting from a decrease in the number of domestic FTE employees and higher capitalized labour costs, partly offset by an increase in TELUS International employees supporting growing business process outsourcing revenue.

 

EBITDA — Wireline segment

 

Three-month periods ended March 31 ($ millions, except margins)

 

2017

 

2016

 

Change

 

EBITDA

 

441

 

384

 

14.6

%

Restructuring and other costs included in EBITDA1

 

3

 

39

 

(92.3

)%

Adjusted EBITDA1

 

444

 

423

 

4.7

%

EBITDA margin (%)

 

30.0

 

26.4

 

3.6

pts.

Adjusted EBITDA margin2 (%)

 

30.2

 

29.1

 

1.1

pts.

 


(1)         See description under EBITDA in Section 11.1.

(2)         The calculation of the Adjusted EBITDA margin excludes restructuring and other costs from EBITDA.

 

Wireline EBITDA increased by $57 million in 2017. Wireline Adjusted EBITDA increased by $21 million in 2017, due to growth in data service margins, including Internet, TELUS TV, TELUS Health services and business process outsourcing services, our execution of cost efficiency programs, partly offset by continued declines in legacy voice services.

 

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6.              Changes in financial position

 

Financial position at:

 

Mar. 31

 

Dec. 31

 

Change

 

 

 

($ millions)

 

2017

 

2016

 

($ millions)

 

(%)

 

Change includes:

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and temporary investments, net

 

794

 

432

 

362

 

84

%

See Section 7 Liquidity and capital resources

 

Accounts receivable

 

1,408

 

1,471

 

(63

)

(4

)%

A decrease in days outstanding in wireless receivables and lower postpaid average revenue per subscriber unit per month (ARPU) including seasonal effects experienced in the first quarter of 2017 compared to the fourth quarter of 2016

 

Income and other taxes receivable

 

105

 

9

 

96

 

n/m

 

An increase due to the timing of tax instalments in excess of current income tax expense as well as payment of taxes owing for 2016

 

Inventories

 

327

 

318

 

9

 

3

%

An increase in work in progress due to the installation of network equipment

 

Prepaid expenses

 

353

 

233

 

120

 

52

%

Increased due to the annual prepayment of statutory employee benefits, maintenance contracts, property taxes and annual wireless spectrum licence fees, net of amortization.

 

Current derivative assets

 

11

 

11

 

 

%

n/m

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

100

 

100

 

 

%

See Section 7.7 Sale of trade receivables

 

Accounts payable and accrued liabilities

 

2,084

 

2,330

 

(246

)

(11

)%

A decrease in payroll and other employee-related liabilities and the timing of accounts payable

 

Income and other taxes payable

 

41

 

37

 

4

 

11

%

An increase due to the timing of current income tax expense in excess of tax instalments for the quarter

 

Dividends payable

 

283

 

284

 

(1

)

%

n/m

 

Advance billings and customer deposits

 

775

 

737

 

38

 

5

%

An increase in customer deposits

 

Provisions

 

73

 

124

 

(51

)

(41

)%

Amounts paid out under restructuring initiatives exceeded new restructuring provisions

 

Current maturities of long-term debt

 

1,386

 

1,327

 

59

 

4

%

An increase of $509 million in outstanding commercial paper, as well as amounts reclassified from long-term debt relating to upcoming maturity of $250 million of our 1.50% Notes, Series CS in March 2018, offset by the maturation of $700 million of our 4.95% Notes, Series CD in March 2017

 

Current derivative liabilities

 

10

 

12

 

(2

)

(17

)%

A decrease in U.S. currency hedging items.

 

Working capital (Current assets subtracting Current liabilities)

 

(1,754

)

(2,477

)

723

 

29

%

Current assets increased by $524 million, while Current liabilities decreased by $199 million. Historically, TELUS has had a negative working capital position. See Capital structure management policies in Section 4.3 of this MD&A and the Liquidity risk discussion in Section 7.9 of our 2016 annual MD&A.

 

 

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23



 

Financial position at:

 

Mar. 31

 

Dec. 31

 

Change

 

 

 

($ millions)

 

2017

 

2016

 

($ millions)

 

(%)

 

Change includes:

 

Non-current assets

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

10,637

 

10,464

 

173

 

2

%

See Capital expenditures in Section 7.3 Cash used by investing activities and Depreciation in Section 5.3

 

Intangible assets, net

 

10,392

 

10,364

 

28

 

%

See Capital expenditures in Section 7.3 Cash used by investing activities and Amortization of intangible assets in Section 5.3

 

Goodwill, net

 

3,792

 

3,787

 

5

 

%

n/m

 

Other long-term assets

 

742

 

640

 

102

 

16

%

Pension and post-retirement assets increased due to positive returns earned on plan assets.

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

 

 

Provisions

 

399

 

395

 

4

 

1

%

n/m

 

Long-term debt

 

12,291

 

11,604

 

687

 

6

%

See Section 7.4 Cash provided by financing activities

 

Other long-term liabilities

 

744

 

736

 

8

 

1

%

n/m

 

Deferred income taxes

 

2,223

 

2,107

 

116

 

6

%

Deferred income tax expense as well as deferred income taxes on returns on pension plan assets.

 

Owners’ equity

 

 

 

 

 

 

 

 

 

 

 

Common equity

 

8,122

 

7,917

 

205

 

3

%

Includes Net income of $433 million and Other comprehensive income of $58 million, net of dividend declarations of $283 million and the impact on contributed surplus arising from adjustments to non-controlling interests of $3 million (see Section 7.4 Cash provided by financing activities)

 

Non-controlling interests

 

30

 

19

 

11

 

58

%

Includes Net income of $8 million, Other comprehensive income of $2 million and adjustments arising from the 35% non-controlling interests in TELUS International of $1 million.

 

 

7.              Liquidity and capital resources

 

This section contains forward-looking statements, including those with respect to our dividend payout ratio and net debt to EBITDA — excluding restructuring and other costs ratio. See Caution regarding forward-looking statements at the beginning of this MD&A.

 

7.1 Overview

 

Our capital structure financial policies and financing and capital structure management plans are described in Section 4.3.

 

Cash flows

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016

 

Change

 

Cash provided by operating activities

 

709

 

563

 

25.9

%

Cash used by investing activities

 

(822

)

(660

)

(24.5

)%

Cash provided by financing activities

 

475

 

352

 

34.9

%

Increase in Cash and temporary investments, net

 

362

 

255

 

42.0

%

Cash and temporary investments, net, beginning of period

 

432

 

223

 

93.7

%

Cash and temporary investments, net, end of period

 

794

 

478

 

66.1

%

 

7.2 Cash provided by operating activities

 

Cash provided by operating activities increased year over year by $146 million.

 

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24



 

Analysis of changes in cash provided by operating activities

 

($ millions)

 

First
quarter

 

Cash provided by operating activities, three-month period ended March 31, 2016

 

563

 

Year-over-year changes:

 

 

 

Higher EBITDA (see Section 5.4 Wireless segment and Section 5.5 Wireline segment)

 

121

 

Lower employer contributions to defined benefits plans, net of expense

 

2

 

Higher restructuring disbursements, net of restructuring costs

 

(18

)

Higher interest paid

 

(19

)

Lower income taxes paid, net of recoveries received

 

127

 

Other

 

(67

)

Cash provided by operating activities, three-month period ended March 31, 2017

 

709

 

 

·                  Income taxes paid, net of refunds received, decreased in 2017, reflecting lower required instalment payments and a larger final income tax payment in the first quarter of 2016 in respect of the 2015 income tax year.

 

·                  Other operating working capital changes in 2017 include a decrease in Accounts payable and accrued liabilities, net of an increase in Accounts receivable. (See Section 6 Changes in financial position and Note 31(a) in the interim consolidated financial statements.)

 

7.3 Cash used by investing activities

 

Cash used by investing activities

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016

 

Change

 

Cash payments for capital assets

 

(796

)

(646

)

(150

)

Cash payments for acquisitions

 

(12

)

(2

)

(10

)

Real estate joint venture advances and contributions, net of receipts

 

(2

)

(12

)

10

 

Proceeds on dispositions

 

3

 

 

3

 

Other

 

(15

)

 

(15

)

Cash used by investing activities

 

(822

)

(660

)

(162

)

 

·                  The increase in Cash payments for capital assets was composed of:

 

·                  A $106 million increase in capital expenditures in 2017 (see Capital expenditure measures table and discussion below)

 

·                  Increased capital expenditure payments with respect to payment timing differences, as associated Accounts payable and accrued liabilities increased by $44 million in 2017.

 

·                  Cash payments for acquisitions was in respect of an acquisition complementary to our existing lines of business.

 

·                  There were decreased Real estate joint venture advances and contributions, net of receipts in 2017, as there was more construction activity in progress in 2016.

 

·                  Proceeds on dispositions in 2017 were primarily related to the sale of small portfolio investments.

 

Capital expenditure measures

 

Three-month periods ended March 31 ($ millions, except capital intensity)

 

2017

 

2016

 

Change

 

Capital expenditures 1

 

 

 

 

 

 

 

Wireless segment

 

249

 

180

 

38.3

%

Wireline segment

 

475

 

438

 

8.4

%

Consolidated

 

724

 

618

 

17.2

%

Wireless segment capital intensity (%)

 

14

 

10

 

4

pts.

Wireline segment capital intensity (%)

 

32

 

30

 

2

pts.

Consolidated capital intensity2 (%)

 

23

 

20

 

3

pts.

 


(1)         Capital expenditures include assets purchased but not yet paid for, and therefore differ from Cash payments for capital assets, as presented on the interim consolidated statements of cash flows.

(2)         See Section 11.1 Non-GAAP and other financial measures.

 

Wireless segment capital expenditures increased by $69 million in 2017 due to continuing investments in our fibre-optic network to support our small-cell technology strategy to improve coverage and prepare for a more efficient and timely evolution to 5G. We also expanded our investment in Manitoba to improve coverage, capacity and speeds to significantly enhance our customer experience and supplement the business acquisition of MTS subscribers, dealers and network. Additionally, we continued to invest in system and network resiliency and reliability in support of our ongoing customers first initiatives and to ready the network and systems for future retirement of legacy assets.

 

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Wireline segment capital expenditures increased by $37 million in 2017 due to continuing investments in our broadband infrastructure, including connecting more homes and businesses directly to our fibre-optic network. This investment supports our high-speed Internet and Optik TV subscriber growth, as well as our customers’ demand for faster Internet speeds, and extends the reach and functionality of our business and healthcare solutions.

 

7.4 Cash provided by financing activities

 

Cash provided by financing activities

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016 

 

Change 

 

Dividends paid to holders of Common Shares

 

(284

)

(263

)

(21

)

Purchase of Common Shares for cancellation

 

 

(60

)

60

 

Long-term debt issued net of redemptions and repayment

 

769

 

675

 

94

 

Other

 

(10

)

 

(10

)

 

 

475

 

352

 

123

 

 

Dividends paid to the holders of Common Shares

 

The increase in dividends paid to the holders of Common Shares reflects higher dividend rates under our dividend growth program (see Section 4.3). Subsequent to March 31, 2017, we paid dividends of $283 million to the holders of Common Shares in April 2017. Included in this amount is approximately $15 million or 350,000 Common Shares issued from treasury. No discount was applicable.

 

Short-term borrowings

 

Short-term borrowings are composed primarily of amounts advanced to us from an arm’s-length securitization trust pursuant to the transfer of receivables securitization transactions (see Section 7.7 Sale of trade receivables). Such proceeds were $100 million at March 31, 2017, unchanged since March 31, 2016.

 

Long-term debt issues and repayments

 

For the first quarter of 2017, long-term debt issues, net of repayments, were $769 million, primarily composed of:

 

·                  The March 2017 issues of U.S.$500 million of senior unsecured notes at 3.70% due September 15, 2027 and $325 million of senior unsecured notes at 4.70% due March 6, 2048. The proceeds were used to fund the repayment, on maturity, of $700 million of the principal amount outstanding on TELUS’ Series CD Notes due March 2017, to repay a portion of outstanding commercial paper and for general corporate purposes. For the U.S. issuance, we have fully hedged the principal and interest obligations of the notes against fluctuations in the Canadian dollar foreign exchange rate for the entire term of the notes by entering into foreign exchange derivatives (cross currency interest rate exchange agreements) that effectively converted the principal payments and interest obligations to Canadian dollar obligations with an effective fixed interest rate of 3.41% and an effective issued and outstanding amount of $667 million (reflecting a fixed exchange rate of $1.3348). For additional information on these notes, please refer to Note 26(b) of the interim consolidated financial statements.

 

·                  A $509 million net increase in commercial paper, including foreign exchange effects, to a balance of $1,122 million at March 31, 2017, (U.S.$844 million) from $613 million (U.S.$456 million) at December 31, 2016. Our commercial paper program, when utilized, provides low-cost funds and is fully backstopped by the five-year committed credit facility (see Section 7.6 Credit facilities).

 

·                  Net draws on the TELUS International credit facility of $305 million ($298 million net of unamortized issue costs), all of which were denominated in U.S. dollars (U.S.$229 million) as at March 31, 2017.

 

·                  The March 2017 repayment of $700 million of Series CD Notes.

 

In comparison, long-term debt issues, net of repayments were $675 million in 2016, primarily composed of:

 

·                  An increase in commercial paper from $256 million at December 31, 2015, to $891 million at March 31, 2016, all of which was denominated in U.S. dollars (U.S. $686 million).

 

The average term to maturity of our long-term debt (excluding commercial paper and the revolving component of the TELUS International credit facility) increased to approximately 11.3 years at March 31, 2017, compared to approximately 10.8 years at March 31, 2016. Additionally, our weighted average cost of long-term debt was 4.16% at March 31, 2017, as compared to 4.22% at December 31, 2016 and 4.32% at March 31, 2016.

 

7.5 Liquidity and capital resource measures

 

Net debt was $13.1 billion at March 31, 2017, an increase of $0.7 billion when compared to one year earlier, resulting mainly from the issuances of the U.S.$500 million of senior unsecured notes and the $325 million of senior unsecured notes, as described in Section 7.4.

 

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Fixed-rate debt as a proportion of total indebtedness was 89% as at March 31, 2017, down from 92% one year earlier, mainly due to amounts drawn on the TELUS International credit facility and an increase in issued commercial paper.

 

Net debt to EBITDA — excluding restructuring and other costs ratio was 2.73 times, as measured at March 31, 2017, down slightly from 2.74 one year earlier. Our long-term objective for this measure is within a range of 2.00 to 2.50 times, which we believe is consistent with maintaining investment grade credit ratings in the range of BBB+, or the equivalent and providing reasonable access to capital. As at March 31, 2017, this ratio remains outside of the long-term objective range due to prior issuance of incremental debt primarily for the acquisition in 2014 and 2015 of spectrum licences for approximately $3.6 billion, which were auctioned in unprecedented amounts and in atypical concentrations during those years, partially offset by growth in EBITDA — excluding restructuring and other costs. These acquired licences have more than doubled our national spectrum holdings and represent an investment to extend our network capacity to support continuing data consumption growth, as well as growth in our wireless customer base. We will endeavour to return this ratio to within the objective range in the medium term, as we believe that this range is supportive of our long-term strategy. While this ratio exceeds our long-term objective range, we are well in compliance with the leverage ratio covenant in our credit facilities, which states that we may not permit our net debt to operating cash flow ratio to exceed 4.00:1.00 (see Section 7.6 Credit facilities).

 

Liquidity and capital resource measures

 

As at, or 12-month periods ended, March 31

 

2017

 

2016

 

Change

 

Components of debt and coverage ratios1 ($ millions)

 

 

 

 

 

 

 

Net debt

 

13,054

 

12,374

 

680

 

EBITDA — excluding restructuring and other costs

 

4,785

 

4,524

 

261

 

Net interest cost

 

564

 

494

 

70

 

Debt ratios

 

 

 

 

 

 

 

Fixed-rate debt as a proportion of total indebtedness (%)

 

89

 

92

 

(3

) pts.

Average term to maturity of long-term debt (excluding commercial paper) (years)

 

11.3

 

10.8

 

0.5

 

Weighted average interest rate on long-term debt (excluding commercial paper) (%)

 

4.16

 

4.32

 

(0.16

) pts.

Net debt to EBITDA — excluding restructuring and other costs1 (times)

 

2.73

 

2.74

 

(0.01

)

Coverage ratios1 (times)

 

 

 

 

 

 

 

Earnings coverage

 

4.1

 

4.6

 

(0.5

)

EBITDA — excluding restructuring and other costs interest coverage

 

8.5

 

9.2

 

(0.7

)

Other measures1 (%)

 

 

 

 

 

 

 

Dividend payout ratio of adjusted net earnings

 

76

 

76

 

 

Dividend payout ratio

 

87

 

76

 

11

pts.

 


(1)              See Section 11.1 Non-GAAP and other financial measures.

 

Earnings coverage ratio for the 12-month period ended March 31, 2017, was 4.1 times, down from 4.6 times one year earlier. A decrease in income before borrowing costs and income taxes reduced the ratio by 0.3, while an increase in borrowing costs reduced the ratio by 0.2.

 

EBITDA — excluding restructuring and other costs interest coverage ratio for the 12-month period March 31, 2017, was 8.5 times, down from 9.2 times one year earlier. An increase in net interest costs reduced the ratio by 1.2, while growth in EBITDA — excluding restructuring and other costs increased the ratio by 0.5.

 

Dividend payout ratios: Actual dividend payout decisions will continue to be subject to our Board’s assessment and the determination of our financial position and outlook, as well as our long-term dividend payout ratio guideline of 65 to 75% of prospective net earnings per share. The disclosed basic and adjusted dividend payout ratios are historical measures utilizing the last four quarters of dividends declared and earnings per share. We estimate that we are within our target guideline on a prospective dividend payout ratio basis. The historical measures for the 12-month period ended March 31, 2017, are presented for illustrative purposes in evaluating our target guideline and both exceeded the objective range.

 

7.6 Credit facilities

 

At March 31, 2017, we had available liquidity of more than $1.1 billion from the TELUS revolving credit facility, approximately $123 million available liquidity from the TELUS International credit facility and $127 million available from uncommitted letters of credit facilities. In addition, we had $400 million available under our trade receivables securitization program (see Section 7.7 Sale of trade receivables). We are well within our objective of generally maintaining at least $1.0 billion of available liquidity.

 

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TELUS revolving credit facility

 

We have a $2.25 billion (or U.S. dollar equivalent) revolving credit facility with a syndicate of financial institutions that expires on May 31, 2021. The revolving credit facility is used for general corporate purposes, including the backstop of commercial paper, as required.

 

TELUS revolving credit facility at March 31, 2017

 

($ millions)

 

Expiry

 

Size

 

Drawn

 

Outstanding 
undrawn 
letters of 
credit

 

Backstop for 
commercial 
paper 
program

 

Available 
liquidity

 

Five-year revolving facility1

 

May 31, 2021

 

2,250

 

 

 

(1,122

)

1,128

 

 


(1)              Canadian dollars or U.S. dollar equivalent.

 

Our revolving credit facility contains customary covenants, including a requirement that we not permit our consolidated leverage ratio to exceed 4.00 to 1.00 and that we not permit our consolidated coverage ratio to be less than 2.00 to 1.00, at the end of any financial quarter. Our consolidated leverage ratio was approximately 2.73 to 1.00 as at March 31, 2017, and our consolidated coverage ratio was approximately 8.48 to 1.00 as at March 31, 2017. These ratios are expected to remain well above the covenants. There are certain minor differences in the calculation of the leverage ratio and coverage ratio under the revolving credit facility, as compared with the calculation of Net debt to EBITDA — excluding restructuring and other costs and EBITDA — excluding restructuring and other costs interest coverage. Historically, the calculations have not been materially different. The covenants are not impacted by revaluation, if any, of Property, plant and equipment, Intangible assets or Goodwill for accounting purposes. Continued access to our credit facilities is not contingent on maintaining a specific credit rating.

 

Commercial paper

 

TELUS Corporation has an unsecured commercial paper program, which is backstopped by our revolving credit facility, enabling us to issue commercial paper up to a maximum aggregate amount of $1.4 billion at March 31, 2017, including a U.S. dollar-denominated commercial paper program for up to U.S.$1.0 billion within this maximum aggregate amount. The commercial paper program is to be used for general corporate purposes, including, but not limited to, capital expenditures and investments. Our ability to reasonably access the commercial paper market in Canada and the U.S. is dependent on our credit ratings (see Section 7.8 Credit ratings).

 

TELUS International (Cda) Inc. credit facilities

 

As at March 31, 2017, our subsidiary TELUS International (Cda) Inc. had a bank credit facility, secured by its assets, expiring on May 31, 2021, with a syndicate of financial institutions. The credit facility is composed of a revolving U.S.$115 million component and an amortizing U.S.$215 million term loan component. The credit facility is non-recourse to TELUS Corporation. As at March 31, 2017, $305 million ($298 million net of unamortized issue costs) was outstanding, all of which was denominated in U.S. dollars (U.S.$229 million), with a weighted average interest rate of 2.72%.

 

Other letter of credit facilities

 

At March 31, 2017, we had $214 million of letters of credit outstanding (December 31, 2016 — $210 million), issued under various uncommitted facilities; such letter of credit facilities are in addition to the ability to provide letters of credit pursuant to our committed bank credit facility. Available liquidity under various uncommitted letters of credit facilities was $127 million at March 31, 2017.

 

7.7 Sale of trade receivables

 

TELUS Communications Inc., a wholly owned subsidiary of TELUS, is a party to an agreement with an arm’s-length securitization trust associated with a major Schedule I Canadian bank, under which it is able to sell an interest in certain trade receivables for an amount up to a maximum of $500 million. The agreement is in effect until December 31, 2018, and available liquidity was $400 million as at March 31, 2017. (See Note 22 of the interim consolidated financial statements.) Sales of trade receivables in securitization transactions are recognized as collateralized Short-term borrowings and thus do not result in our de-recognition of the trade receivables sold.

 

TELUS Communications Inc. is required to maintain at least a BB credit rating by DBRS Ltd., or the securitization trust may require the sale program to be wound down prior to the end of the term. The necessary credit rating was exceeded as of May 11, 2017.

 

7.8 Credit ratings

 

There were no changes to our investment grade credit ratings as of May 11, 2017.

 

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7.9 Financial instruments, commitments and contingent liabilities

 

Financial instruments

 

Our financial instruments and the nature of certain risks that they may be subject to were described in Section 7.9 of our 2016 annual MD&A.

 

Liquidity risk

 

As a component of our capital structure financial policies, discussed in Section 4.3 Liquidity and capital resources, we manage liquidity risk by: maintaining a daily cash pooling process that enables us to manage our available liquidity and our liquidity requirements according to our actual needs; maintaining an agreement to sell trade receivables to an arm’s-length securitization trust; maintaining bilateral bank facilities and syndicated credit facilities; maintaining a commercial paper program; maintaining an in-effect shelf prospectus; continuously monitoring forecast and actual cash flows; and managing maturity profiles of financial assets and financial liabilities.

 

As of the date of this MD&A, we can offer up to $1.2 billion of long-term debt or equity securities pursuant to a shelf prospectus that is effective until April 2018.

 

At March 31, 2017, we had available liquidity of more than $1.1 billion from unutilized credit facilities and $127 million from uncommitted letters of credit facilities (see Section 7.6 Credit facilities), as well as $400 million available under our trade receivables securitization program (see Section 7.7 Sale of trade receivables). We also had $794 million in cash and temporary investments at March 31, 2017 of which a portion was used to close the MTS transaction as noted in Section 1.3. This adheres to our objective of generally maintaining at least $1 billion of available liquidity. We believe that our investment grade credit ratings contribute to reasonable access to capital markets.

 

Commitments and contingent liabilities

 

Purchase obligations

 

As at March 31, 2017, our contractual commitments related to the acquisition of property, plant and equipment were $270 million through to December 31, 2021, as compared to $436 million over a period ending December 31, 2020, reported in our 2016 annual report. The decrease was primarily due to the receipt of materials in connection with the execution of our planned capital program during the first quarter of 2017.

 

Claims and lawsuits

 

A number of claims and lawsuits (including class actions and intellectual property infringement claims) seeking damages and other relief are pending against us and, in some cases, numerous other wireless carriers and telecommunications service providers. As well, we have received notice of, or are aware of, certain possible claims (including intellectual property infringement claims) against us.

 

It is not currently possible for us to predict the outcome of such claims, possible claims and lawsuits due to various factors, including: the preliminary nature of some claims; uncertain damage theories and demands; an incomplete factual record; uncertainty concerning legal theories, procedures and their resolution by the courts, at both the trial and the appeal levels; and the unpredictable nature of opposing parties and their demands. However, when it is determined in respect of a particular claim that payments to claimants are probable, we accrue an estimate of the liability.

 

Subject to the foregoing limitations, management is of the opinion, based upon legal assessments and information presently available, that it is unlikely that any liability, to the extent not provided for through insurance or otherwise, would have a material effect on our financial position and the results of our operations, including cash flows, with the exception of the items disclosed in Note 29 of the interim consolidated financial statements.

 

Indemnification obligations

 

At March 31, 2017, we had no liability recorded in respect of our indemnification obligations.

 

7.10 Outstanding share information

 

Outstanding shares (millions)

 

March 31, 2017

 

April 30, 2017

 

Common Shares

 

591

 

591

 

Common Share options — all exercisable (one for one)

 

1

 

1

 

 

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7.11 Transactions between related parties

 

Investments in significant controlled entities

 

As at March 31, 2017, TELUS Corporation controlled 100% of the equity of TELUS Communications Inc., which, in turn, ultimately controlled 100% of TELUS Communications Company and TELE-MOBILE COMPANY. This is unchanged from December 31, 2016.

 

Transactions with key management personnel

 

Our key management personnel have authority and responsibility for overseeing, planning, directing and controlling our activities. They consist of our Board of Directors and our Executive Leadership Team. Total compensation expense amounts for key management personnel were $8 million in the first quarter of 2017, as compared to $16 million in the corresponding period in 2016. See Note 30(a) of the interim consolidated financial statements for additional detail.

 

Transactions with defined benefit pension plans

 

We provided management and administrative services to our defined benefit pension plans. Charges for these services were on a cost recovery basis and were immaterial.

 

Transactions with real estate joint ventures

 

In the first quarter of 2017, we had transactions with real estate joint ventures, which are related parties to us, as set out in Note 21 of our interim consolidated financial statements. As at March 31, 2017, the proportion of space leased in the TELUS Garden office tower was approximately 99%. Closing was completed for the majority of residential units in the TELUS Garden residential condominium project in the fourth quarter of 2016, with the remaining units expected to close in 2017.

 

For the TELUS Sky™ real estate joint venture, commitments and contingent liabilities include construction-related contractual commitments through to 2018 (approximately $114 million at March 31, 2017) and construction credit facilities ($342 million with three Canadian financial institutions as 66 2/3% lender and TELUS as 33 1/3% lender).

 

8.              Accounting matters

 

8.1 Critical accounting estimates

 

Our significant accounting policies are described in Note 1 of the Consolidated financial statements for the year ended December 31, 2016. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our critical accounting estimates and significant judgments are generally discussed with the Audit Committee each quarter and are described in Section 8.1 of our 2016 annual MD&A, which is hereby incorporated by reference.

 

8.2 Accounting policy developments

 

Our accounting policy developments were discussed in Section 8.2 Accounting policy developments of our 2016 annual MD&A. See Note 2 of the interim consolidated financial statements for additional details.

 

9.              Update to assumptions

 

This section contains forward-looking statements, which should be read together with the Caution regarding forward-looking statements at the beginning of this MD&A.

 

The assumptions for our 2017 outlook, as described in Section 9 General trends, outlook and assumptions of our 2016 annual MD&A, remain the same, except as updated below.

 

·                  Our revised estimate for economic growth in Canada is approximately 2.2% in 2017 (previously 1.8%). For our incumbent local exchange carrier (ILEC) provinces in Western Canada, we estimate that economic growth in Alberta will be 2.4% in 2017 (previously a growth range of 1.0 to 2.0%).

 

9.1 Telecommunications industry regulatory developments and proceedings

 

Our telecommunications, broadcasting and radiocommunication services are regulated under federal laws by various authorities, including the Canadian Radio-television and Telecommunications Commission (CRTC), Innovation, Science and Economic Development Canada (ISED) and the Minister of Canadian Heritage.

 

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The following are updates to Section 9.4 Telecommunications industry regulatory developments and proceedings in our 2016 annual MD&A.

 

Radiocommunication licences and spectrum-related matters

 

ISED regulates, among other matters, the allocation and use of radio spectrum in Canada and licenses radio apparatus, frequency bands and/or radio channels within various frequency bands to service providers and private users. The department also establishes the terms and conditions attaching to such radio authorizations, including restrictions on licence transfers, coverage obligations, research and development obligations, annual reporting, and obligations concerning mandated roaming and antenna site sharing with competitors.

 

Regulatory and federal government reviews

 

The CRTC and the federal government have initiated public proceedings to review various matters. They are discussed below.

 

Telecommunications-related issues

 

Review of competitor quality of service regime

 

The CRTC has commenced Telecom Notice of Consultation CRTC 2017-49 to review the regulatory framework for the competitor quality of service regime (CQoS). CQoS applies to certain wholesale services we provide to competitors. It establishes standards for certain aspects of service provision and requires TELUS to rebate a portion of rates where we fail to meet those standards. TELUS is also subject to tracking, reporting and auditing requirements. This proceeding will consider whether a regime is needed, what services should be subject to the regime, which service providers will be subject to the regime, the appropriateness of the rate rebates and other similar matters. A decision is not expected before the first quarter of 2018. This proceeding is not expected to have a material impact on TELUS.

 

Review regulatory framework for message relay service

 

On February 2, 2017, the CRTC initiated a proceeding to review the regulatory framework and marketplace environment for text-based message relay services. Local exchange carriers are required to provide these services that enable people with a hearing or speech disability to make and receive telephone calls. The CRTC has initiated this review because these services are in declining use in light of technological developments that have made other text messaging services convenient for customers. The proceeding will conclude on June 2, 2017. TELUS will participate in this review. It is not expected that the outcome of this proceeding will have a material impact on TELUS.

 

Phase-out of local service subsidy regime

 

The CRTC has issued Telecom Notice of Consultation CRTC 2017-92 in which it is seeking comments on its proposed approach to the phase-out of the local service subsidy regime and associated policies. This notice is part of the followup activities resulting from Modern Telecommunications Services  — The path forward for Canada’s digital economy, Telecom Regulatory Policy CRTC 2016-496 issued on December 21, 2016. TELUS continues to have the obligation to serve to provide local telephone service in all exchanges which our competitors do not have. TELUS will participate in this proceeding to seek greater pricing flexibility in regulated high cost exchanges if subsidies are removed and ensure we are compensated for any obligation to serve. It is unknown at this time whether the outcome of this proceeding will have a material financial impact on TELUS.

 

Development of the CRTC’s New Broadband Funding Regime

 

On April 25, 2017, the CRTC issued Development of the Commission’s broadband funding regime, Telecom Notice of Consultation CRTC 2017-112. This consultation follows on the CRTC’s Modern Telecommunications Services decision issued on December 21, 2016, in which the CRTC set a new universal service objective that included fixed and mobile wireless broadband Internet access services, and stated that it would begin to shift the focus of its current regulatory frameworks from wireline voice services to broadband in order to assist in expanding the availability and adoption of broadband Internet access services. The CRTC also set out its preliminary views on the establishment of a new broadband funding mechanism at that time. The CRTC has now issued a notice calling for comments on the various issues pertaining to the establishment of the new broadband funding regime, including governance of the new fund, operating and accountability frameworks, as well as eligibility and assessment criteria for proposed projects. The CRTC is also seeking comments on its preliminary views on the new broadband fund set out in Telecom Regulatory Policy 2016-496, and is also seeking responses to a series of questions. It is too early to determine the potential impact that this proceeding may have on TELUS.

 

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Broadcasting-related issues

 

Review and modernizing of the Broadcasting Act and Telecommunications Act

 

In the federal government’s budget announcement on March 22, 2017, the federal government recognized the impact of the digital age on Canada’s media and broadcasting industries and indicated its intention to review and modernize the Broadcasting Act and the Telecommunications Act, looking specifically at issues relating to content creation in the digital age, net neutrality and cultural diversity. This announcement dovetails with the review of Canada’s cultural policies as described in Section 9.4 of our 2016 annual MD&A. TELUS participated in all phases of that consultation and will continue to participate in the upcoming phases of this review of the Acts. Further details on this review will be announced in the coming months. It is unknown at this time whether there will be a material impact on TELUS’ operations resulting from this review.

 

10.       Risks and risk management

 

The principal risks and uncertainties that could affect our future business results and associated risk mitigation activities were described in our 2016 annual MD&A.

 

11.       Definitions and reconciliations

 

11.1 Non-GAAP and other financial measures

 

We have issued guidance on and report certain non-GAAP measures that are used to evaluate the performance of TELUS, as well as to determine compliance with debt covenants and to manage our capital structure. As non-GAAP measures generally do not have a standardized meaning, they may not be comparable to similar measures presented by other issuers. Securities regulations require such measures to be clearly defined, qualified and reconciled with their nearest GAAP measure.

 

Adjusted Net income and adjusted basic earnings per share: These measures are used to evaluate performance at a consolidated level and exclude items that may obscure the underlying trends in business performance. These measures should not be considered alternatives to Net income and basic earnings per share in measuring TELUS’ performance. Items that may, in management’s view, obscure the underlying trends in business performance include significant gains or losses associated with real estate redevelopment partnerships, gains on the exchange of wireless spectrum licences, restructuring and other costs, long-term debt prepayment premiums (when applicable), income tax-related adjustments and asset retirements related to restructuring activities. (See Analysis of Net income and Analysis of basic EPS in Section 1.3).

 

Capital intensity: This measure is calculated as capital expenditures (excluding spectrum licences) divided by total operating revenues. This measure provides a basis for comparing the level of capital expenditures to those of other companies of varying size within the same industry.

 

Dividend payout ratio: This is a historical measure calculated as the sum of the last four quarterly dividends declared per Common Share, as reported in the financial statements, divided by the sum of basic earnings per share for the most recent four quarters for interim reporting periods. For fiscal years, the denominator is annual basic earnings per share. Our policy guideline for the annual dividend payout ratio is on a prospective basis, rather than on a trailing basis, and is 65 to 75% of sustainable earnings per share on a prospective basis. (See Section 7.5 Liquidity and capital resource measures.)

 

Calculation of Dividend payout ratio

 

12-month periods ended March 31 ($)

 

2017

 

2016

 

Numerator — sum of the last four quarterly dividends declared per Common Share

 

1.88

 

1.72

 

Denominator — Net income per Common Share

 

2.16

 

2.25

 

Ratio (%)

 

87

 

76

 

 

Dividend payout ratio of adjusted net earnings: This ratio is a historical measure calculated as the sum of the last four quarterly dividends declared per Common Share, as reported in the financial statements, divided by adjusted net earnings per share. Adjusted net earnings per share is basic earnings per share, as used in the Dividend payout ratio, adjusted to exclude the gain on the exchange of wireless spectrum licences, net gains and equity income from real estate joint venture developments, business acquisition-related provisions, immediately vesting transformative compensation expense, long-term debt prepayment premium (when applicable) and income tax-related adjustments.

 

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Calculation of Dividend payout ratio of adjusted net earnings

 

12-month periods ended March 31 ($)

 

2017

 

2016

 

Numerator — sum of the last four quarterly dividends declared per Common Share

 

1.88

 

1.72

 

Adjusted net earnings ($ millions):

 

 

 

 

 

Net income attributable to Common Shares

 

1,278

 

1,345

 

Deduct net gains and equity income from real estate joint venture developments, after income taxes

 

(16

)

 

Deduct gain on the exchange of wireless spectrum licences, after income taxes

 

(13

)

 

Add back business acquisition-related provisions, after income taxes

 

11

 

4

 

Add back transformative compensation expense, after income taxes

 

224

 

 

Add back net unfavourable (deduct net favourable) income tax-related adjustments

 

(18

)

2

 

 

 

1,466

 

1,351

 

Denominator — Adjusted net earnings per Common Share

 

2.48

 

2.26

 

Adjusted ratio (%)

 

76

 

76

 

 

Earnings coverage: This measure is defined in the Canadian Securities Administrators’ National Instrument 41-101 and related instruments, and is calculated as follows:

 

Calculation of Earnings coverage

 

12-month periods ended March 31 ($ millions, except ratio)

 

2017

 

2016

 

Net income attributable to Common Shares

 

1,278

 

1,345

 

Income taxes (attributable to Common Shares)

 

432

 

516

 

Borrowing costs (attributable to Common Shares)1

 

544

 

523

 

Numerator

 

2,254

 

2,384

 

Denominator — Borrowing costs

 

544

 

523

 

Ratio (times)

 

4.1

 

4.6

 

 


(1)         Interest on Long-term debt plus Interest on short-term borrowings and other plus long-term debt prepayment premium, adding back capitalized interest and deducting borrowing costs attributable to non-controlling interests.

 

EBITDA (earnings before interest, income taxes, depreciation and amortization): We have issued guidance on and report EBITDA because it is a key measure used to evaluate performance at a consolidated level. EBITDA is commonly reported and widely used by investors and lending institutions as an indicator of a company’s operating performance and ability to incur and service debt, and as a valuation metric. EBITDA should not be considered an alternative to Net income in measuring TELUS’ performance, nor should it be used as an exclusive measure of cash flow. EBITDA as calculated by TELUS is equivalent to Operating revenues less the total of Goods and services purchased expense and Employee benefits expense.

 

We calculate EBITDA — excluding restructuring and other costs, as it is a component of the EBITDA — excluding restructuring and other costs interest coverage ratio and the Net debt to EBITDA — excluding restructuring and other costs ratio.

 

We may also calculate Adjusted EBITDA to exclude items of an unusual nature that do not reflect our ongoing operations and should not, in our opinion, be considered in a valuation metric, or should not be included in an assessment of our ability to service or incur debt.

 

EBITDA reconciliation

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016

 

Net income

 

441

 

378

 

Financing costs

 

138

 

123

 

Income taxes

 

150

 

139

 

Depreciation

 

402

 

385

 

Amortization of intangible assets

 

130

 

115

 

EBITDA

 

1,261

 

1,140

 

Restructuring and other costs included in EBITDA

 

 

48

 

EBITDA — excluding restructuring and other costs and Adjusted EBITDA

 

1,265

 

1,188

 

 

EBITDA — excluding restructuring and other costs interest coverage: This measure is defined as EBITDA —excluding restructuring and other costs, divided by Net interest cost, calculated on a 12-month trailing basis. This measure is similar to the coverage ratio covenant in our credit facilities, as described in Section 7.6 Credit facilities.

 

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Free cash flow: We report this measure as a supplementary indicator of our operating performance. It should not be considered an alternative to the measures in the interim consolidated statements of cash flows. Free cash flow excludes certain working capital changes (such as trade receivables and trade payables), proceeds from divested assets and other sources and uses of cash, as found in the Consolidated statements of cash flows. It provides an indication of how much cash generated by operations is available after capital expenditures (excluding purchases of spectrum licences) that may be used to, among other things, pay dividends, repay debt, purchase shares or make other investments. Free cash flow may be supplemented from time to time by proceeds from divested assets or financing activities.

 

Free cash flow calculation

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016

 

EBITDA

 

1,261

 

1,140

 

Deduct non-cash gains from the sale of property, plant and equipment

 

(1

)

(3

)

Restructuring and other costs, net of disbursements

 

(46

)

(28

)

Items from the interim consolidated statements of cash flows:

 

 

 

 

 

Share-based compensation

 

16

 

16

 

Net employee defined benefit plans expense

 

21

 

22

 

Employer contributions to employee defined benefit plans

 

(22

)

(25

)

Interest paid

 

(142

)

(123

)

Capital expenditures (excluding spectrum licences)

 

(724

)

(618

)

Free cash flow before income taxes

 

363

 

381

 

Income taxes paid, net of refunds

 

(146

)

(273

)

Free cash flow

 

217

 

108

 

 

The following reconciles our definition of free cash flow with cash provided by operating activities.

 

Free cash flow reconciliation with Cash provided by operating activities

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016

 

Free cash flow

 

217

 

108

 

Add (deduct):

 

 

 

 

 

Capital expenditures (excluding spectrum licences)

 

724

 

618

 

Adjustments to reconcile to Cash provided by operating activities

 

(232

)

(163

)

Cash provided by operating activities

 

709

 

563

 

 

Net debt: We believe that net debt is a useful measure because it represents the amount of Short-term borrowings and long-term debt obligations that are not covered by available Cash and temporary investments. The nearest IFRS measure to net debt is Long-term debt, including Current maturities of Long-term debt. Net debt is a component of the Net debt to EBITDA — excluding restructuring and other costs ratio.

 

Calculation of Net debt

 

At March 31 ($ millions)

 

2017

 

2016

 

Long-term debt including current maturities

 

13,677

 

12,676

 

Debt issuance costs netted against long-term debt

 

75

 

50

 

Derivative liabilities, net

 

38

 

26

 

Accumulated other comprehensive income amounts arising from financial instruments used to manage interest rate and currency risks associated with U.S. dollar-denominated long-term debt (excluding tax effects)

 

(42

)

 

Cash and temporary investments

 

(794

)

(478

)

Short-term borrowings

 

100

 

100

 

Net debt

 

13,054

 

12,374

 

 

Net debt to EBITDA — excluding restructuring and other costs: This measure is defined as net debt at the end of the period divided by 12-month trailing EBITDA — excluding restructuring and other costs. Our long-term policy guideline for this ratio is from 2.00 to 2.50 times. (See discussion in Section 7.5 Liquidity and capital resource measures.) This measure is similar to the leverage ratio covenant in our credit facilities, as described in Section 7.6 Credit facilities.

 

Net interest cost: This measure is the denominator in the calculation of EBITDA — excluding restructuring and other costs interest coverage. Net interest cost is defined as financing costs, excluding capitalized long-term debt interest, employee defined benefit plans net interest and recoveries on redemption and repayment of debt, calculated on a 12-month trailing basis. No recoveries on redemption and repayment of debt were recorded in 2017 and 2016. Expenses recorded for the long-term debt prepayment premium, if any, are included in net interest cost. Net interest cost was $564 million in the 12-month period ended March 31, 2017, and $494 million in the 12-month period ended March 31, 2016.

 

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Restructuring and other costs: With the objective of reducing ongoing costs, we incur associated incremental, non-recurring restructuring costs. We may also incur atypical charges when undertaking major or transformational changes to our business or operating models. In addition, we include incremental external costs incurred in connection with business acquisition or disposition activity, as well as litigation costs, in the context of significant losses and settlements, in other costs.

 

Components of restructuring and other costs

 

Three-month periods ended March 31 ($ millions)

 

2017

 

2016

 

Goods and services purchased

 

4

 

4

 

Employee benefits expense

 

 

44

 

Restructuring and other costs included in EBITDA

 

4

 

48

 

 

11.2 Operating indicators

 

The following measures are industry metrics that are useful in assessing the operating performance of a wireless and wireline telecommunications entity, but do not have a standardized meaning under IFRS-IASB.

 

Average revenue per subscriber unit per month (ARPU) for wireless subscribers is calculated as network revenue divided by the average number of subscriber units on the network during the period and is expressed as a rate per month.

 

Churn per month (or churn) is calculated as the number of subscriber units deactivated during a given period divided by the average number of subscriber units on the network during the period and is expressed as a rate per month. A TELUS, Koodo or Public Mobile brand prepaid wireless subscriber is deactivated when the subscriber has no usage for 90 days following expiry of the prepaid credits.

 

Wireless subscriber unit (subscriber) is defined as an active mobile recurring revenue-generating unit (e.g. mobile phone, tablet or mobile Internet key) with a unique subscriber identifier (SIM or IMEI number). In addition, TELUS has a direct billing or support relationship with the user of each device. Subscriber units exclude machine-to-machine devices (a subset of the Internet of Things), such as those used for asset tracking, remote control monitoring and meter readings, vending machines and wireless automated teller machines.

 

Wireline subscriber connection is defined as an active recurring revenue-generating unit that has access to stand-alone services, including fixed Internet access, TELUS TV and residential network access lines (NALs). In addition, TELUS has a direct billing or support relationship with the user of each service. Reported subscriber units exclude business NALs as the impact of migrating from voice lines to IP services has led to business NAL losses without a similar decline in revenue, thus diminishing its relevance as a key performance indicator.

 

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