**Exhibit 99.4**

 

**Audited Consolidated Financial Statements as at and for the year endedDecember 31, 2009 and**

**Management’s Discussion and Analysis**

 

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**TELUS CORPORATION**

** **

**CONSOLIDATED FINANCIAL STATEMENTS**

** **

**DECEMBER 31, 2009**

 

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management’s report 

 

Management is responsible to the Board of Directors for the preparationof the Consolidated financial statements of the Company and its subsidiaries.These financial statements have been prepared in accordance with Canadiangenerally accepted accounting principles and necessarily include some amountsbased on estimates and judgements.

 

The Company maintains a system of internalcontrols that provides management with reasonable assurance that assets aresafeguarded and that reliable financial records are maintained. This systemincludes written policies and procedures, an organizational structure thatsegregates duties and a comprehensive program of periodic audits by theinternal auditors. The Company has also instituted policies and guidelines thatrequire TELUS team members (including Board members and Company employees) tomaintain the highest ethical standards, and has established mechanisms for thereporting to the Audit Committee of accounting and ethics policy complaints. Inaddition, the Chief Compliance Officer works to ensure the Company hasappropriate policies, controls and measurements in place to facilitatecompliance with all legal and regulatory requirements. Annually, the Companyperforms an extensive risk assessment process, which includes interviews withsenior management, a web-enabled risk and control assessment survey distributedto a large sample of employees, and input from the Company’s strategic planningactivities. Results of this process influence the development of the internalaudit program. Key enterprise-wide risks are assigned to executive owners forrisk mitigation responsibility. As required by Canadian securities regulationsand the United States *Sarbanes-Oxley Act*,the Company has an effective and efficient Sarbanes-Oxley certificationenablement process. In addition to assessing disclosure controls and proceduresand internal control over financial reporting, this process cascadesinformative certifications from the key stakeholders, which are reviewed by theChief Executive Officer and the Chief Financial Officer as part of their duediligence process.

 

The Company has a formal policy on CorporateDisclosure and Confidentiality of Information, which sets out policies andpractices including the mandate of the Disclosure Committee.

 

The Chief Executive Officer and the ChiefFinancial Officer have evaluated the effectiveness of the Company’s disclosurecontrols and procedures related to the preparation of the Management’sdiscussion and analysis and the Consolidated financial statements, as well asother information contained in this report. They have concluded that theCompany’s disclosure controls and procedures were effective, at a reasonableassurance level, to ensure that material information relating to the Companyand its consolidated subsidiaries would be made known to them by others withinthose entities, particularly during the period in which the Management’sdiscussion and analysis and the Consolidated financial statements contained inthis report were being prepared. In addition, the Chief Executive Officer andthe Chief Financial Officer have also evaluated the design and operatingeffectiveness of the Company’s internal control over financial reporting asexplained in the following report entitled Report of Management on InternalControl over Financial Reporting.

 

The Board of Directors has reviewed and approvedthese Consolidated financial statements. To assist the Board in meeting itsoversight responsibilities, it has appointed an Audit Committee, which iscomprised entirely of independent directors. All the members of the committeeare financially literate and the Chair of the committee has financial expertiseand meets the applicable securities law requirements as a financial expert. Thecommittee oversees the Company’s accounting and financial reporting, internalcontrols and disclosure controls, legal and regulatory compliance, ethicspolicy and timeliness of filings with regulatory authorities, the independenceand performance of the Company’s external and internal auditors, the managementof the Company’s risks, its creditworthiness, treasury plans and financialpolicy, and its whistleblower and accounting and ethics complaint procedures.The committee meets no less than quarterly and, as a standard feature ofregularly scheduled meetings, holds an in-camera session with the externalauditors and separately with the internal auditors without other management,including management directors, present. It oversees the work of the externalauditors and approves the annual audit plan. It also receives reports on theexternal auditor’s internal quality control procedures and independence.Furthermore, the Audit Committee reviews: the Company’s major accountingpolicies including alternatives and potential key management estimates andjudgements; the Company’s financial policies and compliance with such policies;the evaluation by the internal auditors of management’s internal controlsystems; and the evaluation by management of the adequacy and effectiveness inthe design and operation of the Company’s disclosure controls and internalcontrols over financial reporting. The Audit Committee also considers reportson the Company’s business continuity and disaster recovery plan; reports onfinancial risk management including derivative exposure and policies; tax planning,environmental, health and safety risk management, corporate socialresponsibility and management’s approach for safeguarding

 

 

2

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corporate assets; annual review of the Chair of Board of Directors, ChiefExecutive Officer and Executive Leadership Team expenses and their use ofcorporate assets; and regularly reviews material capital expenditureinitiatives. The committee pre-approves all audit, audit-related and non-auditservices provided to the Company by the external auditors (and its affiliates).The committee’s terms of reference are available, on request, to shareholdersand at **telus.com/governance**.

 

 
| /s/Robert G. McFarlane       |   | /s/Darren Entwistle          |
|------------------------------|--------|------------------------------|
| Robert G. McFarlane          |   | Darren Entwistle             |
| Executive  Vice-President    |   | President                    |
| and  Chief Financial Officer |   | and  Chief Executive Officer |
| February 25,  2010      |   | February 25,  2010      |

 

reportof management on internal control over financial reporting

 

Management of TELUS Corporation (TELUS) isresponsible for establishing and maintaining adequate internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting.

 

TELUS’Chief Executive Officer and Chief Financial Officer have assessed theeffectiveness of the Company’s internal control over financial reporting as of December 31,2009, in accordance with the criteria established in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Internal control overfinancial reporting is a process designed by, or under the supervision of, theChief Executive Officer (CEO) and the Executive Vice-President and ChiefFinancial Officer (CFO) and effected by the Board of Directors, management andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.

 

Dueto its inherent limitations, internal control over financial reporting may notprevent or detect misstatements on a timely basis. Also, projections of anyevaluation of the effectiveness of internal control over financial reporting tofuture periods are subject to the risk that the controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate. Based on this assessment, managementhas determined that the Company’s internal control over financial reporting iseffective as of December 31, 2009. In connection with this assessment, nomaterial weaknesses in the Company’s internal control over financial reportingwere identified by management as of December 31, 2009.

 

Deloitte & Touche LLP, theCompany’s Independent Registered Chartered Accountants, audited the Company’sConsolidated financial statements for the year ended December 31, 2009,and as stated in the Report of Independent Registered Chartered Accountants,they have expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2009.

 

 
| /s/Robert  G. McFarlane      |   | /s/Darren  Entwistle         |
|------------------------------|--------|------------------------------|
| Robert G. McFarlane          |   | Darren Entwistle             |
| Executive  Vice-President    |   | President                    |
| and  Chief Financial Officer |   | and  Chief Executive Officer |
| February 25,  2010      |   | February 25,  2010      |

 

 

3

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report of independent registered charteredaccountants

 

To the Board ofDirectors and Shareholders of TELUS Corporation

 

We have audited the accompanying consolidated statements of financialposition of TELUS Corporation and subsidiaries (the Company) as at December 31,2009 and 2008, and the consolidated statements of income and othercomprehensive income, changes in owners’ equity and cash flows for the yearsthen ended. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with Canadian generally accepted auditing standards and thestandards of the Public Company Accounting Oversight Board(United States). These standards require that we plan and perform theaudit to obtain reasonable assurance whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theseconsolidated financial statements present fairly, in all material respects, thefinancial position of TELUS Corporation and subsidiaries as of December 31,2009 and 2008, and the results of their operations and their cash flows for theyears then ended in accordance with Canadian generally accepted accountingprinciples.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the Company’s internal control over financial reportingas at December 31, 2009, based on the criteria established in *Internal Control — Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated February 25, 2010, expressed an unqualified opinion on the Company’sinternal control over financial reporting.

 

 
|   | /s/Deloitte & Touche LLP                  |
|--------|-----------------------------------------------|
|   | Deloitte & Touche LLP                |
|   | Independent  Registered Chartered Accountants |
|   | Vancouver,  Canada                            |
|   | February 25,  2010                       |

 

comments by independent registered charteredaccountants on Canada-United States of America reporting difference 

 

Thestandards of the Public Company Accounting Oversight Board (United States)require the addition of an explanatory paragraph (following the opinionparagraph) when there are changes in accounting principles that have a materialeffect on the comparability of the Company’s financial statements. As describedin Note 2, the Company changed its accounting for customer activation andconnection fees, business combinations and non-controlling interests. Althoughwe conducted our audits in accordance with both Canadian generally acceptedauditing standards and the standards of the Public Company Accounting OversightBoard (United States), our report to the Board of Directors and Shareholders,dated February 25, 2010, is expressed in accordance with Canadianreporting standards which do not require a reference to such changes inaccounting principles in the auditor’s report when the change is properlyaccounted for and adequately disclosed in the financial statements.

 

 
|   | /s/Deloitte & Touche  LLP                 |
|--------|-----------------------------------------------|
|   | Deloitte & Touche LLP                |
|   | Independent  Registered Chartered Accountants |
|   | Vancouver,  Canada                            |
|   | February 25,  2010                       |

 

 

4

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reportof independent registered chartered accountants

 

Tothe Board of Directors and Shareholders of TELUS Corporation

 

Wehave audited the internal control over financial reporting of TELUS Corporationand subsidiaries (the Company) as of December 31, 2009, based on thecriteria established in *Internal Control —Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in the accompanying Report of Management on InternalControl over Financial Reporting. Our responsibility is to express an opinionon the Company’s internal control over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists,testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof the inherent limitations of internal control over financial reporting,including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented ordetected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Inour opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2009, basedon the criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

Wehave also audited, in accordance with Canadian generally accepted auditingstandards and the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements as at and for the yearended December 31, 2009, of the Company and our report dated February 25,2010, expressed an unqualified opinion on those financial statements andincluded a separate report titled Comments by Independent Registered CharteredAccountants on Canada-United States of America Reporting Difference referringto changes that affect the comparability of the Company’s financial statements.

 

 
|   | /s/Deloitte & Touche  LLP                 |
|--------|-----------------------------------------------|
|   | Deloitte & Touche LLP                |
|   | Independent  Registered Chartered Accountants |
|   | Vancouver,  Canada                            |
|   | February 25, 2010                        |

 

 

5

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consolidated statements of income and othercomprehensive income

 
| **Years  ended December 31 (millions except per share amounts)**                                                         | ** ** | **2009**   | ** ** | **2008**                                 | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------------------------|------------|
| ** **                                                                                                                    | ** ** | ** ** | ** ** | **(as adjusted —  Note 2(c))** | ** ** |
| **OPERATING REVENUES**                                                                                                        | ** ** | **$**      | **9,606**  |                                     | $          | 9,653 |   |
| **OPERATING EXPENSES**                                                                                                        | ** ** | ** ** |       |                                     |       |
| Operations                                                                                                                    | ** ** | **5,925**  |       | 5,815                                    |       |
| Restructuring costs *(Note 7)*                                                                                                | ** ** | **190**    |       | 59                                       |       |
| Depreciation                                                                                                                  | ** ** | **1,341**  |       | 1,384                                    |       |
| Amortization of intangible assets                                                                                             | ** ** | **381**    |       | 329                                      |       |
|                                                                                                                          | ** ** | **7,837**  |       | 7,587                                    |       |
| **OPERATING INCOME**                                                                                                          | ** ** | **1,769**  |       | 2,066                                    |       |
| Other expense, net                                                                                                            | ** ** | **32**     |       | 36                                       |       |
| Financing costs*(Note 8)*                                                                                                     | ** ** | **532**    |       | 463                                      |       |
| **INCOME BEFORE INCOME TAXES**                                                                                                | ** ** | **1,205**  |       | 1,567                                    |       |
| Income taxes *(Note 9)*                                                                                                       | ** ** | **203**    |       | 436                                      |       |
| **NET INCOME**                                                                                                                | ** ** | **1,002**  |       | 1,131                                    |       |
| **OTHER COMPREHENSIVE INCOME*****(Note 19(b))*                                                                                | ** ** | ** ** |       |                                     |       |
| Change in unrealized fair  value of derivatives designated as cash flow hedges                                                | ** ** | **69**     |       | (26                                      | )          |
| Foreign currency  translation adjustment arising from translating financial statements of  self-sustaining foreign operations | ** ** | **(12**    | **)**      | 2                                        |       |
| Change in unrealized fair  value of available-for-sale financial assets                                                       | ** ** | **1**      |       | (2                                       | )          |
| ** **                                                                                                                    | ** ** | **58**     |       | (26                                      | )          |
| **COMPREHENSIVE INCOME**                                                                                                      | ** ** | **$**      | **1,060**  |                                     | $          | 1,105 |   |
| **NET INCOME ATTRIBUTABLE TO:**                                                                                               | ** ** | ** ** |       |                                     |       |
| Common Shares and Non-Voting Shares                                                                                           | ** ** | **$**      | **998**    |                                     | $          | 1,128 |   |
| Non-controlling interests                                                                                                     | ** ** | **4**      |       | 3                                        |       |
|                                                                                                                          | ** ** | **$**      | **1,002**  |                                     | $          | 1,131 |   |
| **TOTAL COMPREHENSIVE INCOME  ATTRIBUTABLE TO:**                                                                              | ** ** | ** ** |       |                                     |       |
| Common Shares and Non-Voting Shares                                                                                           | ** ** | **$**      | **1,056**  |                                     | $          | 1,102 |   |
| Non-controlling interests                                                                                                     | ** ** | **4**      |       | 3                                        |       |
|                                                                                                                          | ** ** | **$**      | **1,060**  |                                     | $          | 1,105 |   |
| **NET INCOME PER COMMON SHARE AND  NON-VOTING SHARE***(Note 10)*                                                              | ** ** | ** ** |       |                                     |       |
| — Basic                                                                                                                  | ** ** | **$**      | **3.14**   |                                     | $          | 3.52 |   |
| — Diluted                                                                                                                | ** ** | **$**      | **3.14**   |                                     | $          | 3.51 |   |
| **DIVIDENDS DECLARED PER COMMON  SHARE AND NON-VOTING SHARE***(Note 11)*                                                      | ** ** | **$**      | **1.90**   |                                     | $          | 1.825 |   |
| **TOTAL WEIGHTED AVERAGE COMMON  SHARES AND NON-VOTING SHARES OUTSTANDING**                                                   | ** ** | ** ** |       |                                     |       |
| — Basic                                                                                                                  | ** ** | **318**    |       | 320                                      |       |
| — Diluted                                                                                                                | ** ** | **318**    |       | 322                                      |       |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

 

6

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consolidatedstatements of financial position

 
| **As at  December 31 (millions)**                                                     | ** ** | **2009**   | ** ** | **2008**                                 | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------------------------------------|------------|
| ** **                                                                                 | ** ** | ** ** | ** ** | **(as adjusted —  Note 2(b))** | ** ** |
| **ASSETS**                                                                                 |       |       |       |                                     |       |
| ** **                                                                                 |       |       |       |                                     |       |
| **Current  Assets**                                                                        |       |       |       |                                     |       |
| Cash and temporary investments, net                                                        | ** ** | **$**      | **41**     |                                     | $          | 4 |   |
| Accounts receivable *(Notes 14,  21(b))*                                              | ** ** | **694**    |       | 966                                      |       |
| Income and other taxes receivable                                                          | ** ** | **16**     |       | 25                                       |       |
| Inventories *(Note 21(b))*                                                            | ** ** | **270**    |       | 397                                      |       |
| Prepaid expenses                                                                           | ** ** | **105**    |       | 112                                      |       |
| Derivative assets *(Note  5(h))*                                                           | ** ** | **1**      |       | 10                                       |       |
|                                                                                       | ** ** | **1,127**  |       | 1,514                                    |       |
| **Non-Current  Assets**                                                                    | ** ** | ** ** |       |                                     |       |
| Property, plant, equipment and other, net *(Note 15)*                                      | ** ** | **7,729**  |       | 7,317                                    |       |
| Intangible assets, net *(Note 16)*                                                         | ** ** | **5,148**  |       | 5,166                                    |       |
| Goodwill, net *(Note 16)*                                                                  | ** ** | **3,572**  |       | 3,564                                    |       |
| Other long-term assets *(Note 21(b))*                                                 | ** ** | **1,602**  |       | 1,418                                    |       |
| Investments                                                                                | ** ** | **41**     |       | 42                                       |       |
|                                                                                       | ** ** | **18,092** |       | 17,507                                   |       |
|                                                                                       | ** ** | **$**      | **19,219** |                                     | $          | 19,021 |   |
| ** **                                                                                 | ** ** | ** ** |       |                                     |       |
| **LIABILITIES AND OWNERS’ EQUITY**                                                    | ** ** | ** ** |       |                                     |       |
| ** **                                                                                 | ** ** | ** ** |       |                                     |       |
| **Current Liabilities**                                                                    | ** ** | ** ** |       |                                     |       |
| Accounts payable and accrued liabilities *(Note 21(b))*                               | ** ** | **$**      | **1,385**  |                                     | $          | 1,465 |   |
| Income and other taxes payable                                                             | ** ** | **182**    |       | 163                                      |       |
| Restructuring accounts payable and accrued  liabilities *(Note 7)*                         | ** ** | **135**    |       | 51                                       |       |
| Dividends payable                                                                          | ** ** | **150**    |       | 151                                      |       |
| Advance billings and customer deposits *(Note 21(b))*                                 | ** ** | **674**    |       | 689                                      |       |
| Current maturities of long-term debt *(Note 18)*                                      | ** ** | **82**     |       | 4                                        |       |
| Current portion of derivative liabilities *(Note 5(h))*                                    | ** ** | **62**     |       | 75                                       |       |
| Current portion of future income taxes                                                     | ** ** | **294**    |       | 459                                      |       |
|                                                                                       | ** ** | **2,964**  |       | 3,057                                    |       |
| **Non-Current Liabilities**                                                                | ** ** | ** ** |       |                                     |       |
| Long-term debt *(Note 18)*                                                                 | ** ** | **6,090**  |       | 6,348                                    |       |
| Other long-term liabilities *(Note 21(b))*                                            | ** ** | **1,271**  |       | 1,295                                    |       |
| Future income taxes                                                                        | ** ** | **1,319**  |       | 1,213                                    |       |
|                                                                                       | ** ** | **8,680**  |       | 8,856                                    |       |
| **Total Liabilities**                                                                      | ** ** | **11,644** |       | 11,913                                   |       |
| **Owners’ Equity**                                                                    | ** ** | ** ** |       |                                     |       |
| Common Share and Non-Voting Share equity *(Note 19)* (as adjusted — *Note 2(c)*) | ** ** | **7,554**  |       | 7,085                                    |       |
| Non-controlling interests                                                                  | ** ** | **21**     |       | 23                                       |       |
|                                                                                       | ** ** | **7,575**  |       | 7,108                                    |       |
|                                                                                       | ** ** | **$**      | **19,219** |                                     | $          | 19,021 |   |

 

Commitmentsand Contingent Liabilities *(Note 20)*

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

Approvedby the Directors:

 

 
| /s/Brian  F. MacNeill |   | /s/Brian  A. Canfield |
|-----------------------|--------|-----------------------|
| Brian  F. MacNeill    |   | Brian  A. Canfield    |
| Director              |   | Director              |

 

 

7

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consolidatedstatements of changes in owners’ equity

 
| ** **                                                                                                       | ** ** | **Common Share and Non-Voting Share equity** | ** ** | ** **            | ** ** | ** **            | ** **      |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------|------------|-----------------------|-----------------|
| ** **                                                                                                       | ** ** | **Equity contributed**                       | ** ** | ** **            | ** ** | ** **            | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                       | ** ** | **Share capital**                            | ** ** | ** **            | ** ** | ** **            | ** **      | **Accumulated** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                       | ** ** | **Common Shares**                            | ** ** | **Non-Voting Shares** | ** ** | ** **            | ** **      | ** ** | ** ** | ** ** | ** ** | **other** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| **($ in millions)**                                                                                         | ** ** | **Number of  shares**                        | ** ** | **Share  capital**    | ** ** | **Number of  shares** | ** **      | **Share  capital** | ** ** | **Total** | ** ** | **Contributed  surplus** | ** ** | **Retained  earnings** | ** ** | **comprehensive  income** | ** ** | **Total** | ** ** | **controlling  interests** | ** ** | **Total** | ** ** |
| Balance as at  January 1, 2008                                                                              |       | 175,766,114                                  |       | $                     | 2,228      |                  | 148,581,171     |   | $ | 3,192 |   | $ | 5,420 |   | $ | 152 |   | $ | 1,458 |   | $ | (104) |   | $ | 6,926 |   | $ | 26 |   | $ | 6,952 |   |
| Intangible assets transitional amount (Note 2(b))                                                                |       | —                                       |       | —                |       | —                |            | — |   | — |   | — |   | (97 | ) | — |   | (97 | ) | — |   | (97 | ) |
| Adjusted opening balance                                                                                         |       | 175,766,114                                  |       | 2,228                 |       | 148,581,171           |            | 3,192 |   | 5,420 |   | 152 |   | 1,361 |   | (104 | ) | 6,829 |   | 26 |   | 6,855 |   |
| Net income                                                                                                       |       | —                                       |       | —                |       | —                |            | — |   | — |   | — |   | 1,128 |   | — |   | 1,128 |   | 3 |   | 1,131 |   |
| Other comprehensive income                                                                                       |       | —                                       |       | —                |       | —                |            | — |   | — |   | — |   | — |   | (26 | ) | (26 | ) | — |   | (26 | ) |
| Dividends (Note 11)                                                                                              |       | —                                       |       | —                |       | —                |            | — |   | — |   | — |   | (584 | ) | — |   | (584 | ) | (5 | ) | (589 | ) |
| Purchase of Common Shares and Non-Voting Shares in  excess of stated capital (Note 19(d))                        |       | (950,300                                     | )          | (12                   | )          | (5,810,400            | )               | (125 | ) | (137 | ) | — |   | (143 | ) | — |   | (280 | ) | — |   | (280 | ) |
| Shares issued pursuant to cash exercise of share  options (Note 19(c))                                      |       | 1,700                                        |       | —                |       | 13,339                |            | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Non-Voting Shares issued pursuant to use of share  option award net-equity settlement feature (Note 19(c))  |       | —                                       |       | —                |       | 47,748                |            | 2 |   | 2 |   | (2 | ) | — |   | — |   | — |   | — |   | — |   |
| Share option award expense recognized in period  (Note 12)                                                       |       | —                                       |       | —                |       | —                |            | — |   | — |   | 18 |   | — |   | — |   | 18 |   | — |   | 18 |   |
| Purchase of incremental interest in subsidiary  (Note 16(f))                                                     |       | —                                       |       | —                |       | —                |            | — |   | — |   | — |   | — |   | — |   | — |   | (1 | ) | (1 | ) |
| Balance as at December 31, 2008                                                                             |       | 174,817,514                                  |       | $                     | 2,216      |                  | 142,831,858     |   | $ | 3,069 |   | $ | 5,285 |   | $ | 168 |   | $ | 1,762 |   | $ | (130 | ) | $ | 7,085 |   | $ | 23 |   | $ | 7,108 |   |
| Balance as at  January 1, 2009                                                                              | ** ** | **174,817,514**                              | ** ** | **$**                 | **2,216**  | ** **            | **142,831,858** | ** ** | **$** | **3,069** | ** ** | **$** | **5,285** | ** ** | **$** | **168** | ** ** | **$** | **1,762** | ** ** | **$** | **(130** | **)** | **$** | **7,085** | ** ** | **$** | **23** | ** ** | **$** | **7,108** | ** ** |
| Net income                                                                                                       | ** ** | **—**                                   | ** ** | **—**            | ** ** | **—**            | ** **      | **—** | ** ** | **—** | ** ** | **—** | ** ** | **998** | ** ** | **—** | ** ** | **998** | ** ** | **4** | ** ** | **1,002** | ** ** |
| Other comprehensive income                                                                                       | ** ** | **—**                                   | ** ** | **—**            | ** ** | **—**            | ** **      | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **58** | ** ** | **58** | ** ** | **—** | ** ** | **58** | ** ** |
| Dividends (Note 11)                                                                                              | ** ** | **—**                                   | ** ** | **—**            | ** ** | **—**            | ** **      | **—** | ** ** | **—** | ** ** | **—** | ** ** | **(601** | **)** | **—** | ** ** | **(601** | **)** | **(6** | **)** | **(607** | **)** |
| Shares issued pursuant to  cash exercise of share options (Note 19(c))                                      | ** ** | **1,506**                                    | ** ** | **—**            | ** ** | **23,984**            | ** **      | **1** | ** ** | **1** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **1** | ** ** | **—** | ** ** | **1** | ** ** |
| Non-Voting Shares issued  pursuant to use of share option award net-equity settlement feature  (Note 19(c)) | ** ** | **—**                                   | ** ** | **—**            | ** ** | **15,162**            | ** **      | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Dividend Reinvestment and  Share Purchase Plan — optional cash payments (Note 11(b))                        | ** ** | **—**                                   | ** ** | **—**            | ** ** | **4,512**             | ** **      | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Share option award expense  recognized in period (Note 12)                                                       | ** ** | **—**                                   | ** ** | **—**            | ** ** | **—**            | ** **      | **—** | ** ** | **—** | ** ** | **13** | ** ** | **—** | ** ** | **—** | ** ** | **13** | ** ** | **—** | ** ** | **13** | ** ** |
| Balance as at December 31, 2009                                                                             | ** ** | **174,819,020**                              | ** ** | **$**                 | **2,216**  | ** **            | **142,875,516** | ** ** | **$** | **3,070** | ** ** | **$** | **5,286** | ** ** | **$** | **181** | ** ** | **$** | **2,159** | ** ** | **$** | **(72** | **)** | **$** | **7,554** | ** ** | **$** | **21** | ** ** | **$** | **7,575** | ** ** |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

 

8

----

 

# **consolidated statements of cashflows**

 
| **Years ended December 31  (millions)**                                                                    | ** ** | **2009**   | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| **OPERATING ACTIVITIES**                                                                                        |       |       |       |     |       |
| Net income (as adjusted — *Note 2(c)*)                                                                     | ** ** | **$**      | **1,002**  |     | $          | 1,131 |   |
| Adjustments to reconcile net income to cash  provided by operating activities:                             | ** ** | ** ** |       |     |       |
| Depreciation and amortization                                                                                   | ** ** | **1,722**  |       | 1,713    |       |
| Future income taxes                                                                                             | ** ** | **(83**    | **)**      | 161      |       |
| Share-based compensation *(Note  12(a))*                                                                        | ** ** | **(8**     | **)**      | 5        |       |
| Net employee defined benefit plans expense                                                                      | ** ** | **20**     |       | (102     | )          |
| Employer contributions to employee defined benefit  plans                                                       | ** ** | **(180**   | **)**      | (104     | )          |
| Restructuring costs, net of cash payments *(Note 7)*                                                            | ** ** | **84**     |       | 16       |       |
| Amortization of deferred gains on sale-leaseback of  buildings, amortization of deferred charges and other, net | ** ** | **8**      |       | —   |       |
| Net change in non-cash working capital *(Note 21(c))*                                                      | ** ** | **339**    |       | (1       | )          |
| Cash provided by operating activities                                                                           | ** ** | **2,904**  |       | 2,819    |       |
| **INVESTING ACTIVITIES**                                                                                        | ** ** | ** ** |       |     |       |
| Capital expenditures excluding advanced wireless  services spectrum licences *(Notes 6, 15, 16)*           | ** ** | **(2,103** | **)**      | (1,859   | )          |
| Payment for advanced wireless services spectrum  licences *(Note 6)*                                            | ** ** | **—** |       | (882     | )          |
| Acquisitions *(Note 16)*                                                                                        | ** ** | **(26**    | **)**      | (696     | )          |
| Proceeds from the sale of property and other assets                                                             | ** ** | **—** |       | 13       |       |
| Other                                                                                                           | ** ** | **1**      |       | (9       | )          |
| Cash used by investing activities                                                                               | ** ** | **(2,128** | **)**      | (3,433   | )          |
| **FINANCING ACTIVITIES**                                                                                        | ** ** | ** ** |       |     |       |
| Common Shares and Non-Voting Shares issued                                                                      | ** ** | **1**      |       | —   |       |
| Dividends to holders of Common Shares and  Non-Voting Shares *(Note 11(a))*                                     | ** ** | **(602**   | **)**      | (433     | )          |
| Purchase of Common Shares and Non-Voting Shares for  cancellation *(Note 19(d))*                           | ** ** | **—** |       | (280     | )          |
| Long-term debt issued *(Notes 18,  21(c))*                                                                 | ** ** | **9,112**  |       | 12,983   |       |
| Redemptions and repayment of long-term debt *(Notes 18, 21(c))*                                                 | ** ** | **(9,244** | **)**      | (11,667  | )          |
| Dividends paid by a subsidiary to non-controlling  interests                                                    | ** ** | **(6**     | **)**      | (5       | )          |
| Cash provided (used) by financing activities                                                                    | ** ** | **(739**   | **)**      | 598      |       |
| **CASH POSITION**                                                                                               | ** ** | ** ** |       |     |       |
| Increase (decrease) in cash and temporary investments,  net                                                     | ** ** | **37**     |       | (16      | )          |
| Cash and temporary investments, net, beginning of  period                                                       | ** ** | **4**      |       | 20       |       |
| Cash and temporary investments, net, end of period                                                              | ** ** | **$**      | **41**     |     | $          | 4 |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH  FLOWS**                                                                      | ** ** | ** ** |       |     |       |
| Interest (paid)*(Note 21(c))*                                                                                   | ** ** | **$**      | **(567**   | **)**    | $          | (457 | ) |
| Interest received                                                                                               | ** ** | **$**      | **54**     |     | $          | 3 |   |
| Income taxes (inclusive of Investment Tax Credits *(Note 9)*) (paid) received, net                         | ** ** | **$**      | **(266**   | **)**    | $          | (10 | ) |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

 

9

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notes to consolidated financial statements

 

**DECEMBER 31, 2009**

 

TELUSCorporation was incorporated under the *Company Act*(BritishColumbia) on October 26, 1998, under the name BCT.TELUS CommunicationsInc. (BCT). On January 31, 1999, pursuant to a court-approved plan ofarrangement under the *Canada BusinessCorporations Act* among BCT, BC TELECOM Inc. (BC TELECOM) and theformer Alberta-based TELUS Corporation (TC), BCT acquired all of the shares ofBC TELECOM and TC in exchange for Common Shares and Non-Voting Shares of BCT.Subsequently on January 31, 1999, BC TELECOM was dissolved. On May 3,2000, BCT changed its name to TELUS Corporation and in February 2005, theCompany transitioned under the *Business Corporations Act*(British Columbia), successor to the *Company Act*(BritishColumbia). TELUS Corporation maintains its registered office at Floor 21,3777 Kingsway, Burnaby, British Columbia, V5H 3Z7.

 

TELUS Corporation is one of Canada’s largesttelecommunications companies, providing a full range of telecommunicationsproducts and services. The Company is the largest incumbent telecommunicationsservice provider in Western Canada and provides data, Internet protocol, voiceand wireless services to Central and Eastern Canada.

 
| **Notes  to consolidated financial statements** | ** **                                  | **Page** | ** ** | **Description** |
|-------------------------------------------------|---------------------------------------------|----------|------------|-----------------|
| General  application                            |                                        |     |       |            |
| 1.                                              | Summary of significant  accounting policies |     | 11         |            | Summary review of  accounting principles and the methods used in their application by the  Company |
| 2.                                              | Accounting policy  developments             |     | 18         |            | Summary review of  generally accepted accounting principle developments that do, will, or may,  affect the Company |
| 3.                                              | Capital structure  financial policies       |     | 20         |            | Summary review of the  Company’s objectives, policies and processes for managing its capital structure |
| 4.                                              | Regulation of rates  charged to customers   |     | 22         |            | Summary review of rate  regulation impacts on Company operations and revenues |
| 5.                                              | Financial instruments                       |     | 24         |            | Summary schedules and  review of financial instruments, including the management of associated risks  and fair values |
| Consolidated  results of operations focused     |                                        |     |       |            |
| 6.                                              | Segmented information                       |     | 31         |            | Summary disclosure of  segmented information regularly reported to the Company’s chief operating  decision-maker |
| 7.                                              | Restructuring costs                         |     | 32         |            | Summary continuity  schedule and review of restructuring costs |
| 8.                                              | Financing costs                             |     | 32         |            | Summary schedule of  items comprising financing costs by nature |
| 9.                                              | Income taxes                                |     | 33         |            | Summary reconciliations  of statutory rate income tax expense to provision for income taxes and analyses  of future income tax liability |
| 10.                                             | Per share amounts                           |     | 34         |            | Summary schedule and  review of numerators and denominators used in calculating per share amounts  and related disclosures |
| 11.                                             | Dividends per share                         |     | 34         |            | Summary schedule of  dividends declared |
| 12.                                             | Share-based  compensation                   |     | 35         |            | Summary schedules and  review of compensation arising from share option awards, restricted stock  units and employee share purchase plan |
| 13.                                             | Employee future  benefits                   |     | 38         |            | Summary and review of  employee future benefits and related disclosures |
| Consolidated financial position focused         |                                        |     |       |            |
| 14.                                             | Accounts receivable                         |     | 44         |            | Summary schedule and  review of arm’s-length securitization trust transactions and related  disclosures |
| 15.                                             | Property, plant,  equipment and other       |     | 46         |            | Summary schedule of  items comprising property, plant, equipment and other |
| 16.                                             | Intangible assets and  goodwill             |     | 47         |            | Summary schedule of  intangible assets, including goodwill and review of reported fiscal year  acquisitions from which goodwill arose |
| 17.                                             | Short-term obligations                      |     | 50         |            | Summary review of  bilateral bank facilities |

 

 

10

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notes to consolidated financial statements

 
| **Notes  to consolidated financial statements**      | ** **                                                                                    | **Page** | ** ** | **Description** |
|------------------------------------------------------|-----------------------------------------------------------------------------------------------|----------|------------|-----------------|
| Consolidated  financial position focused (continued) |                                                                                          |     |       |            |
| 18.                                                  | Long-term debt                                                                                |     | 51         |            | Summary schedule of  long-term debt and related disclosures |
| 19.                                                  | Common Share and  Non-Voting Share equity                                                     |     | 53         |            | Summary  schedules and review of Common Share and Non-Voting Share equity items  including details of other comprehensive income, accumulated other  comprehensive income and share option price stratification summaries |
| 20.                                                  | Commitments and  contingent liabilities                                                       |     | 56         |            | Summary review of  contingent liabilities, lease obligations, guarantees, claims and lawsuits |
| Other                                                |                                                                                          |     |       |            |   |
| 21.                                                  | Additional  financial information                                                             |     | 59         |            | Summary  schedules of items comprising certain primary financial statement line items |
| 22.                                                  | Differences between  Canadian and United States generally accepted accounting principles |     | 60         |            | Summary schedules and  review of differences between Canadian and United States generally  accepted accounting principles as they apply to the Company |

## *** ***

## ***1***                  summary of significant accounting policies

## *** ***

Theaccompanyingconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in Canada and are expressed inCanadian dollars.

 

Subsequentevents have been evaluated through February 25, 2010, the date which theseconsolidated financial statements were issued by electronically filing themwith the Canadian Securities Administrators’ System for Electronic Document Analysisand Retrieval (SEDAR).

 

The terms TELUS orCompany are used to mean TELUS Corporation and, where the context of thenarrative permits, or requires, its subsidiaries.

 

### **(a)**          Consolidation

### ** **

Theconsolidated financial statements include the accounts of the Company and allof the Company’s subsidiaries, of which the principal one is TELUSCommunications Inc.  Currently, throughthe TELUS Communications Company partnership and the TELE-MOBILE COMPANYpartnership, TELUS Communications Inc. includes substantially all of theCompany’s Wireline segment’s operations and all of the Wireless segment’soperations.

 

The financing arrangements of the Company and all ofits subsidiaries do not impose restrictions on inter-corporate dividends.

 

On a continuing basis, TELUS Corporation reviewsits corporate organization and effects changes as appropriate so as to enhanceits value. This process can, and does, affect which of the Company’ssubsidiaries are considered principal subsidiaries at any particular point intime.

### ** **

### **(b)**          Use of estimates and judgements

### ** **

The preparation offinancial statements in conformity with generally accepted accountingprinciples (GAAP) requires management to make estimates, assumptions andjudgements that affect: the reported amounts of assets and liabilities at thedate of the financial statements; the disclosure of contingent assets andliabilities at the date of the financial statements; and the reported amountsof revenues and expenses during the reporting period. Actual results coulddiffer from those estimates.

 

Examples ofsignificant estimates and assumptions include:

 

·      the key economic assumptions used todetermine the fair value of residual cash flows arising from accountsreceivable securitization;

·      the allowance for doubtful accounts;

·      the allowance for inventory obsolescence;

·      the estimated useful lives of assets;

·      the recoverability of tangible assets;

·      the recoverability of intangible assetswith indefinite lives;

·      the recoverability of long-terminvestments;

·      the recoverability of goodwill;

 

 

11

----

 

notes to consolidatedfinancial statements

 

·      the amount and composition of income taxassets and income tax liabilities, including the amount of unrecognized taxbenefits;

·      the accruals for CanadianRadio-television and Telecommunications Commission (CRTC) deferral accountliabilities; and

·      certain actuarial and economicassumptions used in determining defined benefit pension costs, accrued pensionbenefit obligations and pension plan assets.

 

Examples ofsignificant judgements, apart from those involving estimation, include:

 

·      The Company’s view that substantially allthe risks and rewards of ownership of accounts receivable sold to an arm’s-lengthsecuritization trust, as discussed further in Note 14, are transferred to thetrust.

·      The Company’s choice to depreciate andamortize its property, plant, equipment and intangible assets subject toamortization on a straight-line basis as it believes that this method betterreflects the consumption of resources related to the economic lifespan of thoseassets than an accelerated method and is more representative of the economicsubstance of the underlying use of those assets.

 

### **(c)**          Revenue recognition

### ** **

The Company earns themajority of its revenue (voice local, voice long distance, data (including dataand information technology managed services) and wireless network) from accessto, and usage of, the Company’s telecommunications infrastructure. The majorityof the balance of the Company’s revenue (other and wireless equipment) arisesfrom providing products and services facilitating access to, and usage of, theCompany’s telecommunications infrastructure.

 

The Company offerscomplete and integrated solutions to meet its customers’ needs. These solutionsmay involve the delivery of multiple services and products occurring atdifferent points in time and/or over different periods of time. As appropriate,these multiple element arrangements are separated into their componentaccounting units, consideration is measured and allocated amongst theaccounting units based upon their relative fair values and then the Company’srelevant revenue recognition policies are applied to the accounting units.

 

Multiple contracts with asingle customer are normally accounted for as separate arrangements. Ininstances where multiple contracts are entered into with a customer in a shortperiod of time, they are reviewed as a group to ensure that, similar tomultiple element arrangements, relative fair values are appropriate.

 

The Company’s revenuesare recorded net of any value-added, sales and/or use taxes billed to thecustomer concurrent with a revenue-producing transaction.

 

When the Company receivesno identifiable, separable benefit for consideration given to a customer (*e.g.* discounts and rebates), theconsideration is recorded as a reduction of revenue rather than as an expense.

 

*Voicelocal, voice long distance, data and wireless network:*The Company recognizes revenues on theaccrual basis and includes an estimate of revenues earned but unbilled.Wireline and wireless service revenues are recognized based upon usage of theCompany’s network and facilities and upon contract fees.

 

Advance billings arerecorded when billing occurs prior to rendering the associated service; suchadvance billings are recognized as revenue in the period in which the servicesare provided. Similarly, and as appropriate, upfront customer activation andconnection fees are deferred and recognized over the average expected term ofthe customer relationship.

 

The Company follows the liability method of accounting for its qualityof service rate rebate amounts that arise from the jurisdiction of the CRTC.

 

The CRTC has establisheda portable subsidy mechanism to subsidize Local Exchange Carriers, such as theCompany, that provide residential service to high cost serving areas. The CRTChas determined the per line/per band portable subsidy rate for all LocalExchange Carriers. The Company recognizes the portable subsidy on an accrualbasis by applying the subsidy rate to the number of residential network accesslines it has in high cost serving areas, as further discussed in Note 4(c).Differences, if any, between interim and final subsidy rates set by the CRTCare accounted for as a change in estimate in the period in which the CRTCfinalizes the subsidy rate.

 

*Other and wireless equipment*: TheCompany recognizes product revenues, including wireless handsets sold tore-sellers and customer premises equipment, when the products are delivered andaccepted by the end-user customers. Revenues from operating leases of equipmentare recognized on a systematic and rational basis (normally a straight-linebasis) over the term of the lease.

 

*Non-highcost serving area deferral account*: On May 30, 2002, and on July 31, 2002, theCRTC issued Decision 2002-34 and Decision 2002-43, respectively,pronouncements that affected the Company’s wireline revenues initially for thefour-year periods beginning June 1, 2002, and August 1, 2002,respectively; subsequently the pronouncements were extended by one year. In aneffort to foster competition for residential basic service in non-high costserving areas, the concept of a deferral account mechanism was introduced bythe CRTC, as an alternative to mandating price reductions.

 

 

12

----

 

notesto consolidated financial statements

 

The deferral accountarises from the CRTC requiring the Company to defer the statement of incomerecognition of a portion of the monies received in respect of residential basicservices provided to non-high cost serving areas. The revenue deferral wasbased on the rate of inflation (as measured by a chain-weighted Gross DomesticProduct Price Index), less a productivity offset, and other exogenous factorsthat were associated with allowed recoveries in previous price cap regimes thathave now expired. The Company may recognize the deferred amounts upon theundertaking of qualifying actions, such as Service Improvement Programs inqualifying non-high cost serving areas, rate reductions (including thoseprovided to competitors as required in Decision 2002-34 and Decision 2002-43)and/or rebates to customers. The deferral account balance also reflects aninterest expense component based on the Company’s applicable short-term cost ofborrowing.

 

The Company has adopted the liability method of accounting for thedeferral account. This results in the Company recording a liability to theextent that activities it has undertaken, realized rate reductions forCompetitor Services and other future qualifying events do not extinguish the balanceof the deferral account, as further discussed in Note 20(a) andquantified in Note 21(b). This also resulted in the Company continuing torecord incremental liability amounts, subject to reductions for the mitigatingactivities, during the Decisions’ initial four-year periods. Other than for theinterest accrued on the balance of the deferral account, which would beincluded in financing costs, substantially all statement of income and othercomprehensive income effects of the deferral account are recorded throughoperating revenues.

 

### **(d)**          Cost of acquisition and advertising costs

### ** **

Costs of acquiringcustomers, which include the total cost of hardware subsidies, commissions,advertising and promotion related to the initial customer acquisition, areexpensed as incurred and are included in the Consolidated Statements of Incomeand Other Comprehensive Income as a component of Operations expense. Costs ofadvertising production, airtime and space are expensed as incurred.

 

### **(e)**          Research and development

### ** **

Research and developmentcosts are expensed except in cases where development costs meet certainidentifiable criteria for capitalization. Capitalized development costs areamortized over the life of the commercial production, or in the case ofserviceable property, plant and equipment, are included in the appropriateproperty group and are depreciated over its estimated useful life.

 

### **(f)**            Depreciation and amortization

### ** **

Assets are depreciated on a straight-line basis over their estimateduseful life as determined by a continuing program of studies. Depreciationincludes amortization of assets under capital leases and amortization ofleasehold improvements. Leasehold improvements are normally amortized over thelesser of their expected average service life or the term of the lease.Intangible assets with finite lives (intangible assets subject to amortization)are amortized on a straight-line basis over their estimated lives; estimatedlives are reviewed at least annually and are adjusted as appropriate. The continuingprogram of asset life studies considers such items as timing of technologicalobsolescence, competitive pressures and future infrastructure utilizationplans; such considerations could also indicate that carrying values of assetsmay not be recoverable. If the carrying values of assets were not consideredrecoverable, an impairment provision (measured at the amount by which thecarrying values of the assets exceed their fair values) would be recorded.

 

Estimateduseful lives for the majority of the Company’s property, plant, equipment andother subject to depreciation are as follows:

 
| ** **                                                   | ** ** | **Estimated  useful live****s(1)** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|
| Network assets                                               |       |                                    |       |
| Outside plant                                                |       | 17 to 40 years                          |       |
| Inside plant                                                 |       | 5 to 15 years                           |       |
| Wireless site equipment                                      |       | 6.5 to 8 years                          |       |
| Balance of depreciable  property, plant, equipment and other |       | 4 to 20 years                           |       |

 

----

(1)          The composite depreciationrate for the year ended December 31, 2009, was 5.4% (2008 — 5.8%). The rate iscalculated by dividing depreciation expense by an average gross book value ofdepreciable assets for the reporting period. A result of this methodology isthat the composite depreciation rate will be lower in a period that has ahigher proportion of fully depreciated assets remaining in use.

 

 

13

----

 

notes to consolidated financial statements

 

Estimateduseful lives for the majority of the Company’s intangible assets subject toamortization are as follows:

 
| ** **                         | ** ** | **Estimated  useful lives** | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| Subscriber base                    |       |                        |       |
| Wireline                           |       | 40 years                    |       |
| Wireless                           |       | 7 years                     |       |
| Software                           |       | 3 to 5 years                |       |
| Access to rights-of-way and  other |       | 8 to 30 years               |       |

 

The carrying value ofintangible assets with indefinite lives, and goodwill, is periodically testedfor impairment using a two-step impairment test. The frequency of theimpairment test generally is the reciprocal of the stability of the relevantevents and circumstances, but intangible assets with indefinite lives andgoodwill must, at a minimum, be tested annually; the Company has selected December asits annual test time. No impairment amounts arose from the December 2009and December 2008 annual tests. The test is applied to each of the Company’stwo reporting units (the reporting units being identified in accordance withthe criteria in the Canadian Institute of Chartered Accountants (CICA) Handbooksection for intangible assets and goodwill): Wireline and Wireless.

 

The Company assesses itsgoodwill by applying the prescribed method of comparing the fair value of itsreporting units to the carrying amounts of its reporting units. Consistent withcurrent industry-specific valuation methods, a combination of the discountedcash flow approach, the market comparable approach and analytical review ofindustry and Company-specific facts is used in determining the fair value ofthe Company’s reporting units.

 

### **(g)**         Translation of foreign currencies

### ** **

Trade transactionscompleted in foreign currencies are translated into Canadian dollars at therates prevailing at the time of the transactions. Monetary assets andliabilities denominated in foreign currencies are translated into Canadiandollars at the rate of exchange in effect at the statement of financialposition date with any resulting gain or loss being included in theConsolidated Statements of Income and Other Comprehensive Income as Financingcosts, as set out in Note 8. Hedge accounting is applied in specific instancesas further discussed in Note 1(i).

 

The Company has minorforeign subsidiaries that are considered to be self-sustaining. Accordingly,foreign exchange gains and losses arising from the translation of the minorforeign subsidiaries’ accounts into Canadian dollars are reported as acomponent of other comprehensive income, as set out in Note 19(b).

 

### **(h)**         Financial instruments — recognition and measurement

### ** **

In respect of therecognition and measurement of financial instruments, the Company has adoptedthe following policies:

 
| **Financial instrument**                                                                                                     | ** ** | **Classified as  available-for-sale  or held as part of  a cash flow  hedging  relationship****(1)** | ** ** | **Classified as  held for  trading****(1) (2)** | ** ** | **Company’s reason for  classification selection**                                                                                                                            |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   Short-term marketable security investments(3)                                                             |       |                                                                                                 |       | X                                                    |       | ·   The Company has selected this method asit better  reflects management’s investment intentions                                                              |
| ·   Long-term investments not subject to significant  influence of the Company(3)                             |       | X                                                                                                    |       |                                                 |       | ·   The Company has selected classification as  available-for-sale asit better reflects  management’s investment intentions                                    |
| ·   Stand-alone derivatives which are a part of an  established and documented cash flow hedging relationship |       | X                                                                                                    |       |                                                 |       | ·   The Company believes that classification as held  for hedging results in a better matching of the change in the fair value with  the risk exposure being hedged |

 

----

(1)          The distinction betweenclassification as available-for-sale (or held as part of a cash flow hedgingrelationship) or held for trading is that *unrealized*changes in the fair values of financial instruments classified asavailable-for-sale, or the effective portion of *unrealized*changesin the fair values of financial instruments held for hedging, are included inother comprehensive income and *unrealized*changes in the fair values of financial instruments classified as held fortrading are included in net income.

(2)          Certain financial instrumentsthat are not required to be classified as held for trading may be classified asheld for trading if the Company so chooses.

(3)          In respect of investments insecurities for which the fair values can be reliably measured, the Companydetermines the classification on an instrument-by-instrument basis at time ofinitial recognition.

 

·      Accounts receivable that areavailable-for-sale to an arm’s-length securitization trust are accounted for asloans and receivables. The Company has selected this method as the benefitsthat would have been expected to arise from using the available-for-sale methodwere not expected to exceed the costs of selecting and implementing thatmethod.

 

 

14

----

 

notes to consolidated financial statements

 

·      Regular-way purchases or sales (thosewhich require actual delivery of financial assets or financial liabilities) arerecognized on the trade date. The Company has selected this method as it isconsistent with the mandatory trade-date accounting required for derivativeinstruments.

·      Transaction costs, other than in respectof held for trading items, are added to the initial fair value of the acquiredfinancial asset or financial liability. The Company has selected this method asit believes that this results in a better matching of the transaction costswith the periods benefiting from the transaction costs.

·      In respect of hedges of anticipatedtransactions, which in the Company’s specific instance currently relates toinventory purchase commitments, hedge gains/losses will be included in the costof the inventory and will be expensed when the inventory is sold. The Companyhas selected this method as it believes that a better matching with the riskexposure being hedged is achieved.

### ** **

### **(i)**            Hedge accounting

### ** **

*General:* The Company applies hedge accounting tothe financial instruments used to:

 

·      establish designated currency hedgingrelationships for its U.S. dollar denominated long-term debt future cashoutflows (semi-annual interest payments and principal payments at maturity), asset out in Note 5 and further discussed in Note 18(b);

 

·      establishdesignated currency hedging relationships for certain U.S. dollardenominated future purchase commitments, as set out in Note 5; and

 

·      fix the compensation cost arising fromspecific grants of restricted stock units, as set out in Note 5 andfurther discussed in Note 12(c).

 

*Hedgeaccounting:* Thepurpose of hedge accounting, in respect of the Company’s designated hedgingrelationships, is to ensure that counterbalancing gains and losses arerecognized in the same periods. The Company chose to apply hedge accounting, asit believes this is more representative of the economic substance of theunderlying transactions.

 

In order to apply hedgeaccounting, a high correlation (which indicates effectiveness) is required inthe offsetting changes in the values of the financial instruments (the hedgingitems) used to establish the designated hedging relationships and all, or apart, of the asset, liability or transaction having an identified risk exposurethat the Company has taken steps to modify (the hedged items). The Company assessesthe anticipated effectiveness of designated hedging relationships at inceptionand for each reporting period thereafter. A designated hedging relationship isconsidered effective by the Company if the following critical terms matchbetween the hedging item and the hedged item: the notional amount of thehedging item and the principal of the hedged item; maturity dates; paymentdates; and interest rate index (if, and as, applicable). As set out in Note5(i), any ineffectiveness, such as from a difference between the notionalamount of the hedging item and the principal of the hedged item, or if apreviously effective designated hedging relationship becomes ineffective, isreflected in the Consolidated Statements of Income and Other Comprehensive Incomeas Financing costs if in respect of long-term debt and as Operations expense ifin respect of U.S. dollar denominated future purchase commitments orshare-based compensation.

 

*Hedgingassets and liabilities:* In the application of hedge accounting, an amount (the hedge value) isrecorded on the Consolidated Statements of Financial Position in respect of thefair value of the hedging items. The net difference, if any, between theamounts recognized in the determination of net income and the amount necessary toreflect the fair value of the designated cash flow hedging items on theConsolidated Statements of Financial Position is effectively recognized as acomponent of other comprehensive income, as set out in Note 19(b).

 

In the application ofhedge accounting to U.S. dollar denominated long-term debt future cashoutflows, the amount recognized in the determination of net income is theamount that counterbalances the difference between the Canadian dollarequivalent of the value of the hedged items at the rate of exchange at thestatement of financial position date and the Canadian dollar equivalent of thevalue of the hedged items at the rate of exchange in the hedging items.

 

In the application ofhedge accounting to the compensation cost arising from share-basedcompensation, the amount recognized in the determination of net income is theamount that counterbalances the difference between the quoted market price ofthe Company’s Non-Voting Shares at the statement of financial position date andthe price of the Company’s Non-Voting Shares in the hedging items.

 

### **(j)**            Income taxes

### ** **

The Company follows theliability method of accounting for income taxes. Under this method, currentincome taxes are recognized for the estimated income taxes payable for thecurrent year. Future income tax assets and liabilities are recognized fortemporary differences between the tax and accounting bases of assets andliabilities as well as for the benefit oflosses available to be carried forward to future years for tax purposes thatare more likely than not to be realized. The amounts recognized in respect offuture income tax assets and liabilities are based upon the expected timing ofthe

 

 

15

----

 

notes to consolidated financial statements

 

reversal of temporarydifferences or usage of tax losses and application of the substantively enactedtax rates at the time of reversal or usage.

 

The operations of theCompany are complex and the related tax interpretations, regulations andlegislation are continually changing. As a result, there are usually some taxmatters in question that result in uncertain tax positions. The Company onlyrecognizes the income tax benefit of an uncertain tax position when it is morelikely than not that the ultimate determination of the tax treatment of theposition will result in that benefit being realized. The Company accrues forinterest charges on current tax liabilities that have not been funded, whichwould include interest and penalties arising from uncertain tax positions. TheCompany includes such charges as a component of Financing costs.

 

The Company’s researchand development activities may be eligible to earn Investment Tax Credits; thedetermination of eligibility is a complex matter. The Company only recognizesthe Investment Tax Credits when there is reasonable assurance that the ultimatedetermination of the eligibility of the Company’s research and developmentactivities will result in the Investment Tax Credits being received. When thereis reasonable assurance that the Investment Tax Credits will be received, theyare accounted for using the cost reduction method whereby such credits arededucted from the expenditures or assets to which they relate, as set out inNote 9.

 

### **(k)**        Share-based compensation

### ** **

Forshare option awards granted after 2001, a fair value is determined for shareoption awards at the date of grant and that fair value is recognized in thefinancial statements. Proceeds arising from the exercise of share option awardsare credited to share capital, as are the recognized fair values of theexercised share option awards.

 

Shareoption awards which have a net-equity settlement feature, as set out in Note12(b), and which do *not* also have anet-cash settlement feature, are accounted for as equity instruments. TheCompany has selected the equity instrument fair value method of accounting forthe net-equity settlement feature so as to align with the accounting treatmentafforded to the associated share option awards.

 

Shareoption awards which have a net-cash settlement feature, as set out inNote 12(b), are accounted for as liability instruments. If share optionawards which have the net-cash settlement feature and which were grantedsubsequent to 2001 are settled using other than the net-cash settlementfeature, they would revert to being accounted for as equity instruments.

 

Inrespect of restricted stock units, as set out in Note 12(c), the Companyaccrues a liability equal to the product of the vesting restricted stock unitsmultiplied by the fair market value of the corresponding shares at the end ofthe reporting period (unless hedge accounting is applied, as set out in Note1(i)). The expense forrestricted stock units that do not ultimately vest is reversed against theexpense that had been previously recorded in their respect.

 

Whenshare-based compensation vests in one amount at a future point in time (cliffvesting), the expense is recognized by the Company in the ConsolidatedStatements of Income and Other Comprehensive Income on a straight-line basisover the vesting period. When share-based compensation vests in tranches(graded vesting), the expense is recognized by the Company in the ConsolidatedStatements of Income and Other Comprehensive Income using the acceleratedexpense attribution method.

 

### **(l)**            Employee future benefit plans

### ** **

TheCompany accrues for its obligations under employee defined benefit plans, andthe related costs, net of plan assets. The cost of pensions and otherretirement benefits earned by employees is actuarially determined using theprojected benefit method pro-rated on service and management’s best estimate ofexpected planinvestment performance, salary escalation andretirement ages of employees.  For the purpose of calculating theexpected return on plan assets, those assets are valued at fair value.  The excess of the net actuarial gain (loss) over10% of the greater of the accrued benefit obligation and the fair value of theplan assets is amortized over the expected average remaining service period ofactive employees of the plan, as are past service costs and transitional assetsand liabilities.

 

TheCompany uses defined contribution accounting for the Telecommunication WorkersPension Plan and the British Columbia Public Service Pension Plan that covercertain of the Company’s employees.

 

### **(m)**      Cash and temporaryinvestments, net

### ** **

Cash and temporaryinvestments, which may include investments in money market instruments that arepurchased three months or less from maturity, are presented net of outstandingitems including cheques written but not cleared by the bank as at the statementof financial position date. Cash and temporary investments, net, are classifiedas a liability on the statement of financial position when the amount of thecheques written but not cleared by the bank exceeds the amount of the cash andtemporary investments. When cash and temporary investments, net, are classifiedas a liability, they may also include overdraft amounts drawn on the Company’sbilateral bank facilities, which revolve daily and are discussed further inNote 17.

 

 

16

----

 

notes to consolidated financial statements

### ** **

### **(n)**         Sales of receivables

### ** **

Transfersof receivables in securitization transactions are recognized as sales when theCompany is deemed to have surrendered control over the transferred receivablesand consideration, other than for its beneficial interests in the transferredreceivables, has been received. When the Company sells its receivables, itretains reserve accounts, which are retained interests in the securitizedreceivables, and servicing rights. When a transfer is considered a sale, theCompany derecognizes all receivables sold, recognizes at fair value the assetsreceived and the liabilities incurred and records the gain or loss on sale inthe Consolidated Statements of Income and Other Comprehensive Income as Otherexpense, net. The amount of gain or loss recognized on the sale of receivablesdepends in part on the previous carrying amount of the receivables involved inthe transfer, allocated between the receivables sold and the retained interestsbased upon their relative fair market value at the sale date. The Companyestimates the fair value for its retained interests based on the present valueof future expected cash flows using management’s best estimates of the keyassumptions (credit losses, the weighted average life of the receivables soldand discount rates commensurate with the risks involved).

 

### **(o)**          Inventories

### ** **

The Company’s inventory consists primarily of wirelesshandsets, parts and accessories and communications equipment held for resale.Inventories are valued at the lower of cost and net realizable value, with costbeing determined on an average cost basis. Previous write-downs to net realizablevalue are reversed if there is a subsequent increase in the value of therelated inventories. See Note 21(b).

 

### **(p)**          Property, plant, equipment and other; intangible assets

### ** **

*General*: Property, plant, equipment and otherand intangible assets are recorded at historical cost and, with respect toself-constructed property, plant, equipment and other, include materials,direct labour and applicable overhead costs. With respect to internallydeveloped, internal-use software, recorded historical costs include materials,direct labour and direct labour-related costs. Where property, plant, equipmentand other construction projects exceed $50 million and are of asufficiently long duration (generally, longer than twelve months), an amount iscapitalized for the cost of funds used to finance construction. The rate forcalculating the capitalized financing costs is based on the Company’s one-yearcost of borrowing.

 

When property, plant and/orequipment are sold by the Company, the historical cost less accumulated depreciationis netted against the sale proceeds and the difference is included in theConsolidated Statements of Income and Other Comprehensive Income as Otherexpense, net.

 

*Assetretirement obligations*: Liabilities are recognized for statutory, contractual or legalobligations, normally when incurred, associated with the retirement ofproperty, plant and equipment (primarily certain items of outside plant andwireless site equipment) when those obligations result from the acquisition,construction, development and/or normaloperation of theassets. The obligations are measured initially at fair value, determined usingpresent value methodology, and the resulting costs are capitalized into thecarrying amount of the related asset. In subsequent periods, the liability isadjusted for the accretion of discount and any changes in the amount or timingof the underlying future cash flows. The capitalized asset retirement cost isdepreciated on the same basis as the related asset and the discount accretionis included in determining the results of operations.

 

### **(q)**          Leases

### ** **

Leases areclassified as capital or operating depending upon the terms and conditions ofthe contracts.

 

Where the Company is thelessee, asset values recorded under capital leases are amortized on astraight-line basis over the period of expected use. Obligations recorded undercapital leases are reduced by lease payments net of imputed interest.

 

For the year ended December 31,2009, real estate and vehicle operating lease expenses, which are net of theamortization of the deferred gain on the sale-leaseback of buildings, were$237 million (2008 — $225 million). The unamortized balances of thedeferred gains on the sale-leaseback of buildings are set out in Note 21(b).

 

### **(r)**          Investments

### ** **

The Company accounts forits investments in companies over which it has significant influence using theequity basis of accounting whereby the investments are initially recorded atcost and subsequently adjusted to recognize the Company’s share of earnings orlosses of the investee companies and reduced by dividends received. The excessof the cost of equity investments over the underlying book value at the date ofacquisition, except for goodwill, is amortized over the estimated useful livesof the underlying assets to which it is attributed.

 

The Companyaccounts for its other investments as available-for-sale at their fair valuesunless the investment securities do not have quoted market prices in an activemarket, in which case the Company uses the cost basis of accounting wherebyinvestments are initially recorded at cost and earnings from such investmentsare recognized only to the extent received or receivable. The cost ofinvestments sold or amounts reclassified out of other comprehensive income intoearnings are determined on a specific identification basis.

 

 

17

----

 

notes to consolidated financial statements

 

Unless there is another than temporary decline in the value of an available-for-sale investment,carrying values for available-for-sale investments are adjusted to estimatedfair values with such adjustment being included in the Consolidated Statementsof Income and Other Comprehensive Income as a component of other comprehensiveincome. When there is an other than temporary decline in the value of theinvestment, the carrying values of investments accounted for using the equity,available-for-sale and cost methods are reduced to estimated fair values withsuch reduction being included in the Consolidated Statements of Income andOther Comprehensive Income as Other expense, net.

 

### **(s)**          Comparative amounts

### ** **

Certain of thecomparative amounts have been reclassified to conform to the presentationadopted currently.

 

## 2                  accounting policy developments

##  

### **(a)**          Convergence with International Financial Reporting Standards as issued bythe International Accounting Standards Board

### ** **

In2006, Canada’s Accounting Standards Board ratified a strategic plan that willresult in Canadian GAAP, as used by publicly accountable enterprises, beingfully converged with International Financial Reporting Standards as issued bythe International Accounting Standards Board (IFRS-IASB) over a transitionalperiod to be complete by 2011. The Company will be required to report using theconverged standards effective for interim and annual financial statementsrelating to fiscal years beginning no later than on or after January 1,2011, the date which the Company has selected for adoption.

 

CanadianGAAP will be fully converged with IFRS-IASB through a combination of twomethods: as current joint-convergence projects of the United States’ FinancialAccounting Standards Board and the International Accounting Standards Board areagreed upon, they will be adopted by Canada’s Accounting Standards Board andmay be introduced in Canada before the publicly accountable enterprises’transition date to IFRS-IASB; and standards not subject to a joint-convergenceproject have been exposed in an omnibus manner for introduction at the time ofthe publicly accountable enterprises’ transition date to IFRS-IASB. Asillustrated in Note 2(b)-(c), the first convergence method may, or will, resultin the Company either having the option to, or being required to, effectively,changeover certain accounting policies to IFRS-IASB prior to 2011.

 

TheInternational Accounting Standards Board’s work plan currently, and expectedly,has projects underway that are expected to result in new pronouncements thatcontinue to evolve IFRS-IASB, and, as a result IFRS-IASB as at the transitiondate is expected to differ from its current form.

 

### **(b)**          Goodwill and intangible assets

### ** **

As an activity consistentwith Canadian GAAP being converged with IFRS-IASB, the previously existing recommendationsfor goodwill and intangible assets and research and development costs werereplaced with new recommendations (CICA Handbook Section 3064).

 

Commencing with theCompany’s 2009 fiscal year, the new recommendations of the CICA for goodwilland intangible assets apply to the Company. This change in accounting policyhas been made in accordance with the transitional provisions of the newrecommendations.

 

The new recommendationsprovide extensive guidance on when expenditures qualify for recognition asintangible assets.  Prior to the Company’s2009 fiscal year, upfront wireline customer activation and connection fees,along with the corresponding direct costs not in excess of revenues, weredeferred and recognized by the Company over the average expected term of thecustomer relationship; the impact of the new recommendations on the Company isthat these costs do not qualify for recognition as intangible assets.

 

The effects of theapplication of this new standard on the Company’s Consolidated Statements ofIncome and Other Comprehensive Income for the year ended December 31,2009, were as follows:

 
| **Year  ended December 31, 2009  (millions except per share amounts)** | ** ** | **Excluding  effect of  application of  HB 3064** | ** ** | **Effect of  application of  HB 3064** | ** ** | **As  currently  reported** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
| Operating expenses                                                          |       |                                                   | ** ** | ** **                                  |       |                        |       |
| Operations                                                                  |       | $                                                      | 5,944      |                                        | $          | (19                         | )          | $ | 5,925 |   |
| Income taxes                                                                |       | $                                                      | 198        |                                        | $          | 5                           |       | $ | 203 |   |
| Net income per Common Share  and Non-Voting Share                      |       |                                                   |       |                                        |       |                        |       |
| - Basic                                                                     |       | $                                                      | 3.10       |                                        | $          | 0.04                        |       | $ | 3.14 |   |
| - Diluted                                                                   |       | $                                                      | 3.10       |                                        | $          | 0.04                        |       | $ | 3.14 |   |

 

 

18

----

 

notes to consolidated financial statements 

 

Due to the nature ofthese costs and the periods of time over which they have been deferred andrecognized, the Company’s results of operations for the comparative periodscurrently presented are not materially affected by these new recommendations.

 

Theeffects of the application of this new standard on the Company’s ConsolidatedStatements of Financial Position as at December 31, 2009 and 2008, were asfollows:

 
| ** **                                | ** ** | **2009**                                               | ** ** | **2008**                                    | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------|------------|
| **As at December 31  (millions)**    | ** ** | **Excluding  effect of  application of  HB 3064** | ** ** | **Effect of  application of  HB 3064** | ** ** | **As  currently  reported** | ** ** | **As previously  reported** | ** ** | **Effect of  application of  HB 3064** | ** ** | **As  currently  reported** | ** ** |
| Current Assets                            | ** ** | ** **                                             |       |                                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Prepaid expenses and other                | ** ** | **$**                                                  | **145**    | ** **                                  | **$**      | **(40** | **)** | **$** | **105** |   | $ | 156 |   | $ | (44 | ) | $ | 112 |   |
| Other Assets                              | ** ** | ** **                                             | ** ** | ** **                                  | ** ** | ** ** |   |   |   |   |   |   |   |
| Other long-term assets                    | ** ** | **$**                                                  | **1,682**  | ** **                                  | **(80**    | **)** | **$** | **1,602** |   | $ | 1,513 |   | (95 | ) | $ | 1,418 |   |
|                                      | ** ** | ** **                                             | ** ** | **$**                                       | **(120**   | **)** | ** ** |   |   |   | $ | (139 | ) |   |   |
| Future income taxes                       | ** ** | **$**                                                  | **1,356**  | ** **                                  | **$**      | **(37** | **)** | **$** | **1,319** |   | $ | 1,255 |   | $ | (42 | ) | $ | 1,213 |   |
| Owners’ Equity                       | ** ** | ** **                                             | ** ** | ** **                                  | ** ** | ** ** |   |   |   |   |   |   |   |
| Common Share and Non-Voting  Share equity | ** ** | ** **                                             | ** ** | ** **                                  | ** ** | ** ** |   |   |   |   |   |   |   |
| Retained earnings                         | ** ** | **$**                                                  | **2,242**  | ** **                                  | **(83**    | **)** | **$** | **2,159** |   | $ | 1,859 |   | (97 | ) | $ | 1,762 |   |
|                                      | ** ** | ** **                                             | ** ** | **$**                                       | **(120**   | **)** | ** ** |   |   |   | $ | (139 | ) |   |   |

 

### **(c)**          Business combinations and non-controlling interests

 

As an activity consistentwith Canadian GAAP being converged with IFRS-IASB, the previously existing recommendationsfor business combinations and consolidated financial statements were replacedwith new recommendations for business combinations (CICA Handbook Section 1582),consolidations (CICA Handbook Section 1601) and non-controlling interests(CICA Handbook Section 1602).

 

Effective January 1,2009, the Company early adopted the new recommendations and did so inaccordance with the transitional provisions; the Company would otherwise havebeen required to adopt the new recommendations effective January 1, 2011.

 

Generally, the newrecommendations result in measuring business acquisitions at the fair value ofthe acquired business and a prospectively applied shift from a parent companyconceptual view of consolidation theory (which results in the parent companyrecording book values attributable to non-controlling interests) to an entityconceptual view (which results in the parent company recording fair valuesattributable to non-controlling interests). Unlike the corresponding newU.S. GAAP (see Note 22(g)) which requires the recognition of the fairvalue of goodwill attributable to non-controlling interests, both the newCanadian GAAP recommendations and IFRS-IASB allow the choice of whether or notto recognize the fair value of goodwill attributable to non-controllinginterests on an acquisition-by-acquisition basis.

 

Measuringbusiness acquisitions at fair value will, among other things, result in:

 

·      acquisition costs being expensed;

·      acquisition-created restructuring costsbeing expensed;

·      contingent consideration, which isaccounted for as a financial liability, being measured at fair value at thetime of the acquisition with subsequent changes in its fair value beingincluded in determining the results of operations; and

·      changes in non-controlling ownershipinterests subsequent to the parent company’s acquisition of control, and notresulting in the parent company’s loss of control, being accounted for ascapital transactions.

 

Whether the Company willbe materially affected by the new recommendations will depend upon the specificfacts of a business combination occurring subsequent to January 1, 2009.The Company’s consolidated financial statements will, however, be subject to asmall number of retrospectively applied non-controlling interest-relatedpresentation and disclosure changes:

 

·      the Consolidated Statements of FinancialPosition now recognize non-controlling interest as a separate component ofowners’ equity; and

·      the Consolidated Statements of Income andOther Comprehensive Income now present the attribution of net income and othercomprehensive income between the Company’s shareholders and non-controllinginterests rather than reflecting the non-controlling interest in the results ofoperations as a deduction in arriving at net income and other comprehensiveincome.

 

 

19

----

 

notes to consolidated financial statements 

 

Theeffects of the application of these new standards on the Company’s ConsolidatedStatements of Income and Other Comprehensive Income for the years ended December 31,2009 and 2008, were as follows:

 
| ** **                                                             | ** ** | **2009**                                                                               | ** ** | **2008**                   | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **Years  ended December 31  (millions except per share amounts)** | ** ** | **Excluding effect  of application of  HB 1582,  HB 1601 and  HB 1602** | ** ** | **As currently  reported** | ** ** | **As previously  reported** | ** ** | **As currently  reported** | ** ** |
| Operating revenues                                                     | ** ** | **$**                                                                                  | **9,606**  | ** **                 | **$**      | **9,606** |   | $ | 9,653 |   | $ | 9,653 |   |
| Operating expenses                                                     | ** ** | **7,837**                                                                              | ** ** | **7,837**                  |       | 7,587 |   | 7,587 |   |
| Operating income                                                       | ** ** | **1,769**                                                                              | ** ** | **1,769**                  |       | 2,066 |   | 2,066 |   |
| Other expense, net                                                     | ** ** | **32**                                                                                 | ** ** | **32**                     |       | 36 |   | 36 |   |
| Financing costs                                                        | ** ** | **532**                                                                                | ** ** | **532**                    |       | 463 |   | 463 |   |
| Income before income taxes (and non-controlling interests)(1)          | ** ** | **1,205**                                                                              | ** ** | **1,205**                  |       | 1,567 |   | 1,567 |   |
| Income taxes(2)                                                        | ** ** | **237**                                                                                | ** ** | **203**                    |       | 436 |   | 436 |   |
| (Non-controlling interests)(1)                                         | ** ** | **4**                                                                                  | ** ** | **N/A**                    |       | 3 |   | N/A |   |
| Net income (and Common Share and Non-Voting Share Income)(1)           | ** ** | **964**                                                                                | ** ** | **1,002**                  |       | 1,128 |   | 1,131 |   |
| Other Comprehensive Income                                             | ** ** | **58**                                                                                 | ** ** | **58**                     |       | (26 | ) | (26 | ) |
| Comprehensive Income                                                   | ** ** | **$**                                                                                  | **1,022**  | ** **                 | **$**      | **1,060** |   | $ | 1,102 |   | $ | 1,105 |   |
| Net income attributable to:                                            | ** ** | ** **                                                                             | ** ** | ** **                 |       |   |   |   |   |
| Common Shares and  Non-Voting Shares                                   | ** ** | ** **                                                                             | ** ** | **$**                      | **998**    |   |   |   | $ | 1,128 |   |
| Non-controlling interests                                              | ** ** | ** **                                                                             | ** ** | **4**                      |       |   |   | 3 |   |
|                                                                   | ** ** | ** **                                                                             | ** ** | **$**                      | **1,002**  |   |   |   | $ | 1,131 |   |
| Total comprehensive income  attributable to:                           | ** ** | ** **                                                                             | ** ** | ** **                 |       |   |   |   |   |
| Common Shares and  Non-Voting Shares                                   | ** ** | ** **                                                                             | ** ** | **$**                      | **1,056**  |   |   |   | $ | 1,102 |   |
| Non-controlling interests                                              | ** ** | ** **                                                                             | ** ** | **4**                      |       |   |   | 3 |   |
|                                                                   | ** ** | ** **                                                                             | ** ** | **$**                      | **1,060**  |   |   |   | $ | 1,105 |   |
| Net income per Common Share  and Non-Voting Share                      | ** ** | ** **                                                                             | ** ** | ** **                 |       |   |   |   |   |
| - Basic                                                                | ** ** | **$**                                                                                  | **3.04**   | ** **                 | **$**      | **3.14** |   | $ | 3.52 |   | $ | 3.52 |   |
| - Diluted                                                              | ** ** | **$**                                                                                  | **3.03**   | ** **                 | **$**      | **3.14** |   | $ | 3.51 |   | $ | 3.51 |   |

 

----

(1)          Captioning in parentheses hasbeen deleted post-adoption.

(2)          The transitional rules ofthe new Canadian standards require that a change in recognized acquired futureincome tax assets, unless the change arose during the business combinationmeasurement period, arising from business combinations occurring prior to theCompany’s date of adoption of the new standards be recorded through theprovision for income taxes.

 

During 2009, a change in recognizedacquired future income tax assets resulted in a decrease in the future incometax liability and the offsetting amount has been recorded as a reduction of theincome tax provision due to the application of the new standards; prior to theadoption of the new standards, the unamortized balance of goodwill arising fromthe acquisition would have been reduced.

 

## 3                  capital structure financial policies

 

The Company’s objectives when managing capital are: (i) tomaintain a flexible capital structure which optimizes the cost of capital atacceptable risk; and (ii) to manage capital in a manner which balances theinterests of equity and debt holders.

 

Inthe management of capital, the Company includes Common Share and Non-VotingShare equity (excluding accumulated other comprehensive income), long-term debt(including any associated hedging assets or liabilities, net of amountsrecognized in accumulated other comprehensive income), cash and temporaryinvestments and securitized accounts receivable in the definition of capital.

 

TheCompany manages the capital structure and makes adjustments to it in the lightof changes in economic conditions and the risk characteristics of theunderlying assets. In order to maintain or adjust the capital structure, theCompany may adjust the amount of dividends paid to holders of Common Shares andNon-Voting Shares, purchase shares for cancellation pursuant to permittednormal course issuer bids, issue new shares, issue new debt, issue new debt toreplace existing debt with different characteristics and/or increase ordecrease the amount of sales of trade receivables to an arm’s-lengthsecuritization trust.

 

TheCompany monitors capital on a number of bases, including: net debt to EarningsBefore Interest, Taxes, Depreciation and Amortization — excluding restructuringcosts (EBITDA — excluding restructuring costs); and dividend payout ratio ofsustainable net earnings.

 

Netdebt to EBITDA — excluding restructuring costs is calculated as net debt at theend of the period divided by twelve-month trailing EBITDA — excludingrestructuring costs. Net debt is a measure that does not have any standardizedmeaning 

 

 

20

----

 

notesto consolidated financial statements 

 

prescribedby GAAP and is therefore unlikely to be comparable to similar measurespresented by other issuers; the calculation of net debt is as set out in thefollowing schedule. Net debt is one component of a ratio used to determinecompliance with debt covenants. The calculation of EBITDA — excludingrestructuring costs is a measure that does not have any standardized meaningprescribed by GAAP and is therefore unlikely to be comparable to similarmeasures presented by other issuers; the calculation of EBITDA — excludingrestructuring costs is as set out in the following schedule. This measure,historically, is substantially the same as the leverage ratio covenant in theCompany’s credit facilities.

 

Dividendpayout ratio of sustainable net earnings is calculated as the most recentquarterly dividend declared per share multiplied by four and divided by basicearnings per share for the twelve-month trailing period excluding incometax-related adjustments and the ongoing statement of income and othercomprehensive income impacts of the share options with the net-cash settlementfeature, which are discussed further in Note 12(b); the dividend payoutratio does not adjust for tax-related adjustments and the ongoing statement ofincome and other comprehensive income impacts of the share options with thenet-cash settlement feature.

 

During2009, the Company’s strategy, which was unchanged from 2008, was to maintainthe financial policies and guidelines set out in the following schedule. TheCompany believes that these financial policies and guidelines, which arereviewed annually, are currently at the optimal level and, by maintainingcredit ratings in the range of BBB+ to A-, or the equivalent, providereasonable access to capital.

 
| **As at, or twelve-month periods ended, December 31 ($ in millions)** | ** ** | **Policies and  guidelines** | ** ** | **2009**   | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------|------------|------------|------------|----------|------------|
| Components of debt and  coverage ratios                                         |       |                         | ** ** | ** ** |       |     |       |
| Net debt(1)                                                                     |       |                         | ** ** | **$**      | **7,312**  |     | $          | 7,286 |   |
| EBITDA — excluding  restructuring costs(2)                                 |       |                         | ** ** | **$**      | **3,681**  |     | $          | 3,838 |   |
| Net interest cost(3)                                                            |       |                         | ** ** | **$**      | **532**    |     | $          | 463 |   |
| Debt ratio                                                                      |       |                         | ** ** | ** ** |       |     |       |
| Net debt to EBITDA —  excluding restructuring costs                        |       | 1.5 – 2.0               | ** ** | **2.0**    |       | 1.9      |       |
| Coverage ratios                                                                 |       |                         | ** ** | ** ** |       |     |       |
| Interest coverage on  long-term debt(4)                                         |       |                         | ** ** | **3.1**    |       | 4.3      |       |
| EBITDA — excluding  restructuring costs interest coverage(5)               |       |                         | ** ** | **6.9**    |       | 8.3      |       |
| Other measure                                                                   |       |                         | ** ** | ** ** |       |     |       |
| Dividend payout ratio of  sustainable net earnings                              |       | 45 – 55%                | ** ** | **67**     | **%**      | 56       | %          |
| Dividend payout ratio                                                           |       |                         | ** ** | **61**     | **%**      | 54       | %          |

 

----

(1)          Net debt is calculated asfollows:

 
| ** **                                                                                                                                                                                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Long-term debt (Note 18)                                                                                                                                                                                  | ** ** | **$**    | **6,172**  |     | $          | 6,352 |   |
| Debt issuance costs netted  against long-term debt                                                                                                                                                        | ** ** | **30**   |       | 28       |       |
| Derivative liabilities, net                                                                                                                                                                               | ** ** | **721**  |       | 778      |       |
| Accumulated other  comprehensive income amounts arising from financial instruments used to  manage interest rate and currency risks associated with U.S. dollar  denominated debt (excluding tax effects) | ** ** | **(70**  | **)**      | (168     | )          |
| Cash and temporary  investments, net                                                                                                                                                                      | ** ** | **(41**  | **)**      | (4       | )          |
| Cumulative proceeds from  accounts receivable securitization (Note 14)                                                                                                                                    | ** ** | **500**  |       | 300      |       |
| Net debt                                                                                                                                                                                                  | ** ** | **$**    | **7,312**  |     | $          | 7,286 |   |

 

----

(2)          EBITDA — excludingrestructuring costs is calculated as follows:

 
| ** **                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| EBITDA (Note 6)                             | ** ** | **$**    | **3,491**  |     | $          | 3,779 |   |
| Restructuring costs (Note  7)               | ** ** | **190**  |       | 59       |       |
| EBITDA — excluding restructuring costs | ** ** | **$**    | **3,681**  |     | $          | 3,838 |   |

 

----

(3)          Net interest cost is definedas financing costs before gains on redemption and repayment of debt, calculatedon a twelve-month trailing basis (losses recorded on the redemption oflong-term debt, if any, are included in net interest cost).

(4)          Interest coverage onlong-term debt is defined as net income before interest expense on long-termdebt and income tax expense, divided by interest expense on long-term debt(including losses recorded on the redemption of long-term debt, if any).

(5)          EBITDA — excludingrestructuring costs interest coverage is defined as EBITDA — excludingrestructuring costs divided by net interest cost. This measure is substantiallythe same as the coverage ratio covenant in the Company’s credit facilities.

 

 

21

----

 

notes to consolidatedfinancial statements 

 

(6)          Sustainable net earnings perCommon Share and Non-Voting Share is calculated as follows:

 
| ** **                                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income attributable to  Common Shares and Non-Voting Shares                     | ** ** | **$**    | **998**    |     | $          | 1,128 |   |
| Income tax-related  adjustments                                                     | ** ** | **(174** | **)**      | (49      | )          |
| Impacts of share options  with the net-cash settlement feature, net of income taxes | ** ** | **1**    |       | —   |       |
| Loss on redemption of  long-term debt, net of income taxes                          | ** ** | **69**   |       | —   |       |
| Sustainable net earnings                                                            | ** ** | **$**    | **894**    |     | $          | 1,079 |   |
| Sustainable net earnings per Common Share and  Non-Voting Share - basic             | ** ** | **$**    | **2.81**   |     | $          | 3.37 |   |

 

Thenet debt to EBITDA — excluding restructuring costs ratio increased primarilydue to lower EBITDA — excluding restructuring costs. The interest coverage onlong-term debt ratio was 3.1 times in 2009, down from 4.3 times one yearearlier. An increase in long-term debt interest expense, including losses onlong-term debt redemption (see Note 8), decreased the ratio by 0.7, and lowerincome before income taxes and long-term debt interest expense decreased theratio by 0.5. The EBITDA — excluding restructuring costs interest coverageratio for 2009 was 6.9 times, down from 8.3 times in 2008, due mainly to thelosses on long-term debt redemption and lower EBITDA — excluding restructuringcosts, partly offset by increased interest income. This ratio, adjusted toexclude the loss on redemption of long-term debt, was 8.5 times in 2009.

 

## 4                  regulation of rates charged to customers

 

### **(a)**          General

 

The provision of telecommunications services by the Company throughTELUS Communications Company partnership and the TELE-MOBILE COMPANYpartnership is subject to regulation under provisions of the *Telecommunications Act*. The regulatoryauthority designated to implement the *TelecommunicationsAct* is the CRTC, which is established pursuant to the terms of the *Canadian Radio-television and Telecommunications Act*.

 

Pursuant to Part III of the *Telecommunications Act*, the CRTC may forbear, conditionallyor unconditionally, from regulating the rates for certain telecommunicationsservices, or certain classes of telecommunications service providers, where theCRTC finds that the service or class of service provided by thetelecommunications service provider is subject to competition sufficient toprotect the interests of customers. TELUS Communications Company partnershiphas, for example, been granted forbearance from regulation in relation to itsentire portfolio of wireless and paging services. In the latter half of 2007,TELUS Communications Company partnership was granted forbearance in relation tothe setting of rates for a number of its wireline telecommunications servicesthat are currently provided within 96 residential and 47 business exchangeswhere it was determined that there was significant competition for suchservices to protect the interests of customers. Previously forborne services,including interexchange voice services, wide area network services and retailInternet services, remain forborne. TELUS Communications Company partnershipalso operates as a forborne telecommunications service provider when itprovides telecommunications services (primarily business local exchangeservice) outside of its traditional incumbent serving territory (Alberta,British Columbia and parts of Quebec) and, as such, all of its services are notsubject to rate regulation.

 

The fact that a portion of the Company’s operations remainsubject to rate regulation does not result in the Company selecting accountingpolicies that would differ from generally accepted accounting principles.

 

Less than one-quarter of the Company’s revenues are fromWireline segment regulated services and subject to CRTC price regulation; noneof the Company’s Wireless segment revenues are currently subject to CRTCregulation.

 

 

22

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notes to consolidated financial statements 

 

The major categories of telecommunicationsservices provided by TELUS Communications Company partnership that are subjectto rate regulation or have been forborne from rate regulation are as follows:

 

| **Regulated  services**                                                                                                         | ** ** | **Forborne services (not subject to rate  regulation)**                                                                                            |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                            |       |                                                                                                                                               |
| ·   Residential  wireline local services in incumbent local exchange carrier regions in non- forborne  exchanges |       | ·   Residential  wireline services in incumbent local exchange carrier regions in forborne exchanges(1)                             |
| ·   Business wireline local services in  incumbent local exchange carrier regions in non- forborne exchanges     |       | ·   Business wireline services in incumbent  local exchange carrier regions in forborne exchanges(2)                                |
| ·   Competitor services                                                                                          |       | ·   Non-incumbent local exchange carrier  services                                                                                  |
| ·   Public telephone services                                                                                    |       | ·   Long distance  services                                                                                                         |
| ·   Miscellaneous other revenue                                                                                  |       | ·   Internet services                                                                                                               |
|                                                                                                                            |       | ·   International telecommunications services                                                                                       |
|                                                                                                                            |       | ·   Interexchange private line services(3)                                                                                          |
|                                                                                                                            |       | ·   Certain data services                                                                                                           |
|                                                                                                                            |       | ·   Cellular, enhanced specialized mobile radio  digital (ESMR digital) and personal communications services digital (PCS  digital) |
|                                                                                                                            |       | ·   Other wireless services, including paging                                                                                       |
|                                                                                                                            |       | ·   Sale of customer premises equipment (CPE)                                                                                       |

 

----

(1)          Forborne on exchanges wheretwo or more competitors, including wireless service providers, are offering orproviding similar services.

(2)          Forborne on exchanges whereone or more competitors, including wireless service providers, are offering orproviding similar services.

(3)          Forborne on routes where oneor more competitors are offering or providing services at DS-3 or greaterbandwidth.

 

### **(b)**          Price caps form of regulation

 

The CRTC has adopted a form of price cap regulation as themeans by which it regulates the prices for the Company’s telecommunicationsrate regulated services. A four-year price regulation regime commenced on June 1,2002, with the issuance of the CRTC’s Decision 2002-34; on December 16,2005, the CRTC issued Decision 2005-69 that extended that price capregime, without changes, for a period of one year to May 31, 2007. TheCRTC conducted a review of the existing price cap regulation, which included anoral hearing, with the CRTC issuing its decision in this matter on April 30,2007. The decision was consistent with the Company’s current accountingpolicies.

* *

*Rate-setting methodology*: Under the prospective price regulation framework,services are separated into seven service categories, or baskets, for thoseexchanges which continue to be regulated. Price constraints within theindividual baskets are outlined in the following table.

** **
| **Capped and non-forborne basket**                                         | ** ** | **Price cap constraint**                        | ** ** | **Overriding  maximum annual  increase** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| Residential wireline  services in incumbent local exchange carrier regions |       |                                            |       |                                     |       |
| In non-high cost serving  areas                                            |       | Capped at existing rates                        |       | 0                                        | %          |
| In high cost serving areas                                                 |       | Increase by lesser of inflation(1) or 5%   |       | 5                                        | %          |
| Business wireline services  in incumbent local exchange carrier regions    |       | Increase annually by inflation(1)               |       | 10                                       | %          |
| Other capped services                                                      |       | Increase annually by inflation(1)               |       | 10                                       | %          |
| Competitor services                                                        |       | Inflation(1) less 3.2% productivity offset |       | 0                                        | %          |
| Public telephone services                                                  |       | One-time $0.50 increase                         |       | N/A                                      |       |
| Services with frozen rates  (*e.g.* 9-1-1 service)                         |       | Capped at existing rates                        |       | 0                                        | %          |

 

----

(1)   As measured by chain-weighted Gross DomesticProduct Price Index.

 

Primary exchange ratesfor forborne services/exchanges are capped at existing rates.

 

### **(c)**          Other non-price cap regulation

* *

*Other:* The CRTC has adopted an imputation testfiling requirement to set floor prices for rate regulated services. The imputationtest filing requirements ensure that the incumbent telephone companies do notreduce rates for services below their costs in an effort to thwart competitiveentry or engage in predatory pricing to drive out existing competitors.

* *

*Unbundling of essential facilities:* In an effort to foster facilities-based competition in the provision oftelecommunications services, the CRTC has mandated that certain essential ornear-essential facilities be made available to competitors at rates based ontheir incremental costs plus an approved mark-up. The CRTC has definedessential facilities as facilities which are monopoly controlled, required bycompetitors as an input to provide services and which cannot be economically ortechnically duplicated by competitors (which include central office codes,subscriber listings and certain local loops in high cost serving areas). Theincumbent local exchange carriers must provide certain non-essentialfacilities, which the CRTC deems to be near-essential, such as local loopfacilities in low cost areas and transiting arrangements, at prices determinedas if they were essential facilities. This obligation on the part of theincumbent local

 

 

23

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notesto consolidated financial statements 

 

exchange carriers will continue until the market fornear-essential loops and transiting arrangements is competitive. The CRTCconducted an oral hearing on this in the fourth quarter of 2007 and issued itsdecision in this matter on March 3, 2008. The decision did not impact thetreatment of the regulated rates.

* *

*Voicecontribution expense and portable subsidy revenue:* Local exchange carriers’ costs ofproviding the level of basic residential services that the CRTC requires to beprovided in high cost serving areas are more than the CRTC allows the localexchange carriers to charge for the level of service. To ameliorate thesituation, the CRTC collects contribution payments, in a central fund, from allCanadian telecommunications service providers (including voice, data andwireless service providers) that are then disbursed as portable subsidypayments to subsidize the costs of providing residential telephone services inhigh cost serving areas. The portable subsidy payments are paid based upon atotal subsidy requirement calculated on a per line/per band subsidy rate, asfurther discussed in Note 1(c). The CRTC currently determines, at anational level, the total contribution requirement necessary to pay the portablesubsidies and then collects contribution payments from the Canadiantelecommunications service providers, calculated as a percentage of theirtelecommunications service revenue (as defined in CRTC Decision 2000-745 andTelecom Order CRTC 2001-220). The final contribution expense rate for 2009 is0.81% and the interim rate for 2010 has been similarly set at 0.81%. TheCompany’s contributions to the central fund, $50 million for the yearended December 31, 2009 (2008 — $52 million), are accounted for as anoperations expense and the portable subsidy receipts, $51 million for theyear ended December 31, 2009 (2008 — $58 million), are accounted foras local revenue.

 

## ***5***                 financial instruments

 

### **(a)**          Risks —overview

 

The Company’s financialinstruments and the nature of risks which they may be subject to are as set outin the following table.

 
| ** **                                       | ** ** | **Risks**  | ** ** |
|--------------------------------------------------|------------|------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Market risks** | ** ** |
| **Financial  instrument**                        | ** ** | **Credit** | ** ** | **Liquidity** | ** ** | **Currency** | ** ** | **Interest rate** | ** ** | **Other price** | ** ** |
| **Measured at cost or amortized  cost**          |       |       |       |   |   |   |   |   |   |   |   |
| Cash and temporary investments                   |       | X          |       |   |   | X |   | X |   |   |   |
| Accounts receivable                              |       | X          |       |   |   | X |   |   |   |   |   |
| Accounts payable                                 |       |       |       | X |   | X |   |   |   |   |   |
| Restructuring accounts payable                   |       |       |       | X |   |   |   |   |   |   |   |
| Short-term obligations                           |       |       |       | X |   |   |   | X |   |   |   |
| Long-term debt                                   |       |       |       | X |   | X |   | X |   |   |   |
| **Measured at fair value**                       |       |       |       |   |   |   |   |   |   |   |   |
| Short-term investments                           |       |       |       |   |   |   |   | X |   | X |   |
| Long-term investments                            |       |       |       |   |   |   |   |   |   | X |   |
| Foreign exchange derivatives(1)                  |       | X          |       | X |   | X |   |   |   |   |   |
| Share-based compensation derivatives(1)          |       | X          |       | X |   |   |   |   |   | X |   |
| Cross currency interest rate swap derivatives(1) |       | X          |       | X |   | X |   | X |   |   |   |

 

----

(1)         Use of derivative financialinstruments is subject to a policy which requires that no derivativetransaction be entered into for the purpose of establishing a speculative orleveraged position (the corollary being that all derivative transactions are tobe entered into for risk management purposes only) and sets criteria for thecreditworthiness of the transaction counterparties.

 

### **(b)**          Credit risk

 

Excludingcredit risk, if any, arising from currency swaps settled on a gross basis (see(c)), the bestrepresentation of the Company’s maximum exposure (excluding tax effects) tocredit risk, which is a worst-case scenario and does not reflect resultsexpected by the Company, is as set out in the following table:

 
| **As at  December 31 (millions)** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Cash and temporary investments, net    | ** ** | **$**    | **41**     |     | $          | 4 |   |
| Accounts receivable                    | ** ** | **694**  |       | 966      |       |
| Derivative assets                      | ** ** | **1**    |       | 10       |       |
|                                   | ** ** | **$**    | **736**    |     | $          | 980 |   |

 

 

24

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notesto consolidated financial statements 

 

*Cash and temporary investments*: Credit risk associated with cash andtemporary investments is minimized substantially by ensuring that thesefinancial assets are placed with: governments; major financial institutionsthat have been accorded strong investment grade ratings by a primary ratingagency; and/or other creditworthy counterparties. An ongoing review isperformed to evaluate changes in the status of counterparties.

 

*Accountsreceivable*:Credit risk associated with accounts receivable is minimized by the Company’slarge and diverse customer base, which covers substantially all consumer andbusiness sectors in Canada. The Company follows a program of credit evaluationsof customers and limits the amount of credit extended when deemed necessary.The Company maintains allowances for potential credit losses, and any suchlosses to date have been within management’s expectations.

 

The following tablepresents an analysis of the age of customer accounts receivable not allowed foras at the dates of the Consolidated Statements of Financial Position. As at December 31,2009, the weighted average life of customer accounts receivable is 35 days(2008 — 28 days) and the weighted average life of past-due customer accountsreceivable is 72 days (2008 — 64 days). No interest is charged oncustomer accounts which are current. Thereafter, interest is charged at amarket rate on outstanding balances.

 
| **As at  December 31 (millions)**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Customer accounts receivable net of allowance for  doubtful accounts |       |     |       |     |       |
| Current                                                              | ** ** | **$**    | **321**    |     | $          | 555 |   |
| 30-60 days past billing date                                         | ** ** | **86**   |       | 121      |       |
| 61-90 days past billing date                                         | ** ** | **23**   |       | 47       |       |
| Greater than 90 days past billing date                               | ** ** | **67**   |       | 43       |       |
| ** **                                                           |       | **$**    | **497**    |     | $          | 766 |   |
| Customer accounts receivable (Note 21(b))                       | ** ** | **$**    | **556**    |     | $          | 843 |   |
| Allowance for doubtful accounts                                      | ** ** | **(59**  | **)**      | (77      | )          |
| ** **                                                           |       | **$**    | **497**    |     | $          | 766 |   |

 

The Company must make significantestimates in respect of the allowance for doubtful accounts. Current economicconditions, historical information, why the accounts are past-due and line ofbusiness from which the customer accounts receivable arose are all consideredwhen determining whether past-due accounts should be allowed for; the samefactors are considered when determining whether to write off amounts charged tothe allowance account against the customer account receivable. The provisionfor doubtful accounts is calculated on a specific-identification basis forcustomer accounts receivable over a specific balance threshold and on astatistically-derived allowance basis for the remainder. No customer accountsreceivable are written off directly to the provision for doubtful accounts.

 

The following tablepresents a summary of the activity related to the Company’s allowance fordoubtful accounts.

 
| **Years  ended December 31 (millions)** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Balance, beginning of period                 | ** ** | **$**    | **77**     |     | $          | 63 |   |
| Additions (provision for doubtful accounts)  | ** ** | **80**   |       | 71       |       |
| Net use                                      | ** ** | **(98**  | **)**      | (57      | )          |
| Balance, end of period                       | ** ** | **$**    | **59**     |     | $          | 77 |   |

 

Aside from the normalcustomer accounts receivable credit risk associated with its retained interest,the Company has no continuing exposure to credit risk associated with its tradereceivables which are sold to an arm’s-length securitization trust, asdiscussed further in Note 14.

 

*Derivativeassets (and derivative liabilities)*: Counterparties to the Company’s cross currencyinterest rate swap agreements, share-based compensation cash-settled equityforward agreements and foreign exchange derivatives are major financialinstitutions that have all been accorded investment grade ratings by a primaryrating agency. The dollar amount of credit exposure under contracts with anyone financial institution is limited and counterparties’ credit ratings aremonitored. The Company does not give or receive collateral on swap agreementsand hedging items due to its credit rating and those of its counterparties.While the Company is exposed to credit losses due to the non-performance of itscounterparties, the Company considers the risk of this remote. The Company’sderivative liabilities do not have credit-risk-related contingent features.

 

### **(c)**          Liquidity risk

 

As a component of theCompany’s capital structure financial policies, discussed further in Note 3,the Company manages liquidity risk by maintaining a daily cash pooling processwhich enables the Company to manage its liquidity surplus and liquidityrequirements according to the actual needs of the Company and its subsidiaries,by maintaining bilateral bank facilities and syndicated credit facilities, bymaintaining a commercial paper program, by the sales of trade receivables to anarm’s-length securitization trust, by continuously monitoring forecast andactual cash flows and by managing maturity profiles of financial assets andfinancial liabilities. As disclosed in Note 18(g), the Company hassignificant debt maturities 

 

 

25

----

 

notesto consolidated financial statements 

 

in future years. As at December 31,2009, the Company has access to a shelf prospectus, in effect until October 2011,pursuant to which it can offer $3 billion (2008 — access to a shelf prospectus, in effectuntil September 2009, pursuant to which it could offer$2.5 billion) ofdebt or equity securities. The Company believes that its investment gradecredit ratings provide reasonable access to capital markets.

 

TheCompany closely matches the derivative financial liability contractualmaturities with those of the risk exposures that they are being used to manage.

 

TheCompany’s undiscounted financial liability expected maturities do not differsignificantly from the contractual maturities. The Company’s undiscounted financial liabilitycontractual maturities, which include interest thereon (where applicable), areas set out in the following tables:

 
| ** **                   | ** ** | **Non-derivative**     | ** ** | **Derivative**                    | ** ** | ** **                       |       |
|------------------------------|------------|------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **Non-  interest**     | ** ** | **Long-term  debt (see Note 18)** | ** ** | **Other  financial liabilities** | ** ** | ** ** |   |
| **As at  December 31,** | ** ** | **bearing  financial** | ** ** | **All  except  capital**          | ** ** | **Capital**                      | ** ** | **Currency  swaps amounts  to be exchanged(2)** | ** ** | ** ** | ** ** | **Currency  swaps amounts  to be exchanged** | ** ** | ** ** |   |
| **2009 (millions)**     | ** ** | **liabilities**        | ** ** | **leases(1)(2)**                  | ** ** | **leases**                       | ** ** | **(Receive)** | ** ** | **Pay** | ** ** | **Other** | ** ** | **(Receive)** | ** ** | **Pay** | ** ** | **Total** |   |
| 2010                         |       |                   |       |                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| First quarter                | ** ** | **$**                  | **1,023**  | ** **                        | **$**      | **35**                           | ** ** | **$** | **1** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **51** | ** ** | **$** | **(75** | **)** | **$** | **77** | ** ** | **$** | **1,112** |   |
| Balance of year              | ** ** | **309**                | ** ** | **420**                           | ** ** | **1**                            | ** ** | **(113** | **)** | **175** | ** ** | **9** | ** ** | **(95** | **)** | **95** | ** ** | **801** |   |
| 2011                         | ** ** | **—**             | ** ** | **1,728**                         | ** ** | **1**                            | ** ** | **(1,473** | **)** | **2,152** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **2,408** |   |
| 2012                         | ** ** | **—**             | ** ** | **1,014**                         | ** ** | **—**                       | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **1,014** |   |
| 2013                         | ** ** | **—**             | ** ** | **532**                           | ** ** | **—**                       | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **532** |   |
| 2014                         | ** ** | **—**             | ** ** | **907**                           | ** ** | **—**                       | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **907** |   |
| Thereafter                   | ** ** | **1**                  | ** ** | **3,813**                         | ** ** | **—**                       | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **3,814** |   |
| Total                        | ** ** | **$**                  | **1,333**  | ** **                        | **$**      | **8,449**                        | ** ** | **$** | **3** | ** ** | **$** | **(1,586** | **)** | **$** | **2,327** | ** ** | **$** | **60** | ** ** | **$** | **(170** | **)** | **$** | **172** | ** ** | **$** | **10,588** |   |
|                         | ** ** |                   |       | Total  (see Note 18(g))           |       | **$**                            | **9,193**  |   |   |   |   |   |   |   |   |   |

 

----

(1)          Interest paymentcash outflows in respect of commercial paper and amounts drawn under theCompany’s credit facilities (if any) have been calculated based upon the ratesin effect as at December 31, 2009.

(2)          The amountsincluded in the undiscounted non-derivative long-term debt in respect of theU.S. dollar denominated long-term debt, and the corresponding amountsincluded in the long-term debt currency swaps receive column, have beendetermined based upon the rates in effect as at December 31, 2009. TheU.S. dollar denominated long-term debt contractual maturity amounts, in effect,are reflected in the long-term debt currency swaps pay column as gross cashflows are exchanged pursuant to the cross currency interest rate swapagreements (see Note 18(b)).

 
| ** **                   | ** ** | **Non-derivative**     | ** ** | **Derivative**          | ** ** | ** **                      | ** ** |
|------------------------------|------------|------------------------|------------|-------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **Non-  interest**     | ** ** | **Long-term debt**      | ** ** | **Other financial liabilities** | ** ** | ** ** | ** ** |
| **As at  December 31,** | ** ** | **bearing  financial** | ** ** | **All except  capital** | ** ** | **Capital**                     | ** ** | **Currency swaps amounts  to be exchanged(2)** | ** ** | ** ** | ** ** | **Currency swaps amounts  to be exchanged** | ** ** | ** ** | ** ** |
| **2008  (millions)**         | ** ** | **liabilities**        | ** ** | **leases(1)(2)**        | ** ** | **leases**                      | ** ** | **(Receive)** | ** ** | **Pay** | ** ** | **Other** | ** ** | **(Receive)** | ** ** | **Pay** | ** ** | **Total** | ** ** |
| 2009                         |       |                   |       |                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| First quarter                |       | $                      | 1,093      |                    | $          | 44                              |       | $ | 1 |   | $ | — |   | $ | — |   | $ | 62 |   | $ | (119 | ) | $ | 110 |   | $ | 1,191 |   |
| Balance of year              |       | 239                    |       | 356                     |       | 2                               |       | (187 | ) | 250 |   | 13 |   | (117 | ) | 116 |   | 672 |   |
| 2010                         |       | 15                     |       | 477                     |       | 2                               |       | (187 | ) | 250 |   | 8 |   | — |   | — |   | 565 |   |
| 2011                         |       | 2                      |       | 2,641                   |       | 1                               |       | (2,439 | ) | 3,077 |   | — |   | — |   | — |   | 3,282 |   |
| 2012                         |       | —                 |       | 1,891                   |       | —                          |       | — |   | — |   | — |   | — |   | — |   | 1,891 |   |
| 2013                         |       | —                 |       | 447                     |       | —                          |       | — |   | — |   | — |   | — |   | — |   | 447 |   |
| Thereafter                   |       | 1                      |       | 2,699                   |       | —                          |       | — |   | — |   | — |   | — |   | — |   | 2,700 |   |
| Total                        |       | $                      | 1,350      |                    | $          | 8,555                           |       | $ | 6 |   | $ | (2,813 | ) | $ | 3,577 |   | $ | 83 |   | $ | (236 | ) | $ | 226 |   | $ | 10,748 |   |
|                         |       |                   |       | Total                   |       |                            |       |   |   | $ | 9,325 |   |   |   |   |   |   |   |   |   |

 

----

(1)          Interest payment cashoutflows in respect of commercial paper and amounts drawn under the Company’scredit facility have been calculated based upon the rates in effect as at December 31,2008.

(2)          The amounts included in theundiscounted non-derivative long-term debt in respect of the U.S. dollardenominated long-term debt, and the corresponding amounts included in thelong-term debt currency swaps receive column, have been determined based uponthe rates in effect as at December 31, 2008. The U.S. dollar denominatedlong-term debt contractual maturity amounts, in effect, are reflected in thelong-term debt currency swaps pay column as gross cash flows are exchangedpursuant to the cross currency interest rate swap agreements (see Note 18(b)).

 

### **(d)**          Currencyrisk

 

The Company’s functionalcurrency is the Canadian dollar, but it regularly transacts in U.S. dollarsdue to certain routine revenues and operating costs being denominated inU.S. dollars, as well as sourcing some inventory purchases and capitalasset acquisitions internationally. The U.S. dollar is the only foreigncurrency to which the Company has a significant exposure.

 

 

26

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notesto consolidated financial statements 

 

The Company’s foreignexchange risk management includes the use of foreign currency forward contractsand currency options to fix the exchange rates on short-term U.S. dollardenominated transactions and commitments. Hedge accounting is applied to theseshort-term foreign currency forward contracts and currency options on anexception basis only.

 

The Company is alsoexposed to currency risks in that the fair value or future cash flows of itsU.S. dollar denominated long-term debt will fluctuate because of changesin foreign exchange rates. Currency hedging relationships have been establishedfor the related semi-annual interest payments and principal payment atmaturity.

 

### **(e)**          Interestrate risk

 

Changes in marketinterest rates will cause fluctuations in the fair value or future cash flowsof temporary investments, short-term investments, short-term obligations,long-term debt and/or cross currency interest rate swap derivatives.

 

When the Company hastemporary investments, they have short maturities and fixed rates, thus theirfair value will fluctuate with changes in market interest rates; absentmonetization prior to maturity, the related future cash flows do not change dueto changes in market interest rates.

 

If the balance ofshort-term investments includes debt instruments and/or dividend-paying equityinstruments, the Company could be exposed to interest rate risks.

 

As short-term obligationsarising from bilateral bank facilities, which typically have variable interestrates, are rarely outstanding for periods that exceed one calendar week,interest rate risk associated with this item is not material.

 

In respect of theCompany’s currently outstanding long-term debt, other than for commercial paperand amounts drawn on its credit facilities (Note 18(d)), it is allfixed-rate debt. The fair value of fixed-rate debt fluctuates with changes inmarket interest rates; absent early redemption and/or foreign exchange ratefluctuations, the related future cash flows do not change. Due to the shortmaturities of commercial paper, its fair values are not materially affected bychanges in market interest rates but its cash flows representing interestpayments may be if the commercial paper is rolled over.

 

Amounts drawn on theCompany’s short-term and long-term credit facilities will be affected bychanges in market interest rates in a manner similar to commercial paper.

 

Similar to fixed-ratedebt, the fair value of the Company’s cross currency interest rate swap derivativesfluctuates with changes in market interest rates as the interest rate swappedto is fixed; absent early redemption, the related future cash flows do notchange due to changes in market interest rates.

 

### **(f)**            Other pricerisk

* *

*Short-term investments:* Ifthe balance of short-term investments includes equity instruments, the Companywould be exposed to equity price risks.

* *

*Long-terminvestments:*TheCompany is exposed to equity price risks arising from investments classified asavailable-for-sale. Such investments are held for strategic rather than tradingpurposes.

* *

*Share-basedcompensation derivatives*: The Company is exposed to other price risk arising from cash-settledshare-based compensation (appreciating Common Share and Non-Voting Share pricesincrease both the expense and the potential cash outflow). Cash-settled equityswap agreements have been entered into that establish a cap on the Company’scost associated with its net-cash settled share options (Note 12(b)) andfix the Company’s cost associated with its restricted stock units (Note 12(c)).

 

### **(g)**         Market risk

 

Net income and othercomprehensive income for the years ended December 31, 2009 and 2008, couldhave varied if the Canadian dollar: U.S. dollar foreign exchange rates,market interest rates and the Company’s Common Share and Non-Voting Shareprices varied by reasonably possible amounts from their actual statement offinancial position date values.

 

The sensitivity analysisof the Company’s exposure to currency risk at the reporting date has beendetermined based upon the hypothetical change taking place at the statement offinancial position date (as contrasted with applying the hypothetical change toall relevant transactions during the reported periods). The U.S. dollardenominated balances and derivative financial instrument notional amounts as atthe statement of financial position dates have been used in the calculations.

 

The sensitivity analysisof the Company’s exposure to interest rate risk at the reporting date has beendetermined based upon the hypothetical change taking place at the beginning ofthe relevant fiscal year and being held constant through to the statement offinancial position date. The relevant statement of financial position dateprincipal and notional amounts have been used in the calculations.

 

The sensitivity analysisof the Company’s exposure to other price risk arising from share-basedcompensation at the reporting date has been determined based upon thehypothetical change taking place at the relevant statement of financialposition date. The relevant statement of financial position date notionalnumber of shares, including those in the cash-settled equity swap agreements,has been used in the calculations.

 

 

27

----

 

notesto consolidated financial statements 

 

The income taxprovisions, which are reflected net in the sensitivity analysis, reflect theapplicable basic blended federal and provincial statutory income tax rates forthe reporting periods.

 
| **Years  ended December 31**                                  | ** ** | **Net income** | ** ** | **Other comprehensive income** | ** ** | **Comprehensive income** | ** ** |
|--------------------------------------------------------------------|------------|----------------|------------|--------------------------------|------------|--------------------------|------------|
| **($ increase (decrease) in millions)**        | ** ** | **2009**       | ** ** | **2008**                       | ** ** | **2009**                 | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Reasonably possible changes in market risks(1)                |       |           |       |                           |       |                     |       |   |   |   |   |   |   |
| 10% change in Cdn. $: U.S.$ exchange rate                |       |           |       |                           |       |                     |       |   |   |   |   |   |   |
| Canadian dollar appreciates                                        | ** ** | **$**          | **(5**     | **)**                          | $          | (7                       | )          | **$** | **(16** | **)** | $ | (34 | ) | **$** | **(21** | **)** | $ | (41 | ) |
| Canadian dollar depreciates                                        | ** ** | **$**          | **5**      |                           | $          | 7                        | ** ** | **$** | **16** |   | $ | 34 | ** ** | **$** | **21** |   | $ | 41 |   |
| 25 basis point change in  market interest rate                |       |           |       |                           |       |                     |       |   |   |   |   |   |   |
| Rate increases                                                     | ** ** | **$**          | **(2**     | **)**                          | $          | (3                       | )          | **$** | **2** |   | $ | 3 | ** ** | **$** | **—** |   | $ | — |   |
| Rate decreases                                                     | ** ** | **$**          | **2**      |                           | $          | 3                        | ** ** | **$** | **(2** | **)** | $ | (3 | ) | **$** | **—** |   | $ | — |   |
| 25%(2) change in Common Share and Non-Voting  Share prices(3) |       |           |       |                           |       |                     |       |   |   |   |   |   |   |
| Price increases                                                    | ** ** | **$**          | **—** |                           | $          | (1                       | )          | **$** | **3** |   | $ | 4 | ** ** | **$** | **3** |   | $ | 3 |   |
| Price decreases                                                    | ** ** | **$**          | **(8**     | **)**                          | $          | (10                      | )          | **$** | **(3** | **)** | $ | (4 | ) | **$** | **(11** | **)** | $ | (14 | ) |

 

----

(1)          These sensitivities arehypothetical and should be used with caution. Changes in net income and/orother comprehensive income generally cannot be extrapolated because therelationship of the change in assumption to the change in net income and/orother comprehensive income may not be linear. In this table, the effect of avariation in a particular assumption on the amount of net income and/or othercomprehensive income is calculated without changing any other assumption; inreality, changes in one factor may result in changes in another (for example,increases in market interest rates may result in more favourable foreignexchange rates (increased strength of the Canadian dollar)), which mightmagnify or counteract the sensitivities.

The sensitivity analysisassumes that changes in exchange rates and market interest rates would berealized by the Company; in reality, the competitive marketplace in which theCompany operates would impact this assumption.

No provision has been madefor a difference in the notional number of shares associated with share-basedcompensation awards made during the reporting period that may have arisen dueto a difference in the Non-Voting Share price.

(2)          To facilitate ongoingcomparison of sensitivities, a constant variance of approximate magnitude hasbeen used. Reflecting a 4.5-year data period and calculated on a monthly basis,which is consistent with the current assumptions and methodology set out inNote 12(b), the volatility of the Company’s Non-Voting Share price as at December 31,2009, was 26.4% (2008 — 26.4%); reflecting the twelve-month data period ended December 31,2009, the volatility was 26.9% (2008 — 30.8%).

(3)          The hypothetical effects ofchanges in the prices of the Company’s Common Share and Non-Voting Shares arerestricted to those which would arise from the Company’s share-basedcompensation items which are accounted for as liability instruments and theassociated cash-settled equity swap agreements.

 

The Company is exposed toother price risks in respect of its financial instruments, as discussed furtherin Note 5(f).

 

### **(h)**         Fair values

* *

*General:* The carrying values of cash andtemporary investments, accounts receivable, accounts payable, restructuringaccounts payable and short-term obligations approximate their fair values dueto the immediate or short-term maturity of these financial instruments. Thecarrying values of the Company’s investments accounted for using the costmethod do not exceed their fair values.

 

The carrying value ofshort-term investments, if any, equals their fair value as they are classifiedas held for trading. The fair value is determined directly by reference toquoted market prices in active markets.

 

The fair values of theCompany’s long-term debt are based on quoted market prices in active markets.The fair values of the Company’s derivative financial instruments used tomanage exposure to interest rate and currency risks are estimated based onquoted market prices in active markets for the same or similar financialinstruments or on the current rates offered to the Company for financialinstruments of the same maturity as well as the use of discounted future cashflows using current rates for similar financial instruments subject to similarrisks and maturities.

 

The fair values of theCompany’s derivative financial instruments used to manage exposure to increasesin compensation costs arising from certain forms of share-based compensationare based upon fair value estimates of the related cash-settled equity forwardagreements provided by the counterparty to the transactions (such fair valueestimates being largely based upon the Company’s Common Share and Non-VotingShare prices as at the statement of financial position dates).

 

 

28

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notesto consolidated financial statements

 

TheCompany’s financial instruments that are measured at fair value on a recurringbasis in periods subsequent to initial recognition and the level within thefair value hierarchy used to measure them are as set out in the followingtable.

 
| ** **                                    | ** ** | ** **         | ** ** | ** **    | ** ** | **Fair value measurements at reporting date using**      | ** ** |
|-----------------------------------------------|------------|--------------------|------------|---------------|------------|----------------------------------------------------------|------------|
| ** **                                    | ** ** | ** **         | ** ** | ** **    | ** ** | **Quoted prices in active  markets for identical items** | ** ** | **Significant other  observable inputs** | ** ** | **Significant  unobservable inputs** | ** ** |
| ** **                                    | ** ** | **Carrying value** | ** ** | **(Level 1)** | ** ** | **(Level 2)**                                            | ** ** | **(Level 3)** | ** ** |
| **As  at December 31 (millions)**        | ** ** | **2009**           | ** ** | **2008**      | ** ** | **2009**                                                 | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Assets**                                    | ** ** | ** **         |       |          |       |                                                     | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |
| Foreign  exchange derivatives                 | ** ** | **$**              | **1**      |          | $          | 10                                                       | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **1** |   | $ | 10 | ** ** | **$** | **—** |   | $ | — |   |
| **Liabilities**                               | ** ** | ** **         |       |          | ** ** | ** **                                               |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Foreign  exchange derivatives                 | ** ** | **$**              | **2**      |          | $          | —                                                   | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **2** |   | $ | — | ** ** | **$** | **—** |   | $ | — |   |
| Share-based compensation derivatives          | ** ** | **60**             |       | 82            | ** ** | **—**                                               |       | — | ** ** | **60** |   | 82 | ** ** | **—** |   | — |   |
| Cross currency interest rate swap derivatives | ** ** | **721**            |       | 778           | ** ** | **—**                                               |       | — | ** ** | **721** |   | 778 | ** ** | **—** |   | — |   |
|                                          | ** ** | **$**              | **783**    |          | $          | 860                                                      | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **783** |   | $ | 860 | ** ** | **$** | **—** |   | $ | — |   |

 

*Derivative:* The Company’s derivative financialinstruments that are measured at fair value on a recurring basis subsequent toinitial recognition are as set out in the following table.

 
| ** **                                                                                                                                                                                       | ** ** | ** **                 | ** ** | **2009**             | ** ** | **2008**             | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------|------------|----------------------|------------|
| **As at****December 31****(millions)**                                                                                                                                                      | ** ** | **Maximum  maturity date** | ** ** | **Notional  amount** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** | **Notional  amount** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** |
| **Current  Assets**                                                                                                                                                                              |       |                       |       |                 |       |                 |       |   |   |   |   |   |   |   |   |
| Derivatives  designated as held for trading upon initial recognition and used to manage currency  risks arising from U.S. dollar transactions to which hedge accounting is not  applied          |       |                       |       |                 |       |                 |       |   |   |   |   |   |   |   |   |
| -  Revenues                                                                                                                                                                                 |       | 2010                       | ** ** | **$**                | **23**     | ** **           | **$**      | **1** | ** ** | **$** | **1** |   | $ | 29 |   | $ | — |   | $ | — |   |
| -  Purchases                                                                                                                                                                                |       | 2009                       | ** ** | **$**                | **—** | ** **           | **—** | ** ** | **—** |   | $ | 95 |   | 3 |   | 3 |   |
| Derivatives(1) designated  as held for hedging(2) upon initial recognition and used to manage currency  risks arising from U.S. dollar denominated purchases                      |       | 2009                       | ** ** | **$**                | **—** | ** **           | **—** | ** ** | **—** |   | $ | 102 |   | 7 |   | 7 |   |
|                                                                                                                                                                                             |       |                       | ** ** | ** **           | ** ** | **$**                | **1**      | ** ** | **$** | **1** |   |   |   | $ | 10 |   | $ | 10 |   |
| **Other  Long-Term Assets**                                                                                                                                                                      |       |                       | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** |   |   |   |   |   |   |   |
| Derivatives(1) used  to manage changes in share-based compensation costs and classified as held  for hedging (2) (Note 12(c))                                                     |       | 2011                       | ** ** | **$**                | **12**     | ** **           | **$**      | **—** | ** ** | **$** | **—** |   | $ | — |   | $ | — |   | $ | — |   |
| **Current  Liabilities**                                                                                                                                                                         |       |                       | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** |   |   |   |   |   |   |   |
| Derivatives  designated as held for trading upon initial recognition and used to manage currency  risks arising from U.S. dollar denominated purchases to which hedge  accounting is not applied |       | 2010                       | ** ** | **$**                | **102**    | ** **           | **$**      | **2** | ** ** | **$** | **2** |   | $ | — |   | $ | — |   | $ | — |   |
| Derivatives(1) designated  as held for hedging(2) upon initial recognition and used to manage currency  risks arising from U.S. dollar denominated purchases                      |       | 2010                       | ** ** | **$**                | **79**     | ** **           | **—** | ** ** | **—** |   | $ | — |   | — |   | — |   |
| Derivatives used to manage  changes in share-based compensation costs and classified as held for                                                                                                 |       |                       | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| - Trading (Note 12(b))                                                                                                                                                                      |       | 2012                       | ** ** | **$**                | **130**    | ** **           | **51**     | ** ** | **51** |   | $ | 177 |   | 64 |   | 64 |   |
| - Hedging(1)(2) (Note 12(c))                                                                                                                                                           |       | 2010                       | ** ** | **$**                | **26**     | ** **           | **9**      | ** ** | **9** |   | $ | 28 |   | 11 |   | 13 |   |
|                                                                                                                                                                                             |       |                       | ** ** | ** **           | ** ** | **62**               | ** ** | ** ** |   |   |   | 75 |   |   |   |
| Add: Net amounts due to  counterparties in respect of derivatives used to manage changes in  share-based compensation costs and classified as held for hedging  (Note 12(c))                |       |                       | ** ** | ** **           | ** ** | **—**           | ** ** | ** ** |   |   |   | 2 |   |   |   |
|                                                                                                                                                                                             |       |                       | ** ** | ** **           | ** ** | **$**                | **62**     | ** ** | **$** | **62** |   |   |   | $ | 77 |   | $ | 77 |   |

 

 

29

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notesto consolidated financial statements

 
| ** **                                                                                                                                                           | ** ** | ** **                 | ** ** | **2009**             | ** ** | **2008**             | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------|------------|----------------------|------------|
| **As at****December 31****(millions)**                                                                                                                          | ** ** | **Maximum  maturity date** | ** ** | **Notional  amount** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** | **Notional  amount** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** |
| **Other  Long-Term Liabilities**                                                                                                                                     |       |                       |       |                 |       |                 |       |   |   |   |   |   |   |   |   |
| Derivatives(1) used to manage changes in  share-based compensation costs and classified as held for hedging (2) (Note 12(c))                          |       | 2011                       | ** ** | **$**                | **—** | ** **           | **$**      | **—** | ** ** | **$** | **—** |   | $ | 26 |   | $ | 7 |   | $ | 8 |   |
| Derivatives(1) classified as held for  hedging(2) and used to  manage currency risks associated with U.S. dollar denominated debt  (Note 18(b))  |       | 2011                       | ** ** | **$**                | **2,064**  | ** **           | **721**    | ** ** | **726** |   | $ | 2,951 |   | 778 |   | 783 |   |
|                                                                                                                                                                 | ** ** | ** **                 |       |                 |       | **721**              |       |   |   |   |   | 785 |   |   |   |
| Add: Net amounts due to  counterparties in respect of derivatives used to manage changes in  share-based compensation costs and classified as held for hedging       | ** ** | ** **                 |       |                 |       | **—**           |       |   |   |   |   | 1 |   |   |   |
| Add: Interest payable in  respect of derivatives used to manage currency risks associated with  U.S. dollar denominated debt and classified as held for hedging | ** ** | ** **                 |       |                 |       | **5**                |       |   |   |   |   | 5 |   |   |   |
|                                                                                                                                                                 | ** ** | ** **                 | ** ** | ** **           |       | **$**                | **726**    | ** ** | **$** | **726** |   |   |   | $ | 791 |   | $ | 791 |   |

 

----

(1)          Designated as cash flowhedging items.

(2)          Hedge accounting is appliedto derivatives that are designated as held for hedging.

 

*Non-derivative:* The Company’s long-term debt, which ismeasured at amortized cost, and the fair value thereof, is as set out in thefollowing table.

 
| ** **                            | ** ** | **2009**             | ** ** | **2008**       | ** ** |
|---------------------------------------|------------|----------------------|------------|----------------|------------|
| **As at December 31 (millions)** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** |
| Long-term debt                        | ** ** | **$**                | **6,172**  | ** **     | **$**      | **6,656** |   | $ | 6,352 |   | $ | 6,445 |   |
|                                       |            |                      |            |                |            |  |  |  |  |  |  |  |  |

 

### **(i)**            Recognition of derivative gains and losses

 

The followingtable sets out the gains and losses, excluding tax effects, on derivativeinstruments classified as cash flow hedging items and their location within theConsolidated Statements of Income and Other Comprehensive Income.

 
| ** **                                                                              | ** ** | **Amount of gain (loss)  recognized in other  comprehensive income  (effective portion)** | ** ** | **Gain (loss)  reclassified from other  comprehensive income into income  (effective portion) (Note 19(b))** | ** ** | **Gain (loss) recognized in  income  on derivative (ineffective portion)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **Years ended December 31**                                                        | ** ** | **(Note 19(b))**                                                                     | ** ** | ** **                                                                                                        | ** ** | **Amount**                                                                 | ** ** | ** ** | ** ** | **Amount** | ** ** |
| **(millions)**                                                                          | ** ** | **2009**                                                                                  | ** ** | **2008**                                                                                                          | ** ** | **Location**                                                               | ** ** | **2009** | ** ** | **2008** | ** ** | **Location** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Derivatives  used to manage currency risks                                              | ** ** | ** **                                                                                |       |                                                                                                              |       |                                                                       | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |
| -Associated  with U.S. dollar denominated debt                                     | ** ** | **$**                                                                                     | **(259**   | **)**                                                                                                             | $          | 402                                                                        |       | Financing  costs | ** ** | **$** | **(357** | **)** | $ | 436 |   | Financing  costs | ** ** | **$** | **—** |   | $ | (1 | ) |
| -Arising  from U.S. dollar denominated purchases                                        | ** ** | **(6**                                                                                    | **)**      | 14                                                                                                                |       | Operations                                                                 | ** ** | **1** |   | 7 |   | Operations | ** ** | **—** |   | — |   |
| Derivatives  used to manage changes in share-based compensation costs (Note 12(c)) | ** ** | **1**                                                                                     |       | (11                                                                                                               | )          | Operations                                                                 | ** ** | **(6** | **)** | (3 | ) | Operations | ** ** | **—** |   | — |   |
|                                                                                    | ** ** | **$**                                                                                     | **(264**   | **)**                                                                                                             | $          | 405                                                                        |       |   | ** ** | **$** | **(362** | **)** | $ | 440 |   |   | ** ** | **$** | **—** |   | $ | (1 | ) |

 

 

30

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notesto consolidated financial statements

 

Thefollowing table sets out gains and losses arising from derivative instruments:that are classified as held for trading items; that are not designated as beingin a hedging relationship; and their location within the ConsolidatedStatements of Income and Other Comprehensive Income.

 
| ** **                                                                         | ** ** | ** **       | ** ** | **Gain (loss) recognized in  income on derivatives** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------|------------|------------------------------------------------------|------------|
| **Years ended December 31 (millions)**                         | ** ** | **Location**     | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Derivatives  used to manage currency risks                                         |       | Financing  costs | ** ** | **$**                                                | **(13**    | **)** | $ | 15 |   |
| Derivatives  used to manage changes in share-based compensation costs (Note 12(b)) |       | Operations       | ** ** | **(4**                                               | **)**      | (47 | ) |
| ** **                                                                         |       |             | ** ** | **$**                                                | **(17**    | **)** | $ | (32 | ) |

 

## 6                  segmented information

 

The Company’s reportable segments are Wireline and Wireless. TheWireline segment****includes****voice local, voice long distance, data andother telecommunications services excluding wireless. The Wireless segmentincludes digital personal communications services, equipment sales and wirelessInternet services. Segmentation is based on similarities in technology, thetechnical expertise required to deliver the products and services, customercharacteristics, the distribution channels used and regulatory treatment.Intersegment sales are recorded at the exchange value, which is the amountagreed to by the parties. The following segmented information is regularlyreported to the Company’s Chief Executive Officer (the Company’s chiefoperating decision-maker).

 
| **Years ended December 31**              | ** ** | **Wireline** | ** ** | **Wireless** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|--------------|------------|--------------|------------|------------------|------------|------------------|------------|
| **(millions)**                                | ** ** | **2009**     | ** ** | **2008**     | ** ** | **2009**         | ** ** | **2008**         | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Operating  revenues**                       | ** ** | ** **   |       |         | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| External revenue                              | ** ** | **$**        | **4,899**  |         | $          | 5,021            | ** ** | **$**            | **4,707**  |   | $ | 4,632 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **9,606** |   | $ | 9,653 |   |
| Intersegment revenue                          | ** ** | **134**      |       | 131          | ** ** | **28**           |       | 28               | ** ** | **(162** | **)** | (159 | ) | **—** |   | — |   |
| ** **                                    | ** ** | **5,033**    |       | 5,152        | ** ** | **4,735**        |       | 4,660            | ** ** | **(162** | **)** | (159 | ) | **9,606** |   | 9,653 |   |
| **Operating  expenses**                       | ** ** | ** **   |       |         | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Operations expense                            | ** ** | **3,297**    |       | 3,327        | ** ** | **2,790**        |       | 2,647            | ** ** | **(162** | **)** | (159 | ) | **5,925** |   | 5,815 |   |
| Restructuring costs                           | ** ** | **178**      |       | 51           | ** ** | **12**           |       | 8                | ** ** | **—** |   | — | ** ** | **190** |   | 59 |   |
|                                          | ** ** | **3,475**    |       | 3,378        | ** ** | **2,802**        |       | 2,655            | ** ** | **(162** | **)** | (159 | ) | **6,115** |   | 5,874 |   |
| EBITDA(1)                                     | ** ** | **$**        | **1,558**  |         | $          | 1,774            | ** ** | **$**            | **1,933**  |   | $ | 2,005 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **3,491** |   | $ | 3,779 |   |
| Capital expenditures                          | ** ** | **$**        | **1,333**  |         | $          | 1,311            | ** ** | **$**            | **770**    |   | $ | 548 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **2,103** |   | $ | 1,859 |   |
| Advanced wireless services  spectrum licences | ** ** | **—**   |       | —       | ** ** | **—**       |       | 882              | ** ** | **—** |   | — | ** ** | **—** |   | 882 |   |
| CAPEX(2)                                      | ** ** | **$**        | **1,333**  |         | $          | 1,311            | ** ** | **$**            | **770**    |   | $ | 1,430 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **2,103** |   | $ | 2,741 |   |
| EBITDA less CAPEX                             | ** ** | **$**        | **225**    |         | $          | 463              | ** ** | **$**            | **1,163**  |   | $ | 575 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **1,388** |   | $ | 1,038 |   |
|                                          | ** ** | ** **   |       |         | ** ** | ** **       |       |             | ** ** | EBITDA (from above) | ** ** | **$** | **3,491** |   | $ | 3,779 |   |
|                                          | ** ** | ** **   |       |         | ** ** | ** **       |       |             | ** ** | Depreciation | ** ** | **1,341** |   | 1,384 |   |
|                                          | ** ** | ** **   |       |         | ** ** | ** **       |       |             | ** ** | Amortization | ** ** | **381** |   | 329 |   |
|                                          | ** ** | ** **   |       |         | ** ** | ** **       |       |             | ** ** | **Operating income** | ** ** | **1,769** |   | 2,066 |   |
|                                          | ** ** | ** **   |       |         | ** ** | ** **       |       |             | ** ** | Other expense, net | ** ** | **32** |   | 36 |   |
|                                          | ** ** | ** **   |       |         | ** ** | ** **       |       |             | ** ** | Financing costs | ** ** | **532** |   | 463 |   |
|                                          | ** ** | ** **   |       |         | ** ** | ** **       |       |             | ** ** | **Income  before income taxes** | ** ** | **1,205** |   | 1,567 |   |
|                                          | ** ** | ** **   |       |         | ** ** | ** **       |       |             | ** ** | Income taxes | ** ** | **203** |   | 436 |   |
|                                          | ** ** | ** **   |       |         | ** ** | ** **       |       |             | ** ** | **Net income** (as adjusted — Note 2(c)) | ** ** | **$** | **1,002** |   | $ | 1,131 |   |

 

----

(1)   Earnings BeforeInterest, Taxes, Depreciation and Amortization (EBITDA) is a measure that doesnot have any standardized meaning prescribed by GAAP and is therefore unlikelyto be comparable to similar measures presented by other issuers; EBITDA isdefined by the Company as operating revenues less operations expense andrestructuring costs. The Company has issued guidance on, and reports, EBITDAbecause it is a key measure used by management to evaluate performance of itsbusiness segments and is utilized in measuring compliance with certain debtcovenants.

(2)   Total capitalexpenditures (CAPEX) are the sum of capital expenditures and advanced wirelessservices spectrum licences.

 

 

31

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notesto consolidated financial statements

 

## 7                  restructuring costs

 
| **Years ended December 31 (millions)**             | ** ** | **2009**   | ** ** | **2008** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------|------------|
| Restructuring costs                                     | ** ** | ** ** |       |     |       |
| Workforce                                               | ** ** | ** ** |       |     |       |
| Voluntary                                               | ** ** | **$**      | **94**     |     | $          | 9 |   |
| Involuntary                                             | ** ** | **92**     |       | 50       |       |
| Other                                                   | ** ** | **4**      |       | —   |       |
|                                                    | ** ** | **190**    |       | 59       |       |
| Disbursements                                           | ** ** | ** ** |       |     |       |
| Workforce                                               | ** ** | ** ** |       |     |       |
| Voluntary                                               | ** ** | **36**     |       | 21       |       |
| Involuntary and other                                   | ** ** | **66**     |       | 21       |       |
| Other                                                   | ** ** | **4**      |       | 1        |       |
|                                                    | ** ** | **106**    |       | 43       |       |
| Expenses greater (less)  than disbursements             | ** ** | **84**     |       | 16       |       |
| Restructuring accounts payable  and accrued liabilities | ** ** | ** ** |       |     |       |
| Balance, beginning of  period                           | ** ** | **51**     |       | 35       |       |
| Balance, end of period                                  | ** ** | **$**      | **135**    |     | $          | 51 |   |

 

In 2009, arising from itscompetitive efficiency program, the Company undertook a number of initiativesincluding:

 

·                  rationalizing external supplier spending;

·                  simplifying processes and decommissioninguneconomic products;

·                  reducing staffing levels, freezing managementcompensation increases and containing benefit costs;

·                  leveraging business process outsourcing andoff-shoring; and

·                  reducing expenses operation-wide.

 

Theseinitiatives were aimed to improve the Company’s long-term operatingproductivity and competitiveness. The Company’s estimate of restructuring costsfor 2010 is approximately $75 million.

 

## 8                  financing costs

 
| **Years ended December 31 (millions)**   | ** ** | **2009**   | ** ** | **2008** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------|------------|
| Interest on long-term debt                    | ** ** | **$**      | **474**    |     | $          | 468 |   |
| Interest on short-term  obligations and other | ** ** | **9**      |       | 13       |       |
| Foreign exchange (Note  5(i))                 | ** ** | **(3**     | **)**      | (1       | )          |
| Loss on redemption of  long-term debt(1)      | ** ** | **99**     |       | —   |       |
|                                          | ** ** | **579**    |       | 480      |       |
| Capitalized interest during  construction     | ** ** | **—** |       | (3       | )          |
|                                          | ** ** | **579**    |       | 477      |       |
| Interest income                               | ** ** | ** ** |       |     |       |
| Interest on tax refunds                       | ** ** | **(46**    | **)**      | (9       | )          |
| Other interest income                         | ** ** | **(1**     | **)**      | (5       | )          |
|                                          | ** ** | **(47**    | **)**      | (14      | )          |
|                                          | ** ** | **$**      | **532**    |     | $          | 463 |   |

 

----

(1)   This amountincludes a loss of $36 which arose from the associated settlement of financialinstruments that were used to manage the foreign exchange rate risk associatedwith the U.S. dollar denominated debt that was redeemed during the fourthquarter of 2009, as discussed in Note 18(b).

 

 

32

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notesto consolidated financial statements

 

## 9                  income taxes

 
| **Years ended December 31 (millions)** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Current                                     | ** ** | **$**    | **286**    |     | $          | 275 |   |
| Future                                      | ** ** | **(83**  | **)**      | 161      |       |
|                                        | ** ** | **$**    | **203**    |     | $          | 436 |   |

 

The Company’sincome tax expense differs from that calculated by applying statutory rates forthe following reasons:

 
| **Years ended  December 31 ($ in millions)**                                               | ** ** | **2009**   | ** ** | **2008**   |     |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|----------|
| Basic blended federal and  provincial tax at statutory income tax rates                              | ** ** | **$**      | **366**    | ** ** | **30.3** | **%** | $ | 486 |   | 31.0 | % |
| Revaluation of future  income tax liability to reflect future statutory income tax rates             | ** ** | **(99**    | **)**      | ** ** |     | (41 | ) |   |   |
| Tax rate differential on,  and consequential adjustments from, reassessment of prior year tax issues | ** ** | **(68**    | **)**      | ** ** |     | (21 | ) |   |   |
| Share option award  compensation                                                                     | ** ** | **4**      | ** ** | ** ** |     | 6 |   |   |   |
| Other                                                                                                | ** ** | **—** | ** ** | ** ** |     | 6 |   |   |   |
| Income tax expense per Consolidated Statements of  Income and Other Comprehensive Income             | ** ** | **$**      | **203**    | ** ** | **16.8** | **%** | $ | 436 |   | 27.8 | % |

 

TheCompany must make significant estimates in respect of the composition of itsfuture income tax liability. The operations of the Company are complex and therelated tax interpretations, regulations and legislation are continuallychanging. As a result, there are usually some tax matters in question.Temporary differences comprising the future income tax liability are estimatedas follows:

 
| **As at December 31****(millions)**                                         | ** ** | **2009**   | ** ** | **2008** | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Property, plant, equipment,  other and intangible assets subject to amortization | ** ** | **$**      | **(209**   | **)**    | $          | (156 | ) |
| Intangible assets with  indefinite lives                                         | ** ** | **(789**   | **)**      | (830     | )          |
| Partnership income  unallocated for income tax purposes                          | ** ** | **(437**   | **)**      | (556     | )          |
| Net pension and share-based  compensation amounts                                | ** ** | **(327**   | **)**      | (306     | )          |
| Reserves not currently  deductible                                               | ** ** | **124**    |       | 112      |       |
| Losses available to be  carried forward                                          | ** ** | **40**     |       | 44       |       |
| Other                                                                            | ** ** | **(15**    | **)**      | 20       |       |
|                                                                             | ** ** | **$**      | **(1,613** | **)**    | $          | (1,672 | ) |
| Presented on the  Consolidated Statements of Financial Position as:              | ** ** | ** ** |       |     |       |
| Future income tax liability                                                      | ** ** | ** ** |       |     |       |
| Current                                                                          | ** ** | **$**      | **(294**   | **)**    | $          | (459 | ) |
| Non-current                                                                      | ** ** | **(1,319** | **)**      | (1,213   | )          |
| Net future income tax asset (liability)                                          | ** ** | **$**      | **(1,613** | **)**    | $          | (1,672 | ) |

 

The Company expects to beable to utilize its non-capital losses prior to expiry.

 

The Company has netcapital losses and such losses may only be applied against realized taxablecapital gains. The Company has included a net capital loss carry-forward of$605 million (2008 — $606 million) in its Canadian income taxreturns. During the year ended December 31, 2009, the Company recognizedthe benefit of $1 million (2008 — $19 million) in net capital losses.Of the net capital losses carried-forward, as at December 31, 2009,$604 million (2008 — $604 million) have been denied on audit by theCanada Revenue Agency and the Company is considering various courses of actionwith a view to confirming all or a part of such net capital losses.

 

The Company conductsresearch and development activities, which are eligible to earn Investment TaxCredits. During the year ended December 31, 2009, the Company recordedInvestment Tax Credits of $15 million (2008 — $12 million),$10 million (2008 — $8 million) of which was recorded as a reductionof capital and the balance of which was recorded as a reduction of Operationsexpense.

 

 

33

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## 10    per share amounts

 

Basic net income per Common Share and Non-Voting Shareis calculated by dividing net income attributable to Common Shares andNon-Voting Shares by the total weighted average Common Shares and Non-VotingShares outstanding during the period. Diluted net income per Common Share andNon-Voting Share is calculated to give effect to share option awards.

 

Thefollowing table presents the reconciliations of the denominators of the basicand diluted per share computations. Net income attributable to Common Sharesand Non-Voting Shares equalled diluted income attributable to Common Shares andNon-Voting Shares for all periods presented.

 
| **Years ended December 31 (millions)**                      | ** ** | **2009**   | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Basic total weighted  average Common Shares and Non-Voting Shares outstanding   | ** ** | **318**    |       | 320      |       |
| Effect of dilutive  securities                                                  | ** ** | ** ** |       |     |       |
| Share option awards                                                             | ** ** | **—** |       | 2        |       |
| Diluted total weighted average Common Shares and  Non-Voting Shares outstanding | ** ** | **318**    |       | 322      |       |

 

For the year ended December 31,2009, certain outstanding share option awards, in the amount of 8 million(2008 — 6 million) were not included in the computation of diluted incomeper Common Share and Non-Voting Share because the share option awards’ exerciseprices were greater than the average market price of the Common Shares andNon-Voting Shares during the reported periods.

 

## 11    dividends per share

 

### **(a)**   Dividends declared

 
| ** **                                                                                                    | ** ** | **2009**                | ** ** | **2008**                  | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| **Years ended December 31  (millions except per share amounts)**                                         | ** ** | **Declared  effective** | ** ** | **Paid to  shareholders** | ** ** | **Total** | ** ** | **Declared  effective** | ** ** | **Paid to  shareholders** | ** ** | **Total** | ** ** |
| Dividend per Common Share  and Non-Voting Share                                                          | ** ** | ** **              | ** ** | ** **                | ** ** | ** ** |   |   |   |   |   |   |   |
| Dividend $0.475 (2008 –  $0.45)                                                                          |       | Mar. 11, 2009      |       | Apr. 1, 2009         | ** ** | **$** | **151** |   | Mar. 11, 2008 |   | Apr. 1, 2008 |   | $ | 145 |   |
| Dividend $0.475 (2008 –  $0.45)                                                                          |       | Jun. 10, 2009      |       | Jul. 2, 2009         | ** ** | **149** |   | Jun. 10, 2008 |   | Jul. 1, 2008 |   | 144 |   |
| Dividend $0.475 (2008 –  $0.45)                                                                          |       | Sept. 10, 2009          |       | Oct. 1, 2009         | ** ** | **151** |   | Sept.  10, 2008 |   | Oct. 1,  2008 |   | 144 |   |
| Dividend $0.475 (2008 –  $0.475)                                                                         |       | Dec. 11, 2009      |       | Jan. 4, 2010         | ** ** | **150** |   | Dec. 11,  2008 |   | Jan. 2,  2009 |   | 151 |   |
|                                                                                                          |       |                    |       |                      | ** ** | **$** | **601** |   |   |   |   |   | $ | 584 |   |
| Common Share and Non-Voting  Share dividends paid, or payable, in cash                                        |       |                    |       |                      | ** ** | **$** | **580** |   |   |   |   |   | $ | 584 |   |
| Common Share and Non-Voting  Share dividends reinvested, or to be reinvested, in shares issued from  Treasury |       |                    |       |                      | ** ** | **21** |   |   |   |   |   | — |   |
|                                                                                                          |       |                    |       |                      | ** ** | **$** | **601** |   |   |   |   |   | $ | 584 |   |

 

On February 10,2010, the Board of Directors declared a quarterly dividend of $0.475 per shareon the issued and outstanding Common Shares and Non-Voting Shares of theCompany payable on April 1, 2010, to holders of record at the close ofbusiness on March 11, 2010. The final amount of the dividend paymentdepends upon the number of Common Shares and Non-Voting Shares issued andoutstanding at the close of business on March 11, 2010.

 

### **(b)**   Dividend Reinvestmentand Share Purchase Plan

 

The Company has aDividend Reinvestment and Share Purchase Plan under which eligible holders ofCommon Shares and Non-Voting Shares may acquire Non-Voting Shares through thereinvestment of dividends and making additional optional cash payments to thetrustee.

 

Excluding Non-VotingShares purchased by way of additional optional cash payments, the Company, atits discretion, may offer the Non-Voting Shares at up to a 5% discount from themarket price. Effective January 1, 2005, the Company did not offerNon-Voting Shares at a discount. Shares purchased through optional cashpayments are subject to a minimum investment of $100 per transaction and amaximum investment of $20,000 per calendar year.

 

Under this Plan, theCompany has the option of offering shares from Treasury or having the trusteeacquire shares in the stock market. Prior to July 1, 2001, when theacquisition of shares from Treasury commenced, all Non-Voting Shares wereacquired in the market at normal trading prices; acquisition in the market atnormal trading prices recommenced on

 

 

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January 1, 2005. TheCompany has announced that effective with the dividend to be paid January 4,2010, Non-Voting Shares will be issued from Treasury at a discount of 3%.

 

In respect of CommonShare and Non-Voting Share dividends declared during the year ended December 31,2009, $36 million (2008 — $21 million) was to be reinvested inNon-Voting Shares.

##  

## 12    share-based compensation

 

### **(a)**   Details of share-basedcompensation expense

 

Reflected in the Consolidated Statements of Income and Other Comprehensive Income asOperations expense and in the Consolidated Statements of Cash Flows are thefollowing share-based compensation amounts:

 
| ** **                                   | ** ** | **2009**                | ** ** | **2008**                                 | ** ** |
|----------------------------------------------|------------|-------------------------|------------|------------------------------------------|------------|
| **Years ended December 31  (millions)** | ** ** | **Operations  expense** | ** ** | **Associated  operating  cash outflows** | ** ** | **Statement  of  cash flows  adjustment** | ** ** | **Operations  expense** | ** ** | **Associated  operating  cash outflows** | ** ** | **Statement  of  cash flows  adjustment** | ** ** |
| Share option awards(1)                       | ** ** | **$**                   | **11**     | ** **                               | **$**      | **(26** | **)** | **$** | **(15** | **)** | $ | 18 |   | $ | (15 | ) | $ | 3 |   |
| Restricted stock units(2)                    | ** ** | **29**                  | ** ** | **(22**                                  | **)**      | **7** |   | 34 |   | (32 | ) | 2 |   |
| Employee share purchase  plan                | ** ** | **29**                  | ** ** | **(29**                                  | **)**      | **—** |   | 36 |   | (36 | ) | — |   |
|                                         | ** ** | **$**                   | **69**     | ** **                               | **$**      | **(77** | **)** | **$** | **(8** | **)** | $ | 88 |   | $ | (83 | ) | $ | 5 |   |

 

----

(1)   The expense (recovery)arising from share options with the net-cash settlement feature, net ofcash-settled equity swap agreement effects (see Note 5(i)), was $(2) (2008— $NIL).

(2)   The expense arising fromrestricted stock units was net of cash-settled equity swap agreement effects(see Note 5(i)).

 

Forthe year ended December 31, 2009, the associated operating cash outflowsin respect of share option awards include cash outflows arising from thecash-settled equity swap agreements of $19 million (2008 —$9 million). Similarly, for the year ended December 31, 2009, theassociated operating cash outflows in respect of restricted stock units includecash outflows arising from the cash-settled equity swap agreements of$15 million (2008 — $9 million). For the year ended December 31, 2009, the income tax benefitarising from share-based compensation was $18 million (2008 —$22 million); as disclosed in Note 9, not all share-basedcompensation amounts are deductible for income tax purposes.

 

### **(b)**   Share option awards

* *

*General:* The Companyapplies the fair value based method of accounting for share-based compensationawards granted to employees. Share option awards typically vest over athree-year period (the requisite service period), but may vest over periods ofup to five years. The vesting method of share option awards, which isdetermined on or before the date of grant, may be either cliff or graded; allshare option awards granted subsequent to 2004 have been cliff-vesting awards.

* *

*Share option awards accounted for as equity instruments:*The weightedaverage fair value of share option awards granted, and the weighted averageassumptions used in the fair value estimation at the time of grant, using theBlack-Scholes model (a closed-form option pricing model), are as follows:

 
| **Years ended December 31**                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Share option award fair  value (per share option) | ** ** | **$**    | **3.64**   |     | $          | 7.10 |   |
| Risk free interest rate                           | ** ** | **2.3**  | **%**      | 3.6      | %          |
| Expected lives(1) (years)                    | ** ** | **4.5**  |       | 4.5      |       |
| Expected volatility                               | ** ** | **26.0** | **%**      | 24.3     | %          |
| Dividend yield                                    | ** ** | **6.2**  | **%**      | 4.1      | %          |
|                                                   |            |          |            |          |            |  |  |

 

----

(1)   The maximum contractual termof the share option awards granted in 2009 and 2008 was seven years.

 

The risk free interestrate used in determining the fair value of the share option awards is based ona Government of Canada yield curve that is current at the time of grant. Theexpected lives of the share option awards are based on historical share optionaward exercise data of the Company. Similarly, expected volatility considersthe historical volatility of the Company’s Non-Voting Shares. The dividendyield is the annualized dividend current at the date of grant divided by theshare option award exercise price. Dividends are not paid on unexercised shareoption awards and are not subject to vesting.

 

 

35

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notesto consolidated financial statements

 

Hadthe weighted average assumptions for grants of share option awards that arereflected in the expense disclosures above been varied by 10% and 20% changes,the compensation cost arising from share option awards for the year ended December 31,2009, would have varied as follows:

 
| ** **               | ** ** | **Hypothetical change in  assumptions(1)** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| **($ in millions)** | ** ** | **10%**                                    | ** ** | **20%** | ** ** |
| Risk free interest rate  |       | $                                          | —     |   | $ | 1 |   |
| Expected lives (years)   |       | $                                          | —     |   | $ | 1 |   |
| Expected volatility      |       | $                                          | 1          |   | $ | 3 |   |
| Dividend yield           |       | $                                          | 1          |   | $ | 1 |   |

 

----

(1)   These sensitivities arehypothetical and should be used with caution. Favourable hypothetical changesin the assumptions result in a decreased amount, and unfavourable hypotheticalchanges in the assumptions result in an increased amount, of the compensationcost arising from share option awards. As the figures indicate, changes in fairvalue based on a 10% variation in assumptions generally cannot be extrapolatedbecause the relationship of the change in assumption to the change in fair valuemay not be linear; in particular, variations in expected lives are constrainedby vesting periods and legal lives. Also, in this table, the effect of avariation in a particular assumption on the amount of the compensation costarising from share option awards is calculated without changing any otherassumption; in reality, changes in one factor may result in changes in another(for example, increases in risk free interest rates may result in increaseddividend yields), which might magnify or counteract the sensitivities.

 

Someshare option awards have a net-equity settlement feature. As discussed furtherin Note 19(c), it is at the Company’s option whether the exercise of a share option award issettled as a share option or settled using the net-equity settlement feature.

* *

*Share option awards accounted for as liability instruments:*Substantially all of the Company’soutstanding share option awards that were granted prior to January 1,2005, have a net-cash settlement feature; the optionee has the choice ofexercising the net-cash settlement feature. The affected outstanding shareoption awards largely take on the characteristics of liability instrumentsrather than equity instruments. For the outstanding share option awards thatwere amended and which were granted subsequent to 2001, the minimum expenserecognized for them will be their grant-date fair values.

 

The Company entered intoa cash-settled equity swap agreementthat establishes a cap on the Company’s cost associated with substantially allof the affected outstanding share option awards. The following table sets outthe number of affected outstanding share option awards and the composition oftheir capped exercise date fair values.

 
| ** **                                                                                                                                                       | ** ** | **Weighted average** | ** ** | ** **                              | ** ** | ** **                                                                     | ** ** | ** **                                                                                         | ** ** | **Associated**                                       | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **As at December 31, 2009 ($ in millions except per  affected outstanding share option award)** | ** ** | **Exercise  price**       | ** ** | **Grant-   date fair  value** | ** ** | **Incremental  expense  arising from  net-cash**

**settlement  feature** | ** ** | **Exercise date  fair value  capped by  cash-settled  equity swap  agreement** | ** ** | **Affected  share option  awards  outstanding** | ** ** | **Aggregate  intrinsic  value(1)** | ** ** | **notional  amount of  cash-settled  equity swap  agreement  (Note 5(h))** | ** ** |
| Affected share option  awards granted for                                                                                                                        |       |                      |       |                                    |       |                                                                           |       |                                                                                               |       |                                                 |       |   |   |   |   |
| Common Shares prior to  2002                                                                                                                                     |       | $                         | 37.11      |                                    | N/A        | (2)                                                                            | $          | 17.15                                                                                              |       | $                                                    | 54.26      |   | 252,411 |   | $ | — |   | $ | 14 |   |
| Non-Voting Shares prior  to 2002                                                                                                                                 |       | $                         | 30.77      |                                    | N/A        | (2)                                                                            | $          | 24.38                                                                                              |       | $                                                    | 55.15      |   | 1,235,254 |   | 4 |   | 63 |   |
| Non-Voting Shares after  2001                                                                                                                                    |       | $                         | 23.32      |                                    | $          | 7.36                                                                           |       | $                                                                                                  | 24.47      |                                                 | $          | 55.15 |   | 1,025,429 |   | 10 |   | 53 |   |
|                                                                                                                                                             |       |                      |       |                                    |       |                                                                           |       |                                                                                               |       | 2,513,094                                            |       | $ | 14 |   | $ | 130 |   |
|                                                                                                                                                                  |            |                           |            |                                         |            |                                                                                |            |                                                                                                    |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1)   The aggregateintrinsic value is calculated upon December 31, 2009, per share prices of$34.11 for Common Shares and $32.75 for Non-Voting Shares. Thedifference between the aggregate intrinsic value amount in this table and theamount disclosed in Note 21(b) is the effect, if any, of recognizingno less than the expense arising from the grant-date fair values for theaffected share option awards outstanding.

(2)   As discussed inNote 1(k), Canadian GAAP did not require that grant date fair values bedetermined for share option awards made prior to 2002.

 

### **(c)**   Restricted stock units

 

TheCompany uses restricted stock units as a form of incentive compensation. Eachrestricted stock unit is equal in value to one Non-Voting Share and thedividends that would have arisen thereon had it been an issued and outstandingNon-Voting Share; the notional dividends are recorded as additional issuancesof restricted stock units during the life of the restricted stock unit. Therestricted stock units become payable when vesting is completed. The restrictedstock units typically vest over a period of 33 months (the requisite serviceperiod). The vesting method of restricted stock units, which is determined onor before the date of grant, may be either cliff or graded. The associatedliability is normally cash-settled.

 

The following tablepresents a summary of the activity related to the Company’s restricted stockunits.

 

 

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| ** **                        | ** ** | **2009**                                   | ** ** | **2008**                          | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **Number of restricted  stock units** | ** ** | **Weighted  average  grant-date** | ** ** | **Number of restricted  stock units** | ** ** | **Weighted  average  grant-date** | ** ** |
| **Years ended December 31**  | ** ** | **Non-vested**                             | ** ** | **Vested**                        | ** ** | **fair value** | ** ** | **Non-vested** | ** ** | **Vested** | ** ** | **fair value** | ** ** |
| Outstanding, beginning of  period | ** ** | ** **                                 | ** ** | ** **                        | ** ** | ** ** |   |   |   |   |   |   |   |
| Non-vested                        | ** ** | **1,506,370**                              | ** ** | **—**                        | ** ** | **$** | **48.15** |   | 1,398,091 |   | — |   | $ | 49.19 |   |
| Vested                            | ** ** | **—**                                 | ** ** | **26,885**                        | ** ** | **50.10** |   | — |   | 31,136 |   | 48.74 |   |
| Issued                            | ** ** | ** **                                 | ** ** | ** **                        | ** ** | ** ** |   |   |   |   |   |   |   |
| Initial award                     | ** ** | **641,404**                                | ** ** | **—**                        | ** ** | **30.78** |   | 997,219 |   | — |   | 43.73 |   |
| In lieu of dividends              | ** ** | **110,806**                                | ** ** | **—**                        | ** ** | **32.23** |   | 96,864 |   | — |   | 39.42 |   |
| Vested                            | ** ** | **(707,062**                               | **)**      | **707,062**                       | ** ** | **52.52** |   | (859,846 | ) | 859,846 |   | 44.66 |   |
| Settled in cash                   | ** ** | **—**                                 | ** ** | **(709,721**                      | **)**      | **52.95** |   | — |   | (864,097 | ) | 44.64 |   |
| Forfeited and cancelled           | ** ** | **(166,427**                               | **)**      | **—**                        | ** ** | **45.15** |   | (125,958 | ) | — |   | 44.69 |   |
| Outstanding, end of period        | ** ** | ** **                                 | ** ** | ** **                        | ** ** | ** ** |   |   |   |   |   |   |   |
| Non-vested                        | ** ** | **1,385,091**                              | ** ** | **—**                        | ** ** | **37.76** |   | 1,506,370 |   | — |   | 48.15 |   |
| Vested                            | ** ** | **—**                                 | ** ** | **24,226**                        | ** ** | **$** | **37.03** |   | — |   | 26,885 |   | $ | 50.10 |   |

 

With respect to certain issuances of restricted stockunits, the Company entered into cash-settled equity forward agreements that fixthe cost to the Company; that information, as well as a schedule of the Company’s non-vested restricted stockunits outstanding as at December 31, 2009, is set out in the following table.

 
| ** **                                 | ** ** | **Number of  fixed-cost  restricted  stock units** | ** ** | **Cost fixed to the  Company per  restricted stock  unit** | ** ** | **Number of  variable-cost  restricted  stock units** | ** ** | **Total number of  non-vested  restricted stock  units** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Vesting in years ending  December 31: |       |                                               |       |                                                       |       |                                                  |       |                                                     |       |
| 2010                                       |       | 600,000                                            |       | $                                                          | 49.22      |                                                  | 168,917    |                                                     | 768,917    |   |
| 2011                                       |       | 390,000                                            |       | $                                                          | 33.79      |                                                  | 226,174    |                                                     | 616,174    |   |
|                                       |       | 990,000                                            |       |                                                       |       | 395,091                                               |       | 1,385,091                                                |       |

 

### **(d)**   Employee sharepurchase plan

 

TheCompany has an employee share purchase plan under which most eligible employees canpurchase Common Shares through regular payroll deductions by contributingbetween 1% and 10% of their pay. The Company contributed 40% (in the fourthquarter of 2008, this was reduced by 5% from 45%) for employees up to a certainjob classification, for every dollar contributed by an employee, to a maximumof 6% of employee pay; for more highly compensated job classifications, theCompany contributed 35% (in the fourth quarter of 2008, this was reduced by 5%from 40%). The Company records its contributions as a component of operatingexpenses and, prior to fiscal 2010, there were no vesting requirements.Subsequent to 2009, the Company’s contribution will vest on the earlier of aplan participant’s last day in the Company’s employ or December 31 in thefiscal year of the Company’s contribution, unless the plan participant’semployment was terminated with cause, in which case the plan participant willforfeit their in-fiscal year Company contribution.

 
| **Years ended December 31 (millions)** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Employee contributions                      | ** ** | **$**    | **79**     |     | $          | 88 |   |
| Company contributions                       | ** ** | **29**   |       | 36       |       |
|                                        | ** ** | **$**    | **108**    |     | $          | 124 |   |

 

Under this plan, theCompany has the option of offering shares from Treasury or having the trusteeacquire shares in the stock market. For the years ended December 31, 2009and 2008, all Common Shares issued to employees under the plan were purchasedon the market at normal trading prices.

 

### **(e)**   Unrecognized,non-vested share-based compensation

 

As at December 31,2009, compensation cost related to non-vested share-based compensation that hasnot yet been recognized is set out in the following table and is expected to berecognized over a weighted average period of 1.6 years (2008 — 1.7 years).

 

 

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| **As at December 31****(millions)(1)** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Share option awards                         | ** ** | **$**    | **12**     |     | $          | 22 |   |
| Restricted stock units(2)                   | ** ** | **22**   |       | 29       |       |
|                                        | ** ** | **$**    | **34**     |     | $          | 51 |   |

 

----

(1)   These disclosures are notlikely to be representative of the effects on reported net income for futureperiods for the following reasons: these amounts reflect an estimate offorfeitures; these amounts do not reflect any provision for future awards;these amounts do not reflect any provision for changes in the intrinsic valueof vested restricted stock units; these amounts do not reflect any provisionfor the impacts of future, if any, modification of share option awards allowingfor net-cash settlement; and for non-vested restricted stock units, theseamounts reflect intrinsic values as at the statement of financial positiondates.

(2)   The compensation cost thathas not yet been recognized in respect of non-vested restricted stock units iscalculated based upon the intrinsic value of the non-vested restricted stockunits as at the statement of financial position dates, net of the impacts ofassociated cash-settled equity forward agreements.

 

## 13    employee future benefits

 

The Company has a number ofdefined benefit and defined contribution plans providing pension, otherretirement and post-employment benefits to most of its employees. Other benefitplans include a TELUS Québec Inc. retiree healthcare plan. The benefit plan(s) inwhich an employee is a participant reflects the general development of theCompany.

* *

*Pension Plan for Management andProfessional Employees of TELUS Corporation*: This defined benefit pension plan, which ceased acceptingnew participants on January 1, 2006, and which comprises approximatelyone-quarter of the Company’s total accrued benefit obligation, provides anon-contributory base level of pension benefits. Additionally, on acontributory basis, employees can annually choose increased and/or enhancedlevels of pension benefits over the base level of pension benefits. At anenhanced level of pension benefits, the defined benefit pension plan hasindexation of 100% of a specified cost-of-living index, to an annual maximum of2%. Pensionable remuneration is determined by the annualized average of the bestsixty consecutive months.

* *

*TELUSCorporation Pension Plan*: Management and professional employees in Alberta who joined the Companyprior to January 1, 2001, and certain unionized employees are covered bythis contributory defined benefit pension plan, which comprises slightly morethan one-half of the Company’s total accrued benefit obligation. The plancontains a supplemental benefit account which may provide indexation up to 70%of the annual change of a specified cost-of-living index and pensionableremuneration is determined by the average of the best five years in the lastten years preceding retirement.

* *

*TELUS Québec Defined Benefit Pension Plan(formerly the TELUS Corporation Pension Plan for Employees of TELUSCommunications (Québec) Inc.)*: Any employee not governed by a collective agreement in Quebec who joinedthe Company prior to April 1, 2006, any non-supervisory employee governedby a collective agreement prior to September 6, 2006, and certain otherunionized employees are covered by this contributory defined benefit pensionplan, which comprises approximately one-tenth of the Company’s total accruedbenefit obligation. The plan has no indexation and pensionable remuneration isdetermined by the average of the best four years.

* *

*TELUSEdmonton Pension Plan*: This contributory defined benefit pension plan ceased accepting newparticipants on January 1, 1998. Indexation is 60% of the annual change ofa specified cost-of-living index and pensionable remuneration is determined bythe annualized average of the best sixty consecutive months.

* *

*Other defined benefit pension plans*: In addition tothe foregoing plans, the Company has non-registered, non-contributorysupplementary defined benefit pension plans which have the effect ofmaintaining the earned pension benefit once the allowable maximums in theregistered plans are attained. As is common with non-registered plans of thisnature, these plans are funded only as benefits are paid.

 

The Company has three contributory, non-indexedpension plans arising from a pre-merger acquisition which comprise less than 1%of the Company’s total accrued benefit obligation; these plans ceased acceptingnew participants in September 1989.

* *

*Other defined benefit plans*: Other definedbenefit plans, which are all non-contributory, are comprised of a disabilityincome plan, a healthcare plan for retired employees and a life insurance plan.The healthcare plan for retired employees and the life insurance plan ceasedaccepting new participants effective January 1, 1997. In connection withthe collective agreement signed in 2005, an external supplier commencedproviding a new long-term disability plan effective January 1, 2006. Theexisting disability income plan will continue to provide payments to previouslyapproved claimants and qualified eligible employees.

* *

*TelecommunicationWorkers Pension Plan*:Certain employees in British Columbia are covered by a union pension plan.Contributions are determined in accordance with provisions of the negotiatedlabour contract and are generally based on employee gross earnings.

 

 

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*BritishColumbia Public Service Pension Plan*: Certain employees in British Columbia are covered bya public service pension plan. Contributions are determined in accordance withprovisions of labour contracts negotiated by the Province of British Columbiaand are generally based on employee gross earnings.

* *

*Definedcontribution pension plan*: During the latter half of 2006, the Company revised its definedcontribution pension plan offerings for 2007. Effective January 1, 2007,the Company offered one defined contribution pension plan, which iscontributory, and is the only Company-sponsored pension plan available tonon-unionized and certain unionized employees joining the Company after thatdate. Generally, employees can annually choose to contribute to the plan at arate of between 3% and 6% of their pensionable earnings. The Company will match100% of the contributions of the employees up to 5% of their pensionableearnings and will match 80% of employee contributions greater than that.Membership in the defined contribution pension plan is voluntary until anemployee’s third year service anniversary. In the event that annualcontributions exceed allowable maximums, excess amounts are contributed to anon-registered supplementary defined contribution pension plan.

 

### **(a)**          Defined benefit plans

 

Information concerningthe Company’s defined benefit plans, in aggregate, is as follows:

 
| ** **                                  | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **(millions)**                              | ** ** | **2009**                  | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Accrued benefit obligation:                 | ** ** | ** **                |       |                    | ** ** | ** ** |   |   |   |
| Balance at beginning of year                | ** ** | **$**                     | **5,243**  |                    | $          | 6,347 | ** ** | **$** | **64** |   | $ | 73 |   |
| Current service cost                        | ** ** | **85**                    |       | 122                     | ** ** | **—** |   | — |   |
| Interest cost                               | ** ** | **374**                   |       | 346                     | ** ** | **5** |   | — |   |
| Benefits paid (c)                           | ** ** | **(318**                  | **)**      | (298                    | )          | **(5** | **)** | (6 | ) |
| Actuarial loss (gain)                       | ** ** | **991**                   |       | (1,280                  | )          | **7** |   | (3 | ) |
| Plan amendments                             | ** ** | **1**                     |       | 6                       | ** ** | **—** |   | — |   |
| Balance at end of year (d)-(e)              | ** ** | **6,376**                 |       | 5,243                   | ** ** | **71** |   | 64 |   |
| Plan assets (g):                            | ** ** | ** **                |       |                    | ** ** | ** ** |   |   |   |
| Fair value at beginning of year             | ** ** | **5,654**                 |       | 6,913                   | ** ** | **34** |   | 37 |   |
| Actual return on plan assets                | ** ** | **767**                   |       | (1,101                  | )          | **—** |   | 1 |   |
| Employer contributions (h)                  | ** ** | **179**                   |       | 102                     | ** ** | **1** |   | 2 |   |
| Employees’ contributions               | ** ** | **34**                    |       | 38                      | ** ** | **—** |   | — |   |
| Benefits paid (c)                           | ** ** | **(318**                  | **)**      | (298                    | )          | **(5** | **)** | (6 | ) |
| Fair value at end of year                   | ** ** | **6,316**                 |       | 5,654                   | ** ** | **30** |   | 34 |   |
| Funded status — plan surplus (deficit) | ** ** | **(60**                   | **)**      | 411                     | ** ** | **(41** | **)** | (30 | ) |
| Unamortized net actuarial loss (gain)       | ** ** | **1,528**                 |       | 938                     | ** ** | **(1** | **)** | (12 | ) |
| Unamortized past service costs              | ** ** | **31**                    |       | 33                      | ** ** | **—** |   | — |   |
| Unamortized transitional obligation (asset) | ** ** | **(106**                  | **)**      | (150                    | )          | **—** |   | 1 |   |
| Accrued benefit asset (liability)           | ** ** | **$**                     | **1,393**  |                    | $          | 1,232 | ** ** | **$** | **(42** | **)** | $ | (41 | ) |

 

Theaccrued benefit asset (liability) is reflected in the Consolidated Statementsof Financial Position as follows:

 
| **As at  December 31 (millions)**                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Pension  benefit plans                                              | ** ** | **$**    | **1,393**  |     | $          | 1,232 |   |
| Other  benefit plans                                                | ** ** | **(42**  | **)**      | (41      | )          |
|                                                                | ** ** | **$**    | **1,351**  |     | $          | 1,191 |   |
| Presented  in the Consolidated Statements of Financial Position as: |       |     |       |     |       |
| Deferred  charges (Note 21(b))                                      | ** ** | **$**    | **1,565**  |     | $          | 1,401 |   |
| Other  long-term liabilities (Note 21(b))                           | ** ** | **(214** | **)**      | (210     | )          |
|                                                                | ** ** | **$**    | **1,351**  |     | $          | 1,191 |   |

 

The measurement date usedto determine the plan assets and accrued benefit obligation was December 31.

 

 

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### **(b)**          Defined benefit plans — cost (recovery)

 

The Company’s netdefined benefit plan costs (recoveries) were as follows:

 
| ** **                                    | ** ** | **2009**                | ** ** | **2008**                         | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|----------------------------------|------------|
| **Years  ended December 31  (millions)** | ** ** | **Incurred in  period** | ** ** | **Matching  adjustments****(1)** | ** ** | **Recognized in  period** | ** ** | **Incurred in  period** | ** ** | **Matching  adjustments****(1)** | ** ** | **Recognized in  period** | ** ** |
| **Pension benefit plans**                     |       |                    |       |                             |       |   |   |   |   |   |   |   |   |
| Current service cost (employer portion)       | ** ** | **$**                   | **51**     | ** **                       | **$**      | **—** | ** ** | **$** | **51** |   | $ | 84 |   | $ | — |   | $ | 84 |   |
| Interest cost                                 | ** ** | **374**                 | ** ** | **—**                       |       | **374** | ** ** | 346 |   | — |   | 346 |   |
| Return on plan assets                         | ** ** | **(767**                | **)**      | **364**                          |       | **(403** | **)** | 1,101 |   | (1,596 | ) | (495 | ) |
| Past service costs                            | ** ** | **—**              | ** ** | **3**                            |       | **3** | ** ** | — |   | 4 |   | 4 |   |
| Actuarial loss                                | ** ** | **991**                 | ** ** | **(954**                         | **)**      | **37** | ** ** | (1,280 | ) | 1,287 |   | 7 |   |
| Amortization of transitional asset            | ** ** | **—**              | ** ** | **(44**                          | **)**      | **(44** | **)** | — |   | (46 | ) | (46 | ) |
|                                          | ** ** | **$**                   | **649**    | ** **                       | **$**      | **(631** | **)** | **$** | **18** |   | $ | 251 |   | $ | (351 | ) | $ | (100 | ) |

 

----

(1)   Accountingadjustments to allocate costs to different periods so as to recognize thelong-term nature of employee future benefits.

 
| ** **                                    | ** ** | **2009**                | ** ** | **2008**                         | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|----------------------------------|------------|
| **Years  ended December 31  (millions)** | ** ** | **Incurred in  period** | ** ** | **Matching  adjustments****(1)** | ** ** | **Recognized in  period** | ** ** | **Incurred in  period** | ** ** | **Matching  adjustments****(1)** | ** ** | **Recognized in  period** | ** ** |
| **Other benefit plans**                       |       |                    |       |                             |       |   |   |   |   |   |   |   |   |
| Interest cost                                 | ** ** | **$**                   | **5**      | ** **                       | **$**      | **—** | ** ** | **$** | **5** |   | $ | — |   | $ | — |   | $ | — |   |
| Return on plan assets                         | ** ** | **—**              | ** ** | **(1**                           | **)**      | **(1** | **)** | (1 | ) | — |   | (1 | ) |
| Actuarial loss (gain)                         | ** ** | **7**                   | ** ** | **(10**                          | **)**      | **(3** | **)** | (3 | ) | 1 |   | (2 | ) |
| Amortization of transitional obligation       | ** ** | **—**              | ** ** | **1**                            | ** ** | **1** |   | — |   | 1 |   | 1 |   |
|                                          | ** ** | **$**                   | **12**     | ** **                       | **$**      | **(10** | **)** | **$** | **2** |   | $ | (4 | ) | $ | 2 |   | $ | (2 | ) |

 

----

(1)   Accountingadjustments to allocate costs to different periods so as to recognize the long-termnature of employee future benefits.

 

### **(c)**          Benefit payments

 

Estimated future benefit payments from theCompany’s defined benefit plans, calculated as at December 31, 2009, areas follows:

 
| **Years  ending December 31 (millions)** | ** ** | **Pension  benefit plans** | ** ** | **Other benefit  plans** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| 2010                                          |       | $                          | 333        |                     | $          | 6 |   |
| 2011                                          |       | 350                        |       | 6                        |       |
| 2012                                          |       | 367                        |       | 6                        |       |
| 2013                                          |       | 385                        |       | 6                        |       |
| 2014                                          |       | 405                        |       | 5                        |       |
| 2015-2019                                     |       | 2,274                      |       | 25                       |       |
|                                               |            |                            |            |                          |            |  |  |

 

### **(d)**          Disaggregation of defined benefit pension plan funding status

 

Accruedbenefit obligations are the actuarial present values of benefits attributed toemployee services rendered to a particular date. The Company’s disaggregation of defined benefitpension plans surplus and deficits at year-end are as follows:

 
| ** **                                                                    | ** ** | **2009**                         | ** ** | **2008**        | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|
| **As at  December 31****(millions)**                                     | ** ** | **Accrued  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Funded status -  plan surplus  (deficit)** | ** ** | **Accrued  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Funded status -  plan surplus  (deficit)** | ** ** |
| Pension plans that have plan assets in excess of  accrued benefit obligations | ** ** | **$**                            | **3,544**  | ** **      | **$**      | **3,799** | ** ** | **$** | **255** |   | $ | 4,616 |   | $ | 5,177 |   | $ | 561 |   |
| Pension plans that have accrued benefit obligations  in excess of plan assets | ** ** | ** **                       | ** ** | ** **      | ** ** | ** ** |   |   |   |   |   |   |   |
| Funded                                                                        | ** ** | **2,627**                        | ** ** | **2,517**       | ** ** | **(110** | **)** | 486 |   | 477 |   | (9 | ) |
| Unfunded                                                                      | ** ** | **205**                          | ** ** | **—**      | ** ** | **(205** | **)** | 141 |   | — |   | (141 | ) |
|                                                                          | ** ** | **2,832**                        | ** ** | **2,517**       | ** ** | **(315** | **)** | 627 |   | 477 |   | (150 | ) |
| (see (a))                                                                     | ** ** | **$**                            | **6,376**  | ** **      | **$**      | **6,316** | ** ** | **$** | **(60** | **)** | $ | 5,243 |   | $ | 5,654 |   | $ | 411 |   |

 

As at December 31, 2009 and 2008, undrawn Letters of Credit, furtherdiscussed in Note 18(d), secured certain of the unfunded defined benefitpension plans.

 

 

40

----

 

notes to consolidated financial statements

 

### **(e)**          Disaggregation of other defined benefit plan funding status

 

Accruedbenefit obligations are the actuarial present values of benefits attributed toemployee services rendered to a particular date. The Company’s disaggregation of other defined benefitplans surplus and deficits at year-end are as follows:

 
| ** **                                                                                   | ** ** | **2009**                         | ** ** | **2008**        | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|
| **As at  December 31****(millions)**                                                    | ** ** | **Accrued  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Funded status -  plan surplus  (deficit)** | ** ** | **Accrued  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Funded status -  plan surplus  (deficit)** | ** ** |
| Other benefit plan that has plan assets in excess  of accrued benefit obligations            | ** ** | **$**                            | **27**     | ** **      | **$**      | **30** | ** ** | **$** | **3** |   | $ | 26 |   | $ | 34 |   | $ | 8 |   |
| Unfunded other benefit plans that have accrued  benefit obligations in excess of plan assets | ** ** | **44**                           | ** ** | **—**      | ** ** | **(44** | **)** | 38 |   | — |   | (38 | ) |
| (see (a))                                                                                    | ** ** | **$**                            | **71**     | ** **      | **$**      | **30** | ** ** | **$** | **(41** | **)** | $ | 64 |   | $ | 34 |   | $ | (30 | ) |

 

### **(f)**            Accumulated pension benefit obligations

 

Accumulated benefitobligations differ from accrued benefit obligations in that accumulated benefitobligations do not include assumptions about future compensation levels. TheCompany’s disaggregation of defined pension benefit plans accumulated benefitobligations and plan assets at year-end are as follows:

 
| ** **                                                                        | ** ** | **2009**                             | ** ** | **2008**        | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------|------------|
| **As at  December 31****(millions)**                                         | ** ** | **Accumulated  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Difference** | ** ** | **Accumulated  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Difference** | ** ** |
| Pension plans that have plan assets in excess of  accumulated benefit obligations | ** ** | **$**                                | **5,353**  | ** **      | **$**      | **5,794** | ** ** | **$** | **441** |   | $ | 4,899 |   | $ | 5,654 |   | $ | 755 |   |
| Pension plans that have accumulated benefit obligations  in excess of plan assets | ** ** | ** **                           | ** ** | ** **      | ** ** | ** ** |   |   |   |   |   |   |   |
| Funded                                                                            | ** ** | **545**                              | ** ** | **522**         | ** ** | **(23** | **)** | — |   | — |   | — |   |
| Unfunded                                                                          | ** ** | **189**                              | ** ** | **—**      | ** ** | **(189** | **)** | 129 |   | — |   | (129 | ) |
|                                                                              | ** ** | **734**                              | ** ** | **522**         | ** ** | **(212** | **)** | 129 |   | — |   | (129 | ) |
|                                                                              | ** ** | **$**                                | **6,087**  | ** **      | **$**      | **6,316** | ** ** | **$** | **229** |   | $ | 5,028 |   | $ | 5,654 |   | $ | 626 |   |

### ** **

### **(g)**         Plan investment strategies and policies

 

The Company’s primarygoal for the defined benefit plans is to ensure the security of the retirementincome and other benefits of the plan members and their beneficiaries. Asecondary goal of the Company is to maximize the long-term rate of return of thedefined benefit plans’ assets within a level of risk acceptable to the Company.

 

*Risk management*: The Company considers absolute risk (the risk ofcontribution increases, inadequate plan surplus and unfunded obligations) to bemore important than relative return risk. Accordingly, the defined benefitplans’ designs, the nature and maturity of defined benefit obligations andcharacteristics of the plans’ memberships significantly influence investmentstrategies and policies. The Company manages risk through specifying allowableand prohibited investment types, setting diversification strategies anddetermining target asset allocations.

* *

*Allowable and prohibited investment types*: Allowable and prohibited investment types, along withassociated guidelines and limits, are set out in each fund’s *Pension Benefits Standards Act, 1985,*required Statement of Investment Policies and Procedures (SIP&P), which isreviewed and approved annually by the designated governing fiduciary. TheSIP&P guidelines and limits are further governed by the *Pension Benefits Standards Regulations, 1985*’spermitted investments and lending limits. As well as conventional investments,each fund’s SIP&P may provide for the use of derivative products tofacilitate investment operations and to manage risk provided that no shortposition is taken, no use of leverage is made and there is no violation ofguidelines and limits established in the SIP&P. Internally managed fundsare prohibited from increasing grandfathered investments in securities of theCompany; grandfathered investments were made prior to the merger ofBC TELECOM Inc. and TELUS Corporation, the Company’s predecessors.Externally managed funds are permitted to invest in securities of the Company,provided that the investments are consistent with the funds’ mandate and are incompliance with the relevant SIP&P.

 

*Diversification*: The Company’s strategy for equity security investments isto be broadly diversified across individual securities, industry sectors andgeographical regions. A meaningful portion (15-25% of total plans’ assets) ofthe investment in equity securities is allocated to foreign equity securitieswith the intent of further increasing the diversification of the plans’ assets.Debt securities may include a meaningful allocation to mortgages with theobjective of enhancing cash flow and providing greater scope for the managementof the bond component of the plans’ assets. Debt securities also

 

 

41

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notes to consolidated financial statements

 

may include realreturn bonds to provide inflation protection, consistent with the indexednature of some defined benefit obligations. Real estate investments are used toprovide diversification of plans’ assets, potential long-term inflation hedgingand comparatively stable investment income.

* *

*Relationship between plan assets and benefit obligations*: With the objective of lowering its long-term costs ofdefined benefit plans, the Company purposely mismatches plan assets and benefitobligations. This mismatching is implemented by including equity investments inthe long-term asset mix as well as fixed income securities and mortgages withdurations that differ from the benefit obligations. Compensation for liquidityissues that may have otherwise arisen from mismatching of plan assets andbenefit obligations comes from broadly diversified investment holdings(including cash and short-term investment holdings) and cash flows fromdividends, interest and rents from diversified investment holdings.

* *

*Asset allocations*: Information concerning the Company’s defined benefitplans’ target asset allocation and actual asset allocation is as follows:

 
| ** **        | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans**                       | ** ** |
|-------------------|------------|---------------------------|------------|-----------------------------------------------|------------|
| ** **        | ** ** | **Target  allocation**    | ** ** | **Percentage of plan assets  at end of year** | ** ** | **Target  allocation** | ** ** | **Percentage of plan assets  at end of year** | ** ** |
| ** **        | ** ** | **2010**                  | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Equity securities |       | 45-55                     | %          | **53**                                        | **%**      | 47 | % | — | ** ** | **—** |   | — |   |
| Debt securities   |       | 35-45                     | %          | **41**                                        | **%**      | 45 | % | — | ** ** | **—** |   | — |   |
| Real estate       |       | 4-8                       | %          | **6**                                         | **%**      | 6 | % | — | ** ** | **—** |   | — |   |
| Other             |       | 0-2                       | %          | **—**                                    |       | 2 | % | 100 | % | **100** | **%** | 100 | % |
|              |       |                      | ** ** | **100**                                       | **%**      | 100 | % |   | ** ** | **100** | **%** | 100 | % |

### ** **

### **(h)**         Fair value measurements — pension benefit plans

 

Information about thefair value measurements of the Company’s defined benefit pension plans’ assets,in aggregate, is as follows:

 
| ** **                                                           | ** ** | ** ** | ** ** | **Fair value measurements at reporting date using**        | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| ** **                                                           | ** ** | ** ** | ** ** | **Quoted prices  in active  markets for  identical items** | ** ** | **Significant  other  observable  inputs** | ** ** | **Significant  unobservable  inputs** | ** ** |
| **As at  December 31, 2009 (millions)**                         | ** ** | **Total**  | ** ** | **(Level 1)**                                              | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| **Asset category**                                                   |       |       |       |                                                       |       |   |   |   |   |
| Cash and cash equivalents                                            |       | $          | 389        |                                                       | $          | 25 |   | $ | 364 |   | $ | — |   |
| Equity securities                                                    |       |       |       |                                                       |       |   |   |   |   |
| Canadian                                                             |       | 1,921      |       | 1,743                                                      |       | 178 |   | — |   |
| Foreign                                                              |       | 1,415      |       | 969                                                        |       | 380 |   | 66 |   |
| Debt securities issued by national, provincial or  local governments |       | 1,207      |       | 1,014                                                      |       | 193 |   | — |   |
| Corporate debt securities                                            |       | 620        |       | —                                                     |       | 620 |   | — |   |
| Asset-backed securities                                              |       | 45         |       | —                                                     |       | 45 |   | — |   |
| Commercial mortgages                                                 |       | 312        |       | —                                                     |       | — |   | 312 |   |
| Real estate                                                          |       | 393        |       | 45                                                         |       | — |   | 348 |   |
| Receivables and other                                                |       | 14         |       | —                                                     |       | 14 |   | — |   |
|                                                                 |       | $          | 6,316      |                                                       | $          | 3,796 |   | $ | 1,794 |   | $ | 726 |   |

 

At December 31, 2009,shares of TELUS Corporation accounted for less than 1% of the assets heldin the pension and other benefit trusts administered by the Company.

 

Thechange in the year ended December 31, 2009, of the fair value measurementsof the Company’s defined benefit pension plans’ assets which use significantunobservable inputs, in aggregate, is as follows:

 
| ** **           | ** ** | ** **                  | ** ** | **Actual return on plan assets  relating to assets** | ** ** | **Purchases,**              | ** ** | **Transfers in**           | ** ** | ** **                 | ** ** |
|----------------------|------------|-----------------------------|------------|------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|----------------------------|------------|
| **(millions)**       | ** ** | **December 31,  2008** | ** ** | **Still held at the  reporting date**                | ** ** | **Sold during  the period** | ** ** | **sales and  settlements** | ** ** | **and/or out of  Level 3** | ** ** | **December 31,  2009** | ** ** |
| **Asset category**   |       |                        |       |                                                 |       |                        |       |                       |       |                       |       |   |   |
| Equity securities    |       |                        |       |                                                 |       |                        |       |                       |       |                       |       |   |   |
| Foreign              |       | $                           | 80         |                                                 | $          | (18                         | )          | $                          | —     |                       | $          | 4 |   | $ | — |   | $ | 66 |   |
| Commercial mortgages |       | 285                         |       | 17                                                   |       | 6                           |       | 4                          |       | —                     |       | 312 |   |
| Real estate          |       | 320                         |       | (13                                                  | )          | —                      |       | 41                         |       | —                     |       | 348 |   |
|                 |       | $                           |  685  |                                                 | $          | (14                         | )          | $                          | 6          |                       | $          | 49 |   | $ | — |   | $ | 726 |   |

 

 

42

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notes to consolidated financial statements

 

### **(i)**            Fair value measurements — other benefit plan

 

Information about thefair value measurements of the Company’s other defined benefit plan’s assets isas follows:

 
| ** **                                   | ** ** | ** ** | ** ** | **Fair value measurements at reporting date using**        | ** ** |
|----------------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| ** **                                   | ** ** | ** ** | ** ** | **Quoted prices  in active  markets for  identical items** | ** ** | **Significant  other  observable  inputs** | ** ** | **Significant  unobservable  inputs** | ** ** |
| **As at  December 31, 2009 (millions)** | ** ** | **Total**  | ** ** | **(Level 1)**                                              | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| **Asset category**                           |       |       |       |                                                       |       |   |   |   |   |
| Experience rated underwriting agreement(1)   |       | $          | 30         |                                                       | $          | — |   | $ | — |   | $ | 30 |   |
|                                              |            |            |            |                                                            |            |  |  |  |  |  |  |  |  |

 

----

(1)          The effect of the experience rated underwriting agreementis that the Company’s contributions were transferred to an insurance companythat in turn provides the other defined benefits.

 

Thechange in the year ended December 31, 2009, of the fair value measurementsof the Company’s other defined benefit plan’s assets which use significantunobservable inputs is as follows:

 
| ** **                                 | ** ** | ** **                  | ** ** | **Actual  return on plan assets  relating to assets** | ** ** | **Purchases,**              | ** ** | **Transfers in**           | ** ** | ** **                 | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|----------------------------|------------|
| **(millions)**                             | ** ** | **December 31,  2008** | ** ** | **Still held at the  reporting date**                 | ** ** | **Sold during  the period** | ** ** | **sales and  settlements** | ** ** | **and/or out of  Level 3** | ** ** | **December 31,  2009** | ** ** |
| **Asset category**                         |       |                        |       |                                                  |       |                        |       |                       |       |                       |       |   |   |
| Experience rated underwriting agreement(1) |       | $                           | 34         |                                                  | $          | —                      |       | $                          | —     |                       | $          | (4 | ) | $ | — |   | $ | 30 |   |
|                                            |            |                             |            |                                                       |            |                             |            |                            |            |                            |            |  |  |  |  |  |  |  |  |

 

----

(1)          The effect of the experience rated underwriting agreementis that the Company’s contributions were transferred to an insurance companythat in turn provides the other defined benefits.

 

### **(j)**            Employer contributions

 

The determination of the minimum funding amounts for substantially allof the Company’s registered defined benefit pension plans is governed by the *Pension Benefits Standards Act, 1985*, which requires that,in addition to current service costs being funded, both going-concern andsolvency valuations be performed on a specified periodic basis.

 

·      Any excessof plan assets over plan liabilities determined in the going-concern valuationreduces the Company’s minimum funding requirement of current service costs, butmay not reduce the requirement to an amount less than the employees’contributions. The going-concern valuation generally determines the excess (ifany) of a plan’s assets over its liabilities, determined on a projected benefitbasis.

·      As of thedate of these consolidated financial statements, the solvency valuationgenerally requires that a plan’s liabilities, determined on the basis that theplan is terminated on the valuation date, in excess of its assets (if any) befunded, at a minimum, in equal annual amounts over a period not exceeding fiveyears. In the latter half of 2009, the Canadian Federal Government announcedproposals that would, among other things, affect the solvency fundingmethodology for pension plans governed by the *PensionBenefits Standards Act, 1985*, possibly commencing in 2010; theimpact of these proposals, if any, on the Company will depend upon the finalenacted form of the proposals.

 

The best estimates of fiscal 2010 employer contributions to the Company’sdefined benefit plans are approximately $143 million for defined benefitpension plans and $2 million for other defined benefit plans. Theseestimates are based upon the mid-year 2009 annual funding reports that wereprepared by actuaries using December 31, 2008, actuarial valuations. Thefunding reports are based on the pension plans’ fiscal years, which arecalendar years. The next annual funding valuations are expected to be preparedmid-year 2010.

 

### **(k)**        Assumptions

 

Management is requiredto make significant estimates about certain actuarial and economic assumptionsto be used in determining defined benefit pension costs, accrued benefitobligations and pension plan assets. These significant estimates are of along-term nature, which is consistent with the nature of employee futurebenefits.

 

The discount rate, which is used to determine the accrued benefitobligation, is based on the yield on long-term, high-quality fixed terminvestments, and is set annually. The expected long-term rate of return isbased upon forecasted returns of the major asset categories and weighted by theplans’ target asset allocations. Future increases in compensation are basedupon the current benefits policies and economic forecasts.

 

 

43

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notes to consolidated financial statements

 

The significant weighted average actuarial assumptions arising from theseestimates and adopted in measuring the Company’s accrued benefit obligationsare as follows:

 
| ** **                                                              | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                                              | ** ** | **2009**                  | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Discount rate used to determine:                                        | ** ** | ** **                |       |                    | ** ** | ** ** |   |   |   |
| Net benefit costs for the year ended  December 31                  | ** ** | **7.25**                  | **%**      | 5.50                    | %          | **7.11** | **%** | 5.36 | % |
| Accrued benefit obligation as at December 31                       | ** ** | **5.85**                  | **%**      | 7.25                    | %          | **5.65** | **%** | 7.11 | % |
| Expected long-term rate of return(1) on plan assets  used to determine: | ** ** | ** **                |       |                    | ** ** | ** ** |   |   |   |
| Net benefit costs for the year ended  December 31                  | ** ** | **7.25**                  | **%**      | 7.25                    | %          | **3.00** | **%** | 3.00 | % |
| Accrued benefit obligation as at December 31                       | ** ** | **7.25**                  | **%**      | 7.25                    | %          | **2.50** | **%** | 3.00 | % |
| Rate of future increases in compensation used to  determine:            | ** ** | ** **                |       |                    | ** ** | ** ** |   |   |   |
| Net benefit costs for the year ended  December 31                  | ** ** | **3.00**                  | **%**      | 3.00                    | %          | **—** |   | — |   |
| Accrued benefit obligation as at December 31                       | ** ** | **3.00**                  | **%**      | 3.00                    | %          | **—** |   | — |   |

 

----

(1)          The expected long-term rateof return is based upon forecasted returns of the major asset categories andweighted by the plans’ target asset allocations (see (g)). Forecasted returnsarise from the Company’s ongoing review of trends, economic conditions, dataprovided by actuaries and updating of underlying historical information.

 
| **2009  sensitivity of key assumptions (year ended, or as at,** | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **December 31,  2009)  (millions)**                        | ** ** | **Change in  obligation** | ** ** | **Change in  expense**  | ** ** | **Change in  obligation** | ** ** | **Change in  expense** | ** ** |
| Impact of hypothetical 25 basis point decrease(1) in:      | ** ** | ** **                |       |                    | ** ** | ** ** |   |   |   |
| Discount rate                                                   |       | $                         | 196        |                    | $          | 16 |   | $ | 1 |   | $ | — |   |
| Expected long-term rate of return on plan assets                |       |                      |       | $                       | 14         |   |   |   | $ | — |   |
| Rate of future increases in compensation                        |       | $                         | 23         |                    | $          | 4 |   | $ | — |   | $ | — |   |

 

----

(1)          These sensitivities arehypothetical and should be used with caution. Favourable hypothetical changesin the assumptions result in decreased amounts, and unfavourable hypotheticalchanges in the assumptions result in increased amounts, of the obligations andexpenses. Changes in amounts based on a 25 basis point variation in assumptionsgenerally cannot be extrapolated because the relationship of the change inassumption to the change in amounts may not be linear. Also, in this table, theeffect of a variation in a particular assumption on the change in obligation orchange in expense is calculated without changing any other assumption; inreality, changes in one factor may result in changes in another (for example,increases in discount rates may result in increased expectations about thelong-term rate of return on plan assets), which might magnify or counteract thesensitivities.

 

### **(l)**            Defined contribution plans

 

The Company’s total defined contribution pension plan costsrecognized were as follows:

 
| **Years  ended December 31 (millions)**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Union pension plan and public service pension plan  contributions | ** ** | **$**    | **30**     |     | $          | 31 |   |
| Other defined contribution pension plans                          | ** ** | **31**   |       | 32       |       |
|                                                              | ** ** | **$**    | **61**     |     | $          | 63 |   |

 

## 14            accounts receivable

 

On July 26, 2002,TELUS Communications Inc., a wholly owned subsidiary of TELUS, entered into anagreement, which was amended September 30, 2002, March 1, 2006, November 30,2006, March 31, 2008, September 12, 2008, and May 6, 2009, withan arm’s-length securitization trust associated with a major Schedule Ibank under which TELUS Communications Inc. is able to sell an interest incertain of its trade receivables up to a maximum of $500  million (December 31,2008 — $650 million). This revolving-period securitization agreement hadan initial term ending July 18, 2007; the November 30, 2006,amendment resulted in the term being extended to July 18, 2008; the March 31,2008, amendment resulted in the term being extended to July 17, 2009; the May 6,2009 amendment resulted in the term being extended to May 6, 2012.

 

As a result of sellingthe interest in certain of the trade receivables on a fully-serviced basis, aservicing liability is recognized on the date of sale and is, in turn,amortized to earnings over the expected life of the trade receivables.

 

TELUS Communications Inc.is required to maintain at least a BBB (low) credit rating by DominionBond Rating Service or the securitization trust may require the sale program tobe wound down prior to the end of the term; at December 31, 2009, therating was A (low).

 

 

44

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notes to consolidated financial statements

 
| **As at  December 31****(millions)** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Total managed portfolio                   | ** ** | **$**    | **1,201**  |     | $          | 1,272 |   |
| Securitized receivables                   | ** ** | **(598** | **)**      | (346     | )          |
| Retained interest in receivables sold     | ** ** | **91**   |       | 40       |       |
| Receivables held                          | ** ** | **$**    | **694**    |     | $          | 966 |   |

 

For the year endedDecember 31, 2009, the Company recognized composite losses of$11 million (2008 — $11 million) on the sale of receivables arisingfrom the securitization.

 

Cashflows from the securitization were as follows:

 
| **Years  ended December 31 (millions)**                              | ** ** | **2009**   | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Cumulative proceeds from securitization, beginning  of period             | ** ** | **$**      | **300**    |     | $          | 500 |   |
| Proceeds from new securitizations                                         | ** ** | **200**    |       | 150      |       |
| Securitization reduction payments                                         | ** ** | **—** |       | (350     | )          |
| Cumulative proceeds from securitization, end of  period                   | ** ** | **$**      | **500**    |     | $          | 300 |   |
| Proceeds from collections reinvested in  revolving-period securitizations | ** ** | **$**      | **4,060**  |     | $          | 3,105 |   |
| Proceeds from collections pertaining to retained  interest                | ** ** | **$**      | **780**    |     | $          | 382 |   |

 

The key economicassumptions used to determine the loss on sale of receivables, the future cashflows and fair values attributed to the retained interest were as follows:

 
| **Years  ended December 31**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected credit losses as a percentage of accounts  receivable sold | ** ** | **1.2**  | **%**      | 1.2      | %          |
| Weighted average life of the receivables sold  (days)               | ** ** | **32**   |       | 33       |       |
| Effective annual discount rate                                      | ** ** | **0.8**  | **%**      | 3.5      | %          |
| Servicing                                                           | ** ** | **1.0**  | **%**      | 1.0      | %          |

 

Generally, the sold tradereceivables do not experience prepayments.

 

At December 31,2009, key economic assumptions and the sensitivity of the current fair value ofresidual cash flows to immediate 10% and 20% changes in those assumptions wereas follows:

 
| ** **                                                          | ** ** | **December 31,** | ** ** | **Hypothetical change  in assumptions(1)** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|
| **($ in  millions)**                                           | ** ** | **2009**              | ** ** | **10%**                                    | ** ** | **20%** | ** ** |
| Carrying amount/fair value of future cash flows                     | ** ** | **$**                 | **91**     |                                       |       |   |   |   |
| Expected credit losses as a percentage of accounts  receivable sold | ** ** | ** **            |       | $                                          | 1          |   | $ | 1 |   |
| Weighted average life of the receivables sold  (days)               | ** ** | ** **            |       | $                                          | —     |   | $ | — |   |
| Effective annual discount rate                                      | ** ** | ** **            |       | $                                          | —     |   | $ | — |   |
|                                                                     |            |                       |            |                                            |            |  |  |  |  |  |

 

----

(1)          These sensitivities arehypothetical and should be used with caution. Favourable hypothetical changesin the assumptions result in an increased value, and unfavourable hypotheticalchanges in the assumptions result in a decreased value, of the retainedinterest in receivables sold. As the figures indicate, changes in fair valuebased on a 10% variation in assumptions generally cannot be extrapolatedbecause the relationship of the change in assumption to the change in fairvalue may not be linear. Also, in this table, the effect of a variation in aparticular assumption on the fair value of the retained interest is calculatedwithout changing any other assumption; in reality, changes in one factor mayresult in changes in another (for example, increases in market interest ratesmay result in increased credit losses), which might magnify or counteract thesensitivities.

 

 

45

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notes to consolidated financial statements

 

## 15            property, plant,equipment and other

 
| **(millions)**                                | ** ** | **Network  assets** | ** ** | **Buildings and  leasehold  improvements** | ** ** | **Assets under  capital lease** | ** ** | **Other**  | ** ** | **Land**   | ** ** | **Assets under  construction** | ** ** | **Total**  | ** ** |
|-----------------------------------------------|------------|---------------------|------------|--------------------------------------------|------------|---------------------------------|------------|------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| **At cost**                                   |       |                | ** ** | ** **                                 | ** ** | ** **                      | ** ** | ** ** |       |       |       |                           |       |       |       |
| As at January 1,  2008                   |       | $                   | 19,848     |                                       | $          | 1,993                           |       | $          | 18         |       | $          | 1,549                          |       | $          | 48         |   | $ | 375 |   | $ | 23,831 |   |
| Additions                                     |       | 374                 |       | 20                                         |       | 1                               |       | 78         |       | —     |       | 1,014                          |       | 1,487      |       |
| Additions arising from  business acquisitions |       | —              |       | 6                                          |       | 6                               |       | 6          |       | —     |       | —                         |       | 18         |       |
| Dispositions and  retirements                 |       | (365                | )          | (1                                         | )          | (10                             | )          | (5         | )          | —     |       | (6                             | )          | (387       | )          |
| Reclassifications                             |       | 752                 |       | 92                                         |       | —                          |       | 53         |       | 1          |       | (898                           | )          | —     |       |
| As at December 31,  2008                 |       | 20,609              |       | 2,110                                      |       | 15                              |       | 1,681      |       | 49         |       | 485                            |       | 24,949     |       |
| Additions                                     | ** ** | **406**             | ** ** | **21**                                     | ** ** | **—**                      | ** ** | **42**     | ** ** | **—** | ** ** | **1,283**                      | ** ** | **1,752**  | ** ** |
| Additions arising from  business acquisitions | ** ** | **—**          | ** ** | **2**                                      | ** ** | **—**                      | ** ** | **7**      | ** ** | **—** | ** ** | **—**                     | ** ** | **9**      | ** ** |
| Dispositions and  retirements                 | ** ** | **(125**            | **)**      | **(28**                                    | **)**      | **(2**                          | **)**      | **(124**   | **)**      | **—** | ** ** | **—**                     | ** ** | **(279**   | **)**      |
| Reclassifications                             | ** ** | **1,160**           | ** ** | **139**                                    | ** ** | **—**                      | ** ** | **38**     | ** ** | **—** | ** ** | **(1,337**                     | **)**      | **—** | ** ** |
| **As at December 31, 2009**              | ** ** | **$**               | **22,050** | ** **                                 | **$**      | **2,244**                       | ** ** | **$**      | **13**     | ** ** | **$**      | **1,644**                      | ** ** | **$**      | **49**     | ** ** | **$** | **431** | ** ** | **$** | **26,431** | ** ** |
| **Accumulated depreciation**                  |       |                |       |                                       |       |                            |       |       |       |       |       |                           |       |       |       |
| As at January 1,  2008                   |       | $                   | 14,345     |                                       | $          | 1,113                           |       | $          | 12         |       | $          | 1,165                          |       | $          | —     |   | $ | — |   | $ | 16,635 |   |
| Depreciation                                  |       | 1,125               |       | 120                                        |       | 2                               |       | 137        |       | —     |       | —                         |       | 1,384      |       |
| Dispositions and  retirements                 |       | (351                | )          | (1                                         | )          | (5                              | )          | (30        | )          | —     |       | —                         |       | (387       | )          |
| As at December 31,  2008                 |       | 15,119              |       | 1,232                                      |       | 9                               |       | 1,272      |       | —     |       | —                         |       | 17,632     |       |
| Depreciation                                  | ** ** | **1,053**           | ** ** | **122**                                    | ** ** | **2**                           | ** ** | **164**    | ** ** | **—** | ** ** | **—**                     | ** ** | **1,341**  | ** ** |
| Dispositions and  retirements                 | ** ** | **(120**            | **)**      | **(21**                                    | **)**      | **(2**                          | **)**      | **(128**   | **)**      | **—** | ** ** | **—**                     | ** ** | **(271**   | **)**      |
| **As at December 31, 2009**              | ** ** | **$**               | **16,052** | ** **                                 | **$**      | **1,333**                       | ** ** | **$**      | **9**      | ** ** | **$**      | **1,308**                      | ** ** | **$**      | **—** | ** ** | **$** | **—** | ** ** | **$** | **18,702** | ** ** |
| **Net book value**                            |       |                |       |                                       |       |                            |       |       |       |       |       |                           |       |       |       |
| As at December 31,  2008                 |       | $                   | 5,490      |                                       | $          | 878                             |       | $          | 6          |       | $          | 409                            |       | $          | 49         |   | $ | 485 |   | $ | 7,317 |   |
| **As at December 31, 2009**              | ** ** | **$**               | **5,998**  | ** **                                 | **$**      | **911**                         | ** ** | **$**      | **4**      | ** ** | **$**      | **336**                        | ** ** | **$**      | **49**     | ** ** | **$** | **431** | ** ** | **$** | **7,729** | ** ** |

 

 

46

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notes to consolidated financial statements

 

## 16            intangible assets and goodwill

 

### **(a)**          Intangible assets and goodwill, net

 
| ** **                                                          | ** ** | **Intangible assets subject to amortization** | ** ** | **Intangible assets with indefinite lives**                       | ** ** | ** **   | ** ** | ** **                              | ** ** | ** **                     | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------|------------|-----------------------------------------|------------|--------------------------------|------------|
| **(millions)**                                                      | ** ** | **Subscriber  base**                          | ** ** | **Customer  contracts and  the related  customer  relationships** | ** ** | **Software** | ** ** | **Access to  rights-of-way  and other** | ** ** | **Assets under  construction** | ** ** | **Total** | ** ** | **Spectrum  licences** | ** ** | **Acquired  brand** | ** ** | **Total** | ** ** | **Total  intangible  assets** | ** ** | **Goodwill** | ** ** | **Total  intangible  assets and  goodwill** | ** ** |
|                                                                |       |                                          |       |                                                              |       |         |       |                                    |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **At cost**                                                         |       |                                          |       |                                                              |       |         |       |                                    |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| As at January 1,  2008                                         |       | $                                             | 250        |                                                              | $          | —       |       | $                                       | 1,761      |                           | $          | 118 |   | $ | 184 |   | $ | 2,313 |   | $ | 3,985 |   | $ | — |   | $ | 3,985 |   | $ | 6,298 |   | $ | 3,532 |   | $ | 9,830 |   |
| Additions                                                           |       | —                                        |       | —                                                            |       | 47           |       | 2                                       |       | 323                            |       | 372 |   | 882 |   | — |   | 882 |   | 1,254 |   | — |   | 1,254 |   |
| Additions arising from  business acquisitions                       |       | —                                        |       | 138                                                               |       | 189          |       | 2                                       |       | —                         |       | 329 |   | — |   | — |   | — |   | 329 |   | 396 |   | 725 |   |
| Dispositions and  retirements                                       |       | (5                                            | )          | —                                                            |       | (225         | )          | (19                                     | )          | —                         |       | (249 | ) | — |   | — |   | — |   | (249 | ) | — |   | (249 | ) |
| Reclassifications                                                   |       | —                                        |       | —                                                            |       | 310          |       | —                                  |       | (310                           | )          | — |   | — |   | — |   | — |   | — |   | 3 |   | 3 |   |
| Foreign exchange on  goodwill of self-sustaining foreign operations |       | —                                        |       | —                                                            |       | —       |       | —                                  |       | —                         |       | — |   | — |   | — |   | — |   | — |   | (3 | ) | (3 | ) |
| As at December 31,  2008                                       |       | 245                                           |       | 138                                                               |       | 2,082        |       | 103                                     |       | 197                            |       | 2,765 |   | 4,867 |   | — |   | 4,867 |   | 7,632 |   | 3,928 |   | 11,560 |   |
| Additions                                                           | ** ** | **—**                                    | ** ** | **—**                                                        | ** ** | **32**       | ** ** | **—**                              | ** ** | **319**                        | ** ** | **351** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **351** | ** ** | **—** | ** ** | **351** | ** ** |
| Additions arising from  business acquisitions                       | ** ** | **—**                                    | ** ** | **—**                                                        | ** ** | **—**   | ** ** | **—**                              | ** ** | **—**                     | ** ** | **—** | ** ** | **—** | ** ** | **7** | ** ** | **7** | ** ** | **7** | ** ** | **8** | ** ** | **15** | ** ** |
| Dispositions and  retirements                                       | ** ** | **—**                                    | ** ** | **(1**                                                            | **)**      | **(63**      | **)**      | **—**                              | ** ** | **—**                     | ** ** | **(64** | **)** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **(64** | **)** | **—** | ** ** | **(64** | **)** |
| Reclassifications                                                   | ** ** | **—**                                    | ** ** | **—**                                                        | ** ** | **357**      | ** ** | **1**                                   | ** ** | **(358**                       | **)**      | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **As at December 31, 2009**                                    | ** ** | **$**                                         | **245**    | ** **                                                        | **$**      | **137**      | ** ** | **$**                                   | **2,408**  | ** **                     | **$**      | **104** | ** ** | **$** | **158** | ** ** | **$** | **3,052** | ** ** | **$** | **4,867** | ** ** | **$** | **7** | ** ** | **$** | **4,874** | ** ** | **$** | **7,926** | ** ** | **$** | **3,936** | ** ** | **$** | **11,862** | ** ** |
| **Accumulated  amortization**                                       |       |                                          |       |                                                              |       |         |       |                                    |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| As  at January 1, 2008                                         |       | $                                             | 44         |                                                              | $          | —       |       | $                                       | 1,243      |                           | $          | 67 |   | $ | — |   | $ | 1,354 |   | $ | 1,018 |   | $ | — |   | $ | 1,018 |   | $ | 2,372 |   | $ | 364 |   | $ | 2,736 |   |
| Amortization                                                        |       | 7                                             |       | 13                                                                |       | 300          |       | 9                                       |       | —                         |       | 329 |   | — |   | — |   | — |   | 329 |   | — |   | 329 |   |
| Dispositions  and retirements                                       |       | (5                                            | )          | —                                                            |       | (229         | )          | (1                                      | )          | —                         |       | (235 | ) | — |   | — |   | — |   | (235 | ) | — |   | (235 | ) |
| As at December 31,  2008                                       |       | 46                                            |       | 13                                                                |       | 1,314        |       | 75                                      |       | —                         |       | 1,448 |   | 1,018 |   | — |   | 1,018 |   | 2,466 |   | 364 |   | 2,830 |   |
| Amortization                                                        | ** ** | **6**                                         | ** ** | **14**                                                            | ** ** | **360**      | ** ** | **1**                                   | ** ** | **—**                     | ** ** | **381** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **381** | ** ** | **—** | ** ** | **381** | ** ** |
| Dispositions and  retirements                                       | ** ** | **—**                                    | ** ** | **—**                                                        | ** ** | **(69**      | **)**      | **—**                              | ** ** | **—**                     | ** ** | **(69** | **)** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **(69** | **)** | **—** | ** ** | **(69** | **)** |
| **As at December 31, 2009**                                    | ** ** | **$**                                         | **52**     | ** **                                                        | **$**      | **27**       | ** ** | **$**                                   | **1,605**  | ** **                     | **$**      | **76** | ** ** | **$** | **—** | ** ** | **$** | **1,760** | ** ** | **$** | **1,018** | ** ** | **$** | **—** | ** ** | **$** | **1,018** | ** ** | **$** | **2,778** | ** ** | **$** | **364** | ** ** | **$** | **3,142** | ** ** |
| **Net book value**                                                  |       |                                          |       |                                                              |       |         |       |                                    |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| As at December 31,  2008                                       |       | $                                             | 199        |                                                              | $          | 125          |       | $                                       | 768        |                           | $          | 28 |   | $ | 197 |   | $ | 1,317 |   | $ | 3,849 |   | $ | — |   | $ | 3,849 |   | $ | 5,166 |   | $ | 3,564 |   | $ | 8,730 |   |
| **As at December 31, 2009**                                    | ** ** | **$**                                         | **193**    | ** **                                                        | **$**      | **110**      | ** ** | **$**                                   | **803**    | ** **                     | **$**      | **28** | ** ** | **$** | **158** | ** ** | **$** | **1,292** | ** ** | **$** | **3,849** | ** ** | **$** | **7** | ** ** | **$** | **3,856** | ** ** | **$** | **5,148** | ** ** | **$** | **3,572** | ** ** | **$** | **8,720** | ** ** |

 

 

47

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notes to consolidated financial statements

 

### **(b)**          Intangible assets subject to amortization

 

Estimatedaggregate amortization expense for intangible assets subject to amortization,calculated upon such assets held as at December 31, 2009, for each of the nextfive fiscal years is as follows:

 
| **Years ending December 31 (millions)** |       |    |       |
|----------------------------------------------|------------|---------|------------|
| 2010                                         | ** ** | **$**   | **364**    | ** ** |
| 2011                                         | ** ** | **277** | ** ** |
| 2012                                         | ** ** | **152** | ** ** |
| 2013                                         | ** ** | **52**  | ** ** |
| 2014                                         | ** ** | **30**  | ** ** |
|                                              |            |         |            |  |

 

### **(c)**          Impairment testing of intangible assets with indefinite lives

 

As referred to in Note 1(b) and Note 1(f), the carryingvalue of intangible assets with indefinite lives, and goodwill, is periodicallytested for impairment and this test represents a significant estimate for theCompany. There is a material degree of uncertainty with respect to thisestimate given the necessity of making key economic assumptions about the future.The Company considers a range of reasonably possible amounts and decides uponan amount that represents management’s best estimate. If the future was toadversely differ from management’s best estimate of key economic assumptionsand associated cash flows were to be materially adversely affected, the Companycould potentially experience future material impairment charges in respect ofits intangible assets with indefinite lives and goodwill.

 

Consistent with currentindustry-specific valuation methods, a combination of the discounted cash flowapproach, the market-comparable approach and analytical review of industry andCompany-specific facts is used in determining the fair value of its spectrum licencesand goodwill. The discounted cash flow methodology uses management’s bestestimate of the cash flows and a discount rate established by calculating aweighted average cost of capital for each reporting unit. The market-comparableapproach uses current (at the time of test) market consensus estimates andequity trading prices for U.S. and Canadian firms in the same industry. Inaddition, the Company ensures that the combination of the valuations of thereporting units is reasonable based on current market values of the Company.

 

Sensitivity testing wasconducted as a part of the December 2009 annual test. Stress testingincluded moderate declines in annual cash flows with all other assumptionsbeing held constant; this also resulted in the Company continuing to be able torecover the carrying value of its intangible assets with indefinite lives, andgoodwill, for the foreseeable future.

 

### **(d)**          Business acquisitions; other transactions; other

 

*Black’sPhoto Corporation:* On September 3, 2009, the Company acquired a 100% economic and votinginterest in Black’s Photo Corporation, a national imaging and digital retailcompany for $28 million cash ($26 million net of cash acquired). There wasno contingent consideration in the transaction. This investment was made with aview to enhancing the Company’s distribution of wireless products and servicesacross Canada.

 

Theprimary factors that contributed to a purchase price that resulted in therecognition of goodwill are: the existing Black’s Photo Corporation business;the acquired workforce; and the time-to-market benefits of acquiring anestablished multi-locationretailer to distribute wireless products. Black’s Photo Corporation’s resultsof operations are included in the Company’s Wireless segment effective September 3,2009. The amount assigned to goodwill is not expected to be deductible for taxpurposes.

 

Thepurchase price amounts assigned are as set out in the following table:

 
| **As at September 3, 2009 (millions)**    |   |   |   |
|------------------------------------------------|--------|--------|--------|
| **Assets**                                     |   |   |   |
| Current assets                                 |   | $      | 22     |   |
| Non-current assets                             |   |   |   |
| Property, plant, equipment  and other          |   | 9      |   |
| Intangible asset with  indefinite life (brand) |   | 7      |   |
| Future income taxes                            |   | 1      |   |
| Goodwill                                       |   | 8      |   |
|                                           |   | $      | 47     |   |
| **Liabilities**                                |   |   |   |
| Current liabilities                            |   | $      | 19     |   |
| **Purchase price**                             |   | 28     |   |
|                                           |   | $      | 47     |   |

 

*Additionaldisclosure:* As atDecember 31, 2009, goodwill attributable to the Company’s Wireline segmentand Wireless segment was $966 million (2008 – $966 million) and$2,606 million (2008 – $2,598 million), respectively.

 

### **(e)**          2008 business acquisitions; other transactions

 

*EmergisInc.:*On November 29, 2007, the Company announced that it had agreed tooffer to acquire 100% of the outstanding shares of Emergis Inc. for $8.25per common share by way of take-over bid (in total, an initially estimatedpurchase price of approximately $763 million on a fully-diluted basis).Emergis Inc. is a business process outsourcer, based in Canada, with afocus on healthcare and financial services sectors, two of the key industriesthe Company’s

 

 

48

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notes to consolidated financial statements

 

BusinessSolutions team has invested in developing expertise in. The Company believes thatits national sales and marketing capabilities will enhance growth inEmergis Inc. solutions, particularly in light of the complementary natureof the parties’ businesses and customer bases.

 

As at December 31,2007, the Company had made market purchases of 1,017,000 Emergis Inc. commonshares for $8 million, as disclosed in the Company’s press releases. On January 17,2008, the Company drew $500 million of bankers’ acceptances on its creditfacilities, issued incremental commercial paper and, including utilization ofcash on hand, remitted $743 million to the depository in payment for:

 

·      the 84,876,494 Emergis Inc. commonshares (representing approximately 94% of the outstanding common shares ofEmergis Inc. on a fully-diluted basis) that were validly deposited to theCompany’s offer; and

·      the remaining outstanding common sharesof Emergis Inc., which the Company acquired on January 18, 2008,utilizing the compulsory acquisition provisions of the *CanadaBusiness Corporations Act*.

 

The primary factor thatcontributed to a purchase price that resulted in the recognition of goodwill isthe degree of net tangible assets and net intangible assets relative to theearnings capacity of the acquired business. Emergis Inc.’s results ofoperations are included in the Company’s Wireline segment effective January 17,2008. The amounts assigned to goodwill are not expected to be deductible fortax purposes. Acquired intangible assets are not expected to have significantresidual values.

 

Thepurchase price amounts assigned are as set out in the following table:

 
| **As at January 16, 2008 (millions)**                 |   |   |   |
|------------------------------------------------------------|--------|--------|--------|
| **Assets**                                                 |   |   |   |
| Current assets                                             |   | $      | 114    |   |
| Non-current assets                                         |   |   |   |
| Property, plant, equipment  and other                      |   | 18     |   |
| Intangible assets                                          |   |   |   |
| Intangible assets subject  to amortization(1)              |   |   |   |
| Customer contracts and the  related customer relationships |   | 138    |   |
| Software                                                   |   | 186    |   |
| Other                                                      |   | 2      |   |
|                                                       |   | 326    |   |
| Goodwill                                                   |   | 396    |   |
| Other long-term assets                                     |   | 6      |   |
|                                                       |   | $      | 860    |   |
| **Liabilities**                                            |   |   |   |
| Current liabilities                                        |   | $      | 92     |   |
| Non-current liabilities                                    |   |   |   |
| Long-term debt                                             |   | 2      |   |
| Other long-term liabilities                                |   | 4      |   |
| Future income taxes                                        |   | 15     |   |
|                                                       |   | 113    |   |
| **Purchase price**                                         |   |   |   |
| Market purchase of shares  prior to closing                |   | 8      |   |
| Remitted to depository(2)                                  |   | 735    |   |
|                                                       |   | 743    |   |
| Acquisition costs(3)                                       |   | 4      |   |
|                                                       |   | 747    |   |
|                                                       |   | $      | 860    |   |

 

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(1)          Customercontracts and the related customer relationships and software are beingamortized over amortization periods of 10 years and 5 years, respectively.

(2)          Net of amountsfor market purchase of shares prior to closing.

(3)          As set out inNote 2(c), effective January 1, 2009, the Company adopted the newaccounting recommendations for business acquisitions which resulted in, amongother things, the Company expensing acquisition costs for business combinationsoccurring subsequent to January 1, 2009.

 

*TELUSInternational Philippines Inc.:*  In 2005, theCompany acquired, for cash, an effective 52.5% economic interest in TELUSInternational Philippines Inc., a business process outsourcing company. Theacquisition was effected in two steps: one on February 15, 2005, for aneffective 49% economic interest and one on May 13, 2005, for an effective3.5% economic interest. The initial effective 49% economic interest resulted inthe Company controlling TELUS International Philippines Inc. as the Companycontrolled, but did not wholly own, an intermediate holding company which, inturn, controlled, but did not wholly own, TELUS International Philippines Inc.This investment was made with a view to enhancing the Company’s competitivenessin contact centre offerings.

 

In the second half of 2006, the Company increased its total effectiveeconomic interest in the entity to 97.4% and in the third quarter of 2008, to100%. None of the resulting 2008 goodwill addition of $3 million arising fromthe $3 million transaction is expected to be deductible for tax purposes.

 

The primary factor thatcontributed to a purchase price that resulted in the recognition of goodwill isthe low degree of net tangible assets in the industry relative to the marketvalue of established Asian operations. TELUS International Philippines Inc.’sresults have been included in the Company’s Consolidated Statements of Incomeand Other Comprehensive Income and the Company’s Wireline segment since theacquisition of control on February 15, 2005.

 

*TransactelBarbados, Inc.:*On December 22, 2008, the Company acquired a direct 29.99% economicinterest in Transactel Barbados Inc., a business process outsourcing and callcentre company with facilities in three Central American countries, for $19million cash. Additional contingent consideration could become payabledepending upon Transactel Barbados Inc. earnings for the year ending December 31,2011.

 

 

49

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notes to consolidated financial statements

 

The Company has providedtwo written put options to the vendor of Transactel Barbados Inc. The firstwritten put option became exercisable on December 31, 2009, expires on June 30,2011, and allows the vendor to put up to a further 21.01% economic interest tothe Company (the Company’s effective economic interest in Transactel BarbadosInc. would become 51% assuming the written put option is exercised in full).The second written put option becomes exercisable on December 31, 2010,with no expiry, and allows the vendor to put whatever interest is not put underthe first written put option plus up to an incremental 44% economic interest tothe Company (the Company’s effective economic interest in Transactel BarbadosInc. would become 95% assuming that the written put option is exercised infull). The written put options set out the share pricing methodology, which isdependent upon Transactel Barbados Inc. future earnings.

 

The vendor provided the Company with two purchased call options whichsubstantially mirror the written put options except that they are onlyexercisable upon achieving certain business growth targets.

 

The Company currently accounts for its investment in TransactelBarbados Inc. using the equity method.

 

The investment was made with a view to enhancing the Company’s businessprocess outsourcing capacity, particularly regarding Spanish-languagecapabilities.

 

### **(f)**            Pro forma disclosures

 

The following pro forma supplemental informationrepresents certain results of operations as if the business acquisitions notedabove had been completed as at the beginning of the fiscal years presented.

 
| **Years ended December 31**                  | ** ** | **2009**                    | ** ** | **2008**                  | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| **(millions except per share amounts)** | ** ** | **As reported****(1)** | ** ** | **Pro forma****(2)** | ** ** | **As reported** | ** ** | **Pro forma****(2)** | ** ** |
| ** **                                                  | ** ** | ** **                  | ** ** | ** **                | ** ** | **(as adjusted –  Note 2(c))** | ** ** | ** ** | ** ** |
| Operating revenues                                          | ** ** | **$**                       | **9,606**  | ** **                | **$**      | **9,668** |   | $ | 9,653 |   | $ | 9,773 |   |
| Net income                                                  | ** ** | **$**                       | **1,002**  | ** **                | **$**      | **993** |   | $ | 1,131 |   | $ | 1,123 |   |
| Net income per Common Share  and Non-Voting Share           | ** ** | ** **                  | ** ** | ** **                |       |   |   |   |   |
| – Basic                                                | ** ** | **$**                       | **3.14**   | ** **                | **$**      | **3.12** |   | $ | 3.52 |   | $ | 3.50 |   |
| – Diluted                                              | ** ** | **$**                       | **3.14**   | ** **                | **$**      | **3.11** |   | $ | 3.51 |   | $ | 3.48 |   |

 

----

(1)          Operating revenues and net income (loss) for the yearended December 31, 2009, include $44 and $(1), respectively, in respect ofthe acquisition of Black’s Photo Corporation.

(2)          Pro forma amounts forthe year ended December 31, 2009 reflect Black’s Photo Corporation.Pro forma amounts for the year ended December 31, 2008 reflect Black’sPhoto Corporation, Emergis Inc. and Fastvibe Corporation. Emergis Inc. was acquiredJanuary 17, 2008, Fastvibe Corporation was acquired January 29, 2008,and Black’s Photo Corporation was acquired on September 3, 2009; theirresults have been included in the Company’s Consolidated Statements of Incomeand Other Comprehensive Income effective the same dates.

 

The pro formasupplemental information is based on estimates and assumptions which arebelieved to be reasonable. The pro forma supplemental information is notnecessarily indicative of the Company’s consolidated financial results infuture periods or the results that actually would have been realized had thebusiness acquisitions been completed at the beginning of the periods presented.The pro forma supplemental information includes incremental intangible assetamortization, financing and other charges as a result of the acquisitions, netof the related tax effects.

##  

## 17            short-term obligations

 

On December 15,2008, TELUS Corporation entered into a $700 million 364-day revolvingcredit facility with a syndicate of financial institutions, expiring March 1,2010. The credit facility is unsecured and bears interest at prime rate orbankers’ acceptance rate (all such terms as used or defined in the creditfacility), plus applicable margins. The credit facility contains customaryrepresentations, warranties and covenants that are substantively the same asthose for TELUS Corporation’s long-term credit facility, as set out in Note18(d).

 

On June 19, 2009,the terms of the credit facility were amended such that the amount availablebecame $300 million and that the expiry date became December 31,2010; as a result of the extension of the term of the facility, it becameclassified as a long-term facility, as set out in Note 18(d).

 
| ** **                              | ** ** | **2009**                        | ** ** | **2008**                        | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **As at December 31  (millions)**  | ** ** | **Bilateral  bank  facilities** | ** ** | **Bilateral  bank  facilities** | ** ** | **364-day  revolving  credit facility** | ** ** | **Total** | ** ** |
| Net available                           | ** ** | **$**                           | **53**     |                            | $          | 64 |   | $ | 700 |   | $ | 764 |   |
| Drawn                                   | ** ** | **6**                           |       | 11                              |       | — |   | 11 |   |
| Outstanding, undrawn  letters of credit | ** ** | **3**                           |       | 3                               |       | — |   | 3 |   |
| Gross available                         | ** ** | **$**                           | **62**     |                            | $          | 78 |   | $ | 700 |   | $ | 778 |   |

 

 

50

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notes to consolidated financial statements

 

## 18            long-term debt

 

### **(a)**          Details of long-term debt

 

| **As at December 31 ($ in  millions)**                                                                     | ** ** | ** **                     | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| **Series**                                                                                                      | ** ** | **Rate of interest** | ** ** | **Maturity**            | ** ** | **2009**   | ** ** | **2008**   | ** ** |
| TELUS Corporation Notes                                                                                         |       |                           |       |                    | ** ** |       |       |       |       |
| U.S. (2)                                                                                                        |       | 8.00                           | %(1)       | June 2011          | ** ** | **$**      | **1,411**  |       | $          | 2,333 |   |
| CB                                                                                |       | 5.00                           | %(1)       | June 2013          | ** ** | **299**    |       | 299        |       |
| CC                                                                                |       | 4.50                           | %(1)       | March 2012         | ** ** | **299**    |       | 299        |       |
| CD                                                                                |       | 4.95                           | %(1)       | March 2017         | ** ** | **690**    |       | 688        |       |
| CE                                                                                |       | 5.95                           | %(1)       | April 2015         | ** ** | **498**    |       | 497        |       |
| CF                                                                                |       | 4.95                           | %(1)       | May 2014           |       | **697**    |       | —     |       |
| CG                                                                                |       | 5.05                           | %(1)       | December 2019      |       | **989**    |       | —     |       |
|                                                                                                            |       | ** **                     |       |                    |       | **4,883**  |       | 4,116      |       |
| TELUS Corporation  Commercial Paper                                                                             |       | 0.34                           | %          | Through March 2010 |       | **467**    |       | 431        |       |
| TELUS Corporation Credit  Facility                                                                              |       | —                         | %          | May 2012           |       | **—** |       | 978        |       |
| TELUS Communications Inc.  Debentures                                                                           |       | ** **                     |       |                    |       | ** ** |       |       |       |
| 1                                                                                                     |       | 12.00                          | %(1)       | May 2010           |       | **50**     |       | 50         |       |
| 2                                                                                                     |       | 11.90                          | %(1)       | November 2015      |       | **124**    |       | 124        |       |
| 3                                                                                                     |       | 10.65                          | %(1)       | June 2021          |       | **173**    |       | 173        |       |
| 5                                                                                                     |       | 9.65                           | %(1)       | April 2022         |       | **245**    |       | 245        |       |
| B                                                                                                     |       | 8.80                           | %(1)       | September 2025     |       | **198**    |       | 198        |       |
|                                                                                                            |       |                           |       |                    |       | **790**    |       | 790        |       |
| TELUS  Communications Inc. First Mortgage Bonds                                                                 |       |                           |       | ** **              |       |       |       |
| U                                                                                                     |       | 11.50                          | %(1)       | July 2010          |       | **30**     |       | 30         |       |
| Capital leases issued at varying rates of interest from 4.1% to 13.0%  and maturing on various dates up to 2013 |       | **2**                          |       | 5                       |       |
| Other                                                                                                           |       | ** **                     |       |                    |       | **—** |       | 2          |       |
| Long-Term Debt                                                                                                  |       |                           |       |                    |       | **6,172**  |       | 6,352      |       |
| Less: Current maturities                                                                                        |       |                           |       |                    |       | **82**     |       | 4          |       |
| Long-Term Debt –  non-current                                                                              |       |                           |       |                    |       | **$**      | **6,090**  |       | $          | 6,348 |   |
|                                                                                                                 |            |                                |            |                         |            |            |            |            |            |  |  |  |  |  |  |

 

----

(1)          Interest is payablesemi-annually.

(2)          Principal face value of notesis U.S.$1,348 million (2008 – U.S.$1,925 million).

 

### **(b)**          TELUS Corporation notes

 

The notes are senior, unsecured and unsubordinated obligations of theCompany and rank equally in right of payment with all existing and futureunsecured, unsubordinated obligations of the Company, are senior in right ofpayment to all existing and future subordinated indebtedness of the Company, andare effectively subordinated to all existing and future obligations of, orguaranteed by, the Company’s subsidiaries.

 

The indentures governingthe notes contain certain covenants which, among other things, placelimitations on the ability of TELUS and certain of its subsidiaries to: grantsecurity in respect of indebtedness, enter into sale and lease-backtransactions and incur new indebtedness.

 

On December 1, 2009,the Company exercised its right to early and partially redeem, on December 31,2009, U.S.$577 million of its publicly held 2011 (U.S. Dollar) Notes. Theloss on redemption, as set out in Note 8, was $99 million.

* *

*2011Cross Currency Interest Rate Swap Agreements:*  With respectto the 2011 (U.S. Dollar) Notes, U.S.$1.3 billion (2008 –U.S.$1.9 billion) in aggregate, the Company entered into cross currencyinterest rate swap agreements which effectively convert the principalrepayments and interest obligations to Canadian dollar obligations with aneffective fixed interest rate of 8.493% and an effective fixed economicexchange rate of $1.5327.

 

The counterparties of theswap agreements are highly rated financial institutions and the Company doesnot anticipate any non-performance. TELUS has not required collateral or othersecurity from the counterparties due to its assessment of theircreditworthiness.

 

The Company translatesitems such as the U.S. Dollar notes into equivalent Canadian dollars atthe rate of exchange in effect at the statement of financial position date. Theswap agreements at December 31, 2009, comprised a net derivative liabilityof $721 million (2008 – $778 million), as set out in Note 5(h).The asset value of the swap agreements increases (decreases) when the statementof financial position date exchange rate increases (decreases) the Canadiandollar equivalent of the U.S. Dollar notes.

 

 

51

----

 

notes to consolidated financial statements

 
| ** **                          | ** ** | ** **         | ** ** | ** **           | ** ** | **Principal face amount** | ** ** | **Redemption**                                          | ** ** |
|-------------------------------------|------------|--------------------|------------|----------------------|------------|---------------------------|------------|---------------------------------------------------------|------------|
| **Series**                          | ** ** | **Issued**         | ** ** | **Issue price** | ** ** | **Originally  issued**    | ** ** | **Outstanding at  financial  statement date** | ** ** | **present value  spread  (basis points)****(1)** | ** ** |
| 8.00%  (U.S. Dollar) Notes due 2011 |       | May 2001      |       | U.S.$994.78          |       | U.S.$2.0 billion          |       | U.S.$1.3 billion                                   |       | 30 |   |
| 5.00%  Notes, Series CB        |       | May 2006      |       | $998.80              |       | $300 million              |       | $300 million                                            |       | 16 |   |
| 4.50%  Notes, Series CC        |       | March 2007    |       | $999.91              |       | $300 million              |       | $300 million                                            |       | 15 |   |
| 4.95%  Notes, Series CD        |       | March 2007    |       | $999.53              |       | $700 million              |       | $700 million                                            |       | 24 |   |
| 5.95%  Notes, Series CE(2)     |       | April 2008    |       | $998.97              |       | $500 million              |       | $500 million                                            |       | 66 |   |
| 4.95%  Notes, Series CF(2)     |       | May 2009      |       | $999.96              |       | $700 million              |       | $700 million                                            |       | 71 |   |
| 5.05%  Notes, Series CG(2)     |       | December 2009 |       | $994.19              |       | $1.0 billion              |       | $1.0 billion                                            |       | 45.5 |   |

 

----

(1)          The notes are redeemable at the option of theCompany, in whole at any time, or in part from time to time, on not fewer than30 and not more than 60 days’ prior notice. The redemption price is equal tothe greater of (i) the present value of the notes discounted at theAdjusted Treasury Rate (in respect of the U.S. dollar denominated notes) or theGovernment of Canada yield (in respect of the Canadian dollar denominatednotes) plus the redemption present value spread, or (ii) 100% of theprincipal amount thereof. In addition, accrued and unpaid interest, if any,will be paid to the date fixed for redemption.

(2)          The Series CE Notes,Series CF Notes and Series CG Notes each require the Company to makean offer to repurchase the Series CE Notes, Series CF Notes and Series CGNotes at a price equal to 101% of their principal plus accrued and unpaidinterest to the date of repurchase upon the occurrence of a change in controltriggering event, as defined in the supplemental trust indenture.

 

### **(c)**          TELUS Corporation commercial paper

 

OnMay 15, 2007, TELUS Corporation entered into an unsecured commercialpaper program, which is backstopped by a portion of its $2.0 billionsyndicated credit facility, enabling it to issue commercial paper up to amaximum aggregate of $800 million (or U.S. dollar equivalent), to be usedfor general corporate purposes, including capital expenditures and investments;in August 2008, the program was expanded to $1.2 billion. Commercialpaper debt is due within one year but is classified as long-term debt as theamounts are fully supported, and the Company expects that they will continue tobe supported, by the revolving credit facility which has no repaymentrequirements within the next year.

### ** **

### **(d)**          TELUS Corporation credit facilities

 

On March 2, 2007,TELUS Corporation entered into a $2.0 billion bank credit facilitywith a syndicate of financial institutions. The credit facility consists of a$2.0 billion (or U.S. dollar equivalent) revolving credit facilityexpiring on May 1, 2012, to be used for general corporate purposesincluding the backstop of commercial paper.

 

TELUS Corporation’scredit facility expiring on May 1, 2012, is unsecured and bears interestat prime rate, U.S. Dollar Base Rate, a bankers’ acceptance rate or Londoninterbank offered rate (LIBOR) (all such terms as used or defined in the creditfacility), plus applicable margins. The credit facility contains customaryrepresentations, warranties and covenants including two financial quarter-endfinancial ratio tests. The financial ratio tests are that the Company may notpermit its net debt to operating cash flow ratio to exceed 4.0:1 and may notpermit its operating cash flow to interest expense ratio to be less than 2.0:1,each as defined under the credit facility.

 

On June 19, 2009,TELUS Corporation entered into an amended $300 million revolving creditfacility with a syndicate of financial institutions, expiring December 31,2010, as discussed further in Note 17. The credit facility is unsecuredand bears interest at prime rate or bankers’ acceptance rate (all such terms asused or defined in the credit facility), plus applicable margins.

 

Continued access toTELUS Corporation’s credit facilities is not contingent on the maintenanceby TELUS Corporation of a specific credit rating.

 
| ** **                                                                   | ** ** | **2009**             | ** ** | **2008**                    | ** ** |
|------------------------------------------------------------------------------|------------|----------------------|------------|-----------------------------|------------|
| **As at December 31****(millions)  Revolving credit facility expiring** | ** ** | **May 1, 2012** | ** ** | **December 31,  2010** | ** ** | **Total** | ** ** | **May 1, 2012** | ** ** |
| Net available                                                                | ** ** | **$**                | **1,410**  | ** **                  | **$**      | **300** | ** ** | **$** | **1,710** |   | $ | 387 |   |
| Drawn(1)                                                                     | ** ** | **—**           | ** ** | **—**                  | ** ** | **—** |   | 980 |   |
| Outstanding, undrawn  letters of credit                                      | ** ** | **123**              | ** ** | **—**                  | ** ** | **123** |   | 201 |   |
| Backstop of commercial  paper                                                | ** ** | **467**              | ** ** | **—**                  | ** ** | **467** |   | 432 |   |
| Gross available                                                              | ** ** | **$**                | **2,000**  | ** **                  | **$**      | **300** | ** ** | **$** | **2,300** |   | $ | 2,000 | ** ** |

 

----

(1)          Amounts drawn include bankers’acceptances of $NIL (December 31, 2008 – $930).

 

 

52

----

 

 

notes to consolidated financial statements

 

### **(e)**   TELUS Communications Inc. debentures

 

The outstanding Series 1through 5 debentures were issued by a predecessor corporation ofTELUS Communications Inc., BC TEL, under a Trust Indenture dated May 31,1990, and are non-redeemable.

 

The outstanding Series BDebentures were issued by a predecessor corporation ofTELUS Communications Inc., AGT Limited, under a Trust Indenture datedAugust 24, 1994, and a supplemental trust indenture dated September 22,1995. They are redeemable at the option of the Company, in whole at any time orin part from time to time, on not less than 30 days’ notice at the higher ofpar and the price calculated to provide the Government of Canada Yield plus 15basis points.

 

Pursuant to anamalgamation on January 1, 2001, the Debentures became obligations ofTELUS Communications Inc. The debentures are not secured by anymortgage, pledge or other charge and are governed by certain covenantsincluding a negative pledge and a limitation on issues of additional debt,subject to a debt to capitalization ratio and interest coverage test. EffectiveJune 12, 2009, TELUS Corporation guaranteed the payment of the debentures’principal and interest.

 

### **(f)**    TELUS Communications Inc. first mortgage bonds

 

The first mortgage bondswere issued by TELUS Communications (Québec) Inc. and are secured by animmovable hypothec and by a movable hypothec charging specifically certainimmovable and movable property of the subsidiary TELUS Communications Inc.,such as land, buildings, equipment, apparatus, telephone lines, rights-of-wayand similar rights limited to certain assets located in the province of Quebec.The first mortgage bonds are non-redeemable. Pursuant to a corporatereorganization effected July 1, 2004, the outstanding first mortgage bondsbecame obligations of TELUS Communications Inc. Effective June 12, 2009,TELUS Corporation guaranteed the payment of the first mortgage bonds’ principaland interest.

 

### **(g)**   Long-term debt maturities

 

Anticipated requirementsto meet long-term debt repayments, including related hedge amounts andcalculated upon such long-term debts owing as at December 31, 2009, foreach of the next five fiscal years are as follows:

 
| ** **                                                                         | ** ** | **Canadian dollars** | ** ** | **U.S. dollars** | ** ** | ** **      | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|------------------|------------|-----------------|------------|
| ** **                                                                         | ** ** | **All except**       | ** ** | ** **       | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Long-term debt  denominated in**                                                 | ** ** | **capital**          | ** ** | **Capital**      | ** ** | ** **      | ** ** | **Derivative liability** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Years ending December 31 (millions)**                                       | ** ** | **leases**           | ** ** | **leases**       | ** ** | **Debt****(1)** | ** ** | **(Receive)****(1)** | ** ** | **Pay** | ** ** | **Total** | ** ** | **Total** | ** ** |
| 2010                                                                               |       | $                    | 80         |             | $          | 2               |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 82 |   |
| 2011                                                                               |       | —               |       | —           |       | 1,416           |       | (1,416 | ) | 2,064 |   | 2,064 |   | 2,064 |   |
| 2012                                                                               |       | 767                  |       | —           |       | —          |       | — |   | — |   | — |   | 767 |   |
| 2013                                                                               |       | 300                  |       | —           |       | —          |       | — |   | — |   | — |   | 300 |   |
| 2014                                                                               |       | 700                  |       | —           |       | —          |       | — |   | — |   | — |   | 700 |   |
| Thereafter                                                                         |       | 2,949                |       | —           |       | —          |       | — |   | — |   | — |   | 2,949 |   |
| Future  cash outflows in respect of long-term debt principal repayments            |       | 4,796                |       | 2                |       | 1,416           |       | (1,416 | ) | 2,064 |   | 2,064 |   | 6,862 |   |
| Future  cash outflows in respect of associated interest and like carrying costs(2) |       | 2,067                |       | 1                |       | 170             |       | (170 | ) | 263 |   | 263 |   | 2,331 |   |
| Undiscounted  contractual maturities (Note 5(c))                              |       | $                    | 6,863      |             | $          | 3               |       | $ | 1,586 |   | $ | (1,586 | ) | $ | 2,327 |   | $ | 2,327 |   | $ | 9,193 |   |

 

----

(1)   Where applicable,principal-related cash flows reflect foreign exchange rates at December 31,2009.

(2)   Futurecash outflows in respect of associated interest and like carrying costs forcommercial paper and amounts drawn under the Company’s credit facilities (ifany) have been calculated based upon the rates in effect as at December 31,2009.

 

## 19    Common Share and Non-Voting Share equity

 

### **(a)**   Authorized share capital

 

Asat December 31, 2009 and 2008, the Company’s authorized share capitalconsisted of 1 billion no par value shares of each of the followingclasses: First Preferred Shares; Second Preferred Shares; Common Shares; andNon-Voting Shares. Only holders of Common Shares may vote at general meetingsof the Company, with each holder of Common Shares being entitled to one voteper Common Share held at all such meetings.

 

Withrespect to priority in payment of dividends and in the distribution of assetsin the event of liquidation, dissolution or winding-up of the Company, whethervoluntary or involuntary, or any other distribution of the assets of theCompany among its shareholders for the purpose of winding-up its affairs,preferences are as follows: First Preferred Shares; Second Preferred Shares;and finally Common Shares and Non-Voting Shares participating equally, withoutpreference or distinction.

 

 

53

----

 

notes to consolidated financial statements

 

Non-Voting Shares have conversion rights that, incertain instances (such as if a change in foreign ownership restrictions wereto occur), allow the holders of Non-Voting Shares to convert them to CommonShares on a one-for-one basis.

 

### **(b)**   Accumulated other comprehensive income (loss)

 
| ** **                                                                                                      | ** ** | **2009**                               | ** ** | **2008**                                                 | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **Other comprehensive  income (loss)** | ** ** | **Accumulated  other comprehensive  income (loss)** | ** ** | **Other comprehensive  income (loss)** | ** ** | **Accumulated  other comprehensive  income (loss)** | ** ** |
| **Years  ended December 31  (millions)**                                                                   | ** ** | **Amount  arising**                    | ** ** | **Income  taxes**                                        | ** ** | **Net** | ** ** | **Beginning  of period** | ** ** | **End of  period** | ** ** | **Amount  arising** | ** ** | **Income  taxes** | ** ** | **Net** | ** ** | **Beginning  of period** | ** ** | **End of  period** | ** ** |
| **Change in unrealized fair value of  derivatives designated as cash flow hedges** (Note 4(i))                  |       |                                   |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gains (losses) arising in current period                                                                        | ** ** | **$**                                  | **(264**   | **)**                                                    | **$**      | **(26** | **)** | **$** | **(238** | **)** | ** ** | ** ** | ** ** |   | $ | 405 |   | $ | 58 |   | $ | 347 |   |   |   |   |   |
| (Gains) losses arising in prior periods and  transferred to net income in the current period                    | ** ** | **362**                                | ** ** | **55**                                                   | ** ** | **307** | ** ** | ** ** | ** ** | ** ** |   | (440 | ) | (67 | ) | (373 | ) |   |   |   |   |
|                                                                                                            | ** ** | **98**                                 | ** ** | **29**                                                   | ** ** | **69** | ** ** | **$** | **(122** | **)** | **$** | **(53** | **)** | (35 | ) | (9 | ) | (26 | ) | $ | (96 | ) | $ | (122 | ) |
| **Cumulative foreign currency translation  adjustment**                                                         | ** ** | **(12**                                | **)**      | **—**                                               | ** ** | **(12** | **)** | **(7** | **)** | **(19** | **)** | 2 |   | — |   | 2 |   | (9 | ) | (7 | ) |
| **Change in unrealized fair value of  available-for-sale financial assets and recognition of amounts realized** | ** ** | **1**                                  | ** ** | **—**                                               | ** ** | **1** | ** ** | **(1** | **)** | **—** |   | (2 | ) | — |   | (2 | ) | 1 |   | (1 | ) |
|                                                                                                            | ** ** | **$**                                  | **87**     | ** **                                               | **$**      | **29** | ** ** | **$** | **58** | ** ** | **$** | **(130** | **)** | **$** | **(72** | **)** | $ | (35 | ) | $ | (9 | ) | $ | (26 | ) | $ | (104 | ) | $ | (130 | ) |

 

The net amount of theexisting gains (losses) arising from the unrealized fair value of the 2011cross currency interest rate swap agreements, which are derivatives that aredesignated as cash flow hedges and are reported in accumulated other comprehensiveincome, would be reclassified to net income if the agreements were earlyterminated; the amount of such reclassification would be dependent upon fairvalues and amounts of the agreements terminated. As at December 31, 2009,the Company’s estimate of the net amount of existing gains (losses) arisingfrom the unrealized fair value of derivatives designated as cash flow hedges,other than in respect of the 2011 cross currency interest rate swap agreements,which are reported in accumulated other comprehensive income and are expectedto be reclassified to net income in the next twelve months, excluding taxeffects, is $3 million.

 

### **(c)**   Share option plans

 

The Company has a numberof share option plans under which officers and other employees may receiveoptions to purchase Non-Voting Shares at a price equal to the fair market valueat the time of grant; prior to 2001, options were also similarly awarded inrespect of Common Shares. Prior to 2002, directors were also awarded options topurchase Non-Voting Shares and Common Shares at a price equal to the fairmarket value at the time of grant. Option awards currently granted under theplans may be exercised over specific periods not to exceed seven years from thetime of grant; prior to 2003, share option awards were granted with exerciseperiods not to exceed ten years.

 

 

54

----

 

notes to consolidated financial statements

 

Thefollowing table presents a summary of the activity related to the Company’sshare option plans.

 
| ** **                        | ** ** | **2009**                      | ** ** | **2008**                                  | ** ** |
|-----------------------------------|------------|-------------------------------|------------|-------------------------------------------|------------|
| **Years ended December 31**  | ** ** | **Number of  share  options** | ** ** | **Weighted  average share  option price** | ** ** | **Number of  share  options** | ** ** | **Weighted  average share  option price** | ** ** |
| Outstanding, beginning of  period | ** ** | **10,153,316**                | ** ** | **$**                                     | **39.23**  |   | 8,284,634 |   | $ | 37.17 |   |
| Granted                           | ** ** | **2,572,556**                 | ** ** | **30.61**                                 |       | 2,949,957 |   | 43.81 |   |
| Exercised(1)                      | ** ** | **(619,760**                  | **)**      | **20.71**                                 |       | (582,286 | ) | 27.54 |   |
| Forfeited                         | ** ** | **(958,122**                  | **)**      | **42.18**                                 |       | (466,489 | ) | 45.61 |   |
| Expired                           | ** ** | **(90,074**                   | **)**      | **30.21**                                 |       | (32,500 | ) | 46.72 |   |
| Outstanding, end of period        | ** ** | **11,057,916**                | ** ** | **$**                                     | **38.08**  |   | 10,153,316 |   | $ | 39.23 |   |

 

----

(1)   The total intrinsic value of share option awardsexercised for the year ended December 31, 2009, was $7 million (2008 —$9 million) (reflecting a weighted average price at the dates of exercise of$32.41 per share (2008 — $42.54 per share)). The tax benefit realized for thetax deductions from share option exercises for the year ended December 31,2009, was $NIL (2008 — $2 million).

 

In 2006, certainoutstanding grants of share option awards, which were made after 2001, had anet-equity settlement feature applied to them. This event did not result in theoptionees receiving incremental value and therefore modification accounting wasnot required for it. The optionee does not have the choice of exercising thenet-equity settlement feature. It is at the Company’s discretion whether anexercise of the share option award is settled as a share option or using thenet-equity settlement feature. In 2007, certain outstanding grants of shareoption awards had a net-cash settlement feature applied to them, as furtherdiscussed in Note 12(b); the optionee has the choice of exercising thenet-cash settlement feature.

 

Thefollowing table reconciles the number of share options exercised and theassociated number of Common Shares and Non-Voting Shares issued.

 
| ** **                                                                                             | ** ** | **2009**           | ** ** | **2008**               | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| **Years ended December 31**                                                                       | ** ** | **Common  Shares** | ** ** | **Non-Voting  Shares** | ** ** | **Total** | ** ** | **Common  Shares** | ** ** | **Non-Voting  Shares** | ** ** | **Total** | ** ** |
| Shares issued pursuant to  exercise of share options                                                   | ** ** | **1,506**          | ** ** | **23,984**             | ** ** | **25,490** |   | 1,700 |   | 13,339 |   | 15,039 |   |
| Impact of optionee choosing  to settle share option award exercises using net-cash settlement feature  | ** ** | **88,221**         | ** ** | **474,941**            | ** ** | **563,162** |   | 34,667 |   | 341,421 |   | 376,088 |   |
| Shares issued pursuant to  use of share option award net-equity settlement feature                     | ** ** | **N/A**            | **(1)**    | **15,162**             | ** ** | **15,162** |   | N/A | (1) | 47,748 |   | 47,748 |   |
| Impact of Company choosing  to settle share option award exercises using net-equity settlement feature | ** ** | **N/A**            | **(1)**    | **15,946**             | ** ** | **15,946** |   | N/A | (1) | 143,411 |   | 143,411 |   |
| Share options exercised                                                                                | ** ** | **89,727**         | ** ** | **530,033**            | ** ** | **619,760** |   | 36,367 |   | 545,919 |   | 582,286 |   |

 

----

(1)   Share optionawards for Common Shares do not have a net-equity settlement feature.

 

 

55

----

 

notes to consolidated financial statements

 

The following is a life and exercise price stratificationof the Company’s share options outstanding as at December 31, 2009.

 
| ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Options exercisable** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **Options  outstanding(1)**                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Number of  shares**   | ** ** | **Weighted  average  price** | ** ** |
| Range of option prices                              |       |       |       |       |       |       |       |       |       |       |       | **Total**  |       |                    |       |   |   |
| Low                                                 |       | $          | 8.43       |       | $          | 14.63      |       | $          | 21.99      |       | $          | 33.14      |       | $                       | 50.47      |   | $ | 8.43 |   |   |   |   |   |
| High                                                |       | $          | 10.75      |       | $          | 19.92      |       | $          | 32.85      |       | $          | 47.22      |       | $                       | 64.64      |   | $ | 64.64 |   |   |   |   |   |
| Year of expiry and number of shares                 |       |       |       |       |       |       |       |       |       |       |       |       |       |                    |       |   |   |
| 2010                                                |       | —     |       | 7,350      |       | 459,198    |       | 226,515    |       | —     |       | 693,063    |       | 693,063                 |       | $ | 28.79 |   |
| 2011                                                |       | —     |       | 2,200      |       | 888,839    |       | 748,709    |       | —     |       | 1,639,748  |       | 1,639,748               |       | $ | 29.24 |   |
| 2012                                                |       | 5,583      |       | 109,700    |       | 65,000     |       | 1,221,446  |       | —     |       | 1,401,729  |       | 1,146,434               |       | $ | 34.91 |   |
| 2013                                                |       | —     |       | —     |       | —     |       | 1,224,350  |       | 52,331     |       | 1,276,681  |       | 1,027,315               |       | $ | 43.24 |   |
| 2014                                                |       | —     |       | —     |       | —     |       | 12,330     |       | 1,065,434  |       | 1,077,764  |       | —                  |       | $ | — |   |
| 2015                                                |       | —     |       | —     |       | —     |       | 2,522,355  |       | —     |       | 2,522,355  |       | —                  |       | $ | — |   |
| 2016                                                |       | —     |       | —     |       | 2,445,936  |       | 640        |       | —     |       | 2,446,576  |       | —                  |       | $ | — |   |
|                                                |       | 5,583      |       | 119,250    |       | 3,858,973  |       | 5,956,345  |       | 1,117,765  |       | 11,057,916 |       | 4,506,560               |       |   |   |
| Weighted average remaining contractual life (years) |       | 2.8        |       | 2.7        |       | 4.4        |       | 3.5        |       | 4.2        |       | 3.9        |       |                    |       |   |   |
| Weighted average price                              |       | $          | 10.05      |       | $          | 16.22      |       | $          | 28.33      |       | $          | 41.39      |       | $                       | 56.59      |   | $ | 38.08 |   |   |   |   |   |
| Aggregate intrinsic value(2) (millions)        |       | $          | —     |       | $          | 2          |       | $          | 17         |       | $          | —     |       | $                       | —     |   | $ | 19 |   |   |   |   |   |
| **Options exercisable**                             |       |       |       |       |       |       |       |       |       |       |       |       |       |                    |       |   |   |
| Number of shares                                    |       | 5,583      |       | 119,250    |       | 1,413,037  |       | 2,951,339  |       | 17,351     |       | 4,506,560  |       |                    |       |   |   |
| Weighted average remaining contractual life (years) |       | 2.8        |       | 2.7        |       | 1.4        |       | 2.2        |       | 3.9        |       | 1.9        |       |                    |       |   |   |
| Weighted average price                              |       | $          | 10.05      |       | $          | 16.22      |       | $          | 24.39      |       | $          | 38.94      |       | $                       | 56.34      |   | $ | 33.80 |   |   |   |   |   |
| Aggregate intrinsic value(2) (millions)        |       | $          | —     |       | $          | 2          |       | $          | 12         |       | $          | —     |       | $                       | —     |   | $ | 14 |   |   |   |   |   |

 

----

(1)   As at December 31,2009, 10,628,744 share options, with a weighted average remaining contractuallife of 3.8 years, a weighted average price of $38.04 and an aggregateintrinsic value of $19 million, are vested or were expected to vest; theseamounts differ from the corresponding amounts for all share options outstandingdue to an estimate for expected forfeitures.

(2)   The aggregateintrinsic value is calculated upon December 31, 2009, per share prices of$34.11 for Common Shares and $32.75 for Non-Voting Shares.

 

As at December 31,2009, less than one million Common Shares and approximately15 million Non-Voting Shares were reserved for issuance, from Treasury,under the share option plans.

 

### **(d)**   Purchase of shares for cancellation pursuant to normal course issuer bid

 

As referred to in Note 3,the Company may purchase shares for cancellation pursuant to permitted normalcourse issuer bids in order to maintain or adjust its capital structure. TheCompany has purchased, for cancellation, through the facilities of the TorontoStock Exchange or other means permitted by the Toronto Stock Exchange and othersecurities regulators, including privately negotiated block purchases, CommonShares and Non-Voting Shares pursuant to successive normal course issuer bids,the most recent of which expired December 22, 2009. The excess of thepurchase price over the average stated value of shares purchased forcancellation is charged to retained earnings. The Company ceases to considershares outstanding on the date of the Company’s purchase of its shares althoughthe actual cancellation of the shares by the transfer agent and registraroccurs on a timely basis on a date shortly thereafter.

 

## 20    commitments and contingent liabilities

 

### **(a)**   Canadian Radio-television and Telecommunications Commission Decisions 2002-34,2002-43 and 2006-9 deferral accounts

### ** **

On May 30, 2002, andon July 31, 2002, the CRTC issued Decisions 2002-34 and 2002-43,respectively, and introduced the concept of a deferral account as a componentof the price caps form of regulation. The Company made significant estimatesand assumptions in respect of the deferral accounts given the complexity andinterpretation required of Decisions 2002-34 and 2002-43.

 

On March 24, 2004,the CRTC issued Telecom Public Notice CRTC 2004-1, *Review anddisposition of the deferral accounts for the second price cap period*,which initiated a public proceeding inviting proposals on the disposition ofthe amounts accumulated in the incumbent local exchange carriers’ deferralaccounts. Although amounts were accumulated in the deferral account only duringthe four-year period ended May 31, 2006, the proceeding was to addressonly the amounts accumulated in the deferral account during the two-year periodended May 31, 2004. The outcomes of this proceeding are as set out in thefollowing table.

 

 

56

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notes to consolidated financial statements

 
| ** **                                                                                                                                                                                              | ** ** | ** **             | ** ** | **Initiative**                                                                                                                                                                                              |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Decision**                                                                                                                                                                                            | ** ** | **Issued**             | ** ** | **Expansion of broadband  services in respective  incumbent local exchange  carrier operating territories to  rural and remote communities**                                                                | ** ** | **Enhance accessibility to  telecommunications services  for individuals with disabilities** | ** ** | **Rebate balance of  deferral  account to local residential  customers in non-high cost  serving areas** |
| Decision CRTC 2006-9, *Disposition of funds in  the deferral account*                                                                                                                                   |       | February 16, 2006 |       | Majority of accumulated balance of deferral account to be used for  this initiative                                                                                                                         |   | Minimum of 5% of accumulated balance of deferral account to be used  for this initiative |   | Remaining amount of accumulated balance of deferral account to be used  for this initiative |
| Decision CRTC 2007-50, *Use of deferral account  to expand broadband services to certain rural and remote communities*                                                                                  |       | July 6, 2007      |       | Expansion of broadband services to 115 communities in British Columbia  and Quebec approved                                                                                                                 |   |   |   |   |
| Decision CRTC 2008-1, *Use of deferral account  funds to improve access to telecommunications services for persons with  disabilities and to expand broadband services to rural and remote communities* |       | January 17, 2008  |       | Expansion of broadband services to an additional 119 rural and remote  communities approved; determination that no further communities can be  submitted to exhaust remaining funds in the deferral account |   | Approved the use of approximately 5% of the accumulated balance of the  Company’s deferral account |   | Confirmed that remaining amount of accumulated balance of deferral  account to be used for this initiative |

 

There have been a seriesof escalating court actions since the issuance of CRTC TelecomDecision 2006-9 and Telecom Decision 2008-1 and the litigants haveincluded the Consumers Association of Canada, the National Anti-PovertyOrganization, Bell Canada and the Company. The consumer groups appealed to thecourts to direct that rebates be made to local telephone subscribers ratherthan have the accumulated deferral account funds used for purposes determinedby the CRTC, as noted above. Bell Canada appealed to the courts that the CRTCexceeded its jurisdiction to the extent it approved rebates from the deferralaccount. The Company appealed to the courts to permit incumbent local exchangecarriers to file for approval further lists of communities that would beeligible for broadband expansion from the remaining funds in the deferralaccount rather than rebating the remaining funds to local telephonesubscribers. The Supreme Court of Canada granted a stay of CRTC TelecomDecision 2006-9 in so far as it required a rebate to local telephonesubscribers. The appeals pertaining to the disposition of the accumulatedamounts in the deferral account by the consumer groups, Bell Canada and theCompany were heard by the Supreme Court of Canada in March 2009.

 

On September 18,2009, the Supreme Court of Canada issued its decision on this matter and deniedboth the Company’s and Bell Canada’s appeal and reconfirmed the previousdecisions of the CRTC. Subsequent to that date the CRTC directed the Company tofile, in January 2010, a re-submission of its initial cost estimates and afour-year construction proposal associated with the currently approved 229communities. The Company anticipates it will commence implementing its InternetProtocol expansion program to rural and remote communities in mid-2010. TheSupreme Court of Canada decision removed the uncertainty associated with the deferralaccount.

 

### **(b)**   Leases

 

The Companyoccupies leased premises in various centres and has land, buildings andequipment under operating leases. At December 31, 2009, the future minimumlease payments under capital leases and operating leases are as follows:

 
| ** **                                   | ** ** | ** **                  | ** ** | **Operating lease payments** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                   | ** ** | ** **                  | ** ** | **Land and buildings**       | ** ** | **Vehicles and** | ** ** | ** ** | ** ** |
| **Years ending December 31 (millions)** | ** ** | **Capital lease  payments** | ** ** | **Rent**                     | ** ** | **Occupancy  costs** | ** ** | **Gross** | ** ** | **other  equipment** | ** ** | **Total** | ** ** |
| 2010                                         |       | $                           | 2          |                         | $          | 170 |   | $ | 92 |   | $ | 262 |   | $ | 21 |   | $ | 283 |   |
| 2011                                         |       | —                      |       | 156                          |       | 88 |   | 244 |   | 18 |   | 262 |   |
| 2012                                         |       | —                      |       | 146                          |       | 87 |   | 233 |   | 11 |   | 244 |   |
| 2013                                         |       | —                      |       | 137                          |       | 83 |   | 220 |   | 5 |   | 225 |   |
| 2014                                         |       | —                      |       | 124                          |       | 77 |   | 201 |   | 1 |   | 202 |   |
| Total future minimum lease  payments         |       | 2                           |       |                         |       |   |   |   |   |   |   |   |   |
| Less imputed interest                        |       | 1                           |       |                         |       |   |   |   |   |   |   |   |   |
| Capital lease liability                      |       | $                           | 3          |                         |       |   |   |   |   |   |   |   |   |   |
|                                              |            |                             |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Total future minimumoperating lease payments at December 31, 2009, were $2,434 million.Of this amount, $2,376 million was in respect of land and buildings;approximately 55% of this amount was in respect of the Company’s five largestleases, all of which were for office premises over various terms, with expirydates which range from 2016 to 2026.

 

 

57

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notesto consolidated financial statements 

 

### **(c)**          Guarantees

* *

*Guarantees:* Canadian generally accepted accountingprinciples require the disclosure of certain types of guarantees and theirmaximum, undiscounted amounts. The maximum potential payments represent aworst-case scenario and do not necessarily reflect results expected by theCompany. Guarantees requiring disclosure are those obligations that requirepayments contingent on specified types of future events. In the normal courseof its operations, the Company enters into obligations that GAAP may considerto be guarantees. As defined by Canadian GAAP, guarantees subject to thesedisclosure guidelines do not include guarantees that relate to the futureperformance of the Company. As at December 31, 2009, the Company’s maximumundiscounted guarantee amounts, without regard for the likelihood of having tomake such payment, were not material.

* *

*Indemnificationobligations:* Inthe normal course of operations, the Company may provide indemnification inconjunction with certain transactions. The terms of these indemnificationobligations range in duration and often are not explicitly defined. Whereappropriate, an indemnification obligation is recorded as a liability. In manycases, there is no maximum limit on these indemnification obligations and theoverall maximum amount of such indemnification obligations cannot be reasonablyestimated. Other than obligations recorded as liabilities at the time of thetransaction, historically the Company has not made significant payments underthese indemnifications.

 

In connection with its2001 disposition of TELUS’ directory business, the Company agreed to bear aproportionate share of the new owner’s increased directory publication costs ifthe increased costs were to arise from a change in the applicable CRTCregulatory requirements. The Company’s proportionate share would have been 80%through May 2006, declining to 40% in the next five-year period and thento 15% in the final five years. As well, should the CRTC take any action whichwould result in the owner being prevented from carrying on the directorybusiness as specified in the agreement, TELUS would indemnify the owner inrespect of any losses that the owner incurred.

 

As at December 31,2009, the Company has no liability recorded in respect of indemnificationobligations.

 

### **(d)**          Claims and lawsuits

* *

*General:* A number of claims and lawsuits(including class actions) seeking damages and other relief are pending againstthe Company.  As well, the Company hasreceived or is aware of certain intellectual property infringement claims andpotential claims against the Company and, in some cases, numerous otherwireless carriers and telecommunications service providers. In some instances,the matters are at a preliminary stage and the potential for liability andmagnitude of potential loss cannot be readily determined currently. It isimpossible at this time for the Company to predict with any certainty theoutcome of any such claims, potential claims and lawsuits. However, subject tothe foregoing limitations, management is of the opinion, based upon legalassessment and information presently available, that it is unlikely that anyliability, to the extent not provided for through insurance or otherwise, wouldbe material in relation to the Company’s consolidated financial position,excepting the items enumerated following.

* *

*TELUSCorporation Pension Plan and TELUS Edmonton Pension Plan:* Two statements of claim were filed inthe Alberta Court of Queen’s Bench on December 31, 2001, and January 2,2002, respectively, by plaintiffs alleging to be either members or businessagents of the Telecommunications Workers Union. In one action, the plaintiffsalleged to be suing on behalf of all current or future beneficiaries of theTELUS Corporation Pension Plan and in the other action, the plaintiffsalleged to be suing on behalf of all current or future beneficiaries of theTELUS Edmonton Pension Plan. The statement of claim in theTELUS Corporation Pension Plan related action named the Company, certainof its affiliates and certain present and former trustees of theTELUS Corporation Pension Plan as defendants, and claims damages in thesum of $445 million. The statement of claim in the TELUS Edmonton PensionPlan related action named the Company, certain of its affiliates and certainindividuals who are alleged to be trustees of the TELUS Edmonton Pension Planand claims damages in the sum of $16 million.

 

After a number of yearsof inactivity, both actions were discontinued by the respective plaintiffs on awithout costs basis as at November 16, 2009.

* *

*Certified class action:* A class action was brought August 9,2004, under the *Class Actions Act*(Saskatchewan), against a number of past and present wireless service providersincluding the Company. The claim alleges that each of the carriers is in breachof contract and has violated competition, trade practices and consumerprotection legislation across Canada in connection with the collection ofsystem access fees, and seeks to recover direct and punitive damages in anunspecified amount. The class was certified on September 17, 2007, by theSaskatchewan Court of Queen’s Bench. OnFebruary 20, 2008, the same court removed from the class all customers ofthe Company who are bound by an arbitration clause, applying two recentdecisions of the Supreme Court of Canada. The Company has applied for leave to appeal thecertification decision.Since theenactment of opt-out class action legislation in Saskatchewan, Plaintiff’scounsel has applied to certify a new national class in Saskatchewan makingsubstantially the same allegations. TheCompany believes this was done in an attempt to take advantage of the expandedscope in class action legislation since 2004. The new class action has been stayed by the court upon an application bythe defendants to dismiss it for abuse of process, conditional on possiblefuture changes in circumstance. The Company believes thatit has good defences to both actions.

 

 

58

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notesto consolidated financial statements 

 

Similar proceedings have also been filed by, or onbehalf of, plaintiffs’ counsel in other provincial jurisdictions.

 

Should the ultimate resolution of these actions differfrom management’s assessments and assumptions, a material adjustment to theCompany’s financial position and the results of its operations could result;management’s assessments and assumptions include that a reliable estimate ofthe exposure cannot be made at this preliminary stage of the lawsuit.

* *

*Uncertified class actions:* Uncertified class actions against theCompany include a 2008 class action brought in Saskatchewan alleging that,among other things, Canadian telecommunications carriers including the Companyhave failed to provide proper notice of 9-1-1 charges to the public and havebeen deceitfully passing them off as government charges, as well as a 2008class action brought in Ontario alleging that the Company has misrepresentedits practice of “rounding up” wireless airtime to the nearest minute andcharging for the full minute. The plaintiffs in these actions seek direct andpunitive damages and other relief. The Company is assessing the merits of theseclaims but the potential for liability and magnitude of potential loss cannotbe readily determined at this time.

 

## 21            additional financial information

 

### **(a)**          Statement of income and other comprehensive income

** **
| **Years  ended December 31 (millions)**      | ** ** | **2009**   | ** ** | **2008** | ** ** |
|---------------------------------------------------|------------|------------|------------|----------|------------|
| **Operations expense**(1):                        | ** ** | ** ** |       |     |       |
| Cost of sales and service                         | ** ** | **$**      | **3,278**  |     | $          | 3,235 |   |
| Selling, general and administrative               | ** ** | **2,647**  |       | 2,580    |       |
|                                              | ** ** | **$**      | **5,925**  |     | $          | 5,815 |   |
| **Advertising expense**                           | ** ** | **$**      | **282**    |     | $          | 312 |   |
| **Employee benefits expense**                     | ** ** | ** ** |       |     |       |
| Wages and salaries(2)                             | ** ** | **$**      | **2,093**  |     | $          | 2,226 |   |
| Pensions — defined benefit (Note 13(a))      | ** ** | **18**     |       | (100     | )          |
| Pensions — defined contribution (Note 13(l)) | ** ** | **61**     |       | 63       |       |
| Other defined benefits                            | ** ** | **2**      |       | (2       | )          |
| Restructuring costs (Note 7)                      | ** ** | **186**    |       | 59       |       |
| Other                                             | ** ** | **128**    |       | 140      |       |
|                                              | ** ** | **2,488**  |       | 2,386    |       |
| Capitalized internal labour costs                 | ** ** | **(368**   | **)**      | (371     | )          |
| ** **                                        | ** ** | **$**      | **2,120**  |     | $          | 2,015 |   |

 

----

(1)          Cost of sales and service excludes depreciation andamortization of intangible assets and includes cost of goods sold and costs tooperate and maintain access to and usage of the Company’s telecommunicationsinfrastructure. Selling, general and administrative costs include sales and marketingcosts (including commissions), customer care, bad debt expense, real estatecosts and corporate overhead costs such as information technology, finance(including billing services, credit and collection), legal, human resources andexternal affairs.

Employee salaries, benefitsand related costs are included in one of the two components of operationsexpense to the extent that the costs are related to the component functions.

(2)          Wages and salaries includeshare-based compensation for the year ended December 31, 2009 of $69 (2008— $88), as disclosed in Note 12.

 

 

### **(b)**          Statement of financial position

** **
| **As at  December 31****(millions)**                                                             | ** ** | **2009**   | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| **Accounts receivable**                                                                               | ** ** | ** ** |       |     |       |
| Customer accounts receivable                                                                          | ** ** | **$**      | **556**    |     | $          | 843 |   |
| Accrued receivables — customer                                                                   | ** ** | **103**    |       | 110      |       |
| Allowance for doubtful accounts                                                                       | ** ** | **(59**    | **)**      | (77      | )          |
|                                                                                                  | ** ** | **600**    |       | 876      |       |
| Accrued receivables — other                                                                      | ** ** | **93**     |       | 87       |       |
| Other                                                                                                 | ** ** | **1**      |       | 3        |       |
|                                                                                                  | ** ** | **$**      | **694**    |     | $          | 966 |   |
| **Inventories**                                                                                       | ** ** | ** ** |       |     |       |
| Wireless handsets, parts and accessories                                                              | ** ** | **$**      | **226**    |     | $          | 332 |   |
| Other                                                                                                 | ** ** | **44**     |       | 65       |       |
|                                                                                                  | ** ** | **$**      | **270**    |     | $          | 397 |   |
| **Other long-term assets******(as adjusted — Note 2(b))                                          | ** ** | ** ** |       |     |       |
| Recognized transitional pension assets and pension  plan contributions in excess of charges to income | ** ** | **$**      | **1,565**  |     | $          | 1,401 |   |
| Other                                                                                                 | ** ** | **37**     |       | 17       |       |
|                                                                                                  | ** ** | **$**      | **1,602**  |     | $          | 1,418 |   |

 

 

59

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notesto consolidated financial statements 

 
| **As at  December 31 (millions)**                                                  |       | **2009**   | ** ** | **2008**   |   |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|--------|
| **Accounts payable and accrued  liabilities**                                      |       | ** ** | ** ** | ** ** |   |
| Accrued liabilities                                                                | ** ** | **$**      | **560**    |       | $      | 527 |   |
| Payroll and other employee-related liabilities                                     | ** ** | **272**    |       | 347        |   |
| Accrual for net-cash settlement feature for share  option awards (Note 12(b)) | ** ** | **14**     |       | 27         |   |
| Asset retirement obligations                                                       | ** ** | **3**      |       | 3          |   |
|                                                                               | ** ** | **849**    |       | 904        |   |
| Trade accounts payable                                                             | ** ** | **382**    |       | 441        |   |
| Interest payable                                                                   | ** ** | **60**     |       | 58         |   |
| Other                                                                              | ** ** | **94**     |       | 62         |   |
|                                                                               | ** ** | **$**      | **1,385**  |       | $      | 1,465 |   |
| **Advance billings and customer  deposits**                                        | ** ** | ** ** |       |       |   |
| Advance billings                                                                   | ** ** | **$**      | **470**    |       | $      | 475 |   |
| Regulatory deferral accounts (Note 20(a))                                     | ** ** | **144**    |       | 146        |   |
| Deferred customer activation and connection fees                                   | ** ** | **40**     |       | 44         |   |
| Customer deposits                                                                  | ** ** | **20**     |       | 24         |   |
|                                                                               | ** ** | **$**      | **674**    |       | $      | 689 |   |
| **Other long-term liabilities**                                                    | ** ** | ** ** |       |       |   |
| Derivative liabilities (Note 5(h))                                            | ** ** | **$**      | **721**    |       | $      | 785 |   |
| Pension and other post-retirement liabilities                                      | ** ** | **214**    |       | 210        |   |
| Other                                                                              | ** ** | **173**    |       | 108        |   |
|                                                                               | ** ** | **1,108**  |       | 1,103      |   |
| Deferred customer activation and connection fees                                   | ** ** | **80**     |       | 95         |   |
| Deferred gain on sale-leaseback of buildings                                       | ** ** | **38**     |       | 54         |   |
| Asset retirement obligations                                                       | ** ** | **45**     |       | 43         |   |
|                                                                               | ** ** | **$**      | **1,271**  |       | $      | 1,295 |   |

 

### **(c)**          Supplementary cash flow information

 
| **Years  ended December 31 (millions)**                                                                                   | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Net change in non-cash working  capital**                                                                                    | ** ** | ** ** |       |       |       |
| Short-term investments                                                                                                         | ** ** | **$**      | **—** |       | $          | 42 |   |
| Accounts receivable                                                                                                            | ** ** | **272**    |       | (217       | )          |
| Inventories                                                                                                                    | ** ** | **143**    |       | (114       | )          |
| Prepaid expenses and other                                                                                                     | ** ** | **9**      |       | 9          |       |
| Accounts payable and accrued liabilities                                                                                       | ** ** | **(98**    | **)**      | (31        | )          |
| Income and other taxes receivable and payable, net                                                                             | ** ** | **28**     |       | 253        |       |
| Advance billings and customer deposits                                                                                         | ** ** | **(15**    | **)**      | 57         |       |
|                                                                                                                           | ** ** | **$**      | **339**    |       | $          | (1 | ) |
| **Long-term debt issued**                                                                                                      | ** ** | ** ** |       |       |       |
| TELUS Corporation Commercial Paper                                                                                             | ** ** | **$**      | **5,387**  |       | $          | 7,831 |   |
| TELUS Corporation Credit Facility expiring  May 1, 2012                                                                   | ** ** | **2,025**  |       | 4,652      |       |
| Long-term debt other than TELUS Corporation  Commercial Paper and TELUS Corporation Credit Facility expiring May 1,  2012 | ** ** | **1,700**  |       | 500        |       |
|                                                                                                                           | ** ** | **$**      | **9,112**  |       | $          | 12,983 |   |
| **Redemptions and repayment of  long-term debt**                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| TELUS Corporation Commercial Paper                                                                                             | ** ** | **$**      | **(5,351** | **)**      | $          | (7,985 | ) |
| TELUS Corporation Credit Facility expiring  May 1, 2012                                                                   | ** ** | **(3,003** | **)**      | (3,674     | )          |
| Long-term debt other than TELUS Corporation Commercial  Paper and TELUS Corporation Credit Facility expiring May 1, 2012  | ** ** | **(890**   | **)**      | (8         | )          |
|                                                                                                                           | ** ** | **$**      | **(9,244** | **)**      | $          | (11,667 | ) |
| **Interest (paid)**                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amounts (paid) in respect of interest expense                                                                                  | ** ** | **$**      | **(468**   | **)**      | $          | (457 | ) |
| Amounts (paid) in respect of loss on redemption of  long-term debt (Note 18(b))                                                | ** ** | **(99**    | **)**      | —     |       |
|                                                                                                                           | ** ** | **$**      | **(567**   | **)**      | $          | (457 | ) |

 

22            differencesbetween Canadian and United States generally accepted accountingprinciples

 

The Consolidated financial statements have beenprepared in accordance with Canadian GAAP. As discussed further in Note 2(a),Canadian GAAP is being converged with IFRS-IASB. The United States Securitiesand Exchange Commission, 

 

 

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effectiveMarch 4, 2008, no longer requires certain reporting issuers, such as theCompany, to reconcile their financial statements included in their filings withthe United States Securities and Exchange Commission and prepared in accordancewith IFRS-IASB to U.S. GAAP. Upon the commencement of presenting theCompany’s financial statements in accordance with IFRS-IASB in fiscal 2011, theCompany currently expects that it will cease reconciling its financialstatements to U.S. GAAP.

 

Theprinciples currently adopted in these financial statements conform in allmaterial respects to those generally accepted in the United States exceptas summarized below.

 

Significantdifferences between Canadian GAAP and U.S. GAAP would have the followingeffect on reported net income of the Company:

 
| **Years  ended December 31 (millions except per share amounts)**               | ** ** | **2009**   | ** ** | **2008**                     | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|------------------------------|------------|
| ** **                                                                          | ** ** | ** ** | ** ** | **(as adjusted — (g))** | ** ** |
| Net income in accordance with Canadian GAAP                                         | ** ** | **$**      | **1,002**  |                         | $          | 1,131 |   |
| Adjustments:                                                                        | ** ** | ** ** |       |                         |       |
| Operating expenses                                                                  | ** ** | ** ** |       |                         |       |
| Operations (b)                                                                      | ** ** | **(65**    | **)**      | (62                          | )          |
| Amortization of intangible assets (c)                                               | ** ** | **(50**    | **)**      | (50                          | )          |
| Taxes on the above adjustments and tax rate  changes (e)                       | ** ** | **44**     |       | 42                           |       |
| Net income in accordance with U.S. GAAP                                        | ** ** | **931**    |       | 1,061                        |       |
| Other comprehensive income (loss), net of taxes (f)                                 | ** ** | ** ** |       |                         |       |
| In accordance with Canadian GAAP                                                    | ** ** | **58**     |       | (26                          | )          |
| Change in pension related other comprehensive  income accounts                      | ** ** | **(439**   | **)**      | (225                         | )          |
| In accordance with U.S. GAAP                                                   | ** ** | **(381**   | **)**      | (251                         | )          |
| Comprehensive income in accordance with  U.S. GAAP                             | ** ** | **$**      | **550**    |                         | $          | 810 |   |
| Net income in accordance with U.S. GAAP  attributable to:                           | ** ** | ** ** |       |                         |       |
| Common Shares and Non-Voting Shares                                                 | ** ** | **$**      | **927**    |                         | $          | 1,058 |   |
| Non-controlling interests                                                           | ** ** | **4**      |       | 3                            |       |
|                                                                                | ** ** | **$**      | **931**    |                         | $          | 1,061 |   |
| Comprehensive income in accordance with U.S. GAAP  attributable to:                 | ** ** | ** ** |       |                         |       |
| Common Shares and Non-Voting Shares                                                 | ** ** | **$**      | **546**    |                         | $          | 807 |   |
| Non-controlling interests                                                           | ** ** | **4**      |       | 3                            |       |
|                                                                                | ** ** | **$**      | **550**    |                         | $          | 810 |   |
| Net income in accordance with U.S. GAAP per  Common Share and Non-Voting Share | ** ** | ** ** |       |                         |       |
| - Basic                                                                             | ** ** | **$**      | **2.92**   |                         | $          | 3.30 |   |
| - Diluted                                                                           | ** ** | **$**      | **2.91**   |                         | $          | 3.29 |   |

 

Thefollowing is an analysis of retained earnings (deficit) reflecting theapplication of U.S. GAAP:

 
| **Years  ended December 31 (millions)**                                                      | ** ** | **2009**   | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Schedule of retained earnings (deficit) under  U.S. GAAP                                     | ** ** | ** ** |       |     |       |
| Balance at beginning of period                                                                    | ** ** | **$**      | **324**    |     | $          | (61 | ) |
| Intangible assets transitional amount (Note 2(b))                                                 | ** ** | **(97**    | **)**      | (97      | )          |
| Adjusted opening balance                                                                          | ** ** | **227**    |       | (158     | )          |
| Net income in accordance with U.S. GAAP  attributable to Common Shares and Non-Voting Shares | ** ** | **927**    |       | 1,058    |       |
|                                                                                              | ** ** | **1,154**  |       | 900      |       |
| Common Share and Non-Voting Share dividends paid,  or payable, in cash                            | ** ** | **(601**   | **)**      | (584     | )          |
| Purchase of Common Shares and Non-Voting Shares in  excess of stated capital                      | ** ** | **—** |       | (89      | )          |
| Balance at end of period                                                                          | ** ** | **$**      | **553**    |     | $          | 227 |   |

 

 

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Thefollowing is an analysis of major statement of financial position categoriesreflecting the application of U.S. GAAP:

 
| **As at  December 31****(millions)** | ** ** | **2009**   | ** ** | **2008**                                  | ** ** |
|-------------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | ** ** | ** ** | **(as adjusted —   Note 2(b))** | ** ** |
| Current Assets                            | ** ** | **$**      | **1,127**  |                                      | $          | 1,514 |   |
| Non-Current Assets                        | ** ** | ** ** |       |                                      |       |
| Property, plant, equipment and other      | ** ** | **7,729**  |       | 7,317                                     |       |
| Intangible assets                         | ** ** | **6,605**  |       | 6,673                                     |       |
| Goodwill                                  | ** ** | **3,974**  |       | 3,966                                     |       |
| Other Assets                              | ** ** | **253**    |       | 639                                       |       |
|                                      | ** ** | **$**      | **19,688** |                                      | $          | 20,109 |   |
| Current Liabilities                       | ** ** | **$**      | **2,964**  |                                      | $          | 3,057 |   |
| Non-Current Liabilities                   | ** ** | ** ** |       |                                      |       |
| Long-term debt                            | ** ** | **6,120**  |       | 6,376                                     |       |
| Other long-term liabilities               | ** ** | **1,304**  |       | 1,256                                     |       |
| Deferred income taxes                     | ** ** | **1,323**  |       | 1,402                                     |       |
| Total Liabilities                         | ** ** | **11,711** |       | 12,091                                    |       |
| Owners’ Equity(1)                    | ** ** | ** ** |       |                                      |       |
| Common Share and Non-Voting Share equity  | ** ** | **7,956**  |       | 7,995                                     |       |
| Non-controlling interests                 | ** ** | **21**     |       | 23                                        |       |
|                                      | ** ** | **7,977**  |       | 8,018                                     |       |
|                                      | ** ** | **$**      | **19,688** |                                      | $          | 20,109 |   |

 

----

(1)          Owners’equityasatDecember31,2008,hasbeenadjustedtoincludenon-controllinginterests,asfurtherdiscussedin(g).

 

The following is a reconciliation of Common Share and Non-Voting Shareequity incorporating the significant differences between Canadian andU.S. GAAP:

 
| ** **                                        | ** ** | **Common Share and Non-Voting Share equity** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------|------------|
| **As at  December 31, 2009 (millions)**      | ** ** | **Common  Shares**                           | ** ** | **Non-Voting  Shares** | ** ** | **Contributed  surplus** | ** ** | **Retained  earnings  (deficit)** | ** ** | **Accumulated other  comprehensive  income (loss)** | ** ** | **Total** | ** ** |
| Under Canadian GAAP                               |       | $                                            | 2,216      |   | $ | 3,070 |   | $ | 181 |   | $ | 2,159 |   | $ | (72 | ) | $ | 7,554 |   |
| Adjustments:                                      |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Merger of BC TELECOM and TELUS (a), (c), (d) |       | 1,733                                        |       | 883 |   | — |   | (1,508 | ) | (829 | ) | 279 |   |
| Share-based compensation (b)                      |       | 10                                           |       | 53 |   | 31 |   | (94 | ) | — |   | — |   |
| Acquisition of Clearnet Communications Inc.       |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Goodwill (d)                                      |       | —                                       |       | 131 |   | — |   | (8 | ) | — |   | 123 |   |
| Convertible debentures                            |       | —                                       |       | (3 | ) | (1 | ) | 4 |   | — |   | — |   |
| Under U.S. GAAP                              |       | $                                            | 3,959      |   | $ | 4,134 |   | $ | 211 |   | $ | 553 |   | $ | (901 | ) | $ | 7,956 |   |

 
| ** **                                        | ** ** | **Common Share and Non-Voting Share equity** |       |
|---------------------------------------------------|------------|----------------------------------------------|------------|
| **As at  December 31, 2008 (millions)**      | ** ** | **Common  Shares**                           | ** ** | **Non-Voting  Shares** | ** ** | **Contributed  surplus** | ** ** | **Retained  earnings  (deficit)** | ** ** | **Accumulated other  comprehensive  income (loss)** | ** ** | **Total** |   |
| Under Canadian GAAP(1)                            |       | $                                            | 2,216      |   | $ | 3,069 |   | $ | 168 |   | $ | 1,762 |   | $ | (130 | ) | $ | 7,085 |   |
| Adjustments:                                      |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Merger of BC TELECOM and TELUS (a), (c), (d) |       | 1,732                                        |       | 883 |   | — |   | (1,438 | ) | (390 | ) | 787 |   |
| Share-based compensation (b)                      |       | 10                                           |       | 53 |   | 30 |   | (93 | ) | — |   | — |   |
| Acquisition of Clearnet Communications Inc.       |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Goodwill (d)                                      |       | —                                       |       | 131 |   | — |   | (8 | ) | — |   | 123 |   |
| Convertible debentures                            |       | —                                       |       | (3 | ) | (1 | ) | 4 |   | — |   | — |   |
| Under U.S. GAAP                              |       | $                                            | 3,958      |   | $ | 4,133 |   | $ | 197 |   | $ | 227 |   | $ | (520 | ) | $ | 7,995 |   |

 

----

(1)          Opening retained earnings under Canadian GAAP and U.S. GAAP have beenadjusted, as further discussed in Note 2(b).

 

### **(a)**          Merger of BC TELECOM and TELUS

The business combinationbetween BC TELECOM and TELUS Corporation (renamed TELUS Holdings Inc.,which was wound up June 1, 2001) was accounted for using the pooling ofinterests method under Canadian GAAP. Under Canadian GAAP, the application ofthe pooling of interests method of accounting for the merger of BC TELECOM andTELUS Holdings Inc. resulted in a restatement of prior periods as if thetwo companies had always been combined. Under U.S. GAAP, the merger isaccounted for using the purchase method. Use of the purchase method resulted inTELUS

 

 

62

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notesto consolidated financial statements 

 

(TELUS Holdings Inc.)being acquired by BC TELECOM for $4,662 million (including merger relatedcosts of $52 million) effective January 31, 1999.

 

### **(b)**          Operating expenses — Operations

* *

*Futureemployee benefits:*Under U.S. GAAP, TELUS’ future employee benefit assets and obligationshave been recorded at their fair values on acquisition. Accounting for futureemployee benefits under Canadian GAAP changed to become more consistent withU.S. GAAP effective January 1, 2000. Canadian GAAP provides that thetransitional balances can be accounted for prospectively. Therefore, to conformto U.S. GAAP, the amortization of the transitional amount needs to beremoved from the future employee benefit expense.

 

Unlike Canadian GAAP,U.S. GAAP requires the full recognition of obligations associated with itsemployee future benefit plans. Under U.S. GAAP, the funded status of theCompany’s plans is shown gross on the consolidated statements of financialposition and the difference between the net funded plan states and the netaccrued benefit asset or liability is included as a component of accumulatedother comprehensive income.

* *

*Share-based compensation:* Both Canadian GAAPand U.S. GAAP require the use of the fair value method of accounting forshare-based compensation for awards made after 2001 and 1994, respectively.

 

On a prospective basis, commencing January 1, 2006,there is no longer a difference between Canadian GAAP and U.S. GAAPshare-based compensation expense recognized in the results of operationsarising from current share-based compensation awards accounted for as equityinstruments. As share option awards granted subsequent to 1994 and prior to2002 are captured by U.S. GAAP, but are not captured by Canadian GAAP, differencesin owners’ equity accounts arising from these awards will continue.

 

Substantially all of theCompany’s outstanding share option awards that were granted prior to January 1,2005, have a net-cash settlement feature; the optionee has the choice ofexercising the net-cash settlement feature. The affected outstanding shareoption awards largely take on the characteristics of liability instrumentsrather than equity instruments; the minimum expense recognized for the affectedshare option awards will be their grant-date fair values. Under U.S. GAAP,the grant-date fair values of affected outstanding share option awards grantedsubsequent to 1994 affected the transitional amount whereas Canadian GAAP onlyconsidered grant-date fair values for affected outstanding share option awardsgranted subsequent to 2001; for the year ended December 31, 2009, thisresulted in the U.S. GAAP expense being greater than the Canadian GAAPexpense by $1 million (2008 — $NIL).

 

### **(c)**          Operating expenses — Amortization of intangibleassets

 

As TELUS’ intangibleassets on acquisition have been recorded at their fair value (see (a)),amortization of such assets, other than for those with indefinite lives, needsto be included under U.S. GAAP; consistent with prior years, amortizationis calculated using the straight-line method.

 

The incrementalamounts recorded as intangible assets arising from the TELUS acquisition aboveare as follows:

 
| ** **                                | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Net book value** | ** ** |
|-------------------------------------------|------------|------------|------------|------------------|------------|--------------------|------------|
| **As at  December 31****(millions)** | ** ** | **Cost**   | ** ** | **amortization** | ** ** | **2009**           | ** ** | **2008** | ** ** |
| Intangible assets subject to amortization |       |       |       |             | ** ** | ** **         |       |   |   |
| Subscribers — wireline               |       | $          | 1,950      |             | $          | 493                | ** ** | **$** | **1,457** |   | $ | 1,507 |   |
| Intangible assets with indefinite lives   |       |       |       |             | ** ** | ** **         |       |   |   |
| Spectrum licences(1)                      |       | 1,833      |       | 1,833            | ** ** | **—**         |       | — |   |
|                                      |       | $          | 3,783      |             | $          | 2,326              | ** ** | **$** | **1,457** |   | $ | 1,507 |   |

 

----

(1)          Accumulated amortization of spectrum licences isamortization recorded prior to 2002 and the transitional impairment amount.

 

Estimated aggregateamortization expense for intangible assets subject to amortization, calculatedupon such assets held as at December 31, 2009, for each of the next fivefiscal years is as follows:

 
| **Years  ending December 31 (millions)** |       |    |       |
|-----------------------------------------------|------------|---------|------------|
| 2010                                          | ** ** | **$**   | **414**    | ** ** |
| 2011                                          | ** ** | **327** | ** ** |
| 2012                                          | ** ** | **202** | ** ** |
| 2013                                          | ** ** | **102** | ** ** |
| 2014                                          | ** ** | **80**  | ** ** |
|                                               |            |         |            |  |

 

### **(d)**          Goodwill

* *

*Mergerof BC TELECOM and TELUS:*Under the purchase method of accounting, TELUS’ assetsand liabilities at acquisition (see (a)) have been recorded at their fairvalues with the excess purchase price being allocated to goodwill in the amountof $403 million. Commencing January 1, 2002, rather than beingsystematically amortized, the carrying value of goodwill is periodically testedfor impairment.

 

 

63

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*Additionalgoodwill on Clearnet purchase:* Under U.S. GAAP, shares issued by the acquirerto effect an acquisition are measured at the date the acquisition wasannounced; however, under Canadian GAAP, at the time the transaction tookplace, shares issued to effect an acquisition were measured at the transactiondate. This results in the purchase price under U.S. GAAP being$131 million higher than under Canadian GAAP. The resulting difference isassigned to goodwill. Commencing January 1, 2002, rather than beingsystematically amortized, the carrying value of goodwill is periodically testedfor impairment.

 

### **(e)**          Income taxes

 
| **Years  ended December 31 (millions)** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Current                                      | ** ** | **$**    | **286**    |     | $          | 275 |   |
| Deferred                                     | ** ** | **(112** | **)**      | 131      |       |
|                                         | ** ** | **174**  |       | 406      |       |
| Investment Tax Credits                       | ** ** | **(15**  | **)**      | (12      | )          |
|                                         | ** ** | **$**    | **159**    |     | $          | 394 |   |

 

The Company’s income taxexpense, for U.S. GAAP purposes, differs from that calculated by applyingstatutory rates for the following reasons:

 
| **Years  ended December 31 ($ in millions)**                                          | ** ** | **2009** | ** ** | **2008**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Basic blended federal and provincial tax at  statutory income tax rates                              | ** ** | **$**    | **331**    | ** ** | **30.3**   | **%** | $ | 451 |   | 31.0 | % |
| Revaluation of deferred income tax liability to  reflect future statutory income tax rates           | ** ** | **(97**  | **)**      | ** ** |       | (40 | ) |   |   |
| Tax rate differential on, and consequential  adjustments from, reassessment of prior year tax issues | ** ** | **(68**  | **)**      | ** ** |       | (21 | ) |   |   |
| Share option award compensation                                                                      | ** ** | **4**    | ** ** | ** ** |       | 6 |   |   |   |
| Investment Tax Credits, net of tax                                                                   | ** ** | **(10**  | **)**      | ** ** |       | (8 | ) |   |   |
| Other                                                                                                | ** ** | **(1**   | **)**      | ** ** |       | 6 |   |   |   |
| U.S. GAAP income tax expense                                                                    | ** ** | **$**    | **159**    | ** ** | **14.7**   | **%** | $ | 394 |   | 27.1 | % |

 

The Company must makesignificant estimates in respect of the composition of its deferred income taxasset and deferred income tax liability. The operations of the Company arecomplex, and related tax interpretations, regulations and legislation arecontinually changing. As a result, there are usually some tax matters inquestion. Temporary differences comprising the deferred income tax liabilityare estimated as follows:

 
| **As at  December 31****(millions)**                                        | ** ** | **2009**   | ** ** | **2008** | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Property, plant, equipment, other and intangible  assets subject to amortization | ** ** | **$**      | **(583**   | **)**    | $          | (559 | ) |
| Intangible assets with indefinite lives                                          | ** ** | **(789**   | **)**      | (830     | )          |
| Partnership income unallocated for income tax  purposes                          | ** ** | **(437**   | **)**      | (556     | )          |
| Net pension and share-based compensation amounts                                 | ** ** | **43**     |       | (92      | )          |
| Reserves not currently deductible                                                | ** ** | **124**    |       | 112      |       |
| Losses available to be carried forward                                           | ** ** | **40**     |       | 44       |       |
| Other                                                                            | ** ** | **(15**    | **)**      | 20       |       |
| ** **                                                                       |       | **$**      | **(1,617** | **)**    | $          | (1,861 | ) |
| Deferred income tax liability                                                    |       |       |       |     |       |
| Current                                                                          | ** ** | **$**      | **(294**   | **)**    | $          | (459 | ) |
| Non-current                                                                      | ** ** | **(1,323** | **)**      | (1,402   | )          |
| Deferred income tax asset (liability)                                            | ** ** | **$**      | **(1,617** | **)**    | $          | (1,861 | ) |

 

Effective January 1,2007, the Company adopted the method of accounting for uncertain income taxpositions prescribed by Financial Accounting Standards Board AccountingStandards Codification topic 740, *Income Taxes*.  This topic is intended to standardizeaccounting practice for the recognition, derecognition and measurement of taxbenefits to enable consistency and comparability among reporting entities forthe reporting of income tax assets and liabilities. No consequentialadjustments were required in the Company’s financial statements as a result ofthat adoption.

 

The total amount of unrecognizedtax benefits, excluding net capital losses, that, if recognized, would affectthe effective tax rate at December 31, 2009, is $258 million (2008 —$221 million). Unrecognized tax benefits related to net capital losses, ifrecognized, amount to $156 million (2008 — $156 million), of which$NIL (2008 — $12 million) would have affected the effective tax rate forthe year ended December 31, 2009.

 

The gross amount ofunrecognized tax benefits is calculated as the undiscounted cumulative impactof such positions on taxable income before timing-related reversals that haveyet to be realized and before the application of losses carried forwardmultiplied by the applicable tax rate for the estimated period when suchbenefit will be realized.

 

 

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notesto consolidated financial statements 

 
| ** **                                                                  | ** ** | **2009**                      | ** ** | **2008**                                             | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Unrecognized tax benefits** | ** ** | **Unrecognized tax benefits**                        | ** ** |
| **Years  ended December 31 (millions)**                                | ** ** | **Gross**                     | ** ** | **Component  sheltered by  losses carried  forward** | ** ** | **Component  comprised of  capital losses** | ** ** | **Gross** | ** ** | **Component  sheltered by  losses carried  forward** | ** ** | **Component  comprised of  capital losses** | ** ** |
| Balance, beginning of period                                                | ** ** | **$**                         | **867**    | ** **                                           | **$**      | **310** | ** ** | **$** | **156** |   | $ | 951 |   | $ | 630 |   | $ | 162 |   |
| Tax positions related to  prior years                                       | ** ** | ** **                    | ** ** | ** **                                           | ** ** | ** ** |   |   |   |   |   |   |   |
| Additions for tax returns  filed during the year, less prior year estimates | ** ** | **11**                        | ** ** | **—**                                           | ** ** | **—** |   | 7 |   | (11 | ) | — |   |
|                                                                        | ** ** | **878**                       | ** ** | **310**                                              | ** ** | **156** |   | 958 |   | 619 |   | 162 |   |
| Tax positions related to  prior years                                       | ** ** | ** **                    | ** ** | ** **                                           | ** ** | ** ** |   |   |   |   |   |   |   |
| Reduction for timing  items deductible in the year                     | ** ** | **(47**                       | **)**      | **(47**                                              | **)**      | **—** |   | (119 | ) | (119 | ) | — |   |
| Acquisitions                                                                | ** ** | **—**                    | ** ** | **—**                                           | ** ** | **—** |   | 25 |   | 28 |   | — |   |
| Other changes in  estimates                                                 | ** ** | **7**                         | ** ** | **—**                                           | ** ** | **—** |   | 52 |   | (10 | ) | — |   |
| Tax positions related to  current year                                      | ** ** | ** **                    | ** ** | ** **                                           | ** ** | ** ** |   |   |   |   |   |   |   |
| Estimated additions                                                         | ** ** | **35**                        | ** ** | **30**                                               | ** ** | **—** |   | 71 |   | 69 |   | — |   |
| Reductions                                                                  | ** ** | **—**                    | ** ** | **—**                                           | ** ** | **—** |   | — |   | — |   | — |   |
| Settlements                                                                 | ** ** | **(67**                       | **)**      | **—**                                           | ** ** | **—** |   | (94 | ) | (57 | ) | — |   |
| Current period reduction in losses                                          | ** ** | **(2**                        | **)**      | **(258**                                             | **)**      | **—** |   | — |   | (207 | ) | — |   |
| Lapses in statutes of limitations                                           | ** ** | **(1**                        | **)**      | **—**                                           | ** ** | **—** |   | (12 | ) | (7 | ) | — |   |
| Adjustments for tax rate changes                                            | ** ** | **(3**                        | **)**      | **—**                                           | ** ** | **—** |   | (14 | ) | (6 | ) | (6 | ) |
| Balance, end of period                                                      | ** ** | **$**                         | **800**    | ** **                                           | **$**      | **35** | ** ** | **$** | **156** |   | $ | 867 |   | $ | 310 |   | $ | 156 |   |

 

Included in the balanceat December 31, 2009 and 2008, excluding net capital losses, are taxpositions for which the ultimate deductibility is highly certain but for whichthere is uncertainty about the timing of such deductibility. In addition, theCompany has losses carried forward that are available to be applied againstunrecognized tax benefits. As a result, the impact on the annual effective taxrate is significantly less than the gross amount of gross unrecognized taxbenefits noted above.

 

The gross reserves areadjusted for tax rate changes applicable to current and future taxation yearsbased on the expected timing of loss utilization.

 

In the application ofboth Canadian GAAP and U.S. GAAP, the Company accrues for interest charges oncurrent tax liabilities that have not been funded, which would include interestand penalties arising from uncertain tax positions. The Company includes suchcharges as a component of Financing costs. As at January 1, 2007, theCompany had recorded accrued interest payable of $8 million in respect ofdifferences between the times tax-related exposures have been funded comparedto the times the tax-related exposures may have come into existence, as well asinterest receivable of $9 million. During the year ended December 31,2009, the Company recorded interest income of $46 million (2008 —$8 million) in respect of income taxes, recorded interest expense of $NIL(2008 — $5 million) and collected $54 million (2008 —$1 million) of interest receivable.

 

As at December 31,2009, it is reasonably possible that the Company’s net unrecognized taxbenefits will significantly increase and decrease in the next twelve months forthe following items:

 

·      It is expected that Notices ofReassessment will be issued and/or settlements will be reached with variousgovernment authorities over the next twelve months that are expected toeffectively settle a number of uncertain tax positions and result inadjustments to the effective tax rate and gross unrecognized tax benefitsincluding the abandonment of any remaining unrecognized tax benefits. Certainpresently unrecognized tax benefits pertain to a number of items involvinguncertainty as to the exact taxation period tax deductions may be claimed amongperiods of changing statutory tax rates. It is estimated the gross amount of the unrecognized tax benefits thatare expected to be resolved ranges from $115 million to $135 million(2008 — $120 million to $140 million).

·      For those items that are timing innature, it is reasonably possible that the gross unrecognized tax benefits willdecrease by $15 million to $25 million (2008 — $50 million to$60 million) as temporary differences are drawn down.

·      It is reasonably possible that theCompany’s net and gross unrecognized tax benefits will decrease due to theexpected lapse of the statute of limitations that would otherwise allowgovernmental authorities to challenge positions taken in tax returns forcertain prior taxation years. Such unrecognized tax benefits are reasonablyestimated at $2 million (2008 — $1 million).

·      During the next twelve months, theCompany will file tax returns covering the period ended December 31, 2009,as required by statute. The returns are likely to contain unrecognized taxbenefits that are different than what has been quantified above. As thepositions will only be finalized at the time the tax returns are prepared, theamount of such benefits cannot be estimated with certainty prior to that time.

 

 

65

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notesto consolidated financial statements 

 

As at December 31,2009, income tax returns, whether filed or not, pertaining to taxation yearsthat remain open to examination by major jurisdictions are as follows:

 
| ** **                  | ** ** | **2009**                   | ** ** | **2008**               | ** ** |
|-----------------------------|------------|----------------------------|------------|------------------------|------------|
| **As at  December 31** | ** ** | **Restricted to  appeals** | ** ** | **Other**              | ** ** | **Restricted to  appeals** | ** ** | **Other** | ** ** |
| Canada – Federal       |       | 1999 – 2001, 2003     |       | 2002, 2004 – 2009 |       | 1999 – 2001, 2003 |   | 2002, 2004 – 2008 |   |
| Canada – provincial    |       | 1999 – 2001           |       | 2002 – 2009       |       | 1999 – 2000 |   | 2001 – 2008 |   |
| United States          |       | N/A                        |       | 2006 – 2009       |       | N/A |   | 2005 – 2008 |   |

 

### **(f)**            Comprehensive income (loss)

 

U.S. GAAP requiresthat a statement of comprehensive income be displayed with the same prominenceas other financial statements. Comprehensive income, which incorporates netincome, includes all changes in equity during a period except those resultingfrom investments by and distributions to owners.

 
| ** **                                                          | ** ** | **2009**                                               | ** ** | **2008**                              | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------|------------|
| **Years  ended December 31  (millions)**                       | ** ** | **Canadian  GAAP other  comprehensive  income (loss)** | ** ** | **Pension and  other benefit  plans** | ** ** | **U.S. GAAP  other  comprehensive  income (loss)** | ** ** | **Canadian  GAAP other  comprehensive  income (loss)** | ** ** | **Pension and  other benefit  plans** | ** ** | **U.S. GAAP  other  comprehensive  income (loss)** | ** ** |
| Amount arising                                                      | ** ** | **$**                                                  | **87**     | ** **                            | **$**      | **(593** | **)** | **$** | **(506** | **)** | $ | (35 | ) | $ | (307 | ) | $ | (342 | ) |
| Income tax expense                                                  | ** ** | **29**                                                 | ** ** | **(154**                              | **)**      | **(125** | **)** | (9 | ) | (82 | ) | (91 | ) |
| Net                                                                 | ** ** | **58**                                                 | ** ** | **(439**                              | **)**      | **(381** | **)** | (26 | ) | (225 | ) | (251 | ) |
| Accumulated other comprehensive income (loss),  beginning of period | ** ** | **(130**                                               | **)**      | **(390**                              | **)**      | **(520** | **)** | (104 | ) | (165 | ) | (269 | ) |
| Accumulated other comprehensive income (loss), end  of period       | ** ** | **$**                                                  | **(72**    | **)**                                 | **$**      | **(829** | **)** | **$** | **(901** | **)** | $ | (130 | ) | $ | (390 | ) | $ | (520 | ) |

 

The closing accumulatedother comprehensive income amounts in respect of components of net periodicbenefit costs not yet recognized, and the amounts expected to be recognized infiscal 2010, are as follows:

 
| ** **                                  | ** ** | **2009**                                            | ** ** | **2008**                          | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **Accumulated other comprehensive  income amounts** | ** ** | **Amounts  expected  to be** | ** ** | **Accumulated other comprehensive  income amounts** | ** ** |
| **As at  December 31 (millions)**      | ** ** | **Gross**                                           | ** ** | **Tax  effect**                   | ** ** | **Net** | ** ** | **recognized  in 2010** | ** ** | **Gross** | ** ** | **Tax  effect** | ** ** | **Net** | ** ** |
| **Pension benefit plans**                   |       |                                                |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Unamortized net actuarial loss (gain)       | ** ** | **$**                                               | **1,528**  | ** **                        | **$**      | **417** | ** ** | **$** | **1,111** |   | $ | 85 |   | $ | 938 |   | $ | 277 |   | $ | 661 |   |
| Unamortized past service costs              | ** ** | **31**                                              | ** ** | **10**                            | ** ** | **21** |   | 4 |   | 33 |   | 11 |   | 22 |   |
| Unamortized business combination difference | ** ** | **(418**                                            | **)**      | **(116**                          | **)**      | **(302** | **)** | — |   | (413 | ) | (128 | ) | (285 | ) |
| ** **                                  | ** ** | **1,141**                                           | ** ** | **311**                           | ** ** | **830** |   | 89 |   | 558 |   | 160 |   | 398 |   |
| **Other benefit plans**                     |       |                                                |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Unamortized net actuarial loss (gain)       | ** ** | **(1**                                              | **)**      | **—**                        | ** ** | **(1** | **)** | (1 | ) | (12 | ) | (3 | ) | (9 | ) |
| Unamortized business combination difference | ** ** | **—**                                          | ** ** | **—**                        | ** ** | **—** |   | — |   | 1 |   | — |   | 1 |   |
| ** **                                  | ** ** | **(1**                                              | **)**      | **—**                        | ** ** | **(1** | **)** | (1 | ) | (11 | ) | (3 | ) | (8 | ) |
| ** **                                  | ** ** | **$**                                               | **1,140**  | ** **                        | **$**      | **311** | ** ** | **$** | **829** |   | $ | 88 |   | $ | 547 |   | $ | 157 |   | $ | 390 |   |

 

### **(g)**         Accounting policy developments

* *

*Businesscombinations and non-controlling interests:* As discussed further inNote 2(c), effective January 1, 2009, the Company has adopted the newCanadian recommendations for business combinations, consolidations and non-controllinginterests. Due to the transitional provisions of the new Canadianrecommendations, and the concurrently adopted Financial Accounting Standards Board AccountingStandards Codification topic 805, *Business Combinations,*and Financial Accounting Standards Board Accounting Standards Codificationtopic 810, *Consolidation*, the reconciliation of the significantdifferences between the Canadian GAAP and U.S. GAAP net income of the Companyfor the years ended December 31, 2009 and 2008, would be affected as follows:

 

 

66

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notesto consolidated financial statements 

 
| ** **                                                                          | ** ** | **2009**                                                                         | ** ** | **2008**                   | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------|------------|
| **Years  ended December 31  (millions except per share amounts)**              | ** ** | **Excluding effect  of application of  cited new  Canadian and  U.S. standards** | ** ** | **As currently  reported** | ** ** | **As previously  reported** | ** ** | **As currently  reported** | ** ** |
| Net income in accordance with Canadian GAAP (Note 2(c))                        | ** ** | **$**                                                                            | **964**    | ** **                 | **$**      | **1,002** |   | $ | 1,128 |   | $ | 1,131 |   |
| Adjustments:                                                                        |       |                                                                             |       |                       |       |   |   |   |   |
| Operating expenses                                                                  |       |                                                                             |       |                       |       |   |   |   |   |
| Operations                                                                          | ** ** | **(65**                                                                          | **)**      | **(65**                    | **)**      | (62 | ) | (62 | ) |
| Amortization of intangible assets                                                   | ** ** | **(50**                                                                          | **)**      | **(50**                    | **)**      | (50 | ) | (50 | ) |
| Taxes on the above adjustments and tax rate changes                                 | ** ** | **44**                                                                           | ** ** | **44**                     |       | 42 |   | 42 |   |
| Net income in accordance with U.S. GAAP                                        | ** ** | **893**                                                                          | ** ** | **931**                    |       | 1,058 |   | 1,061 |   |
| Other comprehensive income (loss), net of taxes                                     |       |                                                                             |       |                       |       |   |   |   |   |
| In accordance with Canadian GAAP                                                    | ** ** | **58**                                                                           | ** ** | **58**                     |       | (26 | ) | (26 | ) |
| Change in pension related other comprehensive  income accounts                      | ** ** | **(439**                                                                         | **)**      | **(439**                   | **)**      | (225 | ) | (225 | ) |
| In accordance with U.S. GAAP                                                   | ** ** | **(381**                                                                         | **)**      | **(381**                   | **)**      | (251 | ) | (251 | ) |
| Comprehensive income in accordance with U.S. GAAP                              | ** ** | **$**                                                                            | **512**    | ** **                 | **$**      | **550** |   | $ | 807 |   | $ | 810 |   |
| Net income in accordance with U.S. GAAP  attributable to:                           |       |                                                                             |       |                       |       |   |   |   |   |
| Common Shares and Non-Voting Shares                                                 | ** ** | ** **                                                                       |       | **$**                      | **927**    |   |   |   | $ | 1,058 |   |
| Non-controlling interests                                                           | ** ** | ** **                                                                       |       | **4**                      |       |   |   | 3 |   |
| ** **                                                                          |       | ** **                                                                       |       | **$**                      | **931**    |   |   |   | $ | 1,061 |   |
| Comprehensive income in accordance with U.S. GAAP  attributable to:                 |       |                                                                             |       |                       |       |   |   |   |   |
| Common Shares and Non-Voting Shares                                                 | ** ** | ** **                                                                       |       | **$**                      | **546**    |   |   |   | $ | 807 |   |
| Non-controlling interests                                                           | ** ** | ** **                                                                       |       | **4**                      |       |   |   | 3 |   |
| ** **                                                                          |       | ** **                                                                       |       | **$**                      | **550**    |   |   |   | $ | 810 |   |
| Net income in accordance with U.S. GAAP per  Common Share and Non-Voting Share |       |                                                                             |       |                       |       |   |   |   |   |
| - Basic                                                                             | ** ** | **$**                                                                            | **2.81**   | ** **                 | **$**      | **2.92** |   | $ | 3.30 |   | $ | 3.30 |   |
| - Diluted                                                                           | ** ** | **$**                                                                            | **2.81**   | ** **                 | **$**      | **2.91** |   | $ | 3.29 |   | $ | 3.29 |   |

 

*Derivativeinstrument disclosure requirements:* Under U.S. GAAP, effectiveJanuary 1, 2009, the Company is required to comply with new standards inrespect of derivative instrument disclosures, as prescribed by Accounting Standards Codificationtopic 815, *Derivatives and Hedging*. TheCompany is not materially affected by the provisions of this standard.

* *

*Accountingfor transfers of financial assets and consolidation of variable interestentities:* Under U.S. GAAP, for interim and annual reportingeffective with its 2010 fiscal year, the Company will be required to complywith amended standards in respect of transfers of financial assets and variableinterest entities, as prescribed by Accounting Standards Codification topic 860, *Transfers and Servicing* and Accounting StandardsCodification topic 810, *Consolidation.* Earlier application is prohibited. TheCompany is assessing the provisions of these topics.

 

Manyof the disclosure provisions of Accounting Standard Codification topic 860, *Transfers and Servicing* were incorporated in FASB Staff Position FAS 140-4 andFIN 46(R)-8, *Disclosures by PublicEntities (Enterprises) about Transfers of Financial Assets and Interests inVariable Interest Entities*, which the Company was required to complywith effective with its 2008 fiscal year end reporting.

* *

*Recentlyissued accounting standards not yet implemented:*As would affect the Company, there are noU.S. accounting standards currently issued and not yet implemented that woulddiffer from Canadian accounting standards currently issued and not yetimplemented.

 

 

67

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**TELUS CORPORATION**

 

**Management’s discussion and analysis**

 

**2009**

 

****

 

----

 

# **Cautionregarding forward-looking statements**

 

*This document containsforward-looking statements about expected future events and financial andoperating performance of TELUS Corporation (TELUS or the Company, and where thecontext of the narrative permits, or requires, its subsidiaries). By theirnature, forward-looking statements require the Company to make assumptions, andforward-looking statements are subject to inherent risks and uncertainties.There is significant risk that assumptions, predictions and otherforward-looking statements will not prove to be accurate. Readers are cautionednot to place undue reliance on forward-looking statements as a number offactors could cause future performance, conditions, actions or events to differmaterially from the targets, expectations, estimates or intentions expressed.Except as required by law, the Company disclaims any intention or obligation toupdate or revise any forward-looking statements, and reserves the right tochange, at any time at its sole discretion, its current practice of updatingannual targets and guidance. Targets for 2010 and assumptions are described in Section 1.5of Management’s discussion and analysis.*

 

*Factorsthat could cause actual performance to differ materially include, but are notlimited to:*

 

*Competition**(including more active pricecompetition; the expectation that new wireless competitors will launch orexpand services in 2010 using advanced wireless services (AWS) spectrum;industry growth rates including wireless penetration gain; actual networkaccess line losses; TELUS TV and wireless subscriber additions experience;variability in wireless average revenue per unit (ARPU) as well as variabilityin subscriber acquisition and retention costs that are dependent on subscriberloading and retention volumes, smartphone sales and subsidy levels, and TELUSTV installation costs); economic growth and fluctuations (includingstrength and persistence of the economic recovery in Canada, and pensionperformance, funding and expenses); capital expenditure levels in 2010and beyond (due to the Company’s wireline broadband initiatives, fourthgeneration (4G) wireless deployment strategy, and any new Industry Canadawireless spectrum auctions); financing and debt requirements (includingability to carry out refinancing activities); tax matters (includingacceleration or deferral of required payments of significant amounts of cashtaxes); human resource developments (including collective bargaining inthe TELUS**Québec**region and for a nationalcollective agreement expiring in late 2010); business integrations andinternal reorganizations (including ability to successfully implement costreduction initiatives and realize expected savings)**;**technology**(including reliance on systems andinformation technology, broadband and wireless technology options and roll-outplans, choice of suppliers and suppliers’ ability to maintain and service theirproduct lines, expected technology and evolution path and transition to 4Gtechnology, expected future benefits and performance of high-speed packetaccess (HSPA) / long-term evolution (LTE) wireless technology, successfuldeployment and operation of new wireless networks and successful introductionof new products (such as new HSPA devices), new services and supportingsystems; and successful upgrades of TELUS TV technology); regulatoryapprovals and developments (including the incumbent local exchangecarriers’ (ILECs’) obligation to serve; utilization of funds in the ILECs’deferral accounts; interpretation and application of tower sharing and roaming**rules; the design and impact offuture spectrum auctions (including the cost of acquiring the spectrum); thepossibility of Industry Canada changing annual spectrum fees to a market-basedapproach;**and possible changes to foreign ownership restrictions); process risks(including conversion of legacy systems and billing system integrations, andimplementation of large complex enterprise deals that may be adversely impactedby available resources and degree of co-operation from other serviceproviders); health, safety and environmental developments; litigationand legal matters; business continuity events (includinghuman-caused and natural threats); any**future acquisitions ordivestitures**;**and other risk factorsdiscussed herein and listed from time to time in TELUS’ reports and publicdisclosure documents including its annual report, annual information form, andother filings with securities commissions in Canada (on SEDAR at sedar.com) andin its filings in the United States, including Form 40-F (on EDGAR at**sec.gov**).*

 

*Forfurther information, see*Section 10:Risks and risk management*in Management’sdiscussion and analysis.*

 

# **Management’sdiscussion and analysis (MD&A)**

February 25, 2010

 

The following sections are a discussion of theconsolidated financial position and financial performance of TELUS Corporationfor the years ended December 31, 2009 and 2008, and should be readtogether with TELUS’ audited Consolidated financial statements dated December 31,2009. This discussion contains forward-looking information qualified byreference to, and should be read together with, the *Cautionregarding forward-looking statements* above.

 

TELUS’ Consolidated financial statements have beenprepared in accordance with Canadian generally accepted accounting principles(GAAP), which differ in certain respects from U.S. GAAP. See Note 22 tothe Consolidated financial statements for a summary of the principal differencesbetween Canadian and U.S. GAAP as they relate to TELUS. All amounts are inCanadian dollars unless otherwise specified. TELUS’ Consolidated financialstatements include the accounts of the Company and all of the Company’ssubsidiaries, of which the principal one is TELUS Communications Inc. (TCI).Currently, through the TELUS Communications Company partnership and theTELE-MOBILE COMPANY

 

2

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partnership, TCI includes substantially all of theCompany’s wireline segment’s operations and all of the wireless segment’soperations.

 

**Management’s discussion andanalysis contents**

 
| **Section**                                                                                                    | ** ** | **Page** | ** ** | **Contents**                                                                                                                                                                                                   |
|----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                           |       |     |       |                                                                                                                                                                                                           |
| 1.        Introduction, performance summary and  targets                    |       | 3        |       | A summary of TELUS’ consolidated results for  2009, performance against 2009 targets, and presentation of targets for 2010                                                                                |
|                                                                                                           |       |     |       |                                                                                                                                                                                                           |
| 2.        Core business and strategy                                        |       | 13       |       | A discussion of TELUS’ core business and  strategy, including examples of TELUS’ activities in support of its six  strategic imperatives                                                             |
|                                                                                                           |       |     |       |                                                                                                                                                                                                           |
| 3.        Key performance drivers                                           |       | 15       |       | A report on 2009 corporate priorities and an  outline of 2010 priorities                                                                                                                                       |
|                                                                                                           |       |     |       |                                                                                                                                                                                                           |
| 4.        Capabilities                                                      |       | 17       |       | A description of the factors that affect the  capability to execute strategies, manage key performance drivers and deliver  results                                                                            |
|                                                                                                           |       |     |       |                                                                                                                                                                                                           |
| 5.        Discussion of operations                                          |       | 22       |       | A detailed discussion of operating  performance for 2009                                                                                                                                                       |
|                                                                                                           |       |     |       |                                                                                                                                                                                                           |
| 6.        Changes in financial position                                     |       | 34       |       | A discussion of changes in the Consolidated  statements of financial position for the year ended December 31, 2009                                                                                        |
|                                                                                                           |       |     |       |                                                                                                                                                                                                           |
| 7.        Liquidity and capital resources                                   |       | 35       |       | A discussion of cash flow, liquidity, credit  facilities and other disclosures                                                                                                                                 |
|                                                                                                           |       |     |       |                                                                                                                                                                                                           |
| 8.        Critical accounting estimates and  accounting policy developments |       | 46       |       | A description of accounting estimates that are  critical to determining financial results, and changes to accounting  policies, including status of transition to International Financial Reporting  Standards |
|                                                                                                           |       |     |       |                                                                                                                                                                                                           |
| 9.        General outlook                                                   |       | 56       |       | Expectations for the telecommunications  industry in 2010                                                                                                                                                      |
|                                                                                                           |       |     |       |                                                                                                                                                                                                           |
| 10.      Risks and risk management                                                    |       | 59       |       | Risks and uncertainties facing TELUS and how  the Company manages these risks                                                                                                                                  |
|                                                                                                           |       |     |       |                                                                                                                                                                                                           |
| 11.      Definitions and reconciliations                                              |       | 82       |       | Definitions of operating, liquidity and  capital resource measures, including calculation and reconciliation of  certain non-GAAP measures used by management                                                  |

 

## **1.**              Introduction, performance summaryand targets

## ** **

The discussion in this section is qualified in itsentirety by the *Caution regarding forward-looking statements*at the beginning of the MD&A.

 

### **1.1 Preparationof the MD&A**

### ** **

The Company’sdisclosure controls and procedures are designed to provide reasonable assurancethat all relevant information is gathered and reported to senior management ona timely basis, so that appropriate decisions can be made regarding publicdisclosure. (See *Disclosure controls and procedures*in *Section 4.4.*) Management determineswhether or not information is material based on whether it believes areasonable investor’s decision to buy, sell or hold securities in the Companywould likely be influenced or changed if the information were omitted ormisstated. The MD&A and the Consolidated financial statements were reviewedby TELUS’ Audit Committee and approved by TELUS’ Board of Directors.

 

Management has issued guidance on and reports oncertain non-GAAP measures to evaluate performance of the Company and itssegments. Non-GAAP measures are also used to determine compliance with debtcovenants and manage the capital structure. Because non-GAAP measures do notgenerally have a standardized meaning, securities regulations require thatnon-GAAP measures be clearly defined and qualified, and reconciled with theirnearest GAAP measure. The Canadian Institute of Chartered Accountants (CICA)Corporate Performance Reporting Board has issued guidelines that definestandardized EBITDA and standardized free cash flow. While EBITDA and free cashflow discussed in this document are management’s definitions, reconciliationsto the standardized definitions are provided in *Section 11:Definitions and reconciliations*.

 

### **1.2 Canadianeconomy and telecommunications industry**

 

Economic environment

 

Canada’s economy entered into a recession inthe fourth quarter of 2008 that continued through the first half of 2009,followed by modest growth beginning in the third quarter of 2009. Unemploymentlevels rose to approximately 8.6% in the fourth quarter of 2009, up from 6.4%one year earlier, and it is expected that improvement in unemployment levelswill lag the economic recovery. The Bank of Canada reported in its January 2010Monetary Report that the economic recovery was expected to have picked up inthe fourth quarter of 2009, but that the economy was still operating below itsproductive

 

3

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capacity. The Bank projected the economy willgrow by 2.9% in 2010 and 3.5% in 2011, after contracting by an estimated 2.5%in 2009. Persistent strength in the Canadian dollar and a low level of absolutedemand in the U.S. continue to act as significant drags on the Canadianeconomy.

 

In this uncertain economic environment,consumers and business customers deferred buying decisions, focused more onvalue, and increased their expectations for lower pricing. See TELUS’ risksdiscussion in *Section 10.11 Economic growth andfluctuations*.

 

Economic effects on TELUS

 

The Company had to adjust to a weaker thanexpected Canadian economy that reduced wireless revenue growth and acceleratedthe Company’s efficiency initiatives to help mitigate the effects of therecession. The economic downturn that began in late 2008 had a significantimpact on first quarter wireless results in 2009, prompting management to issuean early release on April 9 of the disappointing wireless subscriberresults. Uncertainty regarding the strength and persistence of the economicrecovery, and high competitive intensity, affected 2009 wireless results asreflected in year-over-year decreases in gross and net additions ofsubscribers, and average revenue per subscriber unit (ARPU).

 

The wireline segment was impacted in 2009 byslower data revenue growth and faster erosion in voice revenue. Strong pricecompetition in both data and voice services, as well as more cautious spendingby consumers and businesses, are contributing factors. The Company observed a largernumber of disconnections and fewer installations of business network accesslines (NALs) in B.C. and Alberta, attributable partly to economic uncertaintyand partly to competition. However, residential NAL losses moderated in 2009 at6.8%, as compared to 7.5% in 2008.

 

TELUS’ capital structure financial policies,which are discussed under *Section 4.3 Liquidityand capital resources*, were designed with credit cycles in mind. TheCompany believes that these financial policies and guidelines, and maintainingcredit ratings in the range of BBB+ to A-, or the equivalent, providereasonable access to capital markets. This is illustrated by the Company’ssuccessful financing activities in 2009, including two new long-term debtissues that facilitated a reduction in amounts drawn on the 2012 creditfacility, as well as early partial redemption of U.S. dollar Notes maturing in June 2011and termination of associated cross currency interest rate swaps. Through theseactivities, the Company extended the average term to maturity by one year andlocked in favourable interest rates.

 

The economic weakness and stock market declinein 2008 increased TELUS’ net defined benefit pension plans expense and fundingin 2009. The expectation is that the 2010 defined benefit pension plans expensewill increase by approximately $10 million as compared to 2009, while 2010funding is expected to decrease because of the stock market recovery in 2009and proposed federal pension reforms. See *Sections 1.4*and *1.5* for the Company’s 2010 publictargets.

 

Despite the challenges of the economic downturn and uneven recovery in2009, the Company achieved many successes including the early launch of thenational 3G+ wireless network, expanded reach and speed of broadband services,expanded coverage of TELUS TV® services, and progress in optimizing resourcesfor the economic and competitive environment. These achievements are expectedto better position the Company for the future. (See *Section 2:Core business and strategy*.)

 

Telecom industry growth

 

The Company estimates that revenue growth for the Canadian telecomindustry slowed to approximately 1% in 2009 as compared to approximately 3 to 5%in recent years. This can be attributed to the impacts of the recession aswireless growth was reduced by lower ARPU and subscriber growth, and wirelineenhanced data growth was largely offset by declines in mature wireline voicelocal, long distance and legacy data services. TELUS estimates that Canadianwireless industry revenues grew by 3.2% in 2009 (approximately 11% in 2008),with industry-wide growth of more than 1.4 million subscribers and marketpenetration increasing by an estimated 3.6 percentage points to approximately69% of the population. In this context, TELUS’ 2009 consolidated revenues decreasedby 0.5% for the year, as wireless revenue growth of 1.6% only partially offsetthe 2.4% decrease in wireline revenues. In 2009, TELUS gained 406,000 newwireless subscribers. In both segments, declines in voice revenues exceededgrowth in data revenues. See *Section 9: Generaloutlook* for further discussion on expectations in 2010.

 

4

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### **1.3 Consolidatedhighlights**

 
| ** **                                                       | ** ** | **Years  ended December 31** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions, unless noted  otherwise)**                   | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| **Consolidated  statements of income**                           | ** ** | ** **                        |       |   |   |   |   |
| Operating revenues                                               | ** ** | **9,606**                         |       | 9,653 |   | (0.5 | )% |
| Operating income                                                 | ** ** | **1,769**                         |       | 2,066 |   | (14.4 | )% |
| Income before  income taxes                                      | ** ** | **1,205**                         |       | 1,567 |   | (23.1 | )% |
| Net income                                                       | ** ** | **1,002**                         |       | 1,131 |   | (11.4 | )% |
|                                                             | ** ** | ** **                        |       |   |   |   |   |
| Earnings per share  (EPS) (1) – basic ($)              | ** ** | **3.14**                          |       | 3.52 |   | (10.8 | )% |
| EPS (1) –  diluted ($)                                 | ** ** | **3.14**                          |       | 3.51 |   | (10.5 | )% |
| Cash dividends  declared per share (1) ($)                  | ** ** | **1.90**                          |       | 1.825 |   | 4.1 | % |
|                                                             | ** ** | ** **                        |       |   |   |   |   |
| Average shares  (1) outstanding - basic (millions)          | ** ** | **318**                           |       | 320 |   | (0.6 | )% |
|                                                             | ** ** | ** **                        |       |   |   |   |   |
| **Consolidated  statements of cash flows**                       | ** ** | ** **                        |       |   |   |   |   |
| Cash provided by  operating activities                           | ** ** | **2,904**                         |       | 2,819 |   | 3.0 | % |
|                                                             | ** ** | ** **                        |       |   |   |   |   |
| Cash used by  investing activities                               | ** ** | **2,128**                         |       | 3,433 |   | (38.0 | )% |
| Capital  expenditures                                            | ** ** | ** **                        |       |   |   |   |   |
| General                                                          | ** ** | **2,103**                         |       | 1,859 |   | 13.1 | % |
| Payment for AWS  spectrum licences                               | ** ** | **—**                        |       | 882 |   | n/m |   |
| Total                                                            | ** ** | **2,103**                         |       | 2,741 |   | (23.3 | )% |
|                                                             | ** ** | ** **                        |       |   |   |   |   |
| Acquisitions                                                     | ** ** | **26**                            |       | 696 |   | (96.3 | )% |
|                                                             | ** ** | ** **                        |       |   |   |   |   |
| Cash (used)  provided by financing activities                    | ** ** | **(739**                          | **)**      | 598 |   | n/m |   |
|                                                             | ** ** | ** **                        | ** ** |   |   |   |   |
| **Subscribers  and other measures**                              | ** ** | ** **                        |       |   |   |   |   |
| Subscriber  connections (2) (thousands)                     | ** ** | **11,957**                        |       | 11,673 |   | 2.4 | % |
| EBITDA (3)                                                       | ** ** | **3,491**                         |       | 3,779 |   | (7.6 | )% |
| Free cash flow (3)                                               | ** ** | **500**                           |       | 361 |   | 38.5 | % |
|                                                             | ** ** | ** **                        |       |   |   |   |   |
| **Debt  and payout ratios**(4)                                   | ** ** | ** **                        |       |   |   |   |   |
| Net debt to EBITDA –  excluding restructuring costs (times) | ** ** | **2.0**                           |       | 1.9 |   | 0.1 |   |
| Dividend payout  ratio (5) (%)                              | ** ** | **67**                            |       | 56 |   | 11 | pts. |

 

----

n/m – not meaningful; pts. – percentage points

 

(1)               Includes Common Shares and Non-Voting Shares.

 

(2)               The sum of wirelesssubscribers, network access lines, Internet access subscribers and TELUS TVsubscribers (IP TV and satellite TV), measured at the end of the respectiveperiods, based on information inbilling and other systems. In the second quarter of 2009, the opening balancefor subscriber connections was reduced by 5,000 to reflect prior periodreporting adjustments to high-speed Internet subscribers, and in the fourthquarter of 2009 the opening balance for subscriber connections was reduced byapproximately 11,000 to reflect prior period reporting adjustments to wirelesspostpaid subscribers.

 

(3)               EBITDA and free cash flow are non-GAAP measures. See *Section 11.1 Earnings before interest, taxes, depreciation andamortization (EBITDA)* and*Section 11.2 Free cash flow.*

 

(4)               See *Section 7.4 Liquidityand capital resource measures* and *Section 11.4Definitions of liquidity and capital resource measures.*

 

(5)               Based on earnings per share excluding favourableincome tax-related adjustments of 55 cents per share in 2009 and 15 cents pershare in 2008, 22 cents per share loss on redemption of long-term debt in 2009,and minor impacts from a net-cash settlement feature.

 

**Highlights from operations,including a comparison of results for 2009, or measures as at December 31,2009, to those in 2008:**

 

·                  Subscriber connectionsincreased by 284,000 in 2009. This includes 6.4% growth in wireless subscribersand 118% growth in TELUS TV subscribers, partly offset by a 0.4% decrease intotal Internet subscribers and a 4.7% decrease in total network access lines.

 

·                  Wireless ARPU was $58.46 in 2009, reflecting a decrease of 6.8% whencompared to 2008, as the decline in wireless voice ARPU continued to exceedgrowth in data ARPU.

 

·                  Consolidated operating revenues in 2009 decreased by $47 million when compared to 2008. Strongprice competition and uncertainty regarding the economic recovery in Canada,described in *Section 1.2*, havecontributed to lower data revenue growth and accelerated voice revenuedeclines.

 

·                  Operating income in2009 decreased by $297 million when compared to 2008, primarily due tolower EBITDA, which included higher restructuring costs (up by$131 million) and increased defined benefit pension plan (DBPP) expenses(up by $118 million).

 

EBITDA in 2009 decreased by $288 million. Whenexcluding DBPP and restructuring impacts, underlying EBITDA decreased by$39 million. The underlying decrease resulted from lower wireless ARPU andhigher wireless subscriber retention costs, as well as higher costs fordelivery of TELUS TV services and to support implementation of services

 

5

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for new wireline enterprise customers, partlyoffset by lower non-pension employee-related expenditures, lower wirelineadvertising and promotion expenditures and lower costs to acquire new wirelesssubscribers.

 

·                  Income before income taxes decreased by $362 million in 2009. Lower Operating income and a$99 million charge associated with the early partial redemption oflong-term debt in December 2009, were partly offset by a $33 millionincrease in interest income primarily from the settlement of prior years’ taxmatters.

 

·                  Net incomedecreased by $129 million in 2009. In both 2009 and 2008, Net incomeincludes income tax-related adjustments arising from legislated income taxchanges, settlements and tax reassessments for prior years, and any relatedinterest on reassessments (see *Section 5.2*).Underlying Net income before favourable income tax-related adjustments wasapproximately $828 million in 2009, as compared to $1,082 million in2008, a decrease of $254 million. See the analysis in the following table.

 

·                  Basic earnings per share was$3.14 in 2009, a year-over-year decrease of 38 cents. Earnings per sharein 2009 and 2008 included favourable income tax-related adjustments ofapproximately 55 cents and 15 cents, respectively. Underlying EPSbefore favourable income tax-related adjustments was $2.59 in 2009, as comparedto $3.37 in 2008. EPS in 2009 also included an approximate 22 centunfavourable impact of the loss on early partial redemption of long-term debt.

 
| **Analysis of Net income********($ millions)**                                    | ** ** | **Years ended  December 31** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| Net income in 2008                                                                     |       | 1,131                             |       |
| Deduct net  favourable income tax-related adjustments in 2008 (see *Section 5.2)* |       | (49                               | )          |
|                                                                                   |       | 1,082                             |       |
| Tax-effected  changes                                                                  |       |                              |       |
| Higher defined  benefit pension plan expenses (1)                                      |       | (82                               | )          |
| Higher restructuring  charges (1)                                                      |       | (91                               | )          |
| Other changes in  EBITDA (1) (2)                                                  |       | (28                               | )          |
| Changes in  depreciation and amortization (1) (2)                                 |       | (8                                | )          |
| Loss on redemption  of long-term debt                                                  |       | (69                               | )          |
| Other                                                                                  |       | 24                                |       |
|                                                                                   |       | 828                               |       |
|                                                                                   |       |                              |       |
| Net favourable  income tax-related adjustments in 2009 (see *Section 5.2)*        |       | 174                               |       |
| **Net  income in 2009**                                                                | ** ** | **1,002**                         | ** ** |

 

----

(1)          For the purposes of this presentation, the 2009blended statutory tax rate was used.

(2)          Excluding investment tax credits that are included inincome tax-related adjustments.

 

Liquidity and capital resources highlights, includinga comparison of results for 2009, or measures as at December 31, 2009, tothose in 2008:

 

·                  At December 31, 2009, TELUS had unutilized credit facilitiesexceeding $1.7 billion, consistent with its objective of generallymaintaining more than $1 billion of unutilized liquidity.

 

·                  Net debt to EBITDA (excluding restructuring costs) at December 31, 2009 was slightly under2.0 times, within the Company’s long-term target policy range of 1.5 to2.0 times.

 

·                  The dividend payout ratio for 2009 was 67%, based on theannualized fourth quarter dividend and earnings for 2009 excluding favourableincome tax-related adjustments, the loss on redemption of long-term debt, andminimal impact from a net-cash settlement feature. The measure calculated basedon actual 2009 earnings was 61% and based on 2010 targets for earnings pershare (see *Sections 1.4*and *1.5*), the payout range is 58 to 66%. This latter calculationwas factored into the Board decision to not increase the dividend level for thedeclared fourth quarter 2009 dividend, following five consecutive annualincreases in the dividend rate.

 

On February 10, 2010, the Board ofDirectors declared a quarterly dividend of 47.5 cents per share on the issuedand outstanding Common Shares and Non-Voting Shares of the Company, payable on April 1,2010, to shareholders of record at the close of business on March 11,2010.

 

·                  Cash provided by operating activities increased by $85 million in 2009. Changes in securitized accountsreceivable contributed a $400 million comparative increase in cash,largely offset by commencement of significant income tax payments net ofrecoveries of $266 million in 2009 and $110 million higher paidinterest, primarily from the early partial redemption of U.S. dollar Notes due June 2011(see Cash used by financing activities below).

 

·                  Cash used by investing activities decreased by $1,305 million in 2009, largely due to payment of$882 million for AWS spectrum licences in 2008 and a $670 milliondecrease in funds used for acquisitions, partly offset by increased capital

 

6

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investments in wireless andwireline broadband infrastructure to enhance the Company’s competitive positionand support long-term growth. See *Section 1.4*forcapital expenditure expectations in 2010.

 

**·**                  Cash used by financing activities in 2009 was $739 million, used primarily to make dividend paymentsand reduce long-term debt. Financing activities included the May 2009$700 million five-year 4.95% Note issue that facilitated a reduction inamounts drawn on the 2012 credit facility and a reduction in commercial paper.In December, the Company extended the average term to maturity on its long-termdebt through a $1 billion 10-year 5.05% Note issue, from which theproceeds were used primarily to early redeem 30% of its outstanding U.S. dollar8% Notes due June 2011 and terminate associated cross currency interestrate swaps. In 2008, net Cash provided by financing activities was$598 million, as long-term debt increased to help fund the purchase of AWSspectrum in the third quarter and the acquisition of Emergis in January, net ofdividend payments and repurchases of shares under a normal course issuer bid.See the report on the 2009 financing and capital structure management plan, aswell as the 2010 plan, in *Section 4.3 Liquidityand capital resources*.

 

**·**                  Free cash flow increased by$139 million in 2009 when compared to 2008, mainly due to the payment forAWS spectrum last year and higher interest received in 2009 from incometax-related settlements, partly offset by increased income tax payments,general capital expenditures and interest paid, as well as lower EBITDAadjusted for defined benefit plan contributions, share-based compensationpayments and restructuring payments.

 

### **1.4 Performance scorecard**

 

Onlyone of the eight original consolidated and segmented public targets for 2009was met, with capital expenditures being within 2.6% of the target ofapproximately $2.05 billion. Management underestimated the business impact ofthe emerging recession in Canada and Western Canada when announcing the targetsin December 2008. Revenue targets were not achieved as both consumer andbusiness customers restrained spending and, industry-wide, price competitionincreased. The Company alsoincurred dilutive pressures on 2009 profitability associated with growth initiativessuch as accelerating TELUS TV subscriber loading and implementing large complexenterprise deals, as well as in the fourth quarter, higher retention costsassociated with the sale of Apple iPhones beginning in early November. EBITDAwas also negatively impacted in 2009 by management’s acceleration of efficiencyinitiatives to help lower the Company’s longer-term cost structure and maintainmargins in the context of slower revenue growth. Consequently, 2009restructuring costs of $190 million exceeded the original expectation of $50 to$75 million. Notably, the Company stayed within its long-term policy guidelinefor Net debt to EBITDA — excluding restructuring costs.

 

Duringthe year, management provided revised annual 2009 guidance with each interimreport, and provided final guidance in the 2010 targets call on December 15,2009. Actual results met the eight metrics from the final guidance.

 

Thefollowing scorecard compares TELUS’ 2009 results to its original targets. Inaddition, the targets for 2010 are presented to provide information toinvestors, and are fully qualified by the *Caution regardingforward-looking statements* at the beginning of the MD&A. Foradditional information on expectations and assumptions for 2010, see *Section 1.5 Financial and operating targets for 2010*, *Section 1.6 TELUS segments at a glance* and *Section 9: General outlook*.

 

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| ** **                                                                                                    | ** ** | **Performance for 2009** | ** ** | ** **                  | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Scorecards**                                                                                                | ** ** | **Actual  results**      | ** ** | **Change********from 2008** | ** ** | **Original 2009  targets** | ** ** | **Result:********ü********Met  target********X Missed  target** | ** ** | **2010 Targets**

**and change from  2009 actual results** | ** ** |
| **Consolidated**                                                                                              | ** ** | ** **               |       |                        |       |   |   |   | ** ** | ** ** | ** ** |
| Revenues                                                                                                      | ** ** | **$9.606  billion**      |       | (0.5)%                      |       | $10.025 to $10.275 billion |   | X | ** ** | **$9.8  to $10.1 billion  2 to 5%** | ** ** |
| EBITDA  (1)                                                                                                   | ** ** | **$3.491  billion**      |       | (7.6)%                      |       | $3.75 to $3.9 billion |   | X | ** ** | **$3.5  to $3.7 billion  flat to 6%** | ** ** |
| EPS –  basic                                                                                             | ** ** | **$3.14**                |       | (10.8)%                     |       | — |   | — | ** ** | **$2.90  to $3.30   (8) to 5%** | ** ** |
| EPS –  basic (excluding income tax-related adjustments and loss on redemption of  long-term debt) (2)(3) | ** ** | **$2.81**                |       | (16.6)%                     |       | $3.40 to $3.70 |   | X | ** ** | **3  to 17%** | ** ** |
| Capital  expenditures                                                                                         | ** ** | **$2.103  billion**      |       | 13.1% (4)                   |       | Approx. $2.05 billion |   | **ü** | ** ** | **Approx.  $1.7 billion  (19)%** | ** ** |
| **Wireline segment**                                                                                          | ** ** | ** **               |       |                        |       |   |   |   | ** ** | ** ** | ** ** |
| Revenue  (external)                                                                                           | ** ** | **$4.899  billion**      |       | (2.4)%                      |       | $5.05 to $5.175 billion |   | X | ** ** | **$4.85  to $5.0 billion  (1) to 2%** | ** ** |
| EBITDA                                                                                                        | ** ** | **$1.558  billion**      |       | (12.2)%                     |       | $1.65 to $1.725 billion |   | X | ** ** | **$1.575  to $1.675 billion  1 to 8%** | ** ** |
| **Wireless segment**                                                                                          | ** ** | ** **               |       |                        |       |   |   |   | ** ** | ** ** | ** ** |
| Revenue  (external)                                                                                           | ** ** | **$4.707  billion**      |       | 1.6%                        |       | $4.975 to $5.1 billion |   | X | ** ** | **$4.95  to $5.1 billion  5 to 8%** | ** ** |
| EBITDA                                                                                                        | ** ** | **$1.933  billion**      |       | (3.6)%                      |       | $2.1 to $2.175 billion |   | X | ** ** | **$1.925  to $2.025 billion  flat to 5%** | ** ** |

 

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(1)          See *Section 11.1 Earningsbefore interest, taxes, depreciation and amortization (EBITDA)* forthe definition.

(2)          A non-GAAP measure. For comparability purposes,excludes items quantified in Note (3) that were not contemplated insetting targets.

(3)          Excluding from 2009 actual results, 55 cents per shareof positive income tax-related adjustments and 22 cents per share for a loss onearly partial redemption of long-term debt that were not contemplated insetting 2009 targets. Excluding 15 cents per share of positive incometax-related adjustments in 2008 results for comparative purposes.

(4)          Compared to 2008 general capital expenditures, whichexclude payment of $882 million for AWS spectrum licences.

 

Thefollowing key assumptions were made at the time the 2009 targets were announcedin December 2008.

 
| **Assumptions for 2009 original  targets**                                                                                          | ** ** | **Actual or estimated  result for 2009**                                                                                                                                                                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                          | ** ** | ** **                                                                                                                                                                                                                                                                                         |
| Ongoing wireline competition in both business  and consumer markets, particularly from cable-TV and voice over IP (VoIP)  companies |       | Confirmed by a major cable-TV competitor’s  continued digital telephone and Internet subscriber additions and increasing  penetration among business customers.

 

The recent recession contributed to industry-wide  pricing pressures in 2009.                                        |
|                                                                                                                                |       |                                                                                                                                                                                                                                                                                               |
| Canadian wireless industry market penetration  gain of approximately 4.5 percentage points for the year                             |       | Estimated penetration gain for 2009 is 3.6  percentage points, compared to approximately 4.3 percentage points in 2008.                                                                                                                                                                            |
|                                                                                                                                |       |                                                                                                                                                                                                                                                                                               |
| Downward pressure on wireless ARPU                                                                                                  |       | Confirmed by the 6.8% decrease in TELUS’  blended ARPU for the year, which is more than originally expected. See *Section 5.5**Wireless segment results*.                                                                                                                                |
|                                                                                                                                |       |                                                                                                                                                                                                                                                                                               |
| New competitive wireless entry beginning in  the fourth quarter of 2009 with most entrants starting in 2010                         |       | One new entrant launched service in Toronto  and Calgary in December 2009, and certain others are expected to launch  in 2010 or have announced plans for 2011.                                                                                                                               |
|                                                                                                                                |       |                                                                                                                                                                                                                                                                                               |
| Restructuring expenses of approximately  $50 million to $75 million                                                       |       | $190 million, equal to the revised  guidance given in December 2009 to reflect increased operational  efficiency activities (previously revised in May, August and  November 2009 to approximately $125 million, $150 million and  $160 million, respectively). |
|                                                                                                                                |       |                                                                                                                                                                                                                                                                                               |
| A blended statutory tax rate of approximately  30 to 31%                                                                            |       | The blended statutory income tax rate was  30.3% for the year.                                                                                                                                                                                                                                     |

 

8

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| **Assumptions for 2009 original  targets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **Actual or estimated  result for 2009**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Net payments of income tax of approximately  $320 to $350 million                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | Income tax payments net of recoveries for 2009  were $266 million, including final payments for 2008 and instalments for  2009, less income tax recoveries received in 2009 (previously revised in  August to $270 to $310 million and in November to  approximately $270 million).                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Forecast average exchange rate of U.S.$0.80  per Canadian dollar                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | The average closing exchange rate for 2009 was  approximately U.S.$0.88 per Canadian dollar. Over the year, the rate ranged  between U.S.$0.770 and U.S.$0.975. The rate at December 31, 2009, was  approximately U.S.$0.95. (Source: the Bank of Canada.)

 

Most of 2009 capital expenditures were priced  in Canadian dollars. The Company employs currency hedges for a varying  portion of wireless handset purchases, as circumstances warrant. The  principal repayments and interest obligations on the Company’s U.S. dollar  debt are effectively fixed by cross currency interest rate swap agreements. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| A pension accounting discount rate estimated  at 7.00% (subsequently set at 7.25%) and expected long-term return of 7.25%  (consistent with the Company’s long-run returns and its future expectations).  Defined benefit pension plans net expenses and funding were both estimated to  increase in 2009, mainly due to the decline in value of defined benefit  pension plans assets in 2008.

 

·    Defined benefit pension plans net expenses were estimated to be $nil  (1) in 2009, subsequently revised to approximately $18 million (2)

 

·    Defined benefit pension plans contributions were estimated to be  approximately $200 million (1) for 2009, subsequently revised to  $211 million (2). |       | The Company’s defined benefit pension plans  expense was $18 million in 2009.

 

The expectation for contributions to defined  benefit pension plans was revised to approximately $191 million in  May 2009. Actual contributions to defined benefit pension plans were  $179 million in 2009.                                                                                                                                                                                                                                                                                                      |

 

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(1)          December 16, 2008.

(2)          Management’s discussion and analysis for 2008, dated February 11,2009.

 

### **1.5 Financial and operatingtargets for 2010**

### ** **

The following assumptions apply to TELUS’ 2010targets presented in *Scorecards* inthe previous section. The 2010 targets and assumptions were originallyannounced on December 15, 2009, in the Company’s annual financial targetsnews release and accompanying investor conference call.

 

For 2010, TELUS has targeted consolidatedrevenue of $9.8 to $10.1 billion, an increase of 2 to 5%, orapproximately $200 to $500 million, over 2009. EBITDA is expected to be ina range of $3.5 to $3.7 billion, remaining flat to an increase of 6% over2009. Earnings per share (EPS) is targeted to be $2.90 to $3.30 in 2010. TELUSexpects 2010 EPS will be impacted by slightly increased depreciation andamortization expense and higher net financing costs due to lower interestincome in 2010. Excluding 2009 positive income tax impacts (55 cents per share)and financing charges associated with the early partial redemption of June 2011Notes (22 cents per share), TELUS expects underlying EPS growth of3 to 17% in 2010.

 

Wireline revenue is expected to change between(1)% and 2% in 2010, reflecting data growth in business services andresidential entertainment services, largely offset by continued decreases inlegacy local and long distance services. Wireline EBITDA is expected toincrease by 1 to 8% as a result of modest revenue growth, increasedsavings from ongoing efficiency initiatives and lower restructuring costs,partly offset by the increased costs related to strong TELUS TV subscribergrowth.

 

TELUS wireless revenue is forecast to increase5 to 8% in 2010, largely dependent on the extent of growth inwireless subscriber loading and ARPU performance. Growth in wireless loading isexpected to benefit from improved industry growth, with a penetration gain ofapproximately 4%. TELUS expects to benefit from a full year effect of its new3G+ network, increased data and roaming revenues helping offset continueddeclines in voice ARPU and the effects of new competitive entry. WirelessEBITDA is expected to be flat to 5% higher in 2010, despite the impact onmargins of increased subsidies from higher volumes of smartphone sales for bothnew and existing clients.

 

Capital expenditures in 2010 are forecast toreturn to more historical levels at approximately $1.7 billion. The decrease in2010 is largely due to the substantial and early completion of TELUS’high-speed packet access (HSPA) 3G+ wireless network. The wireline broadbandnetwork for ADSL2+ is expected to be completed in 2010 with coverageapproaching

 

9

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90% of the top 48 incumbent markets in Albertaand B.C. In addition, the Company began in the second half of 2009 a program toreach the top 48 communities with VDSL2 by the end of 2011.

 

**Assumptionsfor 2010 targets**

** **

Ongoingwireline and wireless competition in both business and consumer markets

 

Canadianwireless industry market penetration gain of approximately four percentagepoints for the year (approximately 3.6 percentage points in 2009)

 

Increasedwireless subscriber loading in smartphones

 

Reduceddownward pressure on wireless ARPU (down 6.8% in 2009)

 

Newcompetitive wireless entry in early 2010 following one competitive launch in December 2009

 

Inwireline, stable residential network access line losses and continuedcompetitive pressure in small and medium business market from cable-TV and VoIPcompanies

 

Continuedwireline broadband expansion

 

Significantincrease in cost of acquisition and retention expenses for smartphones andTELUS TV loading

 

EBITDAsavings of approximately $135 million from efficiency initiatives

 

Approximately$75 million of restructuring expenses ($190 million in 2009)

 

Ablended statutory tax rate of approximately 28.5 to 29.5% (30.3% in 2009). Theexpected decrease is based on enacted changes in federal and provincial incometax rates.

 

Cashincome taxes peaking at approximately $385 to $425 million (net$266 million in 2009) due to the timing of instalment payments

 

Apension accounting discount rate was estimated at 5.75% and subsequently set at5.85% (140 basis points lower than 2009). The expected long-term return of7.25% is unchanged from 2009 and consistent with the Company’s long-run returnsand its future expectations.

 

·      Definedbenefit pension plans net expenses were estimated to be $47 million (1) in 2010 and subsequently estimated to be$28 million (compared to $18 million in 2009), based on projectedpension fund returns

 

·      Definedbenefit pension plans contributions were estimated to be approximately$147 million (1) in2010 and subsequently estimated to be $143 million, down from$179 million in 2009, largely due to the stock market recovery in 2009 andproposed federal pension reforms.

 

----

(1)          December 15, 2009. 

 

Consolidated 2010 targets

 

See *Caution regardingforward-looking statements* at the beginning of the MD&A.

 

 

 

10

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### **1.6 TELUS segments at aglance**

 

The Company hastwo reportable segments: wireline and wireless. Segmentation is based onsimilarities in technology, the technical expertise required to deliver theproducts and services, customer characteristics, the distribution channels usedand regulatory treatment. Intersegment sales are recorded at the exchangevalue. Segmented information in Note 6 of the Consolidated financialstatements is regularly reported to the Company’s Chief Executive Officer (the chiefoperating decision-maker).

 

*Wireline segment*

 

Solutions offered include:

 

**Voice** — reliable phone service with long distance and call managementservices

 

**Internet** — secure high-speed or dial-up access with a comprehensive suite ofsecurity services

 

**TELUS TV** — flexible digital entertainment service with high-definition (HD) TV,personal video recorder (PVR), Video on Demand and Pay Per View services

 

**IP networks and applications** — IP networks that offer converged voice, video, dataand Internet services on a secure, high-performing multi-protocol labelswitching based (MPLS) network

 

**Contact centre solutions** —****managedcontact centre solutions providing secure, stable, low-cost and scalableinfrastructure. TELUS International provides contact solutions through centresin North America, Central America and Asia

 

**Conferencing and collaboration** —****full range ofequipment and application solutions to support meetings using phone, video andthe web

 

**Hosting and managed IT infrastructure** — ongoing assured availability of telecommunications,networks, servers, databases, files and applications with critical applicationsstored within TELUS’ intelligent Internet data centres

 

**Healthcare**—****TELUS Health Solutions provides claimsmanagement solutions, hospital-to-home technology, patient records at the pointof care, and access to essential drug and medical information throughinformation communication technology.

 

11

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Wireline segment 2010 targets

 

See *Caution regarding forward-lookingstatements* at the beginning of the MD&A.

 

 

 

*Wireless segment*

 

Solutions offered include:

 

**Digital voice** — postpaid, Pay & Talk® prepaid and Mike® all-in-one services;

 

**Internet and data** — web browsing, social networking, instant messaging, text messaging,picture and video messaging, images, ringtones, TELUS Mobile TV®, video ondemand, TELUS Mobile Radio®, downloadable music and the latest wireless mobileapplications.

 

Wireless segment 2010 targets

 

See *Caution regardingforward-looking statements* at the beginning of the MD&A.

 

  

 

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## **2.**              Core business and strategy

 

The discussion in this section is qualified in itsentirety by the *Caution regarding forward-looking statements*at the beginning of the MD&A.

 

### **2.1 Core business**

### ** **

TELUS Corporationis one of Canada’s largest telecommunications companies, providing a full rangeof telecommunications products and services. The Company is the largestincumbent telecommunications provider in Western Canada and also provides data,IP, voice and wireless services to Central and Eastern Canada. TELUS earns themajority of its revenue from access to, and the use of, the Company’stelecommunications infrastructure, or from providing products and services thatfacilitate access to and usage of this infrastructure.

 

At December 31, 2009,the Company’s principal subsidiary was wholly owned TELUS Communications Inc.(TCI).

 

### **2.2 Strategic imperatives**

 

TELUS’ strategic intent is to unleash the powerof the Internet to deliver the best solutions to Canadians at home, in theworkplace and on the move. TELUS’ strategy for growth is to focus on its coretelecommunications business in Canada supported by international contact centreand outsourcing capabilities.

 

The Company developed six strategic imperativesalmost 10 years ago that management believes remain relevant. A consistentfocus on the imperatives guides the Company’s actions and contributes to theachievement of its financial goals. Despite economic challenges in 2009, andchanging regulatory and competitive environments, management believes the focuson the imperatives positions the Company for future growth.

 

**Buildingnational capabilities across data, IP, voice and wireless**

 

A keyfocus for TELUS in 2009 was its investment in broadband networks and servicesto enhance its competitive position and support future growth opportunities.TELUS successfully launched its new national advanced wireless network in November 2009,based on the latest version of high-speed packet access (HSPA) technology,facilitated by network sharing agreements with Bell Canada. The competitivebenefit of the shared network build approach includes: speed-to-marketadvantage, current coverage advantage relative to another major competitor andall new entrants, and meaningfully lower capital expenditures and operatingcosts. This development represents a further evolution of the Company’smulti-network strategy that provides customers with access to HSPA, CDMA (codedivision multiple access) and iDEN (Push to TalkTM) services and devices.

 

TheCompany’s wireline broadband investments are expanding the coverage andbandwidth of high-speed Internet and digital TELUS TV service in incumbentregions, as well as supporting new business and government contracts. TheCompany plans to substantially complete its wireline ADSL2+ network in 2010, tooffer download speeds of 15 megabits per second (Mbps) or higher, and coveringup to 90% of the top 48 communities in Alberta and B.C. by the end of the year.As a next step, the Company has started to deploy VDSL2 technology to bringnetwork download speeds of up to 30 Mbps when the upgrade is largely completedfor the top 48 communities by the end of 2011. The Company is also continuingits fibre to the home deployment in new residential areas. These investments incore infrastructure serve to strengthen the Company’s competitive positionversus other wireless and cable-TV companies.

 

Inthe business market, the Company is maintaining focus on five vertical marketsegments — the public sector, healthcare, financial services, energy andtelecom wholesale. TELUS incurred upfront costs in 2009 to implement servicesfor several large enterprise and public sector customers, for which revenuesare expected to be increasingly realized in 2010 and future years. Thisincludes a seven-to-10-year contract worth up to $900 million with theGovernment of Quebec, to deliver and manage the province’s next generation datanetwork.

 

**Focusingrelentlessly on the growth markets of data, IP and wireless**

 

Wirelessrevenues and wireline data revenues combined account for 71% of total revenue,up two percentage points over 2008 and four percentage points over 2007. TELUSexperienced good wireless subscriber growth in 2009, but this was largelyoffset by decreased ARPU, resulting in network revenue growth of less than 1%.In the wireline segment, data revenue growth was approximately 4% in 2009 ascompared to 17% in 2008.

 

Theinvestment in HSPA/HSPA+ technology allows TELUS to benefit from the futureglobal wireless ecosystem, economies of scale and enhanced roaming revenues. Italso supports the launch of new HSPA devices such as the Apple iPhone 3G and3GS (the iPhone was previously only available through one competitor), BlackBerryBold, HTC Hero and Sierra Internet Key. While increased smartphone adoptiondoes present near-term dilution, it also represents opportunity for future datarevenue growth. As well, TELUS is now able to participate in markets to whichit has not previously had full access, such as global roaming. HSPA technologyis expected to enable an optimal future transition to long-term evolution (LTE)technology, the emerging worldwide standard for fourth generation or 4Gwireless networks.

 

13

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Basedon consumer research, the Company introduced a suite of Clear ChoiceTM rateplans to differentiate TELUS from its competitors and appeal to customers.Clear Choice plans have no system access or carrier 911 fees, and a reducednumber of options, making it easier for customers to choose a plan that isright for them. Existing clients may keep their current plans or switch to newrate plans. It is expected that these rate plans will improve the Company’scompetitive position, although they may reduce ARPU.

 

TheCompany also implemented significant improvements at telusmobility.com toenhance customers’ online experience, including billing enhancements, servicemanagement improvements and online tools to help customers determine the bestsmartphone to meet their needs.

 

TheCompany successfully expanded and complemented its national wirelessdistribution capabilities with the addition of wireless products in November atlocations of newly acquired Black’s Photo Corporation (see *Partnering,*below).

 

**Partnering,acquiring and divesting to accelerate the implementation of TELUS’ strategy andfocus TELUS’ resources on core business**

 

TheCompany acted on two beneficial business opportunities with Bell Canada, whileat the same time continuing to compete vigorously. The network sharingagreement with Bell allowed TELUS to build and launch a national 3G+ wirelessnetwork and service earlier with greater coverage and at a significantly lowercost than if done independently. To expand the addressable market for TELUS TV,the Company entered into an agreement with Bell to offer satellite TV serviceunder the TELUS brand in Alberta and B.C., expanding TELUS TV coverage to over90% of the population in those provinces. TELUS also entered into a networksharing agreement with SaskTel, which is expected to roll out HSPA+ coverage inSaskatchewan in 2010 and 2011.

 

In September 2009,TELUS acquired Black’s Photo Corporation for $28 million cash($26 million net of acquired cash) from the private equity fundReichmannHauer Capital Partners. Black’s is a national imaging and digitalretailer in Canada, with 113 stores that are primarily in mall locations.Eighty-one, or 72%, of Black’s stores are in Ontario. The Company expanded itswireless distribution of camera phones through Black’s starting in November,complementing the existing TELUS network of dealers and Company-owned stores.

 

In2009, Black’s contributed approximately $44 million to revenue and a netloss of $1 million over approximately four months. This acquisition isalso consistent with the strategic imperatives of *Buildingnational capabilities across data and wireless* and *Focusing relentlessly on the growth markets of data, IP and wireless*.

 

**Providingintegrated solutions that differentiate TELUS from its competitors**

 

Thelaunch of TELUS Satellite TVTM in July enables the Company to more widelyoffer attractive wireline bundles of local, long distance, Internet andentertainment services in B.C. and Alberta. The ongoing broadband build is expandingIP-based TELUS TV service coverage across B.C., Alberta and Eastern Quebec,providing more HD TV channels and PVR capabilities. The Company more thandoubled its TELUS TV subscriber base in 2009.

 

TELUSInternational (TI) provides wholesale contact centre, information technology(IT) and business process outsourcing services to domestic, U.S. andinternational customers. TI offers multi-site, multi-language and multi-countryservice delivery to large information technology, financial, energy and utilitycompanies. Efforts to better serve these customers included the opening of anew call centre in Nevada and operation of call centres across Central Americain 2009, to offer geographic diversity to the marketplace and expandedSpanish-language support. The Company also uses its TI operations for internaloutsourcing, providing operational efficiencies and assured quality.

 

TELUSis pursuing the fast-growing small and medium business (SMB) market by offeringdifferentiated solutions that leverage connectivity, security and IP-basedsolutions. For example, with the new 3G+ network, SMB customers now havequicker access to applications and capabilities such as wireless invoicing anddata back-up. In late 2009, TELUS began realigning and increasing resources fora more integrated and regional approach to improving service to thesecustomers.

 

**Investingin internal capabilities to build a high-performance culture and efficientoperations**

 

The Company’s increased focus on its ongoing operatingefficiency program began in the second half of 2008 and intensified in 2009 asmanagement responded to the recession’s impact on operating results.Consequently, restructuring costs more than tripled to $190 million in2009 ($59 million in 2008). TELUS expects to continue its focus on costreduction in 2010 with a restructuring expense of approximately $75 millionfor the year. Efficiency initiatives are expected to generate $135 millionof operating savings in 2010. See targets and assumptions in *Section 1.5 Financial and operating targets for 2010*.

 

The Company continues to implement an array ofinitiatives that are expected to improve efficiency and reduce costs,including:

 

·                  Rationalizingexternal supplier spending

 

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·                  Simplifyingprocesses and decommissioning uneconomic products

·                  Reducingstaffing levels, freezing senior management compensation increases andcontaining benefit costs

·                  Consolidatingsome business units

·                  Leveragingbusiness process outsourcing and off-shoring

·                  Reducingand controlling expenses operation-wide.

 

The number of full-time equivalent (FTE) employeesdecreased by approximately 600 during 2009. This included a decrease of 2,150domestic FTE employees resulting from restructuring initiatives, attrition andhiring freezes, offset by 700 additional FTE employees for operations at TELUSInternational and 850 new FTE employees from the acquisition of Black’s Photo.

 

To help create a positive work environment for teammembers, several initiatives were introduced in 2009. This included a flexibleworkplace strategy where one-half of employees periodically choose mobile orat-home work options. Employees are also encouraged to use collaboration toolssuch as Cisco Telepresence videoconferencing and Microsoft Live Meeting.Benefits include increased productivity, better work-life balance and making adifference to the environment through reduced commuting and travel. These andother efforts earned recognition for TELUS, including being named one of Canada’sTop 100 Employers for 2010 and one of Canada’s Best Diversity Employers in 2009by Mediacorp Canada.

 

**Goingto the market as one team under a common brand, executing a single strategy**

 

Through TELUS’ brand promise — the future is friendly®— the Company is dedicated to enhancing customer lifestyles and improving thecompetitiveness of customers’ businesses. TELUS continues to maintain a strongand consistent brand across wireless and wireline. The brand promise is also atthe heart of the Company’s new wireless Clear and SimpleTM rate plans and theCompany’s determination to continually improve customer service, such asredesigning the telusmobility.com website.

 

## **3.**              Key performance drivers

 

The discussion in this section is qualified in itsentirety by the *Caution regarding forward-looking statements*at the beginning of the MD&A.

 

Management confirms or sets new corporatepriorities each year to advance TELUS’ strategy, and focus on the near-termopportunities and challenges to create value for the Company’s shareholders.One challenge is the entry of new regional wireless companies that arelaunching or expanding operations in 2010. TELUS has been preparing for thissince 2008 by way of the new 3G+ wireless network, new devices, simplified rateplans, expanded wireless distribution, and the Koodo® brand and service.

 

**Corporate priorities**

 

| **2008**                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** ** | ** ** | **2009 (see Progress,  following)**                                                                                                                                                                                                                                                                                                                                        | ** ** | ** ** | ** ** | **2010**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Drive profit from strategic services with a  focus on data

 

Build scale in vertical markets and leverage  the Emergis acquisition

 

Exact productivity gains from efficiency  improvement initiatives

 

Elevate the client experience and build  enhanced loyalty

 

Execute technology initiatives, including  broadband and IT platforms. |       |       |       | Execute on TELUS’ broadband strategy,  leveraging investments in leading wireline and wireless networks to deliver  winning solutions for customers

 

Increase the efficiency of operations to  improve TELUS’ cost structure and economic performance

 

Outpace the competition and earn the patronage  of clients through an engaged TELUS team. |       |       |       | Capitalize on the full potential of TELUS’  leading wireless and wireline broadband networks

 

Enhance TELUS’ position in the small and  medium business market

 

Ensure TELUS delivers its future friendly®  brand promise to clients

 

Continue to improve TELUS’ operational  efficiency to effectively compete in the market and fund future growth

 

Increase TELUS team engagement and live the  culture of personal responsibility and customer service. |

 

15

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**Corporate priorities for 2009 –Progress**

 

**Execute on TELUS’ broadband strategy, leveraginginvestments in leading wireline and wireless networks to deliver winningsolutions for customers**

 

·                  Launched early, on November 5, the national 3G+network offers customers the technology for increased manufacturer-ratedwireless data download speeds of up to 21 megabits per second and accessto international roaming service to more than 200 countries. The benefits toTELUS include ending a competitor’s monopoly and early access to wirelessdevices in Canada, which gives consumers better choice in service providers andsmartphones.

 

·                  Enhanced the launch of new HSPA+ wireless devices withthe introduction of a new suite of simplified pricing plans.

 

·                  Expanded coverage of IP-based TELUS TV service acrossBritish Columbia, Alberta and Eastern Quebec, including HD and PVRcapabilities.

 

·                  Introduced TELUS Satellite TV to expand coverage ofTELUS TV service to more than 90% of the addressable market in B.C. andAlberta.

 

·                  Implemented significant improvements ontelusmobility.com to enhance customers’ online experience and perception ofTELUS’ future friendly brand. Improved online access for such activities aschanging rate plans and services, paying bills, making prepaid account top-ups,changing addresses, viewing recent transactions and usage, and quickly managingfavourite numbers.

 

**Increase the efficiency of operations to improveTELUS’ cost structure and economic performance**

 

·                  Implemented an array of initiatives to improveefficiency and reduce costs, as described in *Section 2.2Investing in internal capabilities to build a high-performance culture andefficient operations*.

 

·                  Reduced consolidated salary, benefits and employee-relatedexpenses by $174 million or 7% (excluding defined benefit pension planexpenses), primarily in the wireline segment.

 

**Outpace the competition and earn the patronage ofclients through an engaged TELUS team**

 

·                  Maintained relatively flat wireless churn rate.

 

·                  Pursued flexible workplace strategy with one-half ofteam members periodically choosing mobile or at-home work options and increaseduse of collaboration tools such as Cisco Telepresence videoconferencing andMicrosoft Live Meeting.

 

·                  Earned recognition for the TELUS team as oneof Canada’s Top 100 Employers for 2010 and one of Canada’s Best DiversityEmployers in 2009 by Mediacorp Canada.

 

·                  The measure of employee engagement decreased by 4% in2009. The decrease likely reflects reduced compensation per employee, the needto implement difficult operating efficiency initiatives including reducing theworkforce and the tremendous workload required to operationalize major wirelessand wireline strategic initiatives. Strengthening team member engagementremains a top priority for management. 

 

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## **4.**              Capabilities

 

The discussion in this section is qualified in itsentirety by the *Caution regarding forward-lookingstatements* at the beginning of theMD&A.

 

### **4.1 Principalmarkets addressed and competition**

 

**Nationalwireless services for consumers and businesses**

 
| **TELUS capability**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Competition**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
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| Licensed national wireless  spectrum.

 

Integrated digital wireless  voice, data and Internet services, as described in *Section 1.6.*

 

Coverage of more than 31  million, or 93%, of Canada’s population with the HSPA 3G+ wireless network  across 1.1 million square kilometres, facilitated by a network sharing  agreement with Bell Canada.

 

New digital HSPA 3G+ network:

 

·      Launched in November 2009

 

·      Manufacturer-rated data download speeds  up to 21 megabits per second

 

·      International roaming agreements with  more than 200 countries

 

·      Improved capability for international  in-roaming revenue, previously limited to in-roaming from CDMA and Mike  service users, primarily from the U.S.

 

·      Expected to enable an optimal future  transition to LTE 4G services.

 

Mature networks:

 

·      Digital PCS (CDMA) network, including a  3G high-speed evolution data optimized (EVDO) Revision A overlay

 

·      TELUS’ iDEN network-based Mike service,  a Push to Talk service focused on the commercial marketplace.

 

Interconnection with TELUS’  wireline networks. |       | Existing wireless service competition includes  services offered by:

 

·      Facilities-based national competitors  Rogers Wireless and Bell Mobility, and provincial telecommunications companies  SaskTel and MTS Mobility

 

·      Resellers of competitors’ wireless  networks, such as 7-Eleven and certain cable-TV companies.

 

Emerging wireless service competition includes:

 

·      Globalive launched services in Toronto  and Calgary in December 2009

 

·      Globalive and several more new entrants,  including cable-TV companies, are expected to expand or begin to offer  services with various regional coverages in 2010 and 2011

 

·      Potential for alliances and integrations  among new regional competitors.

 

Foreign ownership restrictions generally apply  to wireless telecommunications companies, as well as to facilities-based  wireline telecommunications companies and to broadcasting distribution  undertakings, described below. |

 

**National wireline businessservices**

 
| **TELUS capability**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Competition**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| An IP-based national network overlaying an  extensive switched network in incumbent territories in B.C., Alberta and  Eastern Quebec.

 

Global interconnection arrangements.

 

Services are further described in *Section 1.6* and include:

 

·      Voice and data services

 

·      Converged voice and data solutions

 

·      Hosting and infrastructure

 

·      Wholesale services provided to  telecommunications carriers, resellers, Internet service providers (ISPs),  wireless providers, competitive local access providers and cable-TV operators

 

·      Global contact centre solutions in  English, Spanish and French languages at international locations including  Canada, the Philippines, Guatemala, El Salvador, Panama, and Nevada, U.S.A.

 

·      Customized solutions, such as provision  of business process outsourcing services to the healthcare, human resources  and financial services sectors

 

·      Certain  services facilitated by multi-lingual international call centres. |       | Competition for voice and  data communications services includes:

 

·      Principally Bell Canada, as well as MTS  Allstream and cable-TV companies competing with their own national  infrastructures

 

·      Substitution to wireless services  including those offered by TELUS.

 

Wholesale service  competitors include Bell Canada, MTS Allstream and Rogers.

 

Competitors for call centre services include  Convergys, Sykes and Verizon LiveSource.

 

Competitors for customized managed outsourcing  solutions include system integrators CGI, EDS and IBM. |

 

17

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**Wireline consumer servicesin incumbent territories of British Columbia, Alberta and Eastern Quebec**

 
| **TELUS capability**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Competition**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Access to almost every urban and rural home  and business in incumbent territories in B.C., Alberta and Eastern Quebec.  TELUS wireline residential access line services are provided to an estimated  60% of households in B.C. and Alberta.

 

Extensive switched network, significant  investment in Internet infrastructure, and access to an IP-based national  network:

 

·      Provision of local, long distance and  Internet services.

 

Broadcasting distribution licences to offer  digital television services in incumbent territories, and licences to offer  commercial video-on-demand services:

 

·      IP-based TELUS TV services have been  available to an increasing number of communities since 2005

 

·      High-definition (HD) TV and personal  video recorder (PVR) capabilities since 2008

 

·      TELUS Satellite TV, made possible by an  agreement with Bell Canada, was introduced in B.C. and Alberta in mid-2009 to  complement the IP-based service and expand market coverage of TELUS TV to  more than 90% of the population of the two provinces. |       | Substitution of wireless services, including  TELUS’ own wireless offerings, for local and long distance services. Households  with wireless telephone services only (among all providers, including TELUS)  are estimated to be 15% in B.C. and Alberta.

 

Cable-TV providers that have access to urban  and suburban homes to provide Internet, entertainment and VoIP-based  telephony services, including:

 

·      Shaw Communications Inc. in B.C. and  Alberta

 

·      Cogeco Cable in Eastern Quebec.

 

Rogers Communications, Bell Canada and Shaw  Communications, providing combinations of local, long distance, Internet,  entertainment and wireless services.

 

Various others (e.g. Vonage) that offer resale  or VoIP-based local, long distance and Internet services.

 

Satellite-based entertainment and Internet  services (Bell Canada and Shaw Communications).

  |

 

### **4.2 Operationalresources**

 
| **Operational resources**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **Operational risks and risk management**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **People**

 

At the end of 2009, the  Company employed approximately 36,400 (35,300 full-time equivalent)  multi-skilled TELUS team members across a wide range of operational  functions, domestically and certain functions internationally.

 

Offshore operations support  business process outsourcing services for external customers. The Company  also uses offshore services for certain internal operations to improve  efficiency and to allow onshore operations to focus on value-added services.

 

Employee compensation  programs support a high-performance culture, and contain market-driven and  performance-based components.

 

The Company expects that it  has adequate employee resources to cover ongoing retirements, and ready  access to labour in Canada and, for call centres and specific support  functions, in various locations internationally. TELUS uses a small number of  external contractors or consultants.

 

The  Company has extensive training programs in place. |       | Employee compensation,  retention and labour relations risks discussion - See *Section 10.4 Human  resources.*See also *Section 10.5  Process risks — foreign operations.*

 

·      Difficulties in retaining and hiring  qualified staff abated in 2009 due to the economic slowdown. Retention and  hiring issues are expected to remain due to an increase in the number of  competitors, and are indicated by a four percentage point decrease in the  employee engagement score to 54% in 2009.

 

·      TELUS will continue to focus on other  non-monetary factors that have a clear alignment with engagement including:  performance management, career opportunities, training and development, and  recognition.

 

·      The Company has altered weightings of  its performance-based measures for 2010 to place greater emphasis on  corporate-wide and individual performance.

 

·      Approximately 13,400 team members are  covered by a collective agreement. The collective agreement with approximately  1,000 members of the Syndicat québécois des employés de TELUS (SQET)expired  on December 31, 2009. The collective agreement with the  Telecommunications Workers Union, representing approximately 11,800 members,  expires on November 19, 2010.

 

·      TELUS International employs  approximately 8,700 team members.

 

General safety — See *Section 10.8 Health,  safety and environment*. |

 

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| **Operational resources**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Operational risks and risk management**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Brand and services**

 

The Company has a well established and  recognizable national brand that is supported by extensive advertising across  all media.

 

TELUS launched 3G+ wireless services on November 5,  2009, including a wide variety of new smartphones, such as the Apple iPhone  and many others.

 

Koodo Mobile® basic wireless brand and service  was successfully introduced in March 2008 and successfully marketed.

 

Services are summarized in *Section 4.1* above.

 

Sales distribution:

 

·      Wireless services are supported through  a broad network of TELUS-owned and branded stores (including Black’s Photo  stores), an extensive distribution network of exclusive dealers and large  third-party electronics retailers (e.g. Future Shop / Best Buy, London Drugs)  and online self-serve applications

 

·      Business services across wireless and  wireline through both TELUS sales representative and independent dealers

 

·      Wireline consumer services include  mass-marketing campaigns, client care telephone agents, and online self-serve  applications. |       | Industry and economy — See *Section 9: General outlook* and *Section 10.11  Economic growth and fluctuations.*

 

Competition — See *Section 4.1*  above and *Section 10.1.*

 

Regulation — See *Section 10.3.*

 

Regulatory context:

 

·      None of the Wireless segment revenues  are currently subject to CRTC price regulation.

 

·      Less than one-quarter of the Company’s  revenues are from Wireline segment regulated services and subject to CRTC  price regulation.

 

·      Deregulation of wireline local phone  services for residential markets covering approximately 79% of its  residential lines in non-high cost serving areas and 69% of its business  lines in incumbent areas of B.C., Alberta and Eastern Quebec.

 

·      Non-incumbent  local exchange carrier (non-ILEC) services, long distance, Internet,  international telecommunications, inter-exchange private line and certain  data services, as well as the sale of customer premises equipment, continue  to be forborne from regulation. |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Technology, systems and  properties**

 

TELUS is a highly complex  technology-dependent company with a multitude of interconnected wireline and  wireless telecommunications networks, IT systems and processes.

 

Network facilities are  constructed under or along streets and highways, pursuant to rights-of-way  granted by the owners of land such as municipalities and the Crown, or on  freehold land owned by TELUS.

 

Intangible assets include  wireless spectrum licensed from Industry Canada, essential to providing  wireless services.

 

Real properties (owned or  leased) include: administrative office space, work centres, and space for  telecommunications equipment. A small number of buildings are constructed on  leasehold land and the majority of radio towers are situated on lands held  under leases or licences for varying terms.

 

TELUS International provides contact centre  and business process and IT outsourcing by utilizing sophisticated on-site  facilities including call centre solutions, utilizing international data  networks, and reliable data centres with rigorous privacy and security  standards. Global rerouting and diversity is provided from 13 facilities in  six countries.    |       | Technology risks — See *Section 10.2.*

 

Process risks — See *Section 10.5.*

* *

Risks associated with legal  and regulatory compliance, defects in software and failures in data and  transaction processing, and intellectual property and propriety rights — See *Section 10.9*. 

 

Human-caused and natural  threats to TELUS infrastructure and operations — See *Section 10.10.*

 

Increasing adoption of  wireless services and expanding wireless competition have resulted in more  public scrutiny of, and opposition to, new radio towers. Public concerns  include perceived health risks. See *Section 10.8  Health, safety and environment*.

 

Annual spectrum licence fees may rise in  future. In addition, the design of future wireless spectrum auctions, such as  for the 700 MHz and 2.5/2.6 GHz ranges, may be unfavourable to incumbents,  making the cost of acquiring future spectrum uncertain. See *Section 10.3 Regulatory*.                                                                                                                                                                                                             |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

### **4.3 Liquidity andcapital resources**

 

*Capitalstructure financial policies*

 

The Company’s objectiveswhen managing capital are: (i) to maintain a flexible capital structurethat optimizes the cost of capital at acceptable risk; and (ii) to managecapital in a manner that balances the interests of equity and debt holders.

 

In the management and definition of capital,the Company includes Common Share and Non-Voting Share equity (excludingaccumulated other comprehensive income), long-term debt (including anyassociated hedging assets or liabilities, net of amounts recognized inaccumulated other comprehensive income), cash and temporary investments andsecuritized accounts receivable.

 

The Company manages the capital structure andmakes adjustments to it in light of changes in economic conditions and the riskcharacteristics of the underlying assets. In order to maintain or adjust thecapital structure, the Company may adjust the amount of dividends paid toholders of Common Shares and Non-Voting Shares, issue new shares from treasury,purchase shares for cancellation pursuant to permitted normal course issuerbids, issue new

 

19

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debt, issue new debt to replace existing debtwith different characteristics and/or increase or decrease the amount of salesof trade accounts receivable to an arm’s-length securitization trust.

 

The Company monitors capital utilizing a number ofmeasures, including: net debt to EBITDA — excluding restructuringcosts; and dividend payout ratio of sustainable net earnings. For furtherdiscussion, see *Section 7.4 Liquidity and capitalresource measures*.

 

*Financingand capital structure management plans*

 

The2009 financing and capital structure management plan was outlined in the MD&Afor 2008. Progress against the 2009 plan is described below, followed by plansfor 2010.

 

***Reporting back on TELUS’2009 financing and capital structure management plan***

 

**Repurchase TELUS CommonShares and TELUS Non-Voting Shares under the normal course issuer bid (NCIB)**

 

No shares were repurchased in 2009, asmanagement preserved cash to support increased capital expenditures forwireline and wireless broadband initiatives. No new NCIB was filed for 2010.

** **

**Pay dividends to theholders of Common Shares and Non-Voting Shares**

 

The dividend declared for the fourth quarter of 2009was 47.5 cents per share, unchanged from one year earlier. This follows fiveconsecutive years of dividend increases effective with the fourth quarterdeclaration.

 

Beginning with the dividend declared for thefourth quarter of 2009, paid January 4, 2010, TELUS issued shares fromtreasury for reinvested dividends at a 3% discount, rather than purchase sharesexclusively in the open market.

** **

**Use proceeds fromsecuritized receivables, bank facilities, commercial paper and dividendreinvestment, as needed, to supplement free cash flow and meet other cashrequirements**

 

In May 2009, TELUS extended the terminationdate for its accounts receivable securitization program to 2012. Proceeds fromsecuritized accounts receivable were $500 million at December 31, 2009,up from $400 million at September 30 and June 30, 2009, and upfrom $300 million at March 31, 2009 and December 31, 2008.

 

In the second quarter, the Company usedincreased proceeds from securitized receivables and proceeds received from the$700 million May 2009 Note issue to reduce amounts drawn against its2012 credit facility from $300 million at March 31 to $nil at June 30,and to reduce issued commercial paper from $1,188 million at March 31to $604 million at June 30. For the full year, amounts drawn againstthe 2012 credit facility were reduced by $980 million, while issuedcommercial paper increased slightly to $467 million.

 

The Company announced that effective with thedividend to be paid January 4, 2010, shares will be issued from treasuryat a discount of 3% in respect of the dividend reinvestment program. Theseshares were previously purchased in the market with no discount.

** **

**Maintain compliance withfinancial objectives, policies and guidelines**

 

Maintain a minimum $1 billion in unutilized liquidity — The Company had unutilized credit facilitiesexceeding $1.7 billion at December 31, 2009.

 

Net debt to EBITDA excluding restructuring costs ratioof 1.5 to 2.0 times — Actual result slightly under 2.0times at December 31, 2009.

 

Dividend payout ratio of 45 to 55% of sustainable netearnings on a prospective basis— The historical ratio was 67% when calculated based on the annualized fourthquarter dividend and 2009 earnings per share, excluding favourable incometax-related adjustments, the loss on redemption of long-term debt and minimalimpacts from a net-cash settlement feature. The ratio was 61% based on actualearnings per share for 2009.

 

**Maintain position of fullyhedging foreign exchange exposure for indebtedness**

 

Maintained for the 8.00% U.S. dollar Notes due 2011, the only foreign currency-denominateddebt issue. The Company unwound a portion of cross currency interestrate swaps associated with the early partial redemption of 30% of theoutstanding Notes on December 31, 2009.

 

**Give consideration toissuing long-term public debt or establishing new term credit facilities in2009 to refinance short-term financing sources or upcoming debt maturities**

 

In May 2009,the Company successfullyclosed a $700 million offering of 4.95% Notes due May 2014. The netproceeds of the offering were used for corporate purposes, including repaymentof amounts outstanding under the 2012 credit facility and outstandingcommercial paper.

 

In June, the Company extended the term of its365-day revolving credit facility to December 31, 2010, with the availableamount becoming $300 million. In September 2009, the Company renewed itsshelf prospectus pursuant to which it could offer up to $4 billion of debtand equity. Following a debt issue in December, the Company can offer up to$3 billion of debt and equity.

 

In December 2009, the Company successfullyclosed a $1 billion offering of 5.05% Notes due December 4, 2019. Netproceeds of the offering were used: (i) to fund the early partialredemption of U.S.$583.5 million of the of 8% U.S. dollar denominated Notes dueJune 1, 2011, as part of the previously outstanding U.S.$1.945 billion(including U.S.$20 million indirectly owned by the Company); and(ii) for payments required to terminate cross currency interest rate swapsassociated with the Notes redeemed. The redemption price (net of theU.S.$6 million for the Notes owned indirectly by the Company), excludingaccrued interest, was U.S.$577 million, or $607 million, and thepayment required to terminate the associated swaps was $315 million. Thepartial redemption reduced refinancing risk in 2011 and provides a lowerinterest rate for the replaced debt, in the future.

 

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***Reporting back on TELUS’2009 financing and capital structure management plan***

 

**Preserve access to thecapital markets at a reasonable cost by maintaining investment grade creditratings and targeting improved credit ratings in the range of BBB+ to A-, or theequivalent, in the future**

 

At February 25, 2010, investment gradecredit ratings from the four rating agencies that cover TELUS were in thedesired range. TELUS’ May 2009 and December 2009 debt issues wereassigned credit ratings of: A(low) by DBRS Ltd., BBB+ by Standard and Poor’s,Baa1 by Moody’s Investors Service and BBB+ by Fitch Ratings, all with a stabletrend or outlook and consistent with the agencies’ existing ratings of TELUSdebt securities. 

 

***TELUS’ 2010 financing and capitalstructure management plan***

 

AtDecember 31, 2009, TELUS had access to undrawn credit facilities of morethan $1.7 billion. The Company has no significant maturities of long-termdebt until 2011. TELUS expects to generate free cash flow in 2010, which wouldbe available to, among other things, pay dividends to holders of Common Sharesand Non-Voting Shares. While anticipated cash flow is expected to be more thansufficient to meet current requirements and remain in compliance with TELUS’financial policies, these intentions could constrain TELUS’ ability to investin its operations for future growth. For the related risk discussion, see *Section 10.6 Financing and debt requirements.*

 

Asdescribed in *Section 1.5,*payment of netcash income taxes in the future will reduce the after-tax cash flow otherwiseavailable to return capital to the Company’s shareholders. If actual resultsare different from TELUS’ expectations, there can be no assurance that TELUSwill not need to change its financing plans, or its intention to pay dividendsaccording to the target payout guideline.

 

TELUSexpects to maintain its current position of fully hedging its foreign exchangeexposure for indebtedness on its remaining U.S. dollar denominated debt. At theend of 2009, 87% of TELUS’ total debt was on a fixed-rate basis, and theweighted average term to maturity was approximately five years, up from fouryears at the end of 2008.

 

At December 31, 2009, TELUS also hasaccess to a shelf prospectus pursuant to which it can issue up to$3 billion of debt and equity. TELUS believes that its investment gradecredit ratings provide reasonable access to capital markets to facilitatefuture debt issuance.

 

**Debtmaturities as at December 31, 2009**

 
| ** **            | ** ** | **Long-term debt  maturities (1), principal** | ** ** | **Interest**        | ** ** |
|-----------------------|------------|-----------------------------------------------|------------|---------------------|------------|
| **($ millions)** | ** ** | **All except  capital  leases**               | ** ** | **Capital  leases** | ** ** | **and like  carrying  costs (2)** | ** ** |
| 2010                  |       | 80                                            |       | 2                   |       | 437 |   |
| 2011                  |       | 2,064                                         |       | —              |       | 344 |   |
| 2012                  |       | 767                                           |       | —              |       | 247 |   |
| 2013                  |       | 300                                           |       | —              |       | 232 |   |
| 2014                  |       | 700                                           |       | —              |       | 207 |   |
| Thereafter            |       | 2,949                                         |       | —              |       | 864 |   |
| Total                 |       | 6,860                                         |       | 2                   |       | 2,331 |   |

 

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(1)          Where applicable, principal-related maturities reflect foreign currencyexchange rates at December 31, 2009.

 

(2)          Interest and like carrying costs for commercial paper have beencalculated based upon rates in effect as at December 31, 2009.

 

### **4.4 Disclosurecontrols and procedures and internal control over financial reporting**

 

*Disclosure controls andprocedures*

 

Disclosurecontrols and procedures are designed to provide reasonable assurance that allrelevant information is gathered and reported to senior management, includingthe President and Chief Executive Officer (CEO) and the ExecutiveVice-President and Chief Financial Officer (CFO), on a timely basis so thatappropriate decisions can be made regarding public disclosure.

 

The CEO and theCFO have evaluated the effectiveness of the Company’s disclosure controls andprocedures related to the preparation of the MD&A and the Consolidatedfinancial statements. They have concluded that the Company’s disclosurecontrols and procedures were effective, at a reasonable assurance level, toensure that material information relating to the Company and its consolidatedsubsidiaries would be made known to them by others within those entities,particularly during the period in which the MD&A and the Consolidatedfinancial statements contained in this report were being prepared.

 

*Internalcontrol over financial reporting*

 

Internal controlover financial reporting is designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financial statementsin accordance with Canadian GAAP and the requirements of the Securities andExchange Commission in the United States, as applicable. TELUS’ CEO and CFOhave assessed the effectiveness of the Company’s internal control overfinancial reporting as at December 31, 2009 in accordance with *Internal Control — Integrated Framework*, issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Basedon this assessment, TELUS’ CEO and CFO have determined that the Company’sinternal control over financial reporting is effective as at December 31,2009 and expect to certify TELUS’ annual filings with the U.S. Securities andExchange Commission on Form 40-F, as required by the United States *Sarbanes-Oxley Act*, and with Canadian securities regulatoryauthorities.

 

21

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Deloitte &Touche LLP, the Company’s auditor, has audited internal controls over financialreporting of TELUS Corporation as at December 31, 2009.

 

*Changesin internal control over financial reporting*

 

There were nochanges in internal control over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

## **5.**              Discussion of operations

 

The discussion in this section is qualified inits entirety by the *Caution regardingforward-looking statements* at the beginning of the MD&A.

 

### **5.1 Selectedannual information**

 

The following selected three-year consolidatedfinancial information has been derived from and should be read in conjunctionwith the Consolidated financial statements of TELUS for the year endedDecember 31, 2009, and its annual Consolidated financial statements forprevious years.

 

Net income no longer includes a deduction fornon-controlling interests. The change results from the January 1, 2009adoption of the new recommendations for business combinations (CICA HandbookSection 1582), consolidations (CICA Handbook Section 1601) andnon-controlling interests (CICA Handbook Section 1602). Net incomeattributable to Common Shares and Non-Voting Shares is equivalent to Net incomepreviously reported for 2008 and 2007. Commencing in 2009, the newrecommendations of the CICA for goodwill and intangible assets (CICA Handbook Section 3064)apply to the Company, and the application of this standard resulted inadjustments to the Consolidated statements of financial position for 2008 and2007. See *Developments in fiscal 2009* in *Section 8.2.4*.

 
| **Selected annual information**                                                 | ** ** | ** ** | ** ** | **2008**          | ** ** | **2007**          | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|-------------------|------------|
| **Years ended December 31 ($ in millions, except per share amounts)** | ** ** | **2009**   | ** ** | **(as adjusted)** | ** ** | **(as adjusted)** | ** ** |
| Operating revenues                                                              | ** ** | **9,606**  |       | 9,653             |       | 9,074             |       |
|                                                                            | ** ** | ** ** |       |              |       |              |       |
| Operations expense  (1)                                                         | ** ** | **5,925**  |       | 5,815             |       | 5,465             |       |
| Restructuring costs                                                             | ** ** | **190**    |       | 59                |       | 20                |       |
| Depreciation and  amortization                                                  | ** ** | **1,722**  |       | 1,713             |       | 1,615             |       |
| Total operating  expenses                                                       | ** ** | **7,837**  |       | 7,587             |       | 7,100             |       |
| Financing costs and  other expense                                              | ** ** | **564**    |       | 499               |       | 476               |       |
| Income before  income taxes                                                     | ** ** | **1,205**  |       | 1,567             |       | 1,498             |       |
| Income taxes                                                                    | ** ** | **203**    |       | 436               |       | 233               |       |
| Net income                                                                      | ** ** | **1,002**  |       | 1,131             |       | 1,265             |       |
| Other comprehensive  income                                                     | ** ** | **58**     |       | (26               | )          | 74                |       |
| Comprehensive  income                                                           | ** ** | **1,060**  |       | 1,105             |       | 1,339             |       |
| Net income  attributed to:                                                      | ** ** | ** ** |       |              |       |              |       |
| Common Shares and  Non-Voting Shares                                            | ** ** | **998**    |       | 1,128             |       | 1,258             |       |
| Non-controlling  interests                                                      | ** ** | **4**      |       | 3                 |       | 7                 |       |
|                                                                            | ** ** | ** ** |       |              |       |              |       |
| Income per Common Share and Non-Voting Share (2) – basic              | ** ** | **3.14**   |       | 3.52              |       | 3.79              |       |
| Income per Common Share and Non-Voting Share (2) – diluted            | ** ** | **3.14**   |       | 3.51              |       | 3.76              |       |
|                                                                            | ** ** | ** ** |       |              |       |              |       |
| Cash dividends  declared per Common Share and  Non-Voting Share                 | ** ** | **1.90**   |       | 1.825             |       | 1.575             |       |
|                                                                            | ** ** | ** ** |       |              |       |              |       |
| Total assets                                                                    | ** ** | **19,219** |       | 19,021            |       | 16,849            |       |
|                                                                            | ** ** | ** ** |       |              |       |              |       |
| Current maturities  of long-term debt                                           | ** ** | **82**     |       | 4                 |       | 5                 |       |
|                                                                            | ** ** | ** ** |       |              |       |              |       |
| Long-term debt                                                                  | ** ** | **6,090**  |       | 6,348             |       | 4,584             |       |
| Derivative and other  non-current financial liabilities                         | ** ** | **1,108**  |       | 1,103             |       | 1,507             |       |
| Total non-current  financial liabilities                                        | ** ** | **7,198**  |       | 7,451             |       | 6,091             |       |
|                                                                            | ** ** | ** ** |       |              |       |              |       |
| Future income taxes                                                             | ** ** | **1,319**  |       | 1,213             |       | 1,006             |       |
|                                                                            | ** ** | ** ** |       |              |       |              |       |
| Owners’ Equity                                                             | ** ** | ** ** |       |              |       |              |       |
| Common equity                                                                   | ** ** | **7,554**  |       | 7,085             |       | 6,829             |       |
| Non-controlling  interests                                                      | ** ** | **21**     |       | 23                |       | 26                |       |

 

----

(1)          Operations expense in 2007 includes a$169 million charge for introducing a net-cash settlement feature forshare option awards granted prior to 2005.

 

(2)          Or earnings per share (EPS).

 

22

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Differences amongthe three years include:

 

·                  Revenues were relatively flat in2009 due to economic pressures and intense competition, after growing by 6% in2008. Wireless revenue and wireline data revenue combined representapproximately 71% of consolidated revenues in 2009, as compared to 69% in 2008and 67% in 2007.

 

·                  Total operating expenses in 2009include increased restructuring costs as compared to 2008 and 2007. Definedbenefit pension plan expenses included in Operations expense were$18 million in 2009, as compared to recoveries of $100 million in2008 and $96 million in 2007. The pension expense increase resulted mainlyfrom a decline in value of equity markets in 2008. Depreciation andamortization increased mainly from investments in software assets such asbilling and client care systems.

 

·                  Financing costs and other expensesshown in the preceding table are net of interest income of $47 million in2009, $14 million in 2008 and $37 million in 2007. The majority ofinterest income related to settlement of prior years’ income tax matters. Financingcosts in 2009 were affected by the early partial redemption of U.S. dollarNotes in December 2009 and termination of related cross currency interestrate swaps, which resulted in a charge of $99 million.

 

·                  Income tax-related adjustmentsresulting from legislated income tax changes, settlements and tax reassessmentsfor prior years, including any related interest, positively affected Net incomeby approximately $174 million (55 cents per share) in 2009,$49 million (15 cents per share) in 2008 and $257 million (78 centsper share) in 2007.

 

·                  Other comprehensive income includeschanges in unrealized fair value of derivatives designated as cash flow hedgesof $69 million in 2009, $(26) million in 2008 and $82 million in2007, principally associated with U.S. dollar debt.

 

 

### **5.2 Summary ofquarterly results and fourth quarter recap**

 
| **($ in millions, except per share  amounts)**             | ** **     | **2009  Q4** | ** ** | **2009  Q3** | ** ** | **2009  Q2** | ** ** | **2009  Q1** | ** ** | **2008  Q4** | ** ** | **2008  Q3** | ** ** | **2008  Q2** | ** ** | **2008  Q1** | ** ** |
|-----------------------------------------------------------------|----------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
| Operating revenues                                              | ** **     | **2,443**    |       | 2,411        |       | 2,377        |       | 2,375        |       | 2,454        |       | 2,450        |       | 2,399        |       | 2,350        |       |
| Operations expense                                              | ** **     | **1,577**    |       | 1,456        |       | 1,451        |       | 1,441        |       | 1,479        |       | 1,465        |       | 1,477        |       | 1,394        |       |
| Restructuring costs                                             | ** **     | **77**       |       | 32           |       | 53           |       | 28           |       | 38           |       | 10           |       | 4            |       | 7            |       |
|                                                            | ** **     | ** **   |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| EBITDA (1)                                                      | ** **     | **789**      |       | 923          |       | 873          |       | 906          |       | 937          |       | 975          |       | 918          |       | 949          |       |
| Depreciation                                                    | ** **     | **347**      |       | 330          |       | 330          |       | 334          |       | 351          |       | 344          |       | 343          |       | 346          |       |
| Amortization of intangible  assets                              | ** **     | **94**       |       | 100          |       | 94           |       | 93           |       | 84           |       | 92           |       | 77           |       | 76           |       |
|                                                            | ** **     | ** **   |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Operating income                                                | ** **     | **348**      |       | 493          |       | 449          |       | 479          |       | 502          |       | 539          |       | 498          |       | 527          |       |
| Other expense                                                   | ** **     | **10**       |       | 6            |       | 11           |       | 5            |       | 11           |       | 6            |       | 2            |       | 17           |       |
| Financing costs                                                 | ** **     | **230**      |       | 101          |       | 106          |       | 95           |       | 118          |       | 122          |       | 114          |       | 109          |       |
|                                                            | ** **     | ** **   |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Income before income  taxes                                     | ** **     | **108**      |       | 386          |       | 332          |       | 379          |       | 373          |       | 411          |       | 382          |       | 401          |       |
| Income taxes (recovery)                                         | ** **     | **(48**      | **)**      | 106          |       | 88           |       | 57           |       | 88           |       | 125          |       | 114          |       | 109          |       |
| Net income                                                      | ** **     | **156**      |       | 280          |       | 244          |       | 322          |       | 285          |       | 286          |       | 268          |       | 292          |       |
| Net income attributable  to Common Shares and Non-Voting Shares | ** **     | **155**      |       | 279          |       | 243          |       | 321          |       | 285          |       | 285          |       | 267          |       | 291          |       |
| Income per Common Share  and                                    | ** **     | ** **   |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Non-Voting Share                                                | – basic   | ** **   | **0.49**   |         | 0.88       |         | 0.77       |         | 1.01       |         | 0.90       |         | 0.89       |         | 0.83       |         | 0.90       |   |
|                                                            | – diluted | ** **   | **0.49**   |         | 0.87       |         | 0.77       |         | 1.01       |         | 0.89       |         | 0.89       |         | 0.83       |         | 0.90       |   |
| Cash dividends declared  per Common Share and Non-Voting Share  | ** **     | **0.475**    |       | 0.475        |       | 0.475        |       | 0.475        |       | 0.475        |       | 0.45         |       | 0.45         |       | 0.45         |       |

 

----

(1)          EBITDA is a non-GAAP measure. See *Section 11.1Earnings before interest, taxes, depreciation and amortization (EBITDA).*

 

**Trends**

 

The recent economic downturn led to spendingrestraint and deferral of purchases, as well as heightened consumer andbusiness customers’ focus on value and increased expectations for betterpricing and packaging of services. The consolidated revenue trend reflectslower year-over-year growth in wireless network revenue, including a 1.7%decrease in the fourth quarter of 2009. Wireless blended ARPU for the fourthquarter of 2009 decreased by 7.7% year-over-year, as growth in data ARPUmoderated from increased adoption of data plans and use of mobile Internet keys,and was more than offset by declining voice ARPU. The voice ARPU decline inorder of importance includes pricing competition, greater spending restraintand price optimization on the part of customers, increased use of in-bucket orincluded-minute service plans, continued decline in Mike service ARPU, lowerroaming revenues and the growing base of Koodo postpaid basic subscribers.

 

23

----

 

The expected entry of a number of new wirelesscompetitors in 2010 and 2011 may disrupt usual seasonal patterns for wirelesssubscriber additions in the future. Historically, there has been significantfourth quarter seasonality with respect to higher wireless subscriberadditions, related acquisition costs and equipment sales, resulting in lowerfourth quarter wireless EBITDA. The third quarter has become more significantin terms of subscriber additions in recent years as a result of back-to-schooloffers, while subscriber additions have typically been lowest in the first quarter.In addition, wireless ARPU has generally risen sequentially in the second andthird quarters, and declined sequentially in the fourth and first quarters.

 

Consolidated revenues also continue to reflectgrowth in wireline data revenue, however, data revenue growth has moderated in2009 due to the recession and strong price competition, and was more thanoffset by declining wireline legacy voice local and long distance revenues. Thedecline in wireline voice revenues is due to substitution to wireless andInternet services, as well as competition from VoIP service providers(including cable-TV competitors), resellers and facilities-based competitors.Residential network access line (NAL) losses have moderated over the five mostrecent quarters because of more effective winback efforts and synergies frombundling services, while TELUS’ main cable-TV competitor’s digital telephonegeographic coverage expansion slowed. The Company has observed a larger numberof disconnections and fewer installations of business NALs attributed partly toeconomic conditions and partly to competition.

 

The sequential and year-over-year increase infourth quarter 2009 consolidated operations expense primarily reflects higherwireless retention costs associated with migration to smartphones and additionof expenses from Black’s Photo since its acquisition in September 2009.The sequential decrease in consolidated operations expenses in the firstquarter of 2009, and year-over-year quarterly decreases in the second and thirdquarters of 2009, resulted mainly from lower employee compensation, includingperformance bonus expenses. Restructuring costs have increased stronglybeginning in the fourth quarter of 2008, as management accelerated efficiencyinitiatives, primarily in the wireline segment.

 

The sequential increase in depreciation expensein the fourth quarter of 2009 resulted from growth in capital assets in serviceincluding the wireless HSPA network launched in November. The sequentialdecline in depreciation in the first quarter of 2009 was due to certain assetsbecoming fully depreciated in 2008.

 

Amortization in the fourth quarter of 2009 wasreduced by application of approximately $10 million in investment taxcredits following determination of eligibility by taxation authorities, forassets capitalized in prior years that are fully amortized. Similarly,amortization in the fourth quarter of 2008 was reduced by approximately$6 million for investment tax credits. The sequential increase inamortization of intangible assets in the third quarter of 2008 was due toimplementation of the converged billing platform for B.C. residential customersin July 2008.

 

Financing costs in the fourth quarter of 2009include a $99 million loss on redemption of long-term debt to early redeem30% of the principal amount of U.S. dollar 8% Notes (maturing June 2011)and unwinding related cross currency interest rate swaps. The partialredemption was financed with a new ten-year $1 billion 5.05% Note issue.Financing costs for each period shown are also net of varying amounts ofinterest income, including interest from the settlement of prior years’ incometax-related matters.

 

The trends in Net income and earnings per share(EPS) reflect the items noted above, as well as adjustments arising fromlegislated income tax changes, settlements and tax reassessments for prioryears, including any related interest on reassessments. EPS was also positivelyimpacted by decreased shares outstanding from share repurchases in 2008.

 
| **Income tax-related adjustments********($ in  millions, except EPS amounts)** | ** ** | **2009********Q4** | ** ** | **2009********Q3** | ** ** | **2009********Q2** | ** ** | **2009********Q1** | ** ** | **2008********Q4** | ** ** | **2008********Q3** | ** ** | **2008********Q2** | ** ** | **2008********Q1** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| Approximate Net income impact                                                       |       | 79                 |       | 14                 |       | 19                 |       | 62                 |       | 32                 |       | —             |       | —             |       | 17                 |       |
| Approximate EPS impact                                                              |       | 0.25               |       | 0.04               |       | 0.06               |       | 0.20               |       | 0.10               |       | —             |       | —             |       | 0.05               |       |
| Approximate basic EPS excluding income tax-related impacts                          |       | 0.24               |       | 0.84               |       | 0.71               |       | 0.81               |       | 0.80               |       | 0.89               |       | 0.83               |       | 0.85               |       |

 

**Fourth quarter**

 

Management’s review of operations contained inTELUS’ fourth quarter news release on February 12, 2010, discussed fourthquarter results in more detail. The following summarizes changes in the fourthquarter operating results in 2009, as compared to 2008.

 

Consolidated operating revenue decreased by$11 million in the fourth quarter of 2009 when compared to the same periodin 2008. New revenue from the acquisition of Black’s Photo inSeptember 2009 and growth in wireline and wireless data revenues were morethan offset by declining voice revenues in both segments.

 

Operating income decreased by $154 millionmainly from higher expenses for restructuring ($39 million) and definedbenefit pension plans ($30 million), as well as lower wireless ARPU andhigher wireless subscriber retention costs, partly offset by lower non-pensionemployee-related expenditures, lower wireline advertising and promotionexpenditures and lower costs to acquire new wireless subscribers.

 

24

----

 

Income before income taxes decreased by$265 million from lower Operating income, the $99 million loss onearly partial redemption of U.S. dollar debt, and lower interest income. Incometaxes decreased by $136 million as a result of lower income before taxesand recoveries. Income taxes in the fourth quarter of 2009 also decreased as aresult of the revaluation of the future income tax liability for the Ontariorate reduction enacted in the quarter.

 

Net income decreased by $129 million or41 cents per share (basic) in the fourth quarter of 2009 when compared tothe same period in 2008. Net income before income tax-related recoveries decreasedby approximately $176 million (56 cents per share, which included a losson early partial redemption of long-term debt of approximately 22 cents pershare).

 
| **Analysis of Net income********($ millions)**                                    | ** ** | **Quarters ended  December 31** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| Net income in the  fourth quarter of 2008                                              |       | 285                                  |       |
| Deduct net  favourable income tax-related adjustments in 2008 (see *Section 5.2)* |       | (32                                  | )          |
|                                                                                   |       | 253                                  |       |
| Tax-effected  changes                                                                  |       |                                 |       |
| Higher defined  benefit pension plan expenses (1)                                      |       | (21                                  | )          |
| Higher restructuring  charges (1)                                                      |       | (27                                  | )          |
| Other changes in EBITDA  (1) (2)                                                  |       | (55                                  | )          |
| Higher depreciation  and amortization (1) (2)                                     |       | (6                                   | )          |
| Loss on redemption  of long-term debt                                                  |       | (69                                  | )          |
| Other                                                                                  |       | 2                                    |       |
|                                                                                   |       | 77                                   |       |
|                                                                                   |       |                                 |       |
| Net favourable  income tax-related adjustments in 2009 (see *Section 5.2)*        |       | 79                                   |       |
| **Net  income in the fourth quarter of 2009**                                          | ** ** | **156**                              | ** ** |

 

----

(1)          For the purposes of this presentation, the 2009blended statutory tax rate was used.

(2)          Excluding investment tax credits that are included inincome tax-related adjustments.

 

Cash provided by operating activities decreasedby $123 million in the fourth quarter of 2009 when compared to the sameperiod in 2008. Higher paid interest of $103 million was primarily fromthe early partial redemption of U.S. dollar Notes due June 2011.

 

Cash used by investing activities decreased by$130 million in the fourth quarter when compared to the same period in2008. The decrease was largely due to lower general capital expenditures forwireline network access as a result of the recession, as well as the ramp-up ofHSPA spending in the prior year.

 

**Net cash used by financingactivities was $104 million in the fourth quarter of 2009 as compared to$136 million in the fourth quarter of 2008. Cash was used primarily fordividend payments.**

 

### **5.3 Consolidatedoperations**

 
| **($ millions, except EBITDA  margin and** | ** ** | **Years  ended December 31** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| **employees)**                                  | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| Operating revenues                              | ** ** | **9,606**                         |       | 9,653 |   | (0.5 | )% |
| Operations expense                              | ** ** | **5,925**                         |       | 5,815 |   | 1.9 | % |
| Restructuring costs                             | ** ** | **190**                           |       | 59 |   | n/m |   |
| EBITDA (1)                                      | ** ** | **3,491**                         |       | 3,779 |   | (7.6 | )% |
| Depreciation                                    | ** ** | **1,341**                         |       | 1,384 |   | (3.1 | )% |
| Amortization of  intangible assets              | ** ** | **381**                           |       | 329 |   | 15.8 | % |
| Operating income                                | ** ** | **1,769**                         |       | 2,066 |   | (14.4 | )% |
| EBITDA margin (%)  (2)                          | ** ** | **36.3**                          |       | 39.1 |   | (2.8 | )pts. |
| Full-time  equivalent (FTE) employees           | ** ** | **35,300**                        |       | 35,900 |   | (1.7 | )% |

 

----

(1)          EBITDA is a non-GAAP measure. See *Section 11.1 Earnings before interest, taxes,depreciation and amortization (EBITDA).*

(2)          EBITDA divided by Operating revenues.

 

Discussion ofTELUS’ consolidated operations follows. Segmented discussion is provided in *Section 5.4 Wireline segment,**Section 5.5 Wireless segment*and *Section 7.2Cash used by investing activities — capital expenditures**.*

 

**Operating revenues**

 

Consolidated Operating revenues in 2009decreased by $47 million when compared to 2008. Wireless segment networkrevenue increased by $23 million as strong data revenue growth wasimpacted by ongoing declines in voice revenue. Wireless equipment and otherrevenue increased by $52 million from an increasing smartphone mix andhigher retention volumes, as well as inclusion of results from Black’s Photo (acquiredin September 2009), partially offset by lower acquisition volumes. In thewireline segment, data revenue increased by $74 million, but this growthwas more than offset by a

 

25

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$198 million decline in voice local and long distance revenue causedby local competition, technological substitution and economic impacts.

 

**Operations expense**

 

Operationsexpense in 2009 increased by $110 million when compared to 2008.

 
| ** **                                                             | ** ** | **Years  ended December 31** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                                                  | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| Salaries, benefits  except DBPP,(1) and employee-related expenses | ** ** | **2,375**                         |       | 2,549 |   | (6.8 | )% |
| DBPP expense  (recovery)                                               | ** ** | **18**                            |       | (100 | ) | n/m |   |
| Other operations  expenses                                             | ** ** | **3,532**                         |       | 3,366 |   | 4.9 | % |
|                                                                   | ** ** | **5,925**                         |       | 5,815 |   | 1.9 | % |

 

----

(1)          DBPP — defined benefit pension plans.

 

In respect of changes in operations expense in2009 when compared to 2008:

 

·                  Salaries, benefits (except DBPP benefits) and employee-related expensesdecreased by $174 million mainly from lower performance bonus expensesarising from lower than originally planned operating performance, as well as adecrease in domestic full-time equivalent (FTE) employees in 2009 (see *Section 2.2 — Investing in internal capabilities*),while management base salaries were frozen at 2008 levels

 

·                  TELUS’ defined benefit pension plans expense increased by$118 million mainly due to the decline in value of defined benefit pensionplans assets in 2008.

 

·                  Other operations expenses increased by $166 million. The increaseincluded higher wireless subscriber retention costs, higher wireless networkcosts from increasing smartphone adoption, and a $10 million higherwireless bad debt expense, as well as increased wireline TELUS TV programmingand customer acquisition costs, and costs to implement services for newwireline enterprise customers. These increases were partly offset by lowerwireless roaming and marketing costs and lower wireline advertising andpromotions costs.

 

**Restructuring costs**

 

Restructuring costs in 2009 were$190 million, reflecting an increase of $131 million from 2008. Restructuring costs in 2009 were primarilyseverance costs in respect of efficiency initiatives described in *Section 2.2 —**Investing ininternal capabilities*. Anexpense of approximately $75 million is expected for efficiencyinitiatives in 2010.

 

**EBITDA**

 

Consolidated EBITDA in 2009 decreased by$288 million or 8% when compared to 2008, primarily due to significantlyhigher defined benefit pension plan expenses and restructuring costs. Whenexcluding the impacts of higher pension expenses and restructuring costs,EBITDA decreased by $39 million or 1% in 2009. The underlying decreaseresulted from lower wireless ARPU related to the recession and competitiveimpacts and higher wireless subscriber retention costs, as well as higher costsfor delivery of TELUS TV services and implementation of services for newwireline enterprise customers. These increases were partly offset by lowernon-pension employee-related expenditures, lower wireline advertising andpromotion expenditures and lower costs to acquire new wireless subscribers.Excluding higher pension expenses and restructuring costs, underlying wirelineEBITDA increased by $22 million, while underlying wireless EBITDAdecreased by $61 million.

 

**Depreciation; Amortization of intangible assets**

 

Combined depreciation and amortization expensesin 2009 increased by $9 million when compared to 2008.

 

·                  Depreciation decreased by $43 million. Thisreflects accelerated depreciation during 2008 from a reduction in estimateduseful service lives for certain digital switching assets, as well as certaindigital cell sites becoming fully depreciated. This was offset by growth incapital assets.

 

·                  Amortization increased by $52 million. This includes approximately$18 million of increased amortization from the July 2008implementation of the converged wireline billing and client care platform inB.C. The balance is mainly due to increases in other administrative and networkapplication software including that supporting the November 2009 launch ofthe HSPA network.

 

·                  The Company completed its annual impairment testing for goodwill andintangible assets in December, and it was determined that there were noimpairments. See *Intangible assets* in *Section 8.1 Critical accounting estimates*.

 

26

----

 

**Operating income**

 

Operating income in 2009 decreased by$297 million when compared to 2008 primarily due to lower EBITDA.

 

**Other income statement items**

 
| **Other expense, net** | ** ** | **Years  ended December 31** | ** ** |
|------------------------|------------|-----------------------------------|------------|
| **($ millions)**  | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| ** **             |       | **32**                            |       | 36 |   | (11.1 | )% |

 

Other expense, net includes accounts receivablesecuritization expense, income (losses) or impairments in equity or portfolioinvestments, gains and losses on disposal of real estate, and charitabledonations.

 

Accounts receivable securitization expenses wereapproximately $10 million in 2009 and $11 million in 2008. Averageproceeds from securitized accounts receivable were higher in 2009 than in 2008,offset by lower average rates. See *Section 7.6 Accounts receivable sale*for additionalinformation.Charitable donation expensesand other net gains and losses were relatively unchanged.

 
| **Financing costs**                                           | ** ** | **Years  ended December 31** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                                         | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| Interest on  long-term debt, short-term obligations and other | ** ** | **483**                           |       | 481 |   | 0.4 | % |
| Foreign exchange  (gains)                                     | ** ** | **(3**                            | **)**      | (1 | ) | n/m |   |
| Loss on redemption  of long-term debt                         | ** ** | **99**                            |       | — |   | n/m |   |
|                                                          | ** ** | **579**                           |       | 480 |   | 20.6 | % |
| Capitalized interest  during construction                     | ** ** | **—**                        |       | (3 | ) | n/m |   |
| Interest income  (tax refunds)                                | ** ** | **(46**                           | **)**      | (9 | ) | n/m |   |
| Interest income  (other)                                      | ** ** | **(1**                            | **)**      | (5 | ) | n/m |   |
|                                                          | ** ** | **532**                           |       | 463 |   | 14.9 | % |

 

Interest on long-term and short-term debt andother in 2009 increased by $2 million when compared to 2008. A higheraverage debt balance in 2009 resulted primarily from payment for advancedwireless services (AWS) spectrum licences in the third quarter of 2008, largelyoffset by a lower effective interest rate.

 

In December 2009, the Company completed anearly partial redemption of U.S.$583.5 million of the U.S. dollar Notes andassociated cross currency interest rate swaps, funded with $1 billion ofnew 10-year 5.05% Notes. In respect of this redemption, the Company recorded a$63 million loss on redeemed U.S. dollar 8% Notes due June 2011, anda loss of $36 million for termination of associated cross currencyinterest rate swaps.

 

Interest income on tax refunds was related tothe settlement of prior years’ tax matters, while other interest income wasprimarily from cash balances and temporary investments.

 

 

 

27

----

 
| **Income taxes**                                                                                              | ** ** | **Years  ended December 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions, except tax rates)**                                                                       | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| Basic blended  federal and provincial tax at statutory income tax rates                                       | ** ** | **366**                           |       | 486 |   | (24.7 | )% |
| Revaluation of  future income tax liability to reflect future statutory income tax rates                      | ** ** | **(99**                           | **)**      | (41 | ) | — |   |
| Tax rate  differential on, and consequential adjustments from, reassessments of prior  years’ tax issues | ** ** | **(68**                           | **)**      | (21 | ) | — |   |
| Share option award  compensation                                                                              | ** ** | **4**                             |       | 6 |   | — |   |
| Other                                                                                                         | ** ** | **—**                        |       | 6 |   | — |   |
|                                                                                                          | ** ** | **203**                           |       | 436 |   | (53.4 | )% |
| Blended federal and  provincial statutory tax rates (%)                                                  | ** ** | **30.3**                          |       | 31.0 |   | (0.7 | )pts. |
| Effective tax rates  (%)                                                                                      | ** ** | **16.8**                          |       | 27.8 |   | (11.0 | )pts. |

 

Basic blended statutory income taxes decreasedin 2009 when compared to 2008, due to lower income before taxes and lowerblended statutory tax rates. The effective tax rates in both years were lowerthan the statutory tax rates due to the tax rate differential and consequentialadjustments from reassessments of prior years’ tax issues and revaluations offuture income tax liabilities resulting from reductions to future B.C. and Ontarioprovincial income tax rates, as well as future tax rates being applied totemporary differences. Changes to future B.C. income tax rates were enacted inthe first quarter of 2009, reducing rates beginning January 1, 2010. In2008, a rate decrease was enacted for B.C. provincial income taxes, effectiveJuly 1, 2008. Changes to Ontario income tax rates from 2010 to 2013 wereenacted in the fourth quarter of 2009 for provincial income taxes effectiveJuly 1, 2010 and thereafter.

 

  

 
| **Other comprehensive income**          | ** ** | **Years  ended December 31** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| **($ millions, except tax rates)** | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
|                                    | ** ** | **58**                            |       | (26 | ) | n/m |   |

 

Other comprehensive income includes changes inunrealized fair value of derivatives designated as cash flow hedges,principally associated with U.S. dollar debt. The early partial redemption ofU.S. dollar Notes in December 2009 resulted in a credit of$36 million recorded in other comprehensive income, as previouslyunrealized changes in cross currency interest rate swaps were recognized in Netincome as a loss on redemption of long-term debt, a component of Financingcosts.

 

### **5.4 Wirelinesegment**

 
| **Operating revenues — wireline  segment** | ** ** | **Years  ended December 31** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                           | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| Voice local                                     | ** ** | **1,856**                         |       | 1,973 |   | (5.9 | )% |
| Voice long distance                             | ** ** | **619**                           |       | 700 |   | (11.6 | )% |
| Data                                            | ** ** | **2,146**                         |       | 2,072 |   | 3.6 | % |
| Other                                           | ** ** | **278**                           |       | 276 |   | 0.7 | % |
| External operating  revenue                     | ** ** | **4,899**                         |       | 5,021 |   | (2.4 | )% |
| Intersegment  revenue                           | ** ** | **134**                           |       | 131 |   | 2.3 | % |
| Total operating  revenues                       | ** ** | **5,033**                         |       | 5,152 |   | (2.3 | )% |

 

Total wireline segment revenues in 2009 decreasedby $119 million when compared to 2008.

 

28

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·                  Voice local revenue in 2009 decreased by $117 million when comparedto 2008. The decrease was mainly due to lower revenues from basic access andenhanced voice services caused by competition for residential subscribers andthe consequent decline in local residential access lines and matching ofcompetitive offers, as well as decreases in business lines from economicimpacts and competitor activity including price competition.

 

**Wirelineoperating indicators**

 
| ** **                       | ** ** | **As at  December 31** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| **(000s)**                       | ** ** | **2009**                    | ** ** | **2008** | ** ** | **Change** | ** ** |
| **Network  access lines (NALs)** | ** ** | ** **                  |       |   |   |   |   |
| Residential                      | ** ** | **2,238**                   |       | 2,402 |   | (6.8 | )% |
| Business                         | ** ** | **1,810**                   |       | 1,844 |   | (1.8 | )% |
| Total                            | ** ** | **4,048**                   |       | 4,246 |   | (4.7 | )% |

 
| ** **                          | ** ** | **Years  ended December 31** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| **(000s)**                          | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| **Net  (losses) additions in NALs** | ** ** | ** **                        | ** ** |   |   |   |   |
| Residential                         | ** ** | **(164**                          | **)**      | (194 | ) | 15.5 | % |
| Business                            | ** ** | **(34**                           | **)**      | 36 |   | n/m |   |
| Total                               | ** ** | **(198**                          | **)**      | (158 | ) | (25.3 | )% |

 

There were fewer residential NAL losses in 2009when compared to 2008 because of more effective winback efforts and synergywith bundled services including TELUS TV, as well as slowing of a cable-TVcompetitor’s geographic expansion of digital telephone service. The decrease inbusiness NALs in 2009 reflects competitive inroads in the small and mediumbusiness market by cable-TV companies, as well as economic impacts leading to alarger number of disconnections and fewer installations, particularly in B.C.and Alberta. Business NALs increased in Ontario and Quebec in 2009. Inaddition, growth in certain data services, such as private networks, is notmeasured by business NAL counts, and conversion of legacy voice services to IPservices results in an overall decrease in business NALs.

 

·                  Voice long distance revenue in 2009 decreased by $81 million whencompared to 2008. The decrease was due mainly to lower average per-minute ratesresulting from ongoing industry-wide price competition, a lower base ofsubscribers and lower billed retail minute volumes.

 

·                  Wireline data revenues in 2009 increased by $74 million whencompared to 2008. The increase included: (i) subscriber growth in digitalentertainment services; (ii) increased Internet, enhanced data and hostingservices, partly offset by lower average pricing from competitive pressures;and (iii) higher managed workplace revenues from growth in outsourcingservices for business customers. These increases were partly offset by lowerbroadcast and videoconferencing revenues and lower data equipment sales,including the effect of a large equipment sale in the first quarter of 2008.

 

**Wirelineoperating indicators**

 
| ** **                    | ** ** | **As at  December 31** | ** ** |
|-------------------------------|------------|-----------------------------|------------|
| **(000s)**                    | ** ** | **2009**                    | ** ** | **2008** | ** ** | **Change** | ** ** |
| **Internet subscribers**      | ** ** | ** **                  |       |   |   |   |   |
| High-speed (1)                | ** ** | **1,128**                   |       | 1,096 |   | 2.9 | % |
| Dial-up                       | ** ** | **87**                      |       | 124 |   | (29.8 | )% |
| Total (1)                     | ** ** | **1,215**                   |       | 1,220 |   | (0.4 | )% |
| **TELUS  TV subscribers (2)** | ** ** | **170**                     |       | 78 |   | 117.9 | % |

 
| ** **                                          | ** ** | **Years  ended December 31** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| **(000s)**                                          | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| **Net  additions (losses) of Internet subscribers** | ** ** | ** **                        |       |   |   |   |   |
| High-speed (1)                                      | ** ** | **37**                            |       | 76 |   | (51.3 | )% |
| Dial-up                                             | ** ** | **(37**                           | **)**      | (31 | ) | (19.4 | )% |
| Total (1)                                           | ** ** | **—**                        |       | 45 |   | (100.0 | )% |
| **TELUS  TV subscriber net additions (2)**          | ** ** | **92**                            |       | 43 |   | 114.0 | % |

 

----

(1)          Opening balances for high-speed Internet subscribersand total Internet subscribers for the second quarter of 2009 were reduced by5,000 to reflect prior period reporting adjustments.

(2)          Includes TELUS Satellite TV subscribers beginning in2009.

 

High-speed Internet subscriber net additions in2009 were lower than the net additions in 2008, due to a maturing market and adecline in household formation, as well as cable-TV competitors’ expandedproduct offerings, promotional pricing and winback offers. TELUS TV servicesubscriptions more than doubled in 2009, as the Company continued to improveinstallation capability, rolled out high-definition TV channels and PVRs,increased geographic coverage, introduced TELUS Satellite TV service and hadsuccess with bundled offers.

 

·                  Other revenue in 2009 increased by $2 million when compared to 2008as voice equipment sales increased slightly.

 

·                  Intersegment revenue represents services provided by the wirelinesegment to the wireless segment and is eliminated upon consolidation togetherwith the associated expense in the wireless segment.

 

29

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| **Operating expenses – wireline  segment**                                            | ** ** | **Years  ended December 31** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                                                                      | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| Salaries, benefits  except DBPP (1) expense (recovery), and employee-related expenses | ** ** | **1,792**                         |       | 1,944 |   | (7.8 | )% |
| DBPP expense  (recovery)                                                                   | ** ** | **20**                            |       | (91 | ) | n/m |   |
| Other operations  expenses                                                                 | ** ** | **1,485**                         |       | 1,474 |   | 0.7 | % |
| Operations expenses                                                                        | ** ** | **3,297**                         |       | 3,327 |   | (0.9 | )% |
| Restructuring costs                                                                        | ** ** | **178**                           |       | 51 |   | n/m |   |
| Total operating  expenses                                                                  | ** ** | **3,475**                         |       | 3,378 |   | 2.9 | % |

 

----

(1)          DBPP – defined benefit pension plans.

 

Total operating expenses in 2009 increased by$97 million when compared to 2008.

 

·                  Salaries, benefits and employee-related expenses decreased by$152 million. The decrease resulted from a significant reduction inperformance bonus expenses from lower than originally planned operatingperformance for 2009, fewer domestic FTE staff and efficiency initiativesincluding those targeting discretionary employee-related expenses such astravel.

 

·                  The defined benefit pension plans expense increased by $111 millionmainly due to the decline in value of these plans’ assets in 2008.

 

·                  Other operations expenses increased by $11 million. The increasewas mainly due to TELUS TV programming and customer acquisition costs relatedto increased subscriber loading, and access facility costs associated withimplementing new contracts, partly offset by lower advertising and promotionexpenses and lower transit and termination expenses from lower outbound longdistance minute volumes.

 

·                  Restructuring costs increased by $127 million, reflecting severalinitiatives under the Company’s accelerated operating efficiency program, asdescribed in *Investing in internal capabilities*in *Section 2.2*.

 
| ** **                    | ** ** | **Years  ended December 31** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
| **EBITDA - wireline segment** | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| EBITDA ($ millions)      | ** ** | **1,558**                         |       | 1,774 |   | (12.2 | )% |
| EBITDA margin (%)             | ** ** | **31.0**                          |       | 34.4 |   | (3.4 | )pts. |

 

Wireline segment EBITDA in 2009 decreased by$216 million when compared to 2008, due primarily to higher restructuringcosts and defined benefit pension plan expenses. Excluding restructuring costsand pension expenses, wireline EBITDA increased by $22 million. Theunderlying increase was due to lower performance bonus expenses and fewer FTEemployees, as well as cost containment efforts that drove down discretionaryemployee-related costs, and lower advertising and promotion expenses. Thesedecreases were partly offset by increased costs to provision TV services andimplement services for new enterprise customers. Pressure on EBITDA margins,which management expects to alleviate through ongoing efficiency initiatives,is caused by declining voice revenues having higher margins than the growingdata services revenues.

 

### **5.5 Wirelesssegment**

 
| **Operating revenues – wireless  segment** | ** ** | **Years  ended December 31** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                           | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| Network revenue                                 | ** ** | **4,392**                         |       | 4,369 |   | 0.5 | % |
| Equipment and other  revenue                    | ** ** | **315**                           |       | 263 |   | 19.8 | % |
| External operating  revenue                     | ** ** | **4,707**                         |       | 4,632 |   | 1.6 | % |
| Intersegment  revenue                           | ** ** | **28**                            |       | 28 |   | — | % |
| Total operating  revenues                       | ** ** | **4,735**                         |       | 4,660 |   | 1.6 | % |

 

Wireless segment revenues in 2009 increased by$75 million when compared to 2008 due to the following:

 

·                  Network revenue in 2009 increased by $23 million. Data revenuegrowth of $207 million, or 30%, in 2009 moderated as a result of increasedadoption of data plans and lower data roaming rates, and was partially offsetby lower voice revenues of $184 million or 5%. Wireless data revenue as aproportion of network revenue was 20% in 2009, as compared to 16% in 2008. Thegrowth in data revenues continues to reflect strength in text messaging andsmartphone service revenues driven by increased penetration of smartphones,increased adoption of data plans, higher-speed HSPA and EVDO-capable handsets,and mobile Internet keys, partially offset by lower inbound data roaming rates.

 

Blended ARPU of $58.46 for 2009 decreased by$4.27 or 6.8% when compared to 2008. In 2009, data ARPU was $11.88, an increaseof $2.04 or 21%. Moderation in the rate of growth of data ARPU resulted fromincreased adoption of data plans and mobile Internet keys, as well as lowerroaming rates. In contrast, voice ARPU of $46.58 decreased

 

30

----

 

$6.31 or 12%. Declining voice ARPU is acontinuing trend and involves a combination of factors: declining minutes ofuse by both consumers and businesses, increased use of included-minute rateplans as subscribers shift usage patterns and move to optimize price plans(including the elimination of system access fees and carrier 911 charges on newrate plans launched in November 2009 that are only partly compensated forby a $5 monthly increase), lower Mike service ARPU, increased penetrationof the Koodo brand supporting network revenue and subscriber growth, anddecreased inbound roaming rates, partly offset by higher service featurerevenues.

 

While gross subscriber additions decreased by3% in 2009, an improvement in the postpaid/prepaid mix of gross and netsubscribers was observed. Postpaid subscriber gross additions represented 65%of total gross additions in 2009 as compared to 64% in 2008. For net subscriberadditions, postpaid represented 93% of total net additions in 2009 as comparedto 86% in 2008.

 

Net additions in 2009 were down 31% as comparedto 2008 normalized for the deactivation of 28,000 subscribers onSeptember 15, 2008 resulting from the turndown of TELUS’ analogue network.Net additions in 2009 were impacted by slower industry growth, as well asslightly higher overall churn and market competition as compared to normalizednet additions in 2008, and reflect a 66% reduction in prepaid net additions asthe Company shifted focus away from this lower-value segment.

 

The churn rate of 1.58% in2009 increased from 1.52% in 2008 (when 2008 is normalized to excludedeactivation of analogue subscribers in September of that year). Theincreased churn reflects higher involuntary churn as a result of the recession,lower prior year churn in the Koodo brand due to its initial launch inMarch 2008, and continued competitive marketing intensity within both thepostpaid and prepaid market segments. The fourth quarter 2009 churn rate wasstable at 1.60% when compared to the fourth quarter of 2008.

 

·                  Equipment sales, rental and service revenue in 2009 increased by$52 million when compared to 2008, largely due to inclusion of$44 million of revenue from Black’s Photo since its acquisition inSeptember 2009. Additionally, increases were due to higher per-unitrevenues from an increasing smartphone mix (including, notably, the AppleiPhone commencing in early November 2009) and higher retention volumes,and to a lesser extent, higher accessory revenues, partly offset by loweracquisition volumes.

 

·                  Intersegment revenue represents services provided by the wirelesssegment to the wireline segment and is eliminated upon consolidation along withthe associated expense in the wireline segment.

 

31

----

 

**Wirelessoperating indicators**

 
| ** **                                          | ** ** | **As at  December 31** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **2009**                    | ** ** | **2008** | ** ** | **Change** | ** ** |
| **Subscribers** (000s)                              | ** ** | ** **                  |       |   |   |   |   |
| Postpaid(1)                                         | ** ** | **5,290**                   |       | 4,922 |   | 7.5 | % |
| Prepaid                                             | ** ** | **1,234**                   |       | 1,207 |   | 2.2 | % |
| Total(1)                                            | ** ** | **6,524**                   |       | 6,129 |   | 6.4 | % |
| Proportion of  subscriber base that is postpaid (%) | ** ** | **81.1**                    |       | 80.3 |   | 0.8 | pts. |
| Digital  POPs(2) covered (millions)(3)         | ** ** | **33.1**                    |       | 32.6 |   | 1.5 | % |
| HSPA POPs covered  (millions)(3)                    | ** ** | **> 31.0**               |       | — |   | n/m |   |

 
| ** **                                                       | ** ** | **Years  ended December 31** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                       | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| **Subscriber  gross additions**  (000s)                          |       |                              |       |   |   |   |   |
| Postpaid                                                         | ** ** | **1,036**                         |       | 1,062 |   | (2.4 | )% |
| Prepaid                                                          | ** ** | **563**                           |       | 593 |   | (5.1 | )% |
| Total                                                            | ** ** | **1,599**                         |       | 1,655 |   | (3.4 | )% |
| **Subscriber  net additions**  (000s)                            |       |                              |       |   |   |   |   |
| Postpaid                                                         | ** ** | **379**                           |       | 481 |   | (21.2 | )% |
| Prepaid                                                          | ** ** | **27**                            |       | 80 |   | (66.3 | )% |
| Total (4)                                                        | ** ** | **406**                           |       | 561 |   | (27.8 | )% |
| Total subscriber  net additions – adjusted (4)              | ** ** | **406**                           |       | 588 |   | (31.0 | )% |
| ARPU (5) ($)                                                | ** ** | **58.46**                         |       | 62.73 |   | (6.8 | )% |
| Churn, per month  (5) (%)                                   | ** ** | **1.58**                          |       | 1.57 |   | 0.01 | pts. |
| Adjusted churn, per  month (%)(4)                                | ** ** | **1.58**                          |       | 1.52 |   | 0.06 | pts. |
| Average monthly  minutes of use per subscriber (MOU)             | ** ** | **392**                           |       | 411 |   | (4.6 | )% |
| COA (6) per gross subscriber addition (5) (7) ($) | ** ** | **337**                           |       | 351 |   | (4.0 | )% |
| Retention spend to  network revenue (5) (7) (%)        | ** ** | **10.9**                          |       | 8.9 |   | 2.0 | pts. |
| EBITDA excluding  COA ($ millions)                          | ** ** | **2,472**                         |       | 2,587 |   | (4.4 | )% |
| EBITDA to network  revenue (%)                                   | ** ** | **44.0**                          |       | 45.9 |   | (1.9 | )pts. |

 

----

pts. – percentage points

 

(1)          The opening balance for postpaid and total subscribers was reduced by approximately 11,000in the fourth quarter of 2009 to reflect prior period reporting adjustments.

 

(2)          POPs is an abbreviation for population. A POP refersto one person living in a population area that is wholly or substantiallyincluded in the coverage area.

 

(3)          Including roaming/resale agreements, principally withBell Canada.

 

(4)          Net additions and blended churn in 2008 include theimpact of TELUS’ analogue network turndown on September 15, 2008. Adjustedsubscriber net additions and churn exclude the impact of approximately 28,000subscriber deactivations resulting from turning down the analogue network.

 

(5)          See *Section 11.3Definitions of key wireless operating indicators**.*These are industry measures useful in assessing operating performance of awireless company, but are not measures defined under Canadian or U.S. GAAP.

 

(6)          Cost of acquisition.

 

(7)          In 2009, the Company refined the measurement of thecosts of acquisition and retention in its operational systems to align withchanges in the business. Comparative figures for 2008 have been restated on aconsistent basis.

 
| **Operating expenses – wireless  segment**            | ** ** | **Years  ended December 31** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                                      | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| Equipment sales  expenses                                  | ** ** | **845**                           |       | 720 |   | 17.4 | % |
| Network operating  expenses                                | ** ** | **621**                           |       | 603 |   | 3.0 | % |
| Marketing expenses                                         | ** ** | **422**                           |       | 470 |   | (10.2 | )% |
| General and  administration (G&A) expenses             | ** ** | ** **                        |       |   |   |   |   |
| Salaries, benefits  (1) and employee-related expenses | ** ** | **581**                           |       | 596 |   | (2.5 | )% |
| Other G&A  expenses                                    | ** ** | **321**                           |       | 258 |   | 24.4 | % |
| Operations expense                                         | ** ** | **2,790**                         |       | 2,647 |   | 5.4 | % |
| Restructuring costs                                        | ** ** | **12**                            |       | 8 |   | 50.0 | % |
| Total operating  expenses                                  | ** ** | **2,802**                         |       | 2,655 |   | 5.5 | % |

 

----

(1)          Includes defined benefit pension plans recoveries of$2 million in 2009 and $9 million in 2008.

 

Wireless segment total operating expenses in2009 increased by $147 million when compared to 2008.

 

32

----

 

·                  Equipment sales expenses in 2009 increased by $125 million. Theincrease was due in part to higher retention volumes and higher per-unit coststo support migration of clients to smartphones (including the Apple iPhonecommencing in early November 2009), as well as higher inventory valuationadjustments, partly offset by lower acquisition volumes. This category includesresults from Black’s since September 2009.

 

·                  Network operating expenses in 2009 increased by $18 million. Theincrease was due to higher costs related to the new HSPA network, as well asthose from higher penetration of smartphones that drove increases in revenueshare costs to certain third parties and licensing costs to service providers,partly offset by lower roaming costs from reduced rates.

 

·                  Marketing expenses decreased by $48 million. The decrease resultedfrom lower commissions, and to a lesser extent, lower advertising and promotionexpenses. COA per gross subscriber addition decreased by $14 in 2009 whencompared to 2008, which reflects lower commissions, partly offset by higherper-unit subsidy costs including changes in promotional pricing and a highersmartphone mix.

 

Retention costs as a percentage of networkrevenue increased to 10.9% in 2009 as compared to 8.9% in 2008. The increasereflects higher retention costs primarily related to higher retention volumesfrom a larger subscriber base and higher per-unit subsidy costs as part of acontinued focus on the migration of customers to smartphones, which includesadditional volumes as customers upgrade to HSPA devices. The impact of theiPhone and other new smartphone devices is expected to positively impact futuresubscriber loading, data revenue and ARPU, while increasing network usage withhigher data volumes and increasing future costs of retention.

 

·                  In 2009, G&A expenses, salaries, benefits and employee-related costsdecreased by $15 million. The decrease reflects overall lower 2009performance bonus accruals and traction from efficiency initiatives. OtherG&A expenses in 2009 increased by $63 million, including higherexternal labour costs to support the increased subscriber base, higher rentresulting from the expansion of Koodo distribution channels and the inclusionof expenses from Black’s. Bad debt expense increased by $10 million for theyear.

 

·                  Restructuring costs included various initiatives from the acceleratedoperating efficiency program, as described in *Investing ininternal capabilities* in *Section 2.2*.

 
| ** **                    | ** ** | **Years  ended December 31** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
| **EBITDA - wireless segment** | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| EBITDA ($ millions)      | ** ** | **1,933**                         |       | 2,005 |   | (3.6 | )% |
| EBITDA margin (%)             | ** ** | **40.8**                          |       | 43.0 |   | (2.2 | )pts. |

 

Wireless segment EBITDA in 2009 decreased by$72 million when compared to 2008. Wireless EBITDA, before pensionexpenses and restructuring costs, decreased by $61 million, resulting frommore moderate data revenue growth from increased adoption of data plans andlower roaming revenues, declining voice ARPU, increased retention and networkcosts supporting data growth, and higher G&A costs to support the largersubscriber base. These were partly offset by lower COA expenses and lowerroaming costs.

 

33

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## **6.**              Changes in financial position

## ** **

Changes in the Consolidated statements of financialposition for the year ended December 31, 2009, are as follows:

 
| **Financial position as at:**                           | ** ** | **December 31,** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **                     |
|---------------------------------------------------------|------------|-----------------------|------------|------------|------------|-------------|------------|--------------------------------|
| **($ millions)**                                   | ** ** | **2009**              | ** ** | **2008**   | ** ** | **Changes** | ** ** | **Explanation  of the change** |
| **Current  Assets**                                     | ** ** | ** **            | ** ** | ** ** |       |        |       |                           |   |   |
| Cash and temporary  investments, net                    | ** ** | **41**                |       | 4          |       | 37          |       | n/m                            |   | See *Section 7:  Liquidity and capital resources.* |
| Accounts receivable                                     | ** ** | **694**               |       | 966        |       | (272        | )          | (28                            | )% | Reduced by a $200 million increase in  proceeds from securitized accounts receivable, as well as lower wireline  revenue and a decrease in wireless customer accounts receivable due to a  decrease in postpaid ARPU. Accounts receivable turnover was 46 days at  December 31, 2009 compared to 48 days at December 31, 2008. |
| Income and other  taxes receivable                      | ** ** | **16**                |       | 25         |       | (9          | )          | (36                            | )% | Reflects refunds received net of an increase  in accrued income and other taxes receivable. |
| Inventories                                             | ** ** | **270**               |       | 397        |       | (127        | )          | (32                            | )% | Mainly a decrease in wireless handset  volumes, parts and accessories, partly offset by a higher proportion of  higher-priced data capable devices. |
| Prepaid expenses                                        | ** ** | **105**               |       | 112        |       | (7          | )          | (6                             | )% | Mainly a decrease in wireline prepaid licences. |
| Derivative assets                                       | ** ** | **1**                 |       | 10         |       | (9          | )          | (90                            | )% | Mainly fair value adjustments to foreign  exchange hedges for wireless handsets. |
|                                                    | ** ** | ** **            |       |       |       |        |       |                           |   |   |
| **Current  Liabilities**                                | ** ** | ** **            |       |       |       |        |       |                           |   |   |
| Accounts payable  and accrued liabilities               | ** ** | **1,385**             |       | 1,465      |       | (80         | )          | (5                             | )% | Includes lower employee compensation and  related benefits and lower fourth quarter capital expenditures, partially  offset by accrued pension plan payments. |
| Income and other  taxes payable                         | ** ** | **182**               |       | 163        |       | 19          |       | 12                             | % | Reflects current year income tax expense,  offset by final income tax payments in 2009 for the 2008 tax year, as well as  2009 instalments. |
| Restructuring  accounts payable and accrued liabilities | ** ** | **135**               |       | 51         |       | 84          |       | 165                            | % | New obligations under current restructuring  initiatives exceeded payments under previous restructuring initiatives. |
| Dividends payable                                       | ** ** | **150**               |       | 151        |       | (1          | )          | (1                             | )% | — |
| Advance billings  and customer deposits                 | ** ** | **674**               |       | 689        |       | (15         | )          | (2                             | )% | — |
| Current maturities  of long-term debt                   | ** ** | **82**                |       | 4          |       | 78          |       | n/m                            |   | Reflects the May 2010 maturity of  $50 million TELUS Communications Inc. 12% Series 1 debentures and  the July 2010 maturity of $30 million TELUS Communications Inc.  11.5% Series U First Mortgage Bonds, net of a small reduction in capital  leases. |
| Derivative  liabilities                                 | ** ** | **62**                |       | 75         |       | (13         | )          | (17                            | )% | Fair value adjustments for share option and  restricted share unit hedges, including the unwinding of option hedges. |
| Current portion of  future income taxes                 | ** ** | **294**               |       | 459        |       | (165        | )          | (36                            | )% | Primarily a reduction in TELUS Communications  Company partnership’s income that will be allocated over the next 12 months,  as well as net increases in current liabilities that are not deductible in  the current period for tax purposes. |
|                                                    | ** ** | ** **            |       |       |       |        |       |                           |   |   |
| **Working  capital (1)**                                | ** ** | **(1,837)**           |       | (1,543     | )          | (294        | )          | (19                            | )% | The reduction in working capital contributed  to the decrease in long-term debt. |

 

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(1)          Current assets subtracting Current liabilities — anindicator of the ability to finance current operations and meet obligations asthey fall due.

 

34

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**Changes in financial position,** continued from the previous page.

 
| **Financial position as at:**                 | ** ** | **December 31,** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **                     |
|-----------------------------------------------|------------|-----------------------|------------|------------|------------|-------------|------------|--------------------------------|
| **($ millions)**                         | ** ** | **2009**              | ** ** | **2008**   | ** ** | **Changes** | ** ** | **Explanation  of the change** |
| **Non-Current  Assets**                       | ** ** | ** **            | ** ** | ** ** |       |        |       |                           |   |   |
| Property, plant,  equipment and other, net    | ** ** | **7,729**             |       | 7,317      |       | 412         |       | 6                              | % | The  increase was primarily from broadband network builds. See *Capital expenditures* in *Section 7.2  Cash used by investing activities* and *Depreciation*  in *Section 5.3 Consolidated operations.* |
| Intangible assets,  net                       | ** ** | **5,148**             |       | 5,166      |       | (18)        |       | (—                        | )% | See  *Capital expenditures* in *Section 7.2 Cash used by investing activities* and *Amortization* in *Section 5.3  Consolidated operations. Included in the balances at December 31 are  wireless spectrum licences of $3,849 million for 2009 and 2008.* |
| Goodwill, net                                 | ** ** | **3,572**             |       | 3,564      |       | 8           |       | —                         | % | Goodwill  added for the purchase of Black’s Photo. |
| Other long-term  assets                       | ** ** | **1,602**             |       | 1,418      |       | 184         |       | 13                             | % | Primarily  pension plan funding and continued amortization of transitional pension  assets. |
| Investments                                   | ** ** | **41**                |       | 42         |       | (1          | )          | (2                             | )% | Adjustments  to small investments, net of one new small investment. |
| ** **                                    | ** ** | ** **            |       |       |       |        |       |                           |   |   |
| **Non-Current  Liabilities**                  | ** ** | ** **            |       |       |       |        |       |                           |   |   |
| Long-Term Debt                                | ** ** | **6,090**             |       | 6,348      |       | (258        | )          | (4                             | )% | Includes:

·      A $922 million decrease in the 2011  U.S. dollar 8% Notes through redemption of 30% of the principal amount in December 2009,  and Canadian dollar value changes of the Notes (also see Other long-term  liabilities)

·      A net reduction of $980 million in  amounts drawn against the 2012 credit facility

·      $80 million debentures and first  mortgage bonds reclassified to current liabilities

·      Net proceeds of $697 million from  the issue of 4.95% five-year Notes in May

·      Net proceeds of $990 million from  the issue of 5.05% 10-year Notes in December

·      A $35 million increase in  commercial paper. |
| Other Long-Term  Liabilities                  | ** ** | **1,271**             |       | 1,295      |       | (24         | )          | (2                             | )% | Primarily  changes in U.S. dollar exchange rates and a fair value adjustment of the  derivative liability associated with the 2011 U.S. dollar Notes, partially  offset by an increase in deferred revenue. |
| Future Income Taxes                           | ** ** | **1,319**             |       | 1,213      |       | 106         |       | 9                              | % | An  increase in future taxes on long-term assets and liabilities, including  unrealized gains and losses on derivatives and reassessments for prior year  tax issues, partly offset by a revaluation for statutory tax rate changes. |
| ** **                                    | ** ** | ** **            |       |       |       |        |       |                           |   |   |
| **Owners’  Equity**                      | ** ** | ** **            |       |       |       |        |       |                           |   |   |
| Common Share and  Non-Voting Share equity**** | ** ** | **7,554**             |       | 7,085      |       | 469         |       | 7                              | % | Mainly  Net income of $998 million and Other comprehensive income of  $58 million attributable to holders of Common Shares and Non-Voting  Shares, less $601 million of dividends declared. |
| Non-controlling  interests                    | ** ** | **21**                |       | 23         |       | (2          | )          | (9                             | )% | Dividends  paid by a subsidiary to non-controlling interests, net of $4 million Net  income attributable to non-controlling interests. |

 

## **7.**              Liquidityand capital resources

 

The discussion in this section is qualified by the *Caution regarding forward-looking statements* at thebeginning of the MD&A.

 

TheCompany’s capital structure financial policies, financing plan and results aredescribed in *Section 4.3*. In the normalcourse, the Company has generated annual cash flow from operations exceedingannual capital investment needed to support business growth and re-invest intechnology. In 2009, cash provided by operating activities exceeded cash usedby investing activities, long-term debt was reduced and the average term tomaturity of debt was extended by one year through financing activities. In2008, cash provided by operating activities was supplemented with cash providedby financing activities to help fund the acquisition of Emergis and payment forAWS spectrum licences.

 

35

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| **Summary of Consolidated  statements of  cash flows**      | ** ** | **Years  ended December 31** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                                       | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| Cash provided by  operating activities                      | ** ** | **2,904**                         |       | 2,819 |   | 3.0 | % |
| Cash (used) by  investing activities                        | ** ** | **(2,128**                        | **)**      | (3,433 | ) | 38.0 | % |
| Cash (used)  provided by financing activities               | ** ** | **(739**                          | **)**      | 598 |   | n/m |   |
| Increase (decrease)  in cash and temporary investments, net | ** ** | **37**                            |       | (16 | ) | — |   |
| Cash and temporary  investments, net, beginning of period   | ** ** | **4**                             |       | 20 |   | — |   |
| Cash and temporary  investments, net, end of period         | ** ** | **41**                            |       | 4 |   | n/m |   |

 

### **7.1 Cash providedby operating activities**

 

Cash provided by operating activities in 2009increased by $85 million when compared to 2008, primarily due to thefollowing.

 

·                  Changes in proceeds from securitized accounts receivable (included inNet change in non-cash working capital on the Consolidated statements of cashflow) are a source of cash when the proceeds are increased, and a use of cashwhen proceeds are reduced. In 2009, the Company increased proceeds by$200 million, while in 2008 the Company reduced proceeds by a net$200 million. Consequently, changes in securitized accounts receivablecontributed increased cash of $400 million in 2009 when compared to 2008.See *Section 7.6 Accounts receivable sale*.

 

·                  The Company has commenced to make significant income tax payments in2009. Income tax net payments were $266 million in 2009 as compared to$10 million in 2008. Payments in 2009 included final instalments inrespect of the 2008 tax year made in the first quarter, instalments for 2009,and $69 million of recoveries received for settlement of prior years’ taxmatters.

 

·                  EBITDA decreased by $288 million, as described in *Section 5: Discussion of operations*. Excluding expensesfrom defined benefit pension plans and restructuring, EBITDA decreased by$39 million in 2009.

 

·                  Contributions to employee defined benefit plans increased by$76 million primarily as a result of the stock market decline in 2008.

 

·                  Interest received increased by $51 million, primarily for thesettlement of prior years’ tax matters.

 

·                  Interest paid increased by $110 million, primarily due to the$99 million paid in December 2009 in respect of the early partialredemption of U.S. dollar Notes and the interest component of unwinding associatedcross currency interest rate swaps.

 

·                  Other changes in non-cash working capital included a $143 millionreduction in inventory in 2009 as compared to a $114 million increaseduring 2008, and liquidation of $42 million of short-term investments in2008.

 

   

 

### **7.2 Cash used byinvesting activities**

 

Cash used by investing activities decreased by$1,305 million in 2009 when compared to 2008. The decrease was primarilydue to the payment of $882 million for AWS spectrum licences in the thirdquarter of 2008, and lower amounts

 

36

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used for acquisitions net of acquired cash($26 million for Black’s in September 2009 as compared to$696 million for Emergis and FastVibe in January 2008).

 

Property, plant and equipment underconstruction totalled $431 million at December 31, 2009, down by$54 million from December 31, 2008. Intangible assets underconstruction were $158 million at December 31, 2009, down by$39 million from one year earlier. These decreases related mainly tocompleted components of the Company’s wireline and wireless broadbandinitiatives net of new expenditures, described below.

 
| **Capital expenditures**                              | ** ** | **Years  ended December 31** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions, except capital  intensity)**      | ** ** | **2009**                          | ** ** | **2008** | ** ** | **Change** | ** ** |
| Wireline segment  (general)                           | ** ** | **1,333**                         |       | 1,311 |   | 1.7 | % |
| Wireless segment  (general)                           | ** ** | **770**                           |       | 548 |   | 40.5 | % |
| Capital  expenditures (general)                       | ** ** | **2,103**                         |       | 1,859 |   | 13.1 | % |
| Payment for AWS  spectrum licences (wireless segment) | ** ** | **—**                        |       | 882 |   | n/m |   |
| Total capital  expenditures                           | ** ** | **2,103**                         |       | 2,741 |   | (23.3 | )% |
|                                                  | ** ** | ** **                        |       |   |   |   |   |
| Total wireless  capital expenditures                  | ** ** | **770**                           |       | 1,430 |   | (46.2 | )% |
|                                                  | ** ** | ** **                        |       |   |   |   |   |
| EBITDA less total  capital expenditures (1)           | ** ** | **1,388**                         |       | 1,038 |   | 33.7 | % |
| Capital intensity  (2) (%)                       | ** ** | ** **                        |       |   |   |   |   |
| – general capital  expenditures                  | ** ** | **22**                            |       | 19 |   | 3 | pts. |
| – total capital  expenditures                    | ** ** | **22**                            |       | 28 |   | (6 | )pts. |

 

----

(1)          See *Section 11.1 EBITDA*for the calculation and description.

(2)          Capital intensity is calculated as capitalexpenditures divided by operating revenues. This measure provides a basis forcomparing the level of capital expenditures to other companies of varying sizewithin the same industry.

 

Total capital expenditures in 2009 decreased by$638 million when compared to 2008, largely due to the prior year paymentfor 59 spectrum licences acquired in Industry Canada’s AWS spectrum auction.General capital expenditures (excluding payment for AWS spectrum licences)increased by $244 million, largely due to the Company’s focus on wirelinebroadband and wireless HSPA initiatives. Driven by the near completion of thewireless HSPA initiative in 2009 and progress on wireline broadband expansion,the 2010 capital expenditure target of approximately $1.7 billion reflects areturn to average historical levels experienced between 2006 and 2008. See *Section 1.5 Financial and operating targets for 2010*.

 

EBITDA less total capital expenditures improvedby $350 million when compared to 2008 due to the prior year payment forAWS spectrum licences, partly offset by lower EBITDA (see *Section 5.3Consolidated operations*). The 22% capital intensity level in 2009reflects a wireline intensity level of 26% (25% in 2008) and a wirelessintensity level of 16% (31% in 2008 including payment for AWS spectrumlicences, or 12% excluding spectrum licence payments).

 

·                  Wireline segment

 

Wireline capital expenditures in 2009 increasedby $22 million when compared to 2008, mainly due to investments inbroadband and TELUS TV initiatives primarily in B.C. and Alberta. Partlyoffsetting this were expenditures incurred in 2008 for the billing and clientcare platform implemented for B.C. residential customer accounts in July 2008.Wireline cash flow (EBITDA less capital expenditures) was $225 million in2009, a decrease of $238 million or 51% when compared to 2008.

 

·                  Wireless segment

 

General wireless capital expenditures in 2009increased by $222 million when compared to 2008, due mainly to newinvestments in HSPA technology and service capability for the November 2009network launch. Total wireless capital expenditures in 2009 decreased by$660 million, reflecting payment of $882 million for AWS spectrumlicences in 2008, partly offset by higher HSPA spending in 2009. Consequently,wireless cash flow (EBITDA less total capital expenditures) increased to $1,163 millionin 2009, up $588 million or 102% from 2008.

 

### **7.3 Cash (used)provided by financing activities**

### ** **

Net cash used by financing activities in 2009was $739 million. This compares to $598 million net cash provided byfinancing activities in 2008.

 

·                  The increase in cash dividends paid to holders ofCommon Shares and Non-Voting Shares in 2009 primarily reflects a change intiming for remittance of fourth quarter dividends. Cash dividends paid in 2009totalled $602 million for dividends declared in the fourth quarter of 2008(remitted January 2, 2009) and the first, second and third quarters of2009 — each 47.5 cents per share. In comparison, dividends paid in 2008totalled $433 million for dividends declared in the first, second andthird quarters of 2008, as the dividend declared in the fourth quarter of 2007was remitted in December 2007 — each 45 cents per share.

 

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·                  There were no purchases ofTELUS shares under the normal course issuer bid (NCIB) program in 2009. The programto purchase up to eight million shares expired on December 22, 2009.During 2008, the Company repurchased approximately 6.8 million shares for$280 million under a previous program.

 

·                  Long-term debt issues

 

In May 2009, the Company successfully closed a public offering of4.95%, Series CF Notes maturing in May 2014, for aggregate grossproceeds of $700 million. Net proceeds of approximately $697 million wereused for corporate purposes, including repayment of amounts outstanding underthe 2012 credit facility and reducing outstanding commercial paper.

 

In December 2009, the Company successfully closed a public offeringof 5.05%, Series CG Notes maturing in December 2019 for grossproceeds of $1 billion. Net proceeds of approximately $990 millionwere used to fund the redemption on December 31, 2009 of 30% of theoutstanding U.S. dollar 8% Notes due June 2011, as well as paymentsrequired to terminate cross currency interest rate swaps associated with theredeemed Notes.

 

The Series CF and Series CG Notes are redeemable at the optionof the Company, in whole at any time, or in part from time to time, on notfewer than 30 and not more than 60 days’ prior notice, at redemption pricesequal to the greater of the discounted value of the Notes, or 100% of theprincipal amount thereof. In addition, accrued and unpaid interest, if any,will be paid to the date fixed for redemption. The discounted value for Series CFNotes is the present value of the Notes discounted at the Government of Canadayield plus 71 basis points. The discounted value of Series CG Notesis the present value of the Notes discounted at the Government of Canada yieldplus 45.5 basis points.

 

**Series CFand Series CG Notes require that the Company make an offer to repurchasethe Notes at a price equal to 101% of their principal plus accrued and unpaidinterest to the date of repurchase upon the occurrence of a change in controltriggering event, as defined in the respective supplemental trust indentures.Credit rating agencies assigned the same investment-grade ratings to Series CFand Series CG Notes as TELUS’ previous Notes. See *Section 7.7Credit ratings*.**

** **

During 2008 the Company publicly issued $500 million of 5.95%, Series CENotes maturing in April 2015. Net proceeds were used for corporatepurposes including a net reduction in utilized 2012 bank facilities and areduction in proceeds from securitized accounts receivable, with the latterevent being reflected as a change in non-cash working capital (see *Section 7.1 Cash provided by operating activities*).

 

·                  Partial redemption of U.S. dollar 8% Notes due June 1,2011

 

The Company redeemed on December 31, 2009, 30% orU.S.$583.5 million of the principal amount (including U.S.$6 millionindirectly owned by the Company) of the outstanding U.S.$1.945 billion (includingU.S.$20 million indirectly owned by the Company) 8% Notes due June 1,2011. The Company also terminated cross currency interest rate swaps associatedwith the redeemed Notes.

 

The redemption price for the redeemed Notes, net of such Notes owned indirectlyby TELUS, excluding accrued interest, was U.S.$577 million, or$607 million. The payment required to terminate the associated swaps was$315 million. The Company recorded pre-tax charges of $63 million forthe early redemption and $36 million upon terminating the associatedswaps. The U.S. dollar Notes were swapped at issuance in 2001 into a Canadiandollar liability with an effective yield of 8.493%. The partial redemptionreduced refinancing risk in 2011 and provides a lower effective interest ratefor the replaced debt. The average term to maturity of long-term debt increasedto five years at December 31, 2009, as compared to four years at December 31,2008.

 

·                  Bank facilities and commercial paper

 

The Company often shifts among short-term financing sources to takeadvantage of interest cost differentials. In the first quarter of 2009, netamounts drawn on the 2012 credit facility decreased by $680 million to $300 million,while issued commercial paper increased by $756 million to$1,188 million. Due primarily to the successful issue of new Notes in May 2009,during the second quarter the Company reduced net amounts drawn on the 2012credit facility to $nil and reduced commercial paper to $604 million. TheCompany further reduced commercial paper to $534 million in the thirdquarter and to $467 million in the fourth quarter.

 

In 2008, during the first quarter, the Company increased utilization ofthe 2012 credit facility from $nil to $321 million and increased theamount of issued commercial paper from $513 million to $800 millionfor general corporate purposes, including the January acquisition ofEmergis. During the second quarter of 2008, the Company reduced the amountdrawn on the 2012 credit facility to $162 million at June 30, whilethe balance of commercial paper was unchanged. During the third quarter, theCompany increased utilized bank facilities to $430 million and increasedoutstanding commercial paper to $968 million to help fund payment of AWSspectrum licences. During the fourth quarter, commercial paper was reduced to$432 million, while amounts drawn on the 2012 credit facility increased to$980 million.

 

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·                  TELUS Communications Inc. long-term debt

 

Effective June 12, 2009, TELUS Corporation guaranteed the paymentof principal and interest for TCI debentures and TCI first mortgage bonds.

 

For the anticipated requirements to meetlong-term debt repayments, see TELUS’ 2010 financing and capital structuremanagement plan in *Section 4.3*,as well as the Contractual obligations table in *Commitmentsand contingent liabilities* in *Section 7.8.*

 

 

 

### **7.4**Liquidity and capital resource measures

 
| **Liquidity and capital resource  measures**                                                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **As at, or years ended,  December 31**                                                                                                                       | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** |
| **Components of debt and coverage ratios**(1) ($ millions)                                                                                               |       |       |       |       |       |       |       |
|                                                                                                                                                               | ** ** | ** ** |       |       |       |       |       |
| Net debt                                                                                                                                                           | ** ** | **7,312**  |       | 7,286      |       | 26         |       |
| Total  capitalization – book value                                                                                                                            | ** ** | **14,959** |       | 14,524     |       | 435        |       |
| EBITDA – excluding  restructuring costs                                                                                                                       | ** ** | **3,681**  |       | 3,838      |       | (157       | )          |
| Net interest cost                                                                                                                                                  | ** ** | **532**    |       | 463        |       | 69         |       |
|                                                                                                                                                               | ** ** | ** ** |       |       |       |       |       |
| **Debt ratios**                                                                                                                                                    |       |       |       |       |       |       |       |
| ** **                                                                                                                                                         |       |       |       |       |       |       |       |
| Fixed-rate debt as  a proportion of total indebtedness (%)                                                                                                         | ** ** | **87**     |       | 77         |       | 10         | pts.       |
| Average term to  maturity of debt (years)                                                                                                                          | ** ** | **5.0**    |       | 4.0        |       | 1.0        |       |
| Net debt to total  capitalization (%) (1)                                                                                                                          | ** ** | **48.9**   |       | 50.2       |       | (1.3       | )pts.      |
| Net debt to EBITDA –  excluding restructuring costs (1)                                                                                                       | ** ** | **2.0**    |       | 1.9        |       | 0.1        |       |
|                                                                                                                                                               | ** ** | ** ** |       |       |       |       |       |
| **Coverage ratios**(1)                                                                                                                                             |       |       |       |       |       |       |       |
| ** **                                                                                                                                                         |       |       |       |       |       |       |       |
| Interest coverage  on long-term debt (Earnings coverage)                                                                                                           | ** ** | **3.1**    |       | 4.3        |       | (1.2       | )          |
| EBITDA – excluding  restructuring costs interest coverage                                                                                                     | ** ** | **6.9**    |       | 8.3        |       | (1.4       | )          |
|                                                                                                                                                               | ** ** | ** ** |       |       |       |       |       |
| **Other measures**                                                                                                                                                 |       |       |       |       |       |       |       |
| ** **                                                                                                                                                         |       |       |       |       |       |       |       |
| Free cash flow ($ millions) (2)                                                                                                                               | ** ** | **500**    |       | 361        |       | 139        |       |
|                                                                                                                                                               |       |       |       |       |       |       |       |
| Dividend  payout ratio of sustainable net earnings guideline – 45 to 55% (1)                                                                        |       |       |       |       |       |       |       |
| Dividend payout  ratio – actual earnings, excluding income tax-related adjustments, loss on  redemption of long-term debt and net-cash settlement feature (%) | ** ** | **67**     |       | 56         |       | 11         | pts.       |
| Dividend payout  ratio – actual earnings (%)                                                                                                                  | ** ** | **61**     |       | 54         |       | 7          | pts.       |

 

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(1)          See *Section 11.4Definitions of liquidity and capital resource measures.*

(2)          See *Section 11.2Free cash flow* for the definition.

 

Netdebt at December 31, 2009 increased slightly from one year earlier, as a$200 million increase in proceeds from securitized accounts receivable waslargely offset by a decrease in long-term debt and increased cash. Totalcapitalization increased primarily from higher retained earnings, as no NCIBshare repurchases have been made since 2008. Net debt to EBITDA (excludingrestructuring costs) increased primarily due to lower EBITDA beforerestructuring costs.

 

Theproportion of debt on a fixed-rate basis was 87% on December 31, 2009, upfrom 77% one year earlier primarily due to the May 2009 issue of Series CFNotes and repayment of amounts drawn on the 2012 credit facility, partly offsetby

 

39

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increasedsecuritization of accounts receivable. The average term to maturity of debtincreased to five years at December 31, 2009, from four years on December 31,2008, primarily due to the issue of ten-year Series CG Notes in December 2009,and the early partial redemption of U.S. dollar Notes due June 1, 2011 in December 2009.

 

The interest coverage on long-term debt ratio was 3.1times in 2009, down from 4.3 times one year earlier. An increase in long-terminterest expense, including losses on long-term debt redemption recorded in December 2009,decreased the ratio by 0.7, and lower income before income taxes and long-terminterest expense decreased the ratio by 0.5. The EBITDA (excludingrestructuring costs) interest coverage ratio for 2009 was 6.9 times, down from8.3 times in 2008, due mainly to redemption premiums recorded in December 2009and lower EBITDA excluding restructuring costs, partly offset by increasedinterest income. This ratio, adjusted to exclude the $99 million loss onredemption of long-term debt, was 8.5 times in 2009.

 

Free cash flow (FCF) for 2009 increased by$139 million when compared to 2008. The increase resulted mainly fromlower total capital expenditures due to the payment for AWS spectrum in 2008and higher interest received from income tax-related settlements, partly offsetby increased income tax payments and higher interest paid. See FCF details in *Section 11.2*.

 

The Company’s strategy is to maintain the financialpolicies and guidelines set out below. The Company believes that these measuresare currently at the optimal level and by maintaining credit ratings in therange of BBB+ to A-, or the equivalent, are expected to provide reasonableaccess to capital markets.

 

TELUS’ long-term financial guidelines and policiesare:

 

·                  Netdebt to EBITDA — excluding restructuring costs of 1.5 to 2.0 times

 

Theratio at December 31, 2009 was slightly under 2.0 times.

 

·                  Dividendpayout ratio target guideline of 45 to 55% of sustainable net earnings

 

The target guideline is on a prospective basis, rather than on atrailing basis. The ratio calculatedfor the year ended December 31, 2009, was 67% when excluding from earningsincome tax-related adjustments, the loss on redemption of long-term debt and aminimal effect from a net-cash settlement feature. The measure calculated basedon actual 2009 earnings was 61%, and based on 2010 targets for earnings pershare (see *Sections 1.4* and *1.5*), the payout range is 58 to 66%. This latter calculationwas factored into the Board decision to not increase the dividend level for thedeclared dividend in the fourth quarter of 2009.

 

 

 

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### **7.5 Creditfacilities**

### ** **

At December 31, 2009, TELUS had availableliquidity exceeding $1.7 billion from unutilized credit facilities,consistent with the Company’s objective of generally maintaining at least$1 billion of available liquidity. On June 19, 2009, the terms of the364-day credit facility were amended such that the amount available became$300 million and the expiry date was extended to December 31, 2010.

 

**TELUScredit facilities at December 31, 2009**

 
| **($ in millions)**         | ** ** | **Expiry**             | ** ** | **Size** | ** ** | **Drawn** | ** ** | **Outstanding  undrawn  letters of  credit** | ** ** | **Backstop  for  commercial  paper  program** | ** ** | **Available  liquidity** | ** ** |
|----------------------------------|------------|------------------------|------------|----------|------------|-----------|------------|---------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|
| Five-year revolving facility (1) |       | May 1, 2012       |       | 2,000    |       | —    |       | (123                                              | )          | (467                                          | )          | 1,410                    |       |
| 364-day revolving facility (2)   |       | December 31, 2010 |       | 300      |       | —    |       | —                                            |       | —                                        |       | 300                      |       |
| Other bank facilities            |       | —                 |       | 62       |       | (6        | )          | (3                                                | )          | —                                        |       | 53                       |       |
| Total                            |       | —                 |       | 2,362    |       | (6        | )          | (126                                              | )          | (467                                          | )          | 1,763                    |       |

 

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

(2)   Canadiandollars only.

 

TELUS’ revolving credit facilities contain customarycovenants, including a requirement that TELUS not permit its consolidatedLeverage Ratio (debt to trailing 12-month EBITDA) to exceed 4 to 1(approximately 2.0 to 1 at December 31, 2009) and not permit itsconsolidated Coverage Ratio (EBITDA to interest expense on a trailing 12-monthbasis) to be less than 2 to 1 (approximately 6.9 to 1 at December 31,2009) at the end of any financial quarter. There are certain minor differencesin the calculation of the Leverage Ratio and Coverage Ratio under the creditagreements as compared with the calculation of Net debt to EBITDA and EBITDAinterest coverage. Historically, the calculations have not been materiallydifferent. The covenants are not impacted by revaluation of property, plant andequipment, intangible assets and goodwill for accounting purposes. Continuedaccess to TELUS’ credit facilities is not contingent on the maintenance byTELUS of a specific credit rating.

 

### **7.6 Accountsreceivable sale**

### ** **

TELUS Communications Inc. (TCI), a wholly ownedsubsidiary of TELUS, is a party to an agreement with an arm’s-lengthsecuritization trust associated with a major Schedule I Canadian bank,under which TCI is able to sell an interest in certain of its tradereceivables. As a result of selling the interest in certain of the tradereceivables on a fully serviced basis, a servicing liability is recognized onthe date of sale and is, in turn, amortized to earnings over the expected lifeof the trade receivables. A new agreement in May 2009 resulted in the termof this revolving-period securitization agreement being extended three years,for an amount up to a maximum of $500 million.

 

TCI is required to maintain at least a BBB (low)credit rating by DBRS Ltd. or the securitization trust may require the saleprogram to be wound down. The necessary credit rating was exceeded by threelevels at A (low) as of February 25, 2010.

 
| **Balance of proceeds from  securitized receivables********($ millions)** | ** ** | **2009,  Dec. 31** | ** ** | **2009,  Sept. 30** | ** ** | **2009,  June 30** | ** ** | **2009,  Mar. 31** | ** ** | **2008,  Dec. 31** | ** ** | **2008,  Sept. 30** | ** ** | **2008,  June 30** | ** ** | **2008,  Mar. 31** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|---------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                     |       | **500**                 |       | 400                 |       | 400                     |       | 300                     |       | 300                     |       | 250                 |       | 150                     |       | 500                     |       |

### ** **

### **7.7 Creditratings**

### ** **

Therewere no changes to the Company’s investment grade credit ratings in 2009. Fourcredit rating agencies that cover TELUS assigned their existing ratings, allwith a stable outlook or trend, to the Company’s $700 million Note issuein May 2009, and the Company’s $1 billion Note issue in December 2009.

 
| **Credit rating summary**     | ** ** | **DBRS Ltd.** | ** ** | **S&P** | ** ** | **Moody’s** | ** ** | **FitchRatings** | ** ** |
|-------------------------------|------------|---------------|------------|-------------|------------|------------------|------------|------------------|------------|
| **TELUS Corporation**         | ** ** | ** **    | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** |
| Notes                         |       | A (low)       |       | BBB+        |       | Baa1             |       | BBB+             |       |
| Commercial paper              |       | R-1(low)      |       | —      |       | —           |       | —           |       |
| **TELUS Communications Inc.** | ** ** | ** **    | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** |
| Debentures                    |       | A (low)       |       | BBB+        |       | —           |       | BBB+             |       |
| Medium-term notes             |       | A (low)       |       | BBB+        |       | —           |       | BBB+             |       |
| First  mortgage bonds         |       | A (low)       |       | A-          |       | —           |       | —           |       |
| Trend  or outlook             |       | Stable        |       | Stable      |       | Stable           |       | Stable           |       |

 

41

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### **7.8 Financialinstruments, commitments and contingent liabilities**

### ** **

*Financial instruments (Note 5 ofthe Consolidated financial statements)*

 

The Company’s financial instruments and the nature ofrisks that they may be subject to are set out in the following table:

 
| ** **                                        | ** ** | **Risks**  | ** ** |
|---------------------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Market risks** | ** ** |
| **Financial instrument**                     | ** ** | **Credit** | ** ** | **Liquidity** | ** ** | **Currency** | ** ** | **Interest rate** | ** ** | **Other price** | ** ** |
| **Measured  at cost or amortized cost**           |       |       |       |   |   |   |   |   |   |   |   |
| Cash and temporary  investments                   |       | X          |       |   |   | X |   | X |   |   |   |
| Accounts receivable                               |       | X          |       |   |   | X |   |   |   |   |   |
| Accounts payable                                  |       |       |       | X |   | X |   |   |   |   |   |
| Restructuring  accounts payable                   |       |       |       | X |   |   |   |   |   |   |   |
| Short-term  obligations                           |       |       |       | X |   |   |   | X |   |   |   |
| Long-term debt                                    |       |       |       | X |   | X |   | X |   |   |   |
| **Measured  at fair value**                       |       |       |       |   |   |   |   |   |   |   |   |
| Short-term  investments                           |       |       |       |   |   |   |   | X |   | X |   |
| Long-term  investments                            |       |       |       |   |   |   |   |   |   | X |   |
| Foreign exchange  derivatives(1)                  |       | X          |       | X |   | X |   |   |   |   |   |
| Share-based  compensation derivatives(1)          |       | X          |       | X |   |   |   |   |   | X |   |
| Cross currency  interest rate swap derivatives(1) |       | X          |       | X |   | X |   | X |   |   |   |

 

----

(1)   Use of derivative financial instruments is subject toa policy which requires that no derivative transaction be entered into for thepurpose of establishing a speculative or leveraged position (the corollarybeing that all derivative transactions are to be entered into for riskmanagement purposes only) and sets criteria for the creditworthiness of thetransaction counterparties.

 

Credit risk

 

Credit risk associated with cash and temporaryinvestments is minimized substantially by ensuring that these financial assetsare placed with: governments, major financial institutions that have beenaccorded strong investment grade ratings by a primary rating agency, and/orother creditworthy counterparties. An ongoing review is performed to evaluatechanges in the status of counterparties.

 

Credit risk associated with accounts receivable is minimizedby the Company’s large and diverse customer base, which covers substantiallyall consumer and business sectors in Canada. The Company follows a program ofcredit evaluations of customers and limits the amount of credit extended whendeemed necessary. The Company maintains allowances for potential credit losses,and any such losses to date have been within management’s expectations. As at December 31,2009, the weighted average life of past-due customer accounts receivable is 72days (2008 – 64 days).

 

The Company must make significant estimates in respectof the allowance for doubtful accounts. Current economic conditions, historicalinformation, why the accounts are past-due and line of business from which thecustomer accounts receivable arose are all considered when determining whetherpast-due accounts should be allowed for; the same factors are considered whendetermining whether to write off amounts charged to the allowance accountagainst the customer account receivable. The provision for doubtful accounts iscalculated on a specific-identification basis for customer accounts receivableover a specific balance threshold and on a statistically derived allowancebasis for the remainder. No customer accounts receivable are written offdirectly to the provision for doubtful accounts.

 

Aside from the normal customer accounts receivablecredit risk associated with its retained interest, the Company has nocontinuing exposure to credit risk associated with its trade receivables, whichare sold to an arm’s-length securitization trust.

 

Counterparties to the Company’s cross currencyinterest rate swap agreements, share-based compensation cash-settled equityforward agreements and foreign exchange derivatives are major financialinstitutions that have all been accorded investment grade ratings by a primaryrating agency. The dollar amount of credit exposure under contracts with anyone financial institution is limited and counterparties’ credit ratings aremonitored. The Company does not give or receive collateral on swap agreementsand hedging items due to its credit rating and those of its counterparties.While the Company is exposed to credit losses due to the non-performance of itscounterparties, the Company considers the risk of this remote. The Company’sderivative liabilities do not have credit-risk-related contingent features.

 

Liquidity risk

 

As a component of capital structure financialpolicies, discussed under *Section 4.3 Liquidityand capital resources*, the Company manages liquidity risk by maintaininga daily cash pooling process, which enables the Company to manage its 

 

42

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liquidity surplus and liquidity requirementsaccording to the actual needs of the Company and its subsidiaries, by maintainingbilateral bank facilities and syndicated credit facilities, by maintaining acommercial paper program, by the sales of trade receivables to an arm’s-lengthsecuritization trust, by continuously monitoring forecast and actual cash flowsand by managing maturity profiles of financial assets and financialliabilities.

 

The Company has significant debt maturities infuture years. As at December 31, 2009, the Company has access to a shelfprospectus, in effect until October 2011, pursuant to which it can offer$3 billion of debt or equity securities. The Company has credit facilitiesavailable, including a $2 billion facility until 2012 (see *Section 7.5 Credit facilities*). The Company believesthat its investment grade credit ratings provide reasonable access to capitalmarkets.

 

Currency risk

 

The Company’s functional currency is the Canadiandollar, but it regularly transacts in U.S. dollars due to certain routinerevenues and operating costs being denominated in U.S. dollars, as well assourcing some inventory purchases and capital asset acquisitionsinternationally. The U.S. dollar is the only foreign currency to which theCompany has a significant exposure.

 

The Company’s foreign exchange risk managementincludes the use of foreign currency forward contracts and currency options tofix the exchange rates on short-term U.S. dollar denominated transactions andcommitments. Hedge accounting is applied to these short-term foreign currencyforward contracts and currency options on an exception basis only.

 

The Company is also exposed to currency risks in thatthe fair value or future cash flows of its U.S. dollar denominated long-termdebt will fluctuate because of changes in foreign exchange rates. Currencyhedging relationships have been established for the related semi-annualinterest payments and principal payment at maturity, as described in Note 18(b) ofthe Consolidated financial statements.

 

Interest rate risk

 

Changes in market interest rates will causefluctuations in the fair value or future cash flows of temporary investments,short-term investments, short-term obligations, long-term debt and/or crosscurrency interest rate swap derivatives.

 

When the Company has temporary investments, they haveshort maturities and fixed rates, thus their fair value will fluctuate withchanges in market interest rates; absent monetization prior to maturity, therelated future cash flows do not change due to changes in market interestrates.

 

If the balance of short-term investments includes debtinstruments and/or dividend-paying equity instruments, the Company could beexposed to interest rate risks.

 

As short-term obligations arising from bilateral bankfacilities, which typically have variable interest rates, are rarelyoutstanding for periods that exceed one calendar week, interest rate riskassociated with this item is not material.

 

In respect of the Company’s currently outstandinglong-term debt, other than for commercial paper and amounts drawn on its creditfacilities, it is all fixed-rate debt. The fair value of fixed-rate debtfluctuates with changes in market interest rates; absent early redemptionand/or foreign exchange rate fluctuations, the related future cash flows do notchange. Due to the short maturities of commercial paper, its fair values arenot materially affected by changes in market interest rates but its cash flowsrepresenting interest payments may be if the commercial paper is rolled over.

 

Amounts drawn on the Company’s short-term andlong-term credit facilities will be affected by changes in market interestrates in a manner similar to commercial paper.

 

Similar to fixed-rate debt, the fair value of theCompany’s cross currency interest rate swap derivatives fluctuates with changesin market interest rates as the interest rate swapped to is fixed; absent earlyredemption, the related future cash flows do not change due to changes inmarket interest rates.

 

Other price risk

 

If the balance of short-term investments includesequity instruments, the Company would be exposed to equity price risks. TheCompany is exposed to equity price risks arising from long-term investmentsclassified as available-for-sale. Such investments are held for strategicrather than trading purposes.

 

The Company is exposed to other price risk arisingfrom cash-settled share-based compensation (appreciating Common Share andNon-Voting Share prices increase both the expense and the potential cashoutflow). Cash-settled equity swap agreements have been entered into thatestablish a cap on the Company’s cost associated with its net-cash settledshare options and fix the Company’s cost associated with its restricted stockunits.

 

43

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Market risk

 

Net income and other comprehensive income for theyears ended December 31, 2009 and 2008, could have varied if the Canadiandollar to U.S. dollar foreign exchange rates, market interest rates and theCompany’s Common Share and Non-Voting Share prices varied by reasonablypossible amounts from their actual statement of financial position date values.

 

The sensitivity analysis of the Company’s exposure tocurrency risk, interest rate risk and other price risk arising from share-basedcompensation is shown in Note 5(g) of the Consolidated financialstatements.

 

Fairvalue

 

Thecarrying value of cash and temporary investments, accounts receivable, accountspayable, restructuring accounts payable and short-term obligations approximatestheir fair values due to the immediate or short-term maturity of thesefinancial instruments. The carrying values of the Company’s investmentsaccounted for using the cost method do not exceed their fair values.

 

Thecarrying value of short-term investments, if any, equals their fair value asthey are classified as held for trading. The fair value is determined directlyby reference to quoted market prices in active markets.

 

Thefair values of the Company’s long-term debt are based on quoted market pricesin active markets. The fair values of the Company’s derivative financialinstruments used to manage exposure to interest rate and currency risks areestimated based on quoted market prices in active markets for the same orsimilar financial instruments or on the current rates offered to the Companyfor financial instruments of the same maturity as well as the use of discountedfuture cash flows using current rates for similar financial instruments subjectto similar risks and maturities.

 

Thefair values of the Company’s derivative financial instruments used to manageexposure to increases in compensation costs arising from certain forms ofshare-based compensation are based upon fair value estimates of the relatedcash-settled equity forward agreements provided by the counterparty to thetransactions (such fair value estimates being largely based upon the Company’sCommon Share and Non-Voting Share prices as at the statement of financialposition dates).

 

*Commitments and contingentliabilities*

 

Contractual obligations

 

The Company’s known contractual obligations at December 31,2009, are quantified in the following table. Interest obligations are includedin long-term debt maturities. Long-term debt principal maturities andassociated interest obligations, as at December 31, 2009, are presentedseparately in *Capabilities - Section 4.3 Liquidityand capital resources*.

 
| ** **            | ** ** | **Long-term debt maturities (1)** | ** ** | ** **              | ** ** | ** **                         | ** ** | **Other long-**                   | ** ** | ** **                             | ** ** |
|-----------------------|------------|--------------------------------------------------|------------|-------------------------|------------|------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| **($ millions)** | ** ** | **All except  capital leases**         | ** ** | **Capital leases** | ** ** | **Operating  leases**** (2)** | ** ** | **Purchase  obligations**** (3)** | ** ** | **term  obligations**** (4),(5)** | ** ** | **Total** | ** ** |
| 2010                  |       | 517                                              |       | 2                       |       | 283                                |       | 819                                    |       | 17                                     |       | 1,638 |   |
| 2011                  |       | 2,407                                            |       | 1                       |       | 262                                |       | 609                                    |       | 28                                     |       | 3,307 |   |
| 2012                  |       | 1,014                                            |       | —                  |       | 244                                |       | 496                                    |       | 20                                     |       | 1,774 |   |
| 2013                  |       | 532                                              |       | —                  |       | 225                                |       | 11                                     |       | 21                                     |       | 789 |   |
| 2014                  |       | 907                                              |       | —                  |       | 202                                |       | 3                                      |       | 21                                     |       | 1,133 |   |
| Thereafter            |       | 3,813                                            |       | —                  |       | 1,218                              |       | 14                                     |       | 168                                    |       | 5,213 |   |
| Total                 |       | 9,190                                            |       | 3                       |       | 2,434                              |       | 1,952                                  |       | 275                                    |       | 13,854 |   |

 

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(1)   Where applicable, debt maturities reflect hedgedforeign exchange rates as at December 31, 2009. Interest payment cashoutflows in respect of commercial paper have been calculated based on rates ineffect as at December 31, 2009.

 

(2)   Of the total minimum operating lease payments of$2,434 million, $2,376 million was in respect of land and buildings;approximately 55% was in respect of the Company’s five largest operatingleases, all of which were for office premises over various terms, with expirydates that range between 2016 and 2026. See Note 20(b) of theConsolidated financial statements for further details on operating leases.

 

(3)   Where applicable, purchase obligations reflect foreignexchange rates as at the current year-end, December 31, 2009. Purchaseobligations include future operating and capital expenditures that have beencontracted for as at the current year-end and include the most likely estimatesof prices and volumes, where necessary. As purchase obligations reflect marketconditions at the time the obligation was incurred for the items beingpurchased, they may not be representative of future years. Obligations frompersonnel supply contracts and other such labour agreements have been excluded.

 

(4)   Items that do not result in a future outlay ofeconomic resources, such as deferred gains on sale-leasebacks of buildings anddeferred customer activation and connection fees, have been excluded.

 

(5)   Uncertain income tax positions that could result incurrent income taxes being payable have been, or will be, substantially fundedover the next 12 months.

 

44

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Price cap deferral accounts

 

An aggregate deferral account liability of$144 million was recorded as at December 31, 2009. The price capdeferral account concept was introduced by the CRTC in 2002 in *Telecom Decisions 2002-34* and *2002-43*.From June 2002 through May 2006, the deferral account conceptrequired the Company to defer income statement recognition of a portion ofmonies received in respect of residential basic services provided to customersin non-high cost serving areas, rather than lower prices to such customers. TheCRTC has issued a number of decisions in respect of the application anddisposition of funds in the deferral accounts, including expansion of broadbandservices to an approved list of rural and remote communities within incumbentlocal exchange areas. The CRTC ultimately decides when and how the deferralaccount is settled. (See *Section 8.1 Criticalaccounting estimates — Advance billingsand customer deposits*.)

 

The deferral account was subject to appeals tothe Supreme Court of Canada by the Consumers Association of Canada, theNational Anti-Poverty Organization, Bell Canada and the Company. On September 18,2009, the Supreme Court of Canada dismissed all appeals, in effect confirmingthe CRTC’s authority to introduce the deferral account and make decisionsregarding the disposition of deferral account funds. The Supreme Court alsolifted a stay on the CRTC deferral account decision that restricted the use ofdeferral account funds. In January 2010, the Company filed with the CRTC are-submission of its initial cost estimates and a four-year constructionproposal associated with the IP expansion program for the currently approved229 rural and remote communities. The Company anticipates it will commenceimplementation in mid-2010.

 

Guarantees (Note 20(c) of the Consolidatedfinancial statements)

 

Canadian GAAP requires the disclosure of certain typesof guarantees and their maximum, undiscounted amounts. As at December 31,2009, the Company’s maximum undiscounted guarantee amounts, without regard forthe likelihood of having to make such payment, were not material.

 

In the normal course of operations, the Company mayprovide indemnification in conjunction with certain transactions. Other thanobligations recorded as liabilities at the time of the transaction,historically the Company has not made significant payments under theseindemnifications.

 

In connection with its 2001 disposition of TELUS’directory business, the Company agreed to bear a proportionate share of the newowner’s increased directory publication costs if the increased costs were toarise from a change in the applicable CRTC regulatory requirements. TheCompany’s proportionate share would have been 80% through May 2006,declining to 40% in the next five-year period and then to 15% in the final fiveyears. Should the CRTC take any action that would result in the owner beingprevented from carrying on the directory business as specified in theagreement, TELUS would indemnify the owner in respect of any losses that theowner incurred. As at December 31, 2009, the Company has no liabilityrecorded in respect of indemnification obligations.

 

Claims and lawsuits

 

A number of claims and lawsuits seeking damages andother relief are pending against the Company. It is impossible at this time forthe Company to predict with any certainty the outcome of such litigation.However, management is of the opinion, based upon legal assessment andinformation presently available, that it is unlikely that any liability, to theextent not provided for through insurance or otherwise, would be material inrelation to the Company’s consolidated financial position, other than asdisclosed in Note 20(d) of the Consolidated financial statements and*Section 10.9Litigation and legal matters*.

 

45

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### **7.9 Outstandingshare information**

### ** **

The table below contains a summary of the outstandingshares for each class of equity at December 31, 2009 and January 31,2010. The total number of outstanding and issuable shares is also presented forJanuary 31, 2010, assuming full conversion of outstanding options andshares reserved for future option grants. The number of outstanding andissuable shares at February 25, 2010, was not materially different.

 

On November 4, 2009, the Board of Directorsapproved an amendment to the TELUS dividend reinvestment program (DRIP), suchthat beginning with the dividend declared for the fourth quarter of 2009, paid January 4,2010, TELUS will issue shares from treasury for reinvested dividends at a 3%discount, rather than purchase shares exclusively in the open market. The DRIPparticipation was approximately 14% for the fourth quarter 2009 dividend, withapproximately 674,000 Non-Voting Shares issued from treasury.

 
| **Outstanding shares  (millions)**                  | ** ** | **Common  Shares** | ** ** | **Non-Voting  Shares** | ** ** | **Total  shares** | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|------------------------|------------|-------------------|------------|
| Common equity                                            |       |               |       |                   |       |              |       |
| Outstanding shares at December 31, 2009                  |       | 175                |       | 143                    |       | 318               | (1)        |
|                                                     |       |               |       |                   |       |              |       |
| Outstanding shares at January 31, 2010                   |       | 175                |       | 144                    |       | 319               |       |
| Options outstanding and issuable (2) at January 31, 2010 |       | —             |       | 15                     |       | 15                |       |
| Outstanding and issuable shares at January 31, 2010      |       | 175                |       | 159                    |       | 334               |       |

 

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(1)   For the purposes of calculating diluted earnings pershare, the number of shares was 318 million for the year ended December 31,2009.

(2)   Assuming full conversion and ignoring exercise prices.

## ** **

## **8.**     Criticalaccounting estimates and accounting policy developments

 

### **8.1 Criticalaccounting estimates**

### ** **

TELUS’ significant accounting policies are describedin Note 1 of the Consolidated financial statements. The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates, assumptions and judgements.Management’s estimates, assumptions and judgements affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements, as well as the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates. The Company’s critical accounting estimates are describedbelow and are generally discussed with the Audit Committee each quarter.

 

General

 

·      Unless otherwise specified in the discussionof the specific critical accounting estimates, the Company is not aware oftrends, commitments, events or uncertainties that it reasonably expects tomaterially affect the methodology or assumptions associated with the criticalaccounting estimates, subject to the items identified in the *Caution regarding forward-looking statements* section of thisMD&A.

 

·      In the normal course, changes are made toassumptions underlying all critical accounting estimates to reflect currenteconomic conditions, updating of historical information used to develop theassumptions and changes in the Company’s debt ratings, where applicable. Unlessotherwise specified in the discussion of the specific critical accountingestimates, it is expected that no material changes in overall financialperformance and financial statement line items would arise either fromreasonably likely changes in material assumptions underlying the estimate orfrom selection of a different estimate from within a valid range of estimates.

 

·      All critical accounting estimates areuncertain at the time of making the estimate and affect the followingConsolidated statements of income and other comprehensive income line items:Income taxes (except for estimates about goodwill) and Net income. Similarly,all critical accounting estimates affect the following Consolidated statementsof financial position line items: Current assets (Income and other taxesreceivable); Current liabilities (Income and other taxes payable and Currentportion of future income taxes); Future income tax liabilities; and CommonShare and Non-Voting Share equity (retained earnings). The discussion of eachcritical accounting estimate does not differ between the Company’s twosegments, wireline and wireless, unless explicitly noted.

 

·      The critical accounting estimates affect theConsolidated statements of income items, and Consolidated statements offinancial position line items, as follows:

 

46

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| ** **                                    | ** ** | **Consolidated  statements of income and other comprehensive income** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                    | ** ** | ** **                                                            | ** ** | **Operating  expenses** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Amortization** | ** ** | ** ** | ** ** |
| **Consolidated statements of**                | ** ** | **Operating**                                                         | ** ** | ** ** | ** ** |   | ** ** | **of intangible** | ** ** | **Other expense,** | ** ** |
| **financial position**                        | ** ** | **revenues**                                                          | ** ** | **Operations** | ** ** | **Depreciation** | ** ** | **assets** | ** ** | **net** | ** ** |
| Accounts receivable                           |       |                                                                  |       | X |   |   |   |   |   |   |   |   |   |
| Inventories                                   |       |                                                                  |       | X |   |   |   |   |   |   |   |   |   |
| Property, plant, equipment and other, net     |       |                                                                  |       |   |   | X |   |   |   |   |   |   |   |
| Intangible assets, net, and Goodwill, net (1) |       |                                                                  |       |   |   |   |   |   | X |   |   |   |   |
| Investments                                   |       |                                                                  |       |   |   |   |   |   |   |   |   | X |   |
| Advance billings and customer deposits        |       | X                                                                     |       | X |   | X |   |   | X |   |   |   |   |
| Employee defined benefit pension plans        |       |                                                                  |       | X |   | X |  (2) |   | X |  (2) |   |   |   |

 

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(1)   Accounting estimate, asapplicable to intangible assets with indefinite lives and goodwill, primarilyaffects the Company’s wireless segment.

(2)   Accounting estimate impactdue to internal labour capitalization rates.

 

Accounts receivable

 

*General*

 

·      The Company considers the business area that gave rise to the accountsreceivable, performs statistical analysis of portfolio delinquency trends andperforms specific account identification when determining its allowance fordoubtful accounts. This information is also used in conjunction with currentmarket-based rates of borrowing to determine the fair value of its residualcash flows arising from accounts receivable securitization. The fair value ofthe Company’s residual cash flows arising from the accounts receivablesecuritization is also referred to as its retained interest.

 

·      Assumptions underlying the allowance for doubtful accounts includeportfolio delinquency trends and specific account assessments made whenperforming specific account identification. Assumptions underlying thedetermination of the fair value of residual cash flows arising from accountsreceivable securitization include those developed when determining theallowance for doubtful accounts as well as the effective annual discount rate.

 

·      These accounting estimates are in respect of the Accounts receivable lineitem on the Company’s Consolidated statements of financial position comprisingapproximately 4% of Total assets as at December 31, 2009 (5% as at December 31,2008). If the future were to adversely differ from management’s best estimatesof the fair value of the residual cash flows and the allowance for doubtfulaccounts, the Company could experience a bad debt charge in the future. Such abad debt charge does not result in a cash outflow.

 

*Keyeconomic assumptions used to determine the fair value of residual cash flowsarising from accounts receivable securitization*

 

·      The estimate of the Company’s fair value ofits retained interest could materially change from period to period due to thefair value estimate being a function of the amount of accounts receivable sold,which can vary on a monthly basis. See Note 14 of the Consolidatedfinancial statements for further analysis.

 

*Theallowance for doubtful accounts*

 

·      The estimate of the Company’s allowance fordoubtful accounts could materially change from period to period due to theallowance being a function of the balance and composition of accountsreceivable, which can vary on a month-to-month basis. The variance in thebalance of accounts receivable can arise from a variance in the amount andcomposition of operating revenues, from a variance in the amount of accountsreceivable sold to the securitization trust and from variances in accountsreceivable collection performance.

 

Inventories

 

*The allowance for inventory obsolescence*

 

·      The Company determines its allowance for inventory obsolescence basedupon expected inventory turnover, inventory aging, and current and futureexpectations with respect to product offerings.

 

·      Assumptions underlying the allowance for inventory obsolescence includefuture sales trends and offerings and the expected inventory requirements andinventory composition necessary to support these future sales offerings. Theestimate of the Company’s allowance for inventory obsolescence could materiallychange from period to period due to changes in product offerings and consumeracceptance of those products.

 

·      This accounting estimate is in respect of the Inventories line item onthe Company’s Consolidated statements of financial position, which comprisesapproximately 1% of Total assets as at December 31, 2009 (2% as at 

 

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December 31, 2008). If the allowance forinventory obsolescence were inadequate, the Company could experience a chargeto operations expense in the future. Such an inventory obsolescence charge doesnot result in a cash outflow.

 

Property, plant, equipment and other, net;Intangible assets, net; and Goodwill, net

 

*General*

 

·      The Property, plant, equipment and other, net, line item on the Company’sConsolidated statements of financial position represents approximately 40% ofTotal assets, as at December 31, 2009 (38% as at December 31, 2008).

 

·      The Intangible assets, net, line item represents approximately 27% ofTotal assets, as at December 31, 2009 and 2008. Included in Intangibleassets, wireless spectrum licences represent approximately 20% of Total assets,as at December 31, 2009 and 2008.

 

·      The Goodwill line item represents approximately 19% of Total assets, asat December 31, 2009 and 2008.

 

·      If TELUS’ estimated useful lives of assets were incorrect, it couldexperience increased or decreased charges for amortization of intangible assetsor depreciation in the future. If the future were to adversely differ frommanagement’s best estimate of key economic assumptions and associated cashflows were to materially decrease, the Company could potentially experiencefuture material impairment charges in respect of its property, plant, equipmentand other assets, or its intangible assets, including goodwill. If intangibleassets with indefinite lives were determined to have finite lives at some pointin the future, the Company could experience increased charges for amortizationof intangible assets. Such charges do not result in a cash outflow and ofthemselves would not affect the Company’s immediate liquidity.

 

*The estimated useful lives of assets; therecoverability of tangible assets*

 

·      The estimated useful lives of assets are determined by a continuingprogram of asset life studies. The recoverability of tangible assets issignificantly impacted by the estimated useful lives of assets.

 

·      Assumptions underlying the estimated useful lives of assets includetiming of technological obsolescence, competitive pressures and futureinfrastructure utilization plans.

 

*The recoverability of intangible assets with indefinitelives*;*therecoverability of goodwill*

 

·      Consistent with current industry-specific valuation methods, the Company uses adiscounted cash flow model combined with a market-based approach in determiningthe fair value of its spectrum licences and goodwill. See Note 16(c) ofthe Consolidated financial statements for further discussion of methodology.

 

·      The most significant assumptions underlyingthe recoverability of intangible assets with indefinite lives and goodwillinclude: future cash flow and growth projections, including economic riskassumptions and estimates of achieving desired key operating metrics and drivers;future weighted average cost of capital; and annual earnings multiples.Significant factors impacting these assumptions include estimates of futuremarket share, key operating metrics such as churn and ARPU, level ofcompetition, technological developments, interest rates, market economictrends, debt levels and the cost of debt. Sensitivity testing is discussed inNote 16(c) of the Consolidatedfinancial statements.

 

Investments

 

*The recoverability of long-term investments*

 

·      The Company assesses the recoverability of its long-term investments ona regular, recurring basis. The recoverability of investments is assessed on aspecific identification basis taking into consideration expectations aboutfuture performance of the investments and comparison of historical results topast expectations.

 

·      The most significant assumptions underlying the recoverability oflong-term investments are the achievement of future cash flow and operatingexpectations. The estimate of the Company’s recoverability of long-terminvestments could change from period to period due to the recurring nature ofthe recoverability assessment and due to the nature of long-term investments(the Company does not control the investees).

 

·      If the allowance for recoverability of long-term investments wereinadequate, the Company could experience an increased charge to Other expensein the future. Such a provision for recoverability of long-term investmentsdoes not result in a cash outflow.

 

Income tax assets and liabilities

 

*The amount and composition of income tax assets andincome tax liabilities, including the amount of unrecognized tax benefits*

 

·      Assumptions underlying the composition of income tax assets andliabilities, including the amount of unrecognized tax benefits, are based uponan assessment of tax positions as to whether, on their technical merit, theyare more likely than not of being sustained upon examination, and then anestimate of the amount of tax benefit that is greater than 

 

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50% likely of being realized upon ultimate settlementwith taxing authorities. Such assessments are based upon the applicable incometax legislation, regulations and interpretations, all of which in turn aresubject to interpretation.

 

·      Current income tax assets and liabilities are estimated based upon theamount of tax that is calculated as being owed to taxing authorities, net ofperiodic instalment payments. Future income tax liabilities are comprised ofthe tax effect of temporary differences between the carrying amount and taxbasis of assets and liabilities as well as the tax effect of undeducted taxlosses. The timing of the reversal of the temporary differences is estimatedand the tax rate substantively enacted for the periods of reversal is appliedto the temporary differences. The carrying amounts of assets and liabilitiesare based upon the amounts recorded in the financial statements and aretherefore subject to accounting estimates that are inherent in those balances.The tax basis of assets and liabilities as well as the amount of undeducted taxlosses are based upon the assessment of tax positions and measurement of taxbenefits as noted above. Assumptions as to the timing of reversal of temporarydifferences include expectations about the future results of operations andcash flows. The composition of income tax liabilities is reasonably likely tochange from period to period because of changes in the estimation of thesesignificant uncertainties.

 

·      This accounting estimate is in respect of material asset and liabilityline items on the Company’s Consolidated statements of financial positioncomprising less than 1% of Total assets and approximately 9% of Totalliabilities and owners’ equity as at December 31, 2009 (less than 1% ofTotal assets and approximately 10% of Total liabilities and owners’ equity asat December 31, 2008). If the future were to adversely differ frommanagement’s best estimate of the likelihood of tax positions being sustained,the amount of tax benefit that is greater than 50% likely of being realized,the future results of operations, the timing of reversal of deductibletemporary differences and taxable temporary differences, and the tax ratesapplicable to future years, the Company could experience material future incometax adjustments. Such future income tax adjustments could result in anacceleration of cash outflows at an earlier time than might otherwise beexpected.

 

Advance billings and customer deposits

 

*Theaccruals for CRTC deferral account liabilities*

 

·      The deferral account arose from the CRTC requiring the Company to deferthe income statement recognition of a portion of the monies received in respectof residential basic services provided to non-high cost serving areas. Thisdeferral requirement ended May 31, 2006. The critical estimate arisesfrom the Company’s recognition of the deferred amounts. The Company mayrecognize the deferred amounts upon the undertaking of qualifying actions, suchas service improvement programs in qualifying non-high cost serving areas,expansion of broadband services to rural and remote communities in incumbentlocal exchange carrier operating territories, initiatives to enhanceaccessibility of telecommunications services for individuals with disabilities,rate reductions (including those mandated by the CRTC in respect of discountson competitor digital network services) and rebates to customers. In September 2009,a number of challenges in respect of the deferral account were dismissed by theSupreme Court of Canada. The CRTC is expected to decide on the ultimatedisposition of deferred amounts in 2010. (See *Price capdeferral account* under *Commitments and contingentliabilities* in *Section 7.8*.)

 

·      Assumptions underlying the accruals for the CRTC deferral account thatare uncertain at the time of making the estimate include: (i) what actionswill ultimately qualify for recognition of deferred amounts; and (ii) overwhat period of time qualifying deferred amounts will be recognized in theCompany’s Consolidated statements of income. The manner in which deferredamounts are recognized, and the amounts thereof, are reasonably likely tochange as such recognition is ultimately dependent upon future decisions by theCRTC.

 

·      This accounting estimate is in respect of an item within the Advancebillings and customer deposits line item on TELUS’ Consolidated statements offinancial position which, itself, comprises approximately 4% of Totalliabilities and owners’ equity as at December 31, 2009 and 2008. TheCompany currently expects to rebate to residential customers an aggregateamount up to $25 million of the deferral account balance($144 million at December 31, 2009). Rebates from the deferralaccount will not impact TELUS’ Net income, but will result in a net cashoutflow. The balance of the deferral account not rebated to customers isexpected to be applied to approved initiatives including broadband expansion inremote and rural areas. If the Company’s estimate of amounts to be refundedwere to differ materially from what the CRTC ultimately decides will berefunded, the expected cash outflow could differ materially. Similarly, if theamounts expected to be applied to broadband initiatives were to differmaterially from what the CRTC ultimately approves, future revenues could bematerially impacted. Such a revenue impact would not be expected to beaccompanied by a corresponding impact in net cash inflows.

 

Employee defined benefit pension plans

 

*Certain actuarial and economic assumptions used indetermining defined benefit pension costs, accrued pension benefit obligationsand pension plan assets*

 

·      The Company reviews industry practices, trends, economic conditions anddata provided by actuaries when developing assumptions used in thedetermination of defined benefit pension costs and accrued pension benefit 

 

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obligations. Pension plan assets are generally valuedusing market prices, however, some assets are valued using market estimateswhen market prices are not readily available. Defined benefit pension costs arealso affected by the quantitative methods used to determine estimated returnson pension plan assets. Actuarial support is obtained for interpolations ofexperience gains and losses that affect the defined benefit pension costs andaccrued benefit obligations. The discount rate, which is used to determine theaccrued benefit obligation, is based upon the yield on long-term, high-qualityfixed term investments, and is set annually at the end of each calendar year,based upon yields on long-term corporate bond indices in consultation withactuaries. The expected long-term rate of return is based upon forecastedreturns of the major asset categories and weighted by plans’ target assetallocations. Future increases in compensation are based upon the currentbenefits policies and economic forecasts.

 

·      Assumptions used in determining defined benefit pension costs, accruedpension benefit obligations and pension plan assets include: discount rates,long-term rates of return for plan assets, market estimates and rates of futurecompensation increases. Material changes in overall financial performance andfinancial statement line items would arise from reasonably likely changes,because of revised assumptions to reflect updated historical information andupdated economic conditions, in the material assumptions underlying thisestimate. See Note 13 of the Consolidated financial statements for furtheranalysis.

 

·      This accounting estimate is in respect of a component of the largestoperating expense line item on the Company’s Consolidated statements of incomeand other comprehensive income. If the future were to adversely differ frommanagement’s best estimate of assumptions used in determining defined benefitpension costs, accrued benefit obligations and pension plan assets, the Companycould experience future increased defined benefit pension expense. Themagnitude of the immediate impact is lessened, as the excess of net actuarialgains and losses in excess of 10% of the greater of the benefit obligation andthe fair value of the plan assets is amortized over the average remainingservice period of active employees of the plan.

 

### **8.2 Accountingpolicy developments**(Note 2 of the Consolidated financialstatements)

### ** **

The discussion in this section includesexpectations at the reporting date about the transition from Canadian GAAP toInternational Financial Reporting Standards (IFRS) as issued by theInternational Accounting Standards Board (IASB), or IFRS-IASB.

 

*Transitionto International Financial Reporting Standards as issued by the IASB*

 

In 2006, Canada’s Accounting Standards Boardratified a strategic plan that will result in Canadian GAAP, as used bypublicly accountable enterprises, being replaced with IFRS as issued by theIASB over a transitional period to be complete by 2011. TELUS will be requiredto report using the IFRS-IASB standards effective for interim and annualfinancial statements relating to fiscal years beginning no later than on orafter January 1, 2011, the date that the Company has selected foradoption.

 

Canada’s Accounting Standards Board will phasein or transition to IFRS-IASB through a combination of two methods: as currentjoint-convergence projects of the United States’ Financial Accounting StandardsBoard and the IASB are agreed upon, they will be adopted by Canada’s AccountingStandards Board and may be introduced in Canada before the publicly accountableenterprises’ transition date to IFRS-IASB; and standards not subject to ajoint-convergence project have been exposed in an omnibus manner forintroduction at the time of the publicly accountable enterprises’ transitiondate to IFRS-IASB. In the future, as the IASB issues exposure drafts, Canada’sAccounting Standards Board will expose them in Canada individually, rather thangrouping several into an omnibus exposure draft. The first transition methodmay, or will, result in the Company either having the option to, or beingrequired to, effectively, change over certain accounting policies to IFRS-IASBprior to 2011.

 

The IASB’s work plan currently, and expectedly,has projects underway that are expected to result in new pronouncements thatcontinue to evolve IFRS-IASB, and as a result, IFRS-IASB as at the transitiondate is expected to differ from its current form.

 

Key dates:

 

·      January 1, 2010 (transition date): An opening statement offinancial position according to IFRS-IASB will be prepared, as at this date, tofacilitate the changeover to IFRS-IASB in 2011. TELUS will report its fiscal 2010 and comparative 2009 resultsaccording to Canadian GAAP.

 

·      January 1, 2011 (changeover date): The date after which TELUS willprepare and report interim and annual 2011 financial statements according to IFRS-IASB with 2010 comparatives alsoaccording to IFRS-IASB.

 

### **8.2.1**   First-time adoption of IFRS asissued by the IASB (IFRS 1)

### ** **

The transition to IFRS-IASB requires theCompany to apply IFRS 1, which are the requirements for preparingIFRS-IASB-compliant financial statements in the first reporting period afterthe changeover date. IFRS 1 applies only at the time of changeover, andincludes a requirement for retrospective application of each IFRS, as if theywere always in effect. IFRS 1 

 

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also mandates certain exceptions toretrospective application and provides a series of optional exemptions fromretrospective application to ease the transition to the full set of IFRSs. The Company’s initial decisions regardingmandatory exceptions and optional exemptions follow.

 

IFRS 1 mandatory exceptions more relevant to the Company include:

 

·      Hedge accounting

 

All derivatives are measured at fair value andall deferred gains and losses arising on derivatives reported under CanadianGAAP are to be eliminated at the transition date. Each hedging relationshipmust be assessed to determine if it qualifies for hedge accounting underIFRS-IASB. Qualified hedges are recognized on the Consolidated statements offinancial position at the transition date. The Company currently expects thatall existing hedging relationships that will continue to be in place on thetransition date are qualified hedges under IFRS-IASB.

 

·      Use of estimates

 

Retrospective adjustments to accountingjudgements or estimates are not allowed as part of the transition, unless thereis objective evidence that those estimates were in error. The Company currentlyexpects to use the same estimates in preparing its 2010 IFRS-IASB financialstatements as it will use in preparing its 2010 Canadian GAAP financialstatements, except for possible changes to the recognition and measurement ofuncertain tax positions.

 

·      Non-controlling interests

 

The Company early adopted the newrecommendations of the CICA for business combinations and non-controllinginterests, which addressed this exception. See *Accountingpolicy developments in fiscal 2009*in *Section 8.2.4*.

 

IFRS 1 optional exemptions more relevant to the Company include:

 

·      Employee benefits — recognition of actuarial gains or losses

 

IFRS 1 provides an election to recognizecumulative actuarial gains and losses for all employee defined benefit plans atthe transition date, by way of an adjustment to opening retained earnings.Alternatively, retrospective application permits a restatement of cumulativeactuarial gains and losses for all defined benefit plans since their inception.The Company currently expects to record 100% of the actuarial gains or lossesand transitional assets at the transition date as an adjustment to openingretained earnings.

 

·      Fair value of property, plant and equipment as deemed cost

 

Property, plant and equipment at the date oftransition can be recorded at either fair value or carrying value. The optioncan be applied separately to each asset or class of assets. The Companycurrently expects to elect the use of the carrying value at the date oftransition.

 

·      Business combinations

 

Three choices are provided for retrospectiveapplication to past business combinations: (i) apply the standard to allpast business combinations; (ii) apply the standard to all businesscombinations after a particular date prior to the transition date; or (iii) applythe standard prospectively to all business combinations after the transitiondate. The Company elected to apply the standard only to business combinationsthat occur after January 1, 2009. This date is aligned with the Company’sadoption of the CICA’s new recommendations for business combinations,consolidations and non-controlling interests. See *Accountingpolicy developments in fiscal 2009*in *Section 8.2.4*.

 

The Company continues to evaluate transitiondate impacts, including possible changes that may result from IFRS-IASBexposure drafts for related standards. To date, possible transition dateimpacts include:

 

·      De-recognition of financial assets and financial liabilities

 

Proceeds from the sale of accounts receivableunder the Company’s accounts receivable securitization agreement arede-recognized under Canadian GAAP, reflected as a reduction to accountsreceivable on the consolidated statements of financial position. Under currentIFRS-IASB, the sold proceeds do not qualify for de-recognition, which wouldresult in these amounts being recorded as short-term debt, rather than areduction to accounts receivable. Accounts receivable securitization expensesare expected to be included in borrowing costs under IFRS-IASB, instead oftheir current inclusion in Other expense. The IFRS 1 mandatory exemptiondoes not impact the Company’s assessment of de-recognition under IAS 39.

 

·      Leases

 

Sale and leaseback of certain non-strategicoffice buildings and related properties, primarily in 2000 and 2001, resultedin deferred gains under Canadian GAAP that are being amortized to income overthe varying terms of the leases. Under IFRS-IASB, these gains are to berecognized at the time of sale. Consequently, the remaining balance 

 

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of gains deferred under Canadian GAAP isexpected to be recognized at the transition date as an increase in opening retainedearnings under IFRS-IASB.

 

·      Income taxes

 

The IASB had issued an exposure draftcontaining proposals to replace the current IAS 12 for income taxes andrelated interpretations. The IASB indicated in November 2009 that theexposure draft will not proceed as proposed. The IASB is expected to review thestandard for income taxes on a piecemeal basis in future. The impacts ofIAS 12 on the Company are expected to be related to recognition andmeasurement of uncertain tax positions, and disclosure and presentationdifferences. The Company will monitor near-term projects that the IASBinitiates for income taxes, however, the ultimate impacts cannot be determinedat this time.

 

### **8.2.2**   IFRS-IASB accounting policydecisions

### ** **

The Company has determined a modest number ofareas where changes in accounting policies are expected that may impact theConsolidated financial statements. The Company’s initial IFRS-IASB accounting policy decisions include the following.

 

·      Employee benefits — recognition of ongoing actuarial gains or losses

 

IAS 19 permits three choices forrecognizing actuarial gains or losses after the transition date: (i) thecorridor approach, which amortizes gains or losses outside the corridor over anamortization period; (ii) adoption of a more systematic method that wouldresult in faster recognition of the gains or losses in income; or (iii) recognitionof 100% of gains or losses in the period in which they occur, in either Netincome or Other comprehensive income. The Company currently expects to record100% of the actuarial gains or losses in Other comprehensive income, therebyallowing pension assets and liabilities to be reflected at their fair values.

 

·      Property, plant and equipment; intangible assets

 

After the transition date, the Company is requiredto choose for each class of asset, whether to use the cost model or therevaluation model. TELUS currently expects to use the cost model for each classof asset.

 

·      Impairment of assets

 

IAS 36 states that assets should be testedseparately for impairment, and where the recoverable amount cannot be estimatedfor individual assets, it should be estimated as part of a cash-generatingunit. The Company currently expects its cash-generating units under IFRS-IASBto be wireless and wireline, consistent with testing levels under CanadianGAAP.

 

IFRS-IASB uses a one-step process for testingand measuring impairment of long-lived assets, rather than two-step methodsunder Canadian GAAP. Except for goodwill, IFRS-IASB also requires reversal ofimpairments of long-lived assets where adverse circumstances have reversed.Whether the Company will be materially affected will depend upon the facts atthe time of each impairment test.

 

### **8.2.3**   IFRS-IASB changeover plan

### ** **

The following changeover plan is based on theCompany’s current assumptions and expectations, which could change in futurebased on IFRS-IASB changes or other factors.

 
| **Key activity**                                                                 | ** ** | **Milestones (expected  timeframes)**                                                                                                                                                                                                                                                                                        | ** ** | **Status and comments**                                                                   |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|
| **Financial statement preparation**                                              | ** ** | ** **                                                                                                                                                                                                                                                                                                                   | ** ** | ** **                                                                                |
|                                                                             |       |                                                                                                                                                                                                                                                                                                                         |       |                                                                                      |
| ·      Initial impact assessment and scoping phase |       | The Company used a diagnostic process, and  identified a modest number of topics impacting either the Company’s financial  results and/or the Company’s effort necessary to change over to IFRS-IASB.  This diagnostic resulted in the development of a detailed plan under which  activities are being conducted. |       | Completed in the first quarter of 2008.                                                   |
|                                                                             |       |                                                                                                                                                                                                                                                                                                                         |       |                                                                                      |
| ·      Key elements phase                          |       | Identification, evaluation and selection of  accounting policies necessary for the Company to change over to IFRS-IASB.                                                                                                                                                                                                      |       | Initial choices completed. Ongoing review of  IFRS-IASB exposure drafts and developments. |
|                                                                             |       |                                                                                                                                                                                                                                                                                                                         |       |                                                                                      |
|                                                                             |       | This phase includes other operational  elements, such as information technology, internal control over financial  reporting, and training.                                                                                                                                                                                   |       | See commentary below.                                                                     |

 

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| **Key activity**                                     | ** ** | **Milestones (expected  timeframes)**                                                                                                                           | ** ** | **Status and comments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |       | Approval of initial IFRS 1  elections and accounting policy choices.                                                                                       |       | Senior management approval received.

 

Audit Committee review of management’s  decisions, and Board of Directors’ approval of optional exemptions and  accounting policy choices — obtained in November 2009.                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                 |       |                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ·      Embedding phase |       | Integrate the solutions necessary for the  changeover into the Company’s underlying financial systems and processes.  (See *Infrastructure* below.)        |       | The Company expects to adapt its existing  accounting systems for parallel reporting under IFRS-IASB.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                 |       |                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                 |       | In 2010, the Company expects to maintain two  parallel sets of books: one according to contemporary Canadian GAAP and one  according to contemporary IFRS-IASB. |       | Parallel reporting platforms were designed,  implemented and tested for operation in the fourth quarter of 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                 |       |                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                 |       | Develop financial statements formats and note  disclosures.                                                                                                     |       | Drafted. Senior management approval to be sought in 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                 |       |                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                 |       | Disclosure in the MD&A of the  impacts on the 2010 comparative  period, when available.                                                                     |       | Activities are planned for the fourth quarter  of 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                 |       |                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                 |       | 2011 first quarter: Disclosure  in the MD&A of final quantification of conversion effects on the 2010  comparative period.                                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **                                           |       |                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Communication  and training**                      |       | Provide ongoing training on expected  IFRS-IASB impacts, IFRS 1 elections and accounting policy choices.                                                   |       | The Company has implemented a detailed  communications and training plan addressing all aspects of the IFRS  convergence project.

 

In 2009, the Company leveraged internal  resources to implement a general Finance-wide training seminar and a number  of targeted training seminars for Finance team members, who are highly  impacted by the IFRS convergence project; similar activities are planned for  2010.

 

General communication and education is  provided to all Finance team members highlighting a number of external IFRS resources  available through TELUS’ internal IFRS website. |
| ** **                                           |       |                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Infrastructure – Information  technology**    |       | Determine necessary changes to systems and  processes.                                                                                                          |       | Completed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                 |       |                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                 |       | Update accounting systems to enable the  opening financial position under IFRS-IASB, and facilitate dual reporting in  2010.                                    |       | Parallel reporting platforms were designed,  implemented, and tested for operation in the fourth quarter 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                 |       |                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                 |       | Implement financial planning and forecasting  capability under IFRS-IASB standards.                                                                             |       | Processes are currently being adapted. Dual  forecasting capability is to be implemented during 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

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| **Key activity**                                                               | ** ** | **Milestones (expected  timeframes)**                                                                                                                                                                                                                                                                                                                                                            | ** ** | **Status and comments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Business policy assessment**                                                 |       | Assess impacts on contractual arrangements  and covenants. Implement changes as necessary.                                                                                                                                                                                                                                                                                                       |       | Contracts and covenants are currently being  reviewed.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** **                                                                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Control environment**                                                        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** **                                                                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ·      Internal control over financial reporting |       | Approval of initial IFRS 1 elections and  accounting policy choices.                                                                                                                                                                                                                                                                                                                        |       | Senior management approval received for  initial elections and policy choices.

 

Audit Committee review of management’s  decisions, and Board of Directors’ approval for the employee benefits  optional exemption and accounting policy choice – obtained in November 2009.

 

Periodic review by senior management of implementation progress, impacts of outstanding IFRS-IASB exposure drafts and IFRS-IASB  policy decisions.

 

Periodic review of implementation progress  and management decisions by the Audit Committee. |
|                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                           |       | Testing of controls for 2010 comparatives.                                                                                                                                                                                                                                                                                                                                                       |       | Activities are underway in the first quarter  of 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ·      Disclosure controls and procedures        |       | Review and sign-off by senior management of  2009 annual IFRS-IASB disclosures.                                                                                                                                                                                                                                                                                                                  |       | Completed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                           |       | Review and sign-off by senior management of  expected conversion effects on fiscal 2010.                                                                                                                                                                                                                                                                                                         |       | Activities are planned for the first quarter  of 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                           |       | December 2010: Expect to issue final  guidance for fiscal 2010 according to Canadian GAAP.

 

Provide updated disclosure of expected  conversion effects on fiscal 2010.

 

December 2010 to first quarter 2011: Planned  release of 2011 annual targets according to IFRS-IASB standards, together  with supplementary disclosure for fiscal 2010 according to IFRS-IASB. |       | It is a long-standing practice of TELUS to release  annual targets for the upcoming year in December and provide a final  guidance for the current year. An investor call normally follows the news  release.

 

Because of the transition, it may be  necessary to delay the announcement of 2011 targets until the first quarter  of 2011, or revise targets at that time.                                                                                                                                                                    |
|                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                           |       | First quarter 2011 results with 2010 comparatives  according to IFRS-IASB. MD&A discussion of final changeover impacts.                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

### **8.2.4**   Transitional accounting policychanges adopted

### ** **

*Developmentsin fiscal 2009*

 

Goodwill and intangible assets

 

As an activity consistent with Canadian GAAPbeing converged with IFRS-IASB, the previously existing recommendations forgoodwill and intangible assets and research and development costs were replacedwith new recommendations (CICA Handbook Section 3064).

 

Commencing with the Company’s 2009 fiscal year,the new recommendations of the CICA for goodwill and intangible assets apply tothe Company. This change in accounting policy was made in accordance with thetransitional provisions of the new recommendations.

 

The new recommendations provide extensiveguidance on when expenditures qualify for recognition as intangible assets.Prior to the Company’s 2009 fiscal year, upfront wireline customer activationand connection fees, along with the corresponding direct costs not in excess ofrevenues, were deferred and recognized by the Company over the average expectedterm of the customer relationship; the impact of the new recommendations on theCompany is that these direct costs do not qualify for recognition as intangibleassets.

 

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The effects of the application of this newstandard on the Company’s Consolidated statements of income and othercomprehensive income for the year ended December 31, 2009, and the effectsof the application of this new standard on the Company’s Consolidatedstatements of financial position as at December 31, 2009 and 2008 arepresented in Note 2(b) of the Consolidated financial statements. Dueto the nature of these direct costs and the periods of time over which theyhave been deferred and recognized, the Company’s results of operations for theperiods currently presented are not materially affected by these newrecommendations.

 

Business combinations and non-controllinginterests

 

As an activity consistent with Canadian GAAPbeing converged with IFRS-IASB, the previously existing recommendations forbusiness combinations and consolidation of financial statements were replacedwith new recommendations for business combinations (CICA Handbook Section 1582),consolidations (CICA Handbook Section 1601) and non-controlling interests(CICA Handbook Section 1602).

 

Effective January 1, 2009, the Companyearly adopted the new recommendations and did so in accordance with thetransitional provisions; the Company would otherwise have been required toadopt the new recommendations effective January 1, 2011.

 

Generally, the new recommendations result inmeasuring business acquisitions at the fair value of the acquired business anda prospectively applied shift from a parent company conceptual view ofconsolidation theory (which results in the parent company recording book valuesattributable to non-controlling interests) to an entity conceptual view (whichresults in the parent company recording fair values attributable tonon-controlling interests). Unlike the corresponding new U.S. GAAP, whichrequires the recognition of the fair value of goodwill attributable tonon-controlling interests, both the new Canadian GAAP recommendations andIFRS-IASB allow the choice of whether or not to recognize the fair value of goodwillattributable to non-controlling interests on an acquisition-by-acquisitionbasis.

 

Measuring business acquisitions at fair valuewill, among other things, result in:

 

·      Acquisition costs being expensed

 

·      Acquisition-created restructuring costs being expensed

 

·      Contingent consideration, which is accounted for as a financialliability, being measured at fair value at the time of the acquisition withsubsequent changes in its fair value being included in determining the resultsof operations

 

·      Changes in non-controlling ownership interests subsequent to the parentcompany’s acquisition of control, and not resulting in the parent company’sloss of control, being accounted for as capital transactions.

 

Whether the Company will be materially affectedby the new recommendations in the future will depend upon the specific facts ofa business combination occurring subsequent to January 1, 2009. TheCompany’s Consolidated financial statements were subject to a small number ofretrospectively applied non-controlling interest-related presentation anddisclosure changes.

 

·      The Consolidated statements of financial position now recognizenon-controlling interest as a separate component of Owners’ equity.

 

·      The Consolidated statements of income and other comprehensive income nowpresent the attribution of net income and other comprehensive income betweenthe Company’s shareholders and non-controlling interests rather than reflectingthe non-controlling interest in the results of operations as a deduction in arrivingat net income and other comprehensive income.

 

*Developmentsin fiscal 2008*

 

As activities consistent with Canadian GAAPbeing converged with IFRS-IASB, the Company applied the following recommendations commencing in its 2008 fiscal year.

 

Financial instruments — disclosure;presentation

 

The existing recommendations for financialinstrument disclosure were replaced with new recommendations (CICA Handbook Section 3862);the existing recommendations for financial instrument presentation were carriedforward, unchanged (as CICA Handbook Section 3863). The newrecommendations resulted in incremental disclosures, relative to thosepreviously required, with an emphasis on risks associated with both recognizedand unrecognized financial instruments to which an entity is exposed during theperiod and at the statement of financial position date, and how an entitymanages those risks.

 

Inventories

 

The previously existing recommendations foraccounting for inventories were replaced with new recommendations (CICA HandbookSection 3031). The new recommendations provide more guidance on themeasurement and disclosure 

 

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requirements for inventories; significantly,the new recommendations allow the reversals of previous write-downs to netrealizable value where there is a subsequent increase in the value ofinventories. The Company’s results of operations and financial position werenot materially affected by the new recommendations.

 

## **9.**     General outlook

## ** **

The discussion in this section is qualified inits entirety by the *Caution regarding forward-looking statements*atthe beginning of the MD&A.

 

Outlook for the telecommunications industry in2010

 

In2009, the Canadian telecom industry generated estimated revenues of just over$40 billion, with Bell Canada and its affiliated companies representing about40% of the total. As the second largest telecommunications provider in Canada,TELUS generated $9.6 billion in revenues in 2009, or approximately 24% ofthe total.

 

Revenuein the Canadian telecom market grew by an estimated 1% in 2009, considerablyless than the approximate 3 to 5% growth experienced in recent years. Wirelessand enhanced data continued to be the focus of increased investment and act asgrowth engines for the sector. Offsetting this growth was continued wirelineindustry weakness in voice service revenue, as well as declining long distanceand legacy data revenues.

 

TheCompany’s continued focus on national growth in wireless, data and IP wasoffset by wireline losses to cable telephony, and lower wireless monthly ARPUdue to macroeconomic and competitive impacts, resulting in a 0.5% decline in2009 consolidated revenue. TELUS expects competition in the Canadiantelecommunications industry to continue to intensify in 2010 and 2011 withincumbent and new entrant wireless companies, as well as cable-TV operators,competing for market share.

 

Theeconomy in Canada is expected to improve as the country moves from recessionand negative growth in 2009 to low single digit growth in 2010 according to theBank of Canada. Given factors such as strength in Canadian natural resourcesectors and economic growth in Asia, it is anticipated that growth in Albertaand British Columbia may be slightly stronger than in Central Canada. However,significant concerns remain around unemployment rates and new householdformation, the timing and impact of reduced government spending, and expectedinterest rate increases from the Bank of Canada later in the year. Given thesemacroeconomic and industry factors, TELUS expects its revenue to growmoderately in 2010 in the range of 2 to 5%.

 

Wireless

 

TheCanadian wireless industry experienced lower growth in 2009 with estimatedyear-over-year industry revenue and EBITDA increasing by approximately 3.2% and3.1%, respectively (11% and 8% in 2008). The Canadian wireless market continuesto grow at a reasonable pace with an estimate of more than 1.4 million newsubscribers in 2009, and a 3.6 percentage point increase in penetration (4.3%increase in 2008) to approximately 69% of the population. The penetration rateis expected to further increase in 2010 by approximately four percentagepoints.

 

Thewireless market in Canada, at 69% penetration, continues to present ameaningful growth opportunity. Canada’s wireless industry is most comparable tothe U.S., which has a penetration rate of approximately 92%. The lowerpenetration rate in Canada is attributable in part to less expensive local linerates in Canada. Penetration rates in many Western European countries haveapproached and even surpassed 100%. These rates are not exactly comparable toCanada for several reasons, including: Canada’s wireline local service ratesare the lowest of Organization for Economic Co-operation and Development (OECD)countries, priced as flat-rate monthly charges that include all local calls towireless phones; Europe has a calling party pays regime for wireline localcalls; the dominance of global system for mobile communication (GSM) networksin Europe allows for multiple subscriptions on a single handset that are usedto arbitrage roaming charges and inflate subscription numbers; and a much lowerpopulation density in Canada that affected the economic efficiency and speed ofproviding coverage to 99% of the population (i.e. 34 million people within ninemillion square kilometres in Canada compared to 730 million people within 10million square kilometres in Europe). These factors, historically, have reducedthe demand for wireless substitution in Canada as compared to Europe.

 

Akey driver of wireless revenue growth continues to be the increased adoptionand usage of data services such as email, text and picture messaging, mobilecomputing, applications, gaming, ringtones, music, video downloads and mobileTV. This is being facilitated by the increasing availability and popularity ofsmartphones, particularly the RIM BlackBerry and Apple iPhone devices. In 2009,wireless data in Canada represented an estimated 20% of industry ARPU. Thiscompares to approximately 41% in Asia-Pacific, 24% in Europe and 28% in theU.S., suggesting a significant ongoing growth opportunity in Canada. The higherdata proportion in Asia is due in part to a very low rate of penetration ofwired Internet to households in many Asian countries. The higher dataproportion in Europe is partly a result of the popularity of short messagingservice (SMS) and the earlier wide availability of 3G+ facilitated by greaterurban density. The higher proportion of data usage in the U.S. is due in partto earlier introduction of the iPhone in that market by Apple. Since late 2009,Canada has faster national data networks than most U.S. carriers, which couldspur higher data usage in Canada in the coming years.

 

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Tocapture this data opportunity, Canadian wireless providers continue theroll-out of faster, next generation high-speed wireless networks. TELUSsuccessfully completed and launched Canada’s largest national next generation3G+ wireless network in November 2009, covering 93% of the population,facilitated by a network sharing agreement with Bell Canada. The increasingadoption of a wider range of smartphones, which are more expensive thantraditional wireless phones, is impacting industry margins. With a salescontract, there is generally a large upfront device subsidy by carriers withnear-term negative returns initially but with higher ARPU and lower churn ratesleading to higher average lifetime revenue.

 

Thelevel of competitive intensity in the wireless market is expected to continueto increase. In addition to the TELUS, Rogers and Bell name brands, all of theincumbents have separately branded basic service or discount offerings tobetter position themselves in this expanding segment. However, this has theimpact of lowering ARPU. In addition, customers’ reactions to the recession putpressure on industry ARPU as they lowered usage and stayed within their priceplan limits.

 

Dueto a government policy decision to reserve spectrum for new entrants, eight newpotential competitors acquired spectrum in 2008 in various regions coveringmost markets in Canada, although no one national provider emerged. TELUS alsoacquired an average of 16 MHz across Canada to strengthen its spectrumposition and provide capacity for the introduction of future 4G serviceofferings. New entrants are not expected to build networks in remote and ruralareas for some time, and are instead focusing on urban markets and relying onroaming agreements to provide extended service to their urban subscribers. Towin market share, strategies of potential competitors are expected to includeprice discounting, unlimited usage on their networks and no contracts or systemaccess fees.

 

Globalivelaunched services in two cities in December 2009 under the Wind Mobilebrand with plans to launch services in other cities. Competition will continueto intensify in 2010 with the planned launch of additional regional wirelessoperators such as Mobilicity and Public Mobile, as well as Quebec-based cable-TVcompany Videotron, which currently offers wireless service through a resaleagreement. Western-based cable-TV company Shaw continues to indicate that itmay deploy wireless service after 2010. These new entrants must manage numerouschallenges including significant capital requirements for network build-out andupgrades, large upfront costs associated with launching and distributing newbrands and services, and raising investment capital.

 

Long-termevolution (LTE) is emerging as the global standard for 4G wireless technology.To enable the optimal future transition to a 4G LTE wireless network, in November 2009,TELUS launched a next generation wireless network based on high-speed packetaccess (HSPA) technology with national service. This complements the Company’stwo other wireless networks and technologies — code division multiple access(CDMA) and Mike (iDEN), which provide customers access to a nationwide 3Ghigh-speed EVDO service and the industry-leading Push to Talk service,respectively. The new 3G+ network is the largest in Canada at December 31,2009, and provides TELUS with competitive advantage in terms of speed andcoverage. It effectively ends the exclusive early access to the latest non-CDMAtechnology devices by Rogers Wireless.

 

TELUSstrengthened its competitive position in November with the expansion ofits distribution through 113 Black’s Photo stores acquired in September andthe launch of new simplified rate plan options with no carrier 911 or systemaccess fees.

 

GivenTELUS’ high and increasing exposure to wireless (49% of 2009 consolidatedrevenue), strong established brands and consistent focus on leading-edge,value-added products and profitable subscriber growth, TELUS is positioned tobenefit from ongoing growth in the Canadian wireless market.

 

Wireline

 

Incontrast to wireless, expectations for the mature wireline segment continue tobe modest. The wireline telecom landscape is expected to remain verycompetitive in 2010 as traditional services (such as local and long distancetelephony) are expected to continue declining due to consumer migration towireless and voice over IP (VoIP) services. Canada’s four major cable-TVcompanies had an estimated 3.2 million telephony subscribers at the end of2009, up by close to 575,000 from one year earlier, which is an estimated 27%consumer market share nationally. TELUS’ total line losses of 4.7% in 2009compare favourably to North American peers, partly due to growth in TELUSbusiness lines in Central Canada mitigating residential and business lineerosion in TELUS’ incumbent regions.

 

Tohelp alleviate the competitive challenges in the traditional wireline segment,TELUS’ Future Friendly Home® strategy continues to position the Company to growwallet share with consumers, while enhancing retention and loyalty throughmultiple service offerings. TELUS is continuing the roll-out of higher-speedInternet services and TELUS TV, including new products such as high-definition(HD) TV and personal video recorders, to markets in B.C., Alberta and EasternQuebec. In mid-2009, TELUS launched satellite TV service in Alberta and B.C.,expanding the addressable market for TELUS TV to more than 90% of households inthose provinces. Satellite TV complements TELUS’ IP TV service, enabling theCompany to more effectively serve those households that are not currently onthe TELUS IP TV network footprint, and leverages TELUS’ strong distribution andmarketing capabilities.

 

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In2010, TELUS intends to continue the significant expansion of its broadbandnetwork and IP TV service offerings in communities in B.C., Alberta, andEastern Quebec, to cover up to 90% of the top 48 communities with ADSL2+, whichallows broadband download speeds of 15 megabitsper second (Mbps) or more. In addition, the Company began in the secondhalf of 2009, a program to reach the top 48 communities with VDSL2 by the endof 2011, which will allow download speeds of up to 30 Mbps.

 

In February 2010,the Company began the upgrade of its IP TV middleware to next generationMicrosoft Mediaroom. Mediaroom is a proven carrier-grade platform with featuressuch as an enhanced total home networked personal video recorder (PVRAnywhere), picture correction and extremely fast channel changing. This isexpected to provide differentiation over services offered by cable-TVcompetitors.

 

Combinedwith wireline local and long distance, wireless and high-speed Internet andentertainment services, TELUS is increasingly offering bundled products to achievecompetitive differentiation with an integrated set of services that providescustomers more freedom, flexibility and choice. At the same time, cable-TVcompanies have shown a greater ability to increase pricing without regulatoryoversight, and are also continuing to roll out higher-speed Internet services,Internet telephony and digital cable-TV services to fuel their growth.

 

In 2007, the federal government moved thetelecommunications industry towards a more open and deregulated wirelineenvironment by directing the CRTC to grant residential local exchangeforbearance in markets with three independent facilities-based competitors thatserve at least 75% of residential lines, and business forbearance in marketswith two facilities-based competitors that serve at least 75% of businesslines. Approvals for forborne exchanges continued in 2009, providing TELUS andother incumbent telecom companies enhanced competitive flexibility in pricing,promotions and bundling of services.

 

Theopportunities presented by forbearance, such as bundled product offerings, areheavily contingent on TELUS implementing its new integrated billing and clientcare platform that consolidates multiple legacy systems. Anticipated benefitsinclude increased customer service efficiencies — greater flexibility,differentiation, enhanced marketing opportunities and accuracy — as well asfuture expense savings. TELUS has successfully converted nearly all of itsconsumer wireline customers in Alberta and British Columbia to the new system,and intends to convert business customers, and those outside of B.C. andAlberta, in the coming years.

 

Inthe business market, the convergence of IT and telecom, facilitated by theubiquity of IP, continues to shape competitive investments. Telecoms areproviding network-centric managed applications, while IT service providersattempt to bundle network connectivity with their software as a service (SaaS)offerings. In addition, manufacturers are bringing all-IP and converged (IPplus legacy) equipment to market, enabling a steady migration to IP-basedsolutions. The development of IP-based platforms providing combined IP voice,data and video solutions creates cost efficiencies to compensate, in part, formargin pressures related to the migration from legacy to IP-based services. Atthe same time, this opens new opportunities for integrated solutions that havegreater business impact than traditional telecom services. TELUS is offering aseries of solutions targeting specific high-value segments as well as small andmedium businesses (SMB).

 

Inrecent years, TELUS has been successful in winning a number of large enterprisecontracts, such as a $900 million, seven-to-10-year contract with theGovernment of Quebec. These types of investments typically require largeupfront earnings-dilutive investments in return for longer-term revenue andearnings. In 2010, TELUS’ focus in this segment will be on the continuedsuccessful implementation of previously won contracts that leverage theCompany’s capital investments and capabilities.

 

TheSMB market, often viewed as underserved because it looks for big-businesssolutions at close to small-business price points, is forecast to be one of thefastest-growing markets in Canada. TELUS is investing in a range of affordablesolutions for this segment, including security, videoconferencing and managedhosting solutions for everything from email to web applications. In the smallbusiness market, TELUS has countered increased cable-TV company competition bycreating a small business solutions platform called TELUS Business One®, whichincludes connectivity (data and voice, wireline and mobility), security, audioand video conferencing, and other IP-based tools. In 2010, the Company isrealigning and refocusing resources on this valuable segment.

 

Whilethe recession has led to softening demand for telecommunications services, itis forecast that the Canadian economy will return to economic growth in 2010.TELUS continues to believe its consistent strategic focus on providing a fullsuite of valuable and reliable communications services; deliveringdifferentiated, premium national business solutions in data and IP; exposure togrowth services such as wireless, data and IP including high-speed Internet andTELUS TV; and the continued enhancement of national wireless and broadbandnetworks, solidly position the Company for growth in the years ahead. At thesame time, TELUS’ management remains focused on initiatives aimed at enhancingoperating efficiency to mitigate economic, competitive and dilutive investmentimpacts, and will continue to carefully monitor trends in 2010 to ensure timelyadjustments may be made to maintain profitability, cash flow and financialstrength.

 

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## **10.**       Risks and risk management

## ** **

The discussion in this section is qualified inits entirety by the *Caution regarding forward-looking statements*atthe beginning of the MD&A.

 

*TELUS’ risk and controlassessment process*

 

 

TELUS uses a three-level enterprise risk andcontrol assessment process that solicits and incorporates the expertise andinsight of team members from all areas of the Company. TELUS implemented itsthree-level risk and control assessment process in 2002 and tracks multi-yeartrends for various key risks and control environment perceptions across theorganization.

 

*TELUS’definition of business risk*

 

TELUS definesbusiness risk as the degree of exposure associated with the achievement of keystrategic, financial, organizational and process objectives in relation to theeffectiveness and efficiency of operations, the reliability of financialreporting, compliance with laws and regulations and the safeguarding of assetswithin an ethical organizational culture.

 

TELUS’ enterpriserisks are largely derived from the Company’s business environment and arefundamentally linked to TELUS’ strategies and business objectives. TELUSstrives to proactively mitigate its risk exposures through rigorous performanceplanning and effective and efficient business operational management. Residualexposure for certain risks is mitigated through appropriate insurance coverage,including for domestic and international operations, where this is judged to beefficient and commercially viable.

 

TELUS strives toavoid taking on undue risk exposures whenever possible and ensure alignmentwith business strategies, objectives, values and risk tolerances.

 
| **Enterprise risk and control assessment process** |
|----------------------------------------------------|
|                                               |   |   |
| Level one                                          |   | Annual risk and  control assessment

 

Key inputs into  this process include interviews with senior managers, data and updates from  TELUS’ ongoing strategic planning process, and the results of an annual  web-enabled risk and control assessment survey. The survey is based on the  COSO (Committee of Sponsoring Organizations of the Treadway Commission)  enterprise risk management and internal control frameworks. The survey is  widely distributed to TELUS’ management leadership team (all executive  vice-president, vice-president and director level team members and a random  sample of management). Survey responses were received from 1,650 individuals  in 2009.

 

Additionally,  TELUS’ assessment process incorporates input from recent internal and  external audits, as well as input from management’s SOX 404 (*Sarbanes Oxley Act*of 2002) internal control over  financial reporting compliance activities. Key enterprise risks are  identified, defined and prioritized, and risks are classified into one of  seven risk categories. Perceived risk resiliency (or readiness) is assessed  by key risk and risk tolerance/appetite is evaluated by risk category.  Executive-level responsibility for key risk mitigation is assigned.

 

Results of the  annual risk and control assessment are shared with senior management and the  Audit Committee. The results guide the development of TELUS’ annual internal  audit program, which has an emphasis on assurance coverage of higher-rated  risks and is approved by the Audit Committee. Risk assessments are also  incorporated back into the Company’s strategic planning and performance management  processes and shared with the Board. |
|                                               |   |   |
| Level two                                          |   | Quarterly risk  assessment review

 

TELUS conducts a  quarterly risk assessment review with key internal stakeholders across all  business units to capture and communicate the dynamically changing business  risks, identify key risk mitigation activities and provide quarterly updates  and assurance to the Audit Committee. |
|                                               |   |   |
| Level three                                        |   | Granular risk  assessments

 

TELUS conducts  granular risk assessments for specific audit engagements and various risk  management, strategic and operational initiatives (e.g. project,  environmental management, safety, business continuity planning, network and  IT vulnerability, and fraud and ethics risk assessments). The results of the  multiple risk assessments are evaluated, prioritized, updated and integrated  into the key risk profile throughout the year. |

 

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The followingsections summarize the principal risks and uncertainties that could affectTELUS’ future business results going forward, and TELUS’ associated riskmitigation activities. The significance of these risks is such that they aloneor in combination may have material impacts on TELUS’ business operations,reputation, results and valuation.

 
| 10.1  | Competition                       |
|-------|-----------------------------------|
| 10.2  | Technology                        |
| 10.3  | Regulatory                        |
| 10.4  | Human resources                   |
| 10.5  | Process risks                     |
| 10.6  | Financing and debt  requirements  |
| 10.7  | Tax matters                       |
| 10.8  | Health, safety and  environment   |
| 10.9  | Litigation and  legal matters     |
| 10.10 | Human-caused and  natural threats |
| 10.11 | Economic growth and  fluctuations |

 

### **10.1 Competition**

### ** **

*Aggressive competition mayadversely affect market shares, volumes and pricing*

 

TELUS faces intense competition across all keybusiness lines and market segments, including consumer, small and medium businesses(SMB), and the large enterprise market.

 

Technological advances have blurred thetraditional boundaries between broadcasting, Internet and telecommunications.Cable-TV companies continue to expand offerings of digital voice and enhancedphone services, resulting in intensified competition in the residential andcertain SMB, local access, long distance and high-speed Internet access (HSIA)markets. As a result of the 2008 AWS spectrum auction, one new wireless carrierlaunched services in December 2009, and several others, including at leastone cable-TV company, are expected to launch services in 2010. Overall,industry pricing pressure and customer acquisition efforts have intensifiedacross most product and service categories and market segments, and this isexpected to continue.

 

***Risk mitigation, general:*****Canadian Radio-television and Telecommunications Commission (CRTC)decisions in recent years approving wireline deregulation have provided TELUSwith improved flexibility to respond to intensifying competition (see *Section 10.3 Regulatory*). Active monitoring ofcompetitive developments in product and geographic markets enables TELUS torespond more rapidly to competitor offers and leverage the Company’s full suiteof integrated solutions and national reach. TELUS continues to expand its TELUSTV offering in its incumbent territories in order to provide a premiumtelevision experience and enhance its bundles to better address customer needsand respond to cable-TV company bundled offerings. In order to offsetincreasing competitive intensity and losses in its incumbent areas, TELUScontinues to expand into and generate growth in non-incumbent markets inCentral Canada with business services and mobility offerings. In addition toexpanding services, TELUS also continues to actively pursue the mostcompetitive cost structure possible. In 2009, TELUS consolidated certain of itscustomer-facing units to achieve cost efficiencies, and to better aligndistribution channels and product and service roadmaps with key industryvertical markets: the public sector, healthcare, financial services, energy andtelecom wholesale.

 

*Customer experience*

 

There is a risk that TELUSwill not earn improved levels of client loyalty if products and services andservice experience offered by the Company do not meet or exceed customerexpectations. If TELUS does not provide a better customer experience than itscompetitors, the TELUS brand image could suffer, and business clients andconsumers may change service providers. The Company’s revenues andprofitability could be negatively impacted should the costs to acquire andretain customers increase.

 

***Risk mitigation:*** Driving the best customer experience and earning thepatronage of clients is a Company-wide commitment. Two of the Company’sinternal priorities for 2010 are to increase TELUS team member engagement andlive the culture of personal responsibility and customer service, and ensureTELUS delivers its future friendly brand promise to clients. (See *Section 3: Key performance drivers*).

 

*Wireline voice and data*

 

Competition is expected to remain intense fromtraditional telephony, data, IP and IT service providers, as well as from newvoice over Internet protocol (VoIP) focused entrants. Competitors are focusingon both business and consumer markets.

 

The industry transition from legacy voiceinfrastructure to IP telephony, and from legacy data platforms to Ethernet, IPvirtual private networks (VPN), multi-protocol label switching (MPLS) IPplatforms and IP-based service delivery models, continues at a robust pace.Legacy data revenues and margins continue to decline. This decline has beenonly partially offset by increased demand and/or increased migration ofcustomers to IP-based platforms. IP-based solutions are also subject to downwardpricing pressure, lower margins and technological evolution. It is expectedthat significantcapital investments in wireline infrastructure are required to facilitate thisongoing transition process for all traditional incumbent local exchange carrier(ILEC) entities including TELUS.

 

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*Wireline voice and data —Business*

 

In the business market, price-discountedbundling of local access, wireless and advanced data and IP services hasevolved to include web-based and e-commerce services, as well as other ITservices and support. Non-traditional competitors such as Microsoft haveentered the telecom space through new products such as Unified Communications,which provides the ability to redirect and deliver, in real time, email, voiceand text messages from a variety of telecom and IT systems to the devicenearest to the intended recipient. With this broader bundling of traditionaltelecom services with IT services, TELUS increasingly faces competition frompure Internet and information technology hardware, software and businessprocess/consulting related companies. Cable-TV companies have begun to targetthe SMB market with their VoIP services. The result is that traditional andnon-traditional competitors are now focused on providing a broad range oftelecommunications services to the business market, particularly in the majorurban areas.

 

***Risk mitigation in the businesswireline market:*****TELUS continues to increase its capabilities in theoverall business market through a combination of strategic acquisitions andpartnerships, a focus on priority vertical markets (public sector, healthcare,financial services, energy, and telecom wholesale), expansion of strategicsolution sets in the enterprise market, and a mass modular approach in the SMBmarket (including services such as TELUS Business One). Through the launch ofTELUS Health Solutions in 2008, TELUS can now leverage systems, its proprietarysolutions and its reach and brand to extend the Company’s footprint inhealthcare, benefit from the investments being made by governments in eHealth,bring to market services targeted at consumers such as mobile personal healthrecords and tools to manage their health, as well as pursue the transformationof the Canadian pharmacy benefit management sector and cross-sell moretraditional telecom products and services to the healthcare sector. TELUS isalso focused on implementing large enterprise deals that leverage the Company’scapital investments and capabilities.

 

*Wireline voice and data —Consumer*

 

In the consumer wireline market, cable-TVcompanies and other competitors encounter minimal regulation and continue tocombine a mix of residential local VoIP, long distance, HSIA and, in somecases, wireless services into one bundled and/or discounted monthly rate, alongwith their traditional broadcast or satellite-based TV services. In addition,cable-TV companies continue to increase the speed of their HSIA offerings. To alesser extent, other non-facilities-based competitors offer local and longdistance VoIP services over the Internet and resell HSIA solutions. Erosion ofTELUS’ residential network access lines (NALs) is expected to continue fromthis competition, as well as ongoing technological and wireless substitution.Competitors are anticipated to capture a majority of the share in growthmarketplace opportunities; thus, access line associated revenues, includinglong distance, can be expected to continue to decline. Although the HSIA marketis maturing, subscriber growth is expected to continue over the next severalyears. With a more mature HSIA market, and the potential for higher-speedInternet offerings from competitors, TELUS may be constrained in its ability tomaintain market share in its incumbent territories, because of the amount andtiming of capital expenditures associated with maintaining competitive networkaccess speeds.

 

***Risk mitigation in the consumer wireline market:*****With a major broadband expansion program in 2009 and continuing into2010, TELUS continues to significantly expand its broadband infrastructure, inboth coverage area and increased speed of service, to enter new market segmentssuch as video and enhance current services. The provision of TELUS TV servicehelps the Company counter the threat from the cable-TV competition in itsincumbent markets, and to retain and grow revenues with a bundled offering oflocal and long distance telephony, HSIA and TV entertainment services. In June 2009,TELUS launched satellite TV service in Alberta and B.C., expanding theaddressable market for TELUS TV to more than 90% of households in these twoprovinces. The new satellite TV service complements TELUS’ IP TV service andenables the Company to more effectively serve those households that are not currentlyon the TELUS IP TV network footprint and leverage TELUS’ strong distributionand marketing presence. In 2010, TELUS is continuing the expansion of its IP TVservice offerings in communities in B.C., Alberta and Eastern Quebec.

 

While TELUS Satellite TV service is made possibleby an agreement with Bell Canada, Bell TV remains a competitor to TELUS’satellite and IP TV service offerings in B.C. and Alberta, and TELUS’ IP TVservice offerings in Eastern Quebec.

 

*Broadcasting*

 

As noted above, the Companyoffers TELUS TV in B.C., Alberta and Eastern Quebec, and continues targetedroll-outs of IP TV to new areas in order to generate new revenues and gain theability to create new service bundles for enhanced competitiveness and customerretention.While TELUS TV provides numerous interactivity and customizationadvantages, there can be no assurance that TELUS TV will be successful inachieving its plans of obtaining a sizable share of the TV services market orthat implementation costs or projected revenues for TELUS’ television servicewill be as planned.

 

***Riskmitigation:*****Fullydigital TELUS TV is offered as both an IP-based service (in urban markets ofB.C., Alberta and Eastern Quebec)and as a satellite-based service (in B.C. and Alberta). It provides uniquecompetitive advantages relative to analogue cable-TV, such as time-shiftedprogramming flexibility, on-screen caller ID and an all-digital, broadselection of channels. It also provides the Company with the ability to bundleentertainment with other communication services.

 

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TELUS’IP-based TV services offer more than 390 channels, Pay Per View, personal videorecorder (PVR), and video on demand services similar to those offered by directcompetitors Shaw Cable, Shaw Direct and Bell TV. TELUS also offers HDcapability in selected areas through the deployment of ADSL2+ technology. TELUSexpects its HD TV service to increase penetration in 2010 asadditional ADSL2+ build-outs expand TELUS’ addressable market. TELUS haslaunched an upgrade to its IP TV middleware to next generation MicrosoftMediaroom in February 2010. This is a proven carrier grade platform thatis expected to provide differentiation from services offered by cable-TV competitorswith features such as total home PVR, forward error correction and fasterchannel changing. In 2009, the Company began upgrading to VDSL2 technology.While IP TV is still at a relatively early stage of development and adoption,per-unit capital and operating costs are expected to decline with technologicaladvances and as TELUS increases scale.

 

TELUS Satellite TV offers more than 500 digitalchannels with more than 80 HD channels, and advantages noted above.

 

*Wireless competitiveintensity is expected to increase*

 

The AWS spectrum auction in 2008 resulted ineight new potential competitors acquiring spectrum in separate and overlappingregions, collectively covering most markets in Canada. New entrants are notexpected to build networks in remote and rural areas for some time, choosinginstead to focus in urban markets, and through roaming agreements, provideextended coverage for their urban-based subscribers. One new entrant launchedservice in Toronto and Calgary in December 2009, and other new entrantsare expected to begin offering services in early 2010. *(See Section 10.3Regulatory.)*To win market share, strategies of potentialcompetitors are expected to include price discounting relative to incumbents,unlimited rate plans, no system access fees and increased competition at pointsof distribution.

 

In addition to new entrants, existingcompetitors are expected to be more aggressive. TELUS’ network sharingagreement with Bell is expected to increase competitive intensity, as itprovides Bell with an expanded coverage advantage that TELUS also benefitsfrom. TELUS anticipates average revenue per subscriber unit (ARPU), cost ofacquisition (COA) and cost of retention (COR) pressures as competitors increasesubsidies for handsets (particularly for generally more expensive smartphones),lower airtime and wireless data prices, and offer other incentives to attractnew customers. TELUS believes it has positioned itself well to respond to thearrival of new entrants and increased competitive intensity from incumbents,but there can be no assurance that the Company’s preparations and responseswill be as successful as planned.

 

*Competition from adjunctwireless technologies may increase*

 

While adjunct wireless technologies, like fixedWiMAX and Wi-Fi (wireless fidelity), are continuing to develop, theirassociated economic viability remains unproven. Regardless, increasedcompetition is expected through the use of licensed and/or unlicensed spectrumto deliver higher-speed data services. At the end of November 2008, IndustryCanada granted a licence to Craig Wireless to move its fixed wireless servicein Vancouver to mobile, and Craig Wireless subsequently announced thedevelopment of a WiMAX network in Vancouver in September 2009. LookCommunications sold similar spectrum to Bell Canada and Rogers Communications(through their joint venture Inukshuk Wireless Partnership) in May 2009.These technologies offer portable data capabilities that can overlap in someinstances with mobile 3G service. TELUS considers the Craig Wireless and LookCommunications developments to be a sign that activity in the 2.5/2.6 GHzband may increase competitive intensity in the mobile market.

 

Certain non-traditional telecom players, suchas municipalities, may contemplate launching fixed wireless ventures in urbanand suburban locations, as has been the case in the United States. Though manymunicipal Wi-Fi network initiatives have failed to gain meaningful share in themarketplace, there can be no assurance that new or existing services offered byTELUS will be competitive with such fixed wireless services, or will beavailable on time, or that TELUS will be able to charge incrementally for theservices.

 

***Risk mitigation in wirelessmarkets*****:** The Company’s competitive position and expectationsfor future performance improved with the November 2009 launch of a new 3G+high-speed packet access (HSPA/HSPA+) wireless network offeringmanufacturer-rated data download speeds of up to 21 megabits per second (Mbps).The new network covers more than 93% of Canada’s population over more than1.1 million square kilometres, including network sharing agreements withBell Canada. The HSPA network sharing agreement builds on and enhances anagreement signed in 2001 and helped TELUS lower the cost, accelerate deploymenton a national basis, optimize cell-site utilization and maximize potentialoperating efficiencies.

 

HSPA+ technology enables an expanded selectionof world-class mobile devices, including the Apple iPhone 3GS, andinternational roaming service to more than 200 countries. As the only globalsystem for mobile communication (GSM) and formerly the only HSPA competitor inCanada, Rogers Communications Inc. previously enjoyed advantages in handsetselection, earlier availability of certain devices and lower handset costs andaccess to international roaming revenue. The new HSPA wireless network providesTELUS with competitive advantages in terms of speed and coverage, and endedRogers’ competitive advantage of early and broader access to the latest cutting-edge,non-CDMA wireless devices.

 

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In conjunction with the launch of TELUS’ newwireless network, TELUS launched new simplified rate plans with no systemaccess or carrier 911 fees. The new rate plans reduce pricing complexity andbetter position TELUS to win and retain customers in the competitive wirelessmarket. In November, TELUS expanded its wireless distribution capabilitythrough 113 store locations of recently acquired Black’s Photo Corporation, ofwhich 72% are located in Ontario where TELUS is targeting increaseddistribution. Black’s stores are primarily in key mall locations, complementingthe existing network of dealers and Company-owned stores.

 

To compete more effectively in serving avariety of customer segments, TELUS launched a basic service brand called KoodoMobile in March 2008. Koodo has been successful to date, positivelyaffecting postpaid subscriber loading. As Canadian wireless penetrationincreases, industry net loading is expected to continue to shift towards basicservice brands. Koodo positions TELUS to compete more effectively with thevalue segment of the market including new entrants that are expected to focuson this segment.

 

TELUS intends to continue the marketing anddistribution of innovative and differentiated wireless services; investing inits extensive network; evolving technologies when deemed prudent; and acquiringspectrum, as appropriate, to facilitate service development and profitableexpansion of the Company’s subscriber base. In the May 2008 AWS auction,TELUS acquired sufficient spectrum assets to support the capacity required tointroduce fourth generation (4G) wireless technology known as long-termevolution (LTE). TELUS also expects to participate in future wireless spectrumauctions, anticipated in 2011/2012. TELUS continues to monitor wirelesstechnology developments and takes a proactive approach to product testing anddevelopment. The launch of the HSPA+ network is expected to enable an optimal transitionto LTE.

 

### **10.2 Technology**

### ** **

****Technology is a key enabler for TELUS and itscustomers, however, technology evolution brings risks, uncertainties andopportunities. TELUS is vigorous in maintaining its short-term and long-termtechnology strategy to optimize the Company’s selection and timely use oftechnology, while minimizing the associated costs, risks and uncertainties. Thefollowing identifies the main technology risks and uncertainties and how TELUSis proactively addressing them.****

 

*Evolving wired broadband accesstechnology standards may outpace projected access infrastructure investmentlifetimes*

 

The technology standards for broadband accessover copper loops to customer premises are evolving rapidly. This evolutionenables higher broadband access speeds and is fuelled by user appetite forfaster connectivity, the threat of increasing competitor capabilities andofferings, and the desire of service providers like TELUS to offer newservices, such as IP TV, that require greater bandwidth. In general, the evolutionto higher broadband access speeds is achieved by deploying fibre further outfrom the central office, thus shortening the copper loop portion of the accessnetwork and using faster modem technologies on the shortened copper loop.However, new access technologies are evolving faster than the traditionalinvestment cycle for access infrastructure. The introduction of these newtechnologies and the pace of adoption could result in increased requirementsfor capital funding not currently planned, as well as shorter estimated usefullives for certain existing infrastructure, which would increase depreciationexpenses.

 

***Risk mitigation:*** TELUS actively monitors the development and carrieracceptance of competing proposed FTTx standards (fibre to the home, curb, pedestalor neighbourhood). One or more of these fibre-based solutions may be a morepractical technology to deploy in new greenfield neighbourhoods or multipledwelling units (MDUs) than the current copper loops. In addition, TELUS isexploring business models for the economical deployment of fibre-basedtechnologies in areas currently connected by copper.

 

In 2005, TELUS began shortening copper loopsusing a fibre to the neighbourhood (FTTN) access architecture by deployingremote digital subscriber line access multiplexers (DSLAMs) at extended reachaccess (ERA) sites with ADSL technology. Since then, as part of its multi-yearbroadband build program, TELUS has been upgrading its network to ADSL2+technology, a generation of ADSL technology that enables link rates of 15 Mbps orhigher to the customer premises. In the second half of 2009, TELUS begandeploying VDSL2 technology in certain urban areas to extend the capabilities ofthe copper loops to double previous speeds. VDSL2 technology enables typicaldown link rates at up to 30 Mbps, is backward-compatible with ADSL and ADSL2+and takes advantage of TELUS’ investments in ERA copper/fibre accessinfrastructure and in the installed base of ADSL modems. The VDSL2 deploymentis expected to continue into 2011. In 2007, TELUS began partnering with developersof MDUs to build future friendly buildings. In these greenfield buildings,TELUS placed fibre to the building and deployed category 5E data cables withinthe building to deliver services at speeds up to 100 Mbps to customers inthese buildings. In 2008, TELUS also commenced field trials of FTTHtechnologies utilizing standards-based gigabit passive optical network (GPON)technology. In 2009, as part of its continued evaluations, TELUS switched GPONvendors, and anticipates exclusive deployment of GPON for greenfieldresidential developments in 2010.

 

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The evolution of these access architectures andcorresponding standards, enabled with Quality of Service standards and networktraffic engineering, all support the TELUS Future Friendly Home strategy todeliver IP-based Internet, voice and video services over a common broadbandaccess infrastructure.

 

*IP-based telephony as areplacement for legacy analogue telephony is evolving and cost savings areuncertain*

 

TELUS continues to monitor the evolution ofIP-based telephony technologies and service offerings and is developing andtesting a consumer solution for IP-based telephony over broadband access inaccordance with TELUS’ strategy and standards. This solution could provideadditional telephone services over the same line as legacy analogue telephoneservice or could replace the legacy analogue telephone service. One of therealities of VoIP in the consumer space is that the actual state of technologydeveloped to inter-work telephony, video and Internet access on the samebroadband infrastructure is in its infancy and there are risks anduncertainties to be addressed, such as ensuring all services can be deliveredsimultaneously to the home (and to different devices within the home) withuncompromised quality. These issues are exacerbated when the exchange ofinformation is between service providers with different broadbandinfrastructures.

 

A long-term technology strategy is to move allservices to IP to simplify the network, reduce costs and enable advanced TELUS FutureFriendly Home services. Pursuing this strategy to its full extent would involvetransitioning TELUS’ standard telephone service offering to IP-based telephonyand phasing out legacy analogue-based telephone service. To this point, TELUS’legacy voice network infrastructure could be simplified if regular analoguetelephone lines were discontinued in favour of digital-only broadband accesslines supporting all services including telephony, Internet and video. Thiswould, for example, allow inexpensive high-bandwidth conventional Ethernet to beused as the broadband access technology in the multiple dwelling unit model.However, digital-only broadband access may not be feasible or economical inmany areas for some time, particularly in rural and remote areas. TELUS needsto support both legacy and broadband voice systems for some time and,therefore, is expected to continue to incur costs to maintain both systems.There is a risk that investments in broadband voice may not be accompanied bydecreased costs of maintaining legacy voice systems. There is also the riskthat broadband access infrastructure and corresponding IP-telephony platformsmay not be in place in time to avoid some re-investment in traditionalswitching platforms to support the legacy public switched telephone networkaccess base in certain areas, resulting in some investment in line adaptationin non-broadband central offices.

 

***Risk mitigation:*****TELUS continues to monitor and conduct trials of IP-based voicetechnologies to better assess their technical applicability and evolving costprofiles, as well as to determine the appropriate timing for implementation byservice area in line with TELUS’ commitments to the CRTC and its customers.TELUS is making investments in FTTN technologies and access technologies thatenable a smoother future evolution of IP-based telephony. TELUS is also workingwith manufacturers to optimize the operations and cost structure of analoguesystems.

 

*The convergence in a common IP-based application environment fortelephony, Internet and video is complex*

 

Traditionally the technology and systemsassociated with telephony, Internet and video were different from each otherand provided little opportunity for common platforms for cost savings andlittle flexibility to integrate media, services and service developmentenvironments. The convergence in a common IP-based application environment,carried over a common IP-based network, provides opportunities for cost savingsand for the rapid development of more advanced services that are more flexibleand easier to use. Further, the global standards for drawing together classicwireline and wireless services into a combined architecture using an IPmultimedia subsystem are being actively ratified. However, the transformationfrom individual traditional silo systems and architectures to a commonenvironment is very complex.

 

TELUShas commercially launched an IP TV system, called TELUS TV. In 2008, TELUSlaunched HD TV for both broadcast and video on demand content as well as PVRtechnologies. TELUS TV utilizes middleware designed specifically for videodelivery that allows complex signalling communication between applicationsoftware and system hardware in the network, and in the set-top box in thehome. In 2009, TELUS evaluated alternative middleware providers and in 2010began transitioning its primary IP TV middleware to next generation MicrosoftMediaroom for new customers. The new middleware software platform is a provencarrier grade platform, offering features such as total home networked PVR, retransmissionfunctionality and extremely fastchannel changing, which is expected to provide differentiation from servicesoffered by cable-TV competitors. The deployment gives rise to potential risksinherent in the execution of the upgrade.

 

***Risk mitigation:*** In February 2010 TELUS began offering its upgraded IP TVmiddleware platform to new customers where applicable and will be expanded overtime. The Company plans to expand the platform over time, giving existing TELUSTV customers the opportunity to migrate to the new platform as it becomesavailable. TELUS has been undertaking employee trials since September 2009and will be applying those learnings during the implementation to help mitigatethe execution risk. TELUS is also mitigating the implementation risk through modulararchitectures, lab investments, partnering with system integrators whereappropriate, and using hardware that is common to most other North American IPTV deployments. TELUS is striving to ensure that its IP TV deployment is partof an open framework that will fit into the overall transformation strategyonce standards are ratified and the actual implementations have stabilized,particularly with the set-top box. In addition, TELUS is active in a number ofstandards bodies such as the MEF 

 

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andIP Sphere to ensure its IP infrastructure strategy leverages standards-basedfunctionality to further collapse and simplify the TELUS networks.

 

*Support systems will increasingly be critical to operational efficiency*

 

TELUS currently has a very large number ofinterconnected operational and business support systems, and the complexity isincreasing. This is typical of incumbent telecommunications providers thatsupport a wide variety of legacy and emerging telephony, mobility, data andvideo services. The development and launch of a new service typically requiressignificant systems development and integration. The associated developmentaland ongoing operational costs are a significant factor in maintainingcompetitive position and profit margins. TELUS is proactive in evolving to nextgeneration support systems. As next generation services are introduced, theyshould be designed to work with both legacy and next generation supportsystems, which introduces uncertainty with respect to the costs andeffectiveness of the solutions and the evolution.

 

***Risk mitigation:*****In line with industry best practice, TELUS’ approach is to separate thebusiness support systems from the operational support systems and underlyingnetwork technology. The aim is to decouple the introduction of new networktechnologies from the services sold to customers. This should allow TELUS tooptimize network costs while limiting the impact on customer services and tofacilitate the introduction of new services by removing, where possible, anydevelopment dependency on the operational support systems. In addition, TELUSis an active participant in the TeleManagement Forum that is working to developstandard industry-defined modules in order to reduce cost through scale andincrease adoption through scope. TELUS has established a next generationOSS-BSS (operations support system — business support system) framework toensure that, as new services and technologies are developed, they are part ofthe next generation framework to ease the retirement of legacy systems inaccordance with TeleManagement Forum’s Next Generation Operations Systems andSoftware (NGOSS) program.

 

*Restructuring of equipment vendors may impact the services andsolutions TELUS provides*

 

TELUS has a number of relationships withequipment vendors, which are important to supplying the services and solutionsTELUS provides to its retail and business customers. TELUS faces the risk thatsome equipment vendors may experience business difficulties, may not remainviable or may have to restructure their operations, which could impact theirability to support all of their products in future. This may negatively impactthe services and solutions TELUS provides.

 

***Risk mitigation:*** TELUS plans for this possibility in terms of futuregrowth, maintenance and support of existing equipment and services. TELUS has acomprehensive contingency plan for multiple scenarios, including exposure tomultiple suppliers and ongoing strong vendor relations. There can be noguarantee that the outcome of any vendor restructuring will not affect theservices that TELUS provides to its customers, or that TELUS will not incuradditional costs to continue providing services.

 

*Mature CDMA and iDEN wirelesstechnologies must coexist with the new HSPA/HSPA+ network*

 

The wireless industry continues to expand thedeployment of second generation (2G), third generation (3G) and emerging fourthgeneration (4G) technologies to deliver increased data speeds required for manynew wireless, IP and data services. TELUS’ evolution to next generationwireless technologies involves services and devices that meet the requirementsof the Company’s current and future subscriber base.

 

TELUS continues to support CDMA2000 3G wirelessservices on its digital CDMA PCS (personal communication services) and cellularnetworks. TELUS has deployed technology enabling EVDO revision A (DOrA)services that were turned up in most markets in 2007. TELUS has enjoyedcommercial success with the CDMA2000-based technologies, and believes CDMA2000technology will continue for some time into the future.

 

TELUScontinues to support its Mike service, which is differentiated from currentCDMA-based Push to Talk (PTT) services in Canada in that Mike’s Direct Connect® (iDEN PTT) has superior call set-up time and inter-call latency. With itsMike service and CDMA-based Instant Talk® service, TELUS remains the Canadianleader with the largest number of subscribers using PTT. Notably, there iscurrently no GSM-based PTT service in the Canadian market, but there is riskthat one could be introduced in the future.

 

The Company’s future growth is expected to bepropelled mainly by HSPA/HSPA+ technology, because of HSPA’s broader geographicadoption, anticipated greater economies of scale, superior speeds and widerdevice selection. As such, CDMA and iDEN coexistence with HSPA/HSPA+ needs tobe managed and ensured.

 

*Implementationof HSPA/HSPA+ and 4G network technologies and systems*: TELUS successfully launched its HSPA/HSPA+ network inNovember 2009, under a network sharing agreement with Bell Canada thatsped up and reduced the Company’s costs of deployment nationally. Although thenetwork sharing agreement provided the foundation for reducing capital andoperating costs, there is no limitation on either party from building furthernetwork infrastructure to meet future and changing business requirements. Whilethe Company expects its overall capital intensity level for 2010 to beapproximately 

 

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17%of consolidated revenues, there is the risk that TELUS’ future wireless capitalexpenditures may be higher than those recorded historically in order to meetongoing technology investments.

 

*Technologyevolution*: CDMA2000 operatorsVerizon, MetroPCS and Telstra announced their intentions to migrate to LTE.Similarly, many HSPA operators such as AT&T, T-Mobile Germany, Vodafone,NTT DoCoMo and China Mobile have announced their intentions to migrate to LTE.Although LTE is part of the technology evolution of a mature HSPA platformdeployed by more than 50 operators worldwide, some operators seeking to deployLTE could influence the diversion of resources from HSPA development by thevendor and operator communities.

 

***Risk mitigation*****:** As common and continual practice, TELUS optimizes capital investmentsto enable positive payback periods and strong flexibility to consider futuretechnology evolutions. Certain capital investments, such as towers, leaseholdimprovements and power systems, are technology agnostic. TELUS invested in HSPAtechnology to offset the risk of the uncertain long-term competitiveness ofCDMA and iDEN technologies.

 

TELUS also has a migration initiative underwayto strategically move certain CDMA2000 and Mike subscribers to high-speed datacapable services, thereby providing the potential to increase utilization ofdata services and stabilize revenue. TELUS expects to leverage the economies ofscale and handset variety with the HSPA device portfolio, while continuing totake advantage of both the CDMA and iDEN device portfolios.

 

The agreement with Bell Canada to jointly buildout an HSPA network provided the means for TELUS to better manage its capitalexpenditures and more quickly deliver a commercial network than could otherwisehave been accomplished. TELUS’ network agreements with Bell Canada are possiblebecause both companies have a similar mobile technology path and vendors, andan existing relationship in this arena. TELUS’ continued collaboration with BellCanada is expected to provide cost savings beyond the initial network build andflexibility to invest in service differentiation.

 

TELUS maintains a close liaison with itsnetwork technology suppliers and operator partners to influence and benefitfrom developments in iDEN, CDMA and HSPA technologies. By contracting itssuppliers to provide technology solutions that are amenable to futureadvancements like LTE, TELUS can mitigate the operational disruption duringtechnology transitions. Fundamental to TELUS’ strategy is the reuse andredeployment of application servers and network elements that areaccess-agnostic, such as messaging (voice and text), into the latest radioaccess technology such as HSPA. This enables TELUS to invest in radio-basedtechnologies as they evolve and as required, without the need to replace theseapplication servers.

 

*Subscriberdemand for data may challenge wireless networks*

 

Thedemand for wireless data services has been growing at unprecedented rates andit is projected that this demand will further accelerate, driven by increasinglevels of broadband penetration, increasing need for personal connectivity andnetworking, increasing affordability of smartphones and Internet-only devices(e.g. high-usage data devices such as the Apple iPhone, mobile Internet keysand emerging products such as electronic book readers), increasingly richmultimedia services and applications, increasing wireless competition, andpossibly unlimited data plans. The industry expects dramatic year-over-yearincreases in subscriber data traffic over the next one to five years, as it isanticipated that wireless data demand will continue to track wired Internetdata consumption, lagging by only three to five years. The anticipated levelsof data traffic will represent a growing challenge to the current mobilenetwork’s ability to serve this traffic. The ability to acquire additionalspectrum to address future requirements is dependent on the timing and the rules establishedby Industry Canada. (See *Section 3:Regulatory.*)

 

***Risk mitigation*****:** TELUS built an extensive 3G+ wireless network based on HSPA/HSPA+technologies. This 3G+ network uses the most advanced mobile broadbandtechnology commercially available in Canada at the reporting date, deliveringmanufacturer-rated download speeds of up to 21 megabits per second, as well assignificant increases in network capacity. The new wireless network bringshigher capacity and improved support and performance for real-timeconversational and interactive services through the introduction of MIMO(multiple input multiple output) antennas, continuous packet connectivity andhigher-order modulation schemes. As such, TELUS’ 3G+ network, with coverageexceeding 1.1 million square kilometres and reaching 93% of the Canadianpopulation (including network sharing agreements), positions TELUS to meet thecapacity demands and challenges in the foreseeable future. The new networkcomplements TELUS’ existing wireless portfolio that includes the CDMA, 3Ghigh-speed wireless (EVDO) network and the Mike Push to Talk network andbusiness service. TELUS is continuing to evolve its technology leadershipposition to address traffic demand, while offering customers a wide selectionof wireless devices and service experiences, no matter which network technologyis running in the background.

 

Inaddition to the superior capabilities and higher capacity delivered byHSPA/HSPA+, the infrastructure supporting TELUS’ 3G+ network facilitates themigration to 4G LTE wireless technologies, which in turn is expected to furtherincrease network capacity and speed. TELUS investments to date in IP networks, IP/fibrecell-site backhaul and a software-upgradeable radio infrastructure, areexpected to greatly facilitate rapid introduction of LTE when this ecosystemreaches maturity. LTE technologies are expected to deliver speeds up to 100Mbps, while at the same time introducing significant 

 

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improvementsin performance including a reduction in delay/latency. These improvements areexpected to increase network capacity, enhance performance, enable richermultimedia applications and services, and deliver a superior subscriberexperience.

 

Fastgrowth of wireless data volumes requires optimal and efficient utilization ofTELUS’ spectrum holdings. Deployment of TELUS’ HSPA/HSPA+ technology, eventuallaunch of 4G LTE technology, and development of a traffic management toolkitaim to achieve efficient utilization of TELUS’ spectrum holdings and positionTELUS to meet increasing levels of data traffic. Furthermore, TELUS hasdeveloped a spectrum strategy to further strengthen its ability to deliver themobile Internet to Canadians in the future.

 

*Transitionto 4G wireless technologies could be slowed by delays in the development of theLTE ecosystem*

 

Thetiming for the standardization and development of LTE technologies aligns withthe need for additional network capacity required to address the surging demandfor wireless data. However, just as with any other new wireless technology inthe past, there remain significant and non-trivial challenges that the industryneeds to overcome in the first few years following standardization, and priorto being able to successfully support large LTE deployments. These include bothtechnological and business challenges, including harmonization of globalspectrum, intellectual property rights, support for voice and SMS,interoperability, device availability, technology maturity, operationalreadiness and costs. The wireless industry appears committed to making LTE theworldwide technology standard, as evidenced by its R&D, testing andinteroperability efforts. Despite this, there remains a risk that thedevelopment of a robust LTE ecosystem may experience some delays; these delays,when put against a background of surging data traffic demand, represent a riskfor the operator.

 

***Risk mitigation:*** TELUS’ implementation of LTE technologies will primarily be driven by abusiness case whose foundations have been laid by the launch of TELUS’ national3G+ network, and as such, TELUS’ focus remains on the revenue growthopportunities that this new network enables. In support of this, TELUS’wireless network is ready to evolve through software upgrades to supportenhancements in HSPA/HSPA+ that improve performance, capacity and peak datarates. In parallel and complementary to the evolution of HSPA/HSPA+, TELUS isdeveloping a comprehensive capacity management toolkit that will help addresscapacity challenges prior to the introduction of LTE, and which also isexpected to complement LTE once it is deployed.

 

*Rapid growth in wirelessdata traffic is expected to be accompanied by decreasing unit-pricing*

 

Wireless data traffic has been growing atunprecedented rates. It is expected that levels of data consumption willcontinue to expand from increasing wireless adoption, usage increases driven byincreasingly sophisticated smartphones, increasing laptop connectivity, richermultimedia applications and services, and flat-rate unlimited data plans. However,given the highly competitive wireless business environment in Canada, it isexpected that wireless data revenues will not grow at the same rate as trafficdemand. This gap between traffic and revenue growth represents one of the mostsignificant challenges for operators in this mobile Internet era the industryis just entering.

 

***Risk Mitigation:*** To compensate for the gap between data revenue growthand traffic growth, a key requirement for operators in the mobile Internet erais improvement in capacity and performance that lowers costs. TELUS’ recentimplementation of HSPA/HSPA+ technology is expected to reduce the cost ofdelivery per megabyte of data to the subscriber, relative to 3G and 2Gtechnologies. The future evolution to 4G LTE technology is expected to deliverfurther increases in capacity, as well as improved network architecture andnetwork management capabilities.

 

### **10.3 Regulatory**

### ** **

*Regulatorydevelopments could have a material impact on TELUS’ operating procedures, costsand revenues*

 

TELUS’telecommunications and broadcasting services are regulated under federallegislation by the Canadian Radio-television and Telecommunications Commission(CRTC), Industry Canada and Heritage Canada. The CRTC has taken steps toforbear from regulating prices for services offered in competitive markets,such as local residential and business services in selected exchanges, longdistance and some data services, and does not regulate the pricing of wirelessservices. Local telecommunications services that have not been forborne areregulated by the CRTC using a price cap mechanism. Major areas of regulatoryreview currently include the ILECs’ obligation to serve and the utilization ofthe funds in the ILECs’ deferral accounts.

 

Theoutcome of the regulatory reviews, proceedings and appeals discussed below andother regulatory developments could have a material impact on TELUS’ operatingprocedures, costs and revenues.

 

*Implementation of phase IIwireless enhanced 911 (E911) services*

 

On February 2, 2009, the CRTC issued *Telecom Policy CRTC 2009-40*, directing Canadian wirelessservice providers to implement wireless phase II E911 service by February 1,2010, and ruling that wireless service providers are responsible for their owncosts of implementation. Wireless phase II E911 services automatically provideE911 call centres with more 

 

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precise location information when a personcalls 911 emergency services from an equipped wireless device. Wireless phaseII E911 services provide the caller’s location using a GPS-based system, atriangulation method using the nearest cellular towers, or a combinationthereof. Most wireless devices already in use and all new wireless devicesoffered by TELUS have the GPS or other technologies required for Phase II E911service. The CRTC ordered all Canadian wireless providers to implement wirelessphase II E911 services in the same areas where wireline E911 services werealready available by February 1, 2010 (stage 1). TELUS has successfullycompleted the implementation of wireless phase II E911 services, in accordancewith the CRTC’s requirements, across its wireless networks. However, the newtechnology must be tested in every local authority’s 911 operations centre,each with its own technology and approach.

 

*Future availability andcost of wireless spectrum*

 

IndustryCanada plans to auction spectrum in both the 700 MHz and 2.5/2.6 GHzbands in the 2011 to 2012 timeframe. **Therelease of future wireless spectrum in these bands could facilitate expansionfor incumbents and provide additional opportunities for new entrants to offerwireless broadband services. There is uncertainty regarding the government’stiming and position in regulating these potential spectrum bands. Auction rules may,for example, favour non-incumbents. As the rules for future auctions areunknown, the capital outlay required to successfully bid on additional spectrumis uncertain. TELUS expects a 700 MHz spectrum auction discussion paper bymid-2010. However, it is possible that most new spectrum will not be availablefor mobile purposes prior to 2011 or 2012.**

 

Currently,spectrum at 2.5 GHz has been used for fixed wireless and fixed wirelessbroadcast applications. However, this spectrum band has been given a primarymobile designation by Industry Canada and is anticipated to become a commonglobal band for mobile services. In 2006, Industry Canada issued a policy thatprovides for a claw back of a portion of the band for auction when mobileservice is implemented within the band, and has announced that it intends toauction unassigned portions of the multipoint distribution service portion ofthe band. At the end of November 2008, Industry Canada granted a licenceto Craig Wireless to move its fixed service in Vancouver to mobile, consistentwith this policy. On May 5, 2009, Look Communications announced that itwas selling its spectrum in Ontario and Quebec to Inukshuk WirelessPartnership, owned by Bell and Rogers.

 

TELUSexpects an Industry Canada decision regarding the transition issues for2.5 GHz MDS spectrum to broadband radio service (BRS) mobile servicesubject to the 2006 policy to be announced in early 2010. TELUS also expectsthat an auction discussion paper will be announced by mid-2010 and an auction tobe scheduled sometime in 2011 or later.

 

CompetitorsBell and Rogers hold significant amounts of spectrum at 2.5 GHz throughtheir Inukshuk partnership, have deployed a fixed wireless solution in majorcities including Toronto, Montreal, Calgary, Edmonton and Vancouver, and aremarketing portable DSL service with moderate print and billboard campaigns.Although TELUS has experienced only limited competition from this and similarservices to date, there can be no assurance that future marketing of these serviceswill not negatively impact TELUS’ wireless or wireline services.

 

**Inaddition, Industry Canada is undertaking review of existing mobile spectrumlicence fees and is considering fees for auctioned mobile spectrum uponcompletion of the initial spectrum licence term. Any increase could impactTELUS beginning in 2011 for spectrum already subject to annual fees, and in2013 for spectrum acquired in the 2001 PCS auction. Industry Canada has raisedthe issue of what constitutes market rates and is expected to release anindependent consultant’s report in the spring 2010 timeframe, as part of aformal public consultation on the issue of mobile spectrum licence fees. Theactual impact of any fee increase cannot be determined at this time.**

 

*Local forbearance*

 

On December 14, 2006, the Governor in Councilissued a direction to the CRTC to rely on market forces to the maximum extentfeasible; to ensure technological and competitive neutrality and enablecompetition from new technologies; to use tariff approval mechanisms that areas minimally intrusive as possible; to complete a review of the framework formandated access to wholesale services; to publish and maintain performancestandards for its various processes; and to continue to explore new ways ofstreamlining its processes.

 

On April 4,2007, the Governor in Council issued Order in Council P.C. 2007-532 and variedDecision 2006-15 by changing the criteria for local forbearance for residentialand business local exchange services. Instead of requiring at least 25% marketshare loss in large local forbearance regions (Decision 2006-15), the Order inCouncil requires two independent facilities-based competitors (of which one canbe a wireless service provider) capable of serving at least 75% of theresidential lines for forbearance based on local exchange areas. For businesslocal exchange service, forbearance is granted when one facilities-basedcompetitor is able to serve at least 75% of the business lines.

 

The Order in Council reduced the number of quality-of-serviceindicators that must be met for the six-month period prior to the forbearanceapplication. The Order in Council also removed restrictions on winbacks (i.e.delays on actions to regain customers who have changed to a competing serviceprovider) and promotions by the incumbent telephone companies.

 

Since the Order in Council was issued, TELUS hasobtained forbearance for about 79% of its incumbent local residential servicelines in non-high cost areas and about 69% of local business service lines inB.C., Alberta and Eastern Quebec.

 

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As a result of the forbearance granted for localresidential and business services, TELUS believes it has significantly enhanced flexibility in pricing,promotions and bundling to compete with other providers of these services. However,TELUS has no assurance that it will be able to prevent further market shareloss in these markets or that it will be able to obtain forbearance in otherexchanges where it is facing competition for residential and businesscustomers.

 

*Pricecap regulation*

 

Pricecap regulation continues to apply to a basket of local services provided byILECs. TELUS is subject to price cap regulation as an ILEC in B.C., Alberta andEastern Quebec. On April 30, 2007, the CRTC issued Decision 2007-27 (thirdprice cap period) and established an open-ended price cap regime.

 

TheCRTC removed the productivity adjustment from the Residential Services innon-high cost serving areas (non-HCSA or urban) price cap basket and the OtherCapped Services price cap basket. For the Competitor Services price cap basket,the CRTC reduced the productivity adjustment from inflation minus 3.5% toinflation minus 3.2%. The Commission moved residential optional local servicesand service bundles containing residential local exchange service to theUncapped Services basket (no upward pricing constraints).

 

TheCRTC capped residential service rates in urban areas at existing levels andlimited annual rate increases in rural areas to the rate of inflation (to amaximum of 5%). However, the CRTC removed restrictions on rate de-averaging forresidential local service and optional local services. Subsequent to the pricecap decision (Decision 2007-106), the CRTC also removed restrictions on ratede-averaging for business and pay telephone services.

 

TheCRTC incorporated a deferral account into the second price cap period to whichan amount equivalent to the cumulative annual productivity adjustments forresidential services in non-high cost serving areas was added. Since the CRTCremoved these productivity adjustments in Decision 2007-27, the CRTC alsodetermined that the deferral account was no longer required.

 

In February 2006,the CRTC determined in Decision 2006-9 that the funds accumulated in the ILECdeferral accounts would be used to expand broadband services to rural andremote communities and to improve accessibility to telecommunications servicesfor individuals with disabilities. After receiving proposals from the ILECs inresponse to Decision 2006-9, the CRTC launched a further proceeding in November 2006(Public Notice 2006-15) to further explore the ILECs’ proposals.

 

On July 6,2007, the CRTC issued Decision 2007-50, which partially approved TELUS’broadband expansion proposal for locations in B.C. and Eastern Quebec. TELUS isstill waiting for the CRTC’s final decision in this proceeding on the balanceof its broadband expansion proposal and its proposals to improve accessibilityto telecommunications services for individuals with disabilities.

 

On January 17, 2008, the CRTC issued Decision2008-1 and approved an additional 119 communities in B.C., Alberta and EasternQuebec for broadband expansion (subsequently reduced to 102 communitiesfollowing a competitor’s appeal). The CRTC also approved TELUS’ proposedinitiatives to enhance accessibility to telecommunications services for thedisabled. The CRTC determined in Decision 2008-1 that any funds remaining inthe ILEC deferral accounts after the initiatives to expand broadband services and to improve accessibility totelecommunications services for individuals with disabilities are completedwill be refunded to customers.

 

In2009, the Supreme Court of Canada heard three appeals on how the funds in theILECs’ deferral accounts should be treated. On September 18, 2009, theSupreme Court rejected all three appeals. The ILECs are proceeding with theimplementation of deferral account initiatives for broadband expansion, improved access to telecommunications servicesfor the disabled and customer rebates. For further information on the deferralaccount liability, see *Section 7.8*under *Commitments and contingent liabilities*.

 

*TELUS’broadcasting distribution undertakings*

 

TELUSholds licences from the CRTC to operate terrestrial broadcasting distributionundertakings to serve various communities in B.C. and Alberta (both licensed inAugust 2003 and recently renewed in 2009 for a second full seven-yearterm) and Eastern Quebec (licensed in July 2005). TELUS also holds alicence to operate a national video-on-demand undertaking (licensed in September 2003and in the process of being renewed).

 

TheCRTC has issued a revised policy for broadcasting distribution undertakings inBroadcasting Public Notice 2008-100. In this policy, the CRTC has increasedcontribution requirements of distribution undertakings by 1% of gross revenues.This policy also altered the framework regarding the offering of distantover-the-air television signals, which will likely make the offering oftime-shifting packages more expensive. The new policy framework also providesfor new flexibility for broadcasting distribution undertakings (BDUs) inpackaging of Canadian and foreign programming services. These changes will takeeffect at the same time as the digital conversion of analogue over-the-airsignals in August 2011. The CRTC has also held proceedings relating tolocal television and some obligations may flow to all broadcast distributors asa result of the determinations made in the context of these proceedings.

 

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*CRTCreview of new media and Internet traffic management practices*

 

TheCRTC reviewed its exemption orders regarding new media broadcastingundertakings (which dates back to 1999) and mobile television broadcastingundertakings (which were issued in 2005). The CRTC issued BroadcastingRegulatory Policy 2009-329 in June 2009 and determined that its exemptionof new media from regulation is still appropriate and that the creation of anew fund to support Canadian content online and on wireless is not required.TELUS will continue to press the CRTC and the federal government to ensure theInternet remains an open platform for innovation, diversity and consumerchoice.

 

TheCRTC also reviewed the traffic management practices of Canadian ISPs. Thisfollowed an earlier decision by the CRTC denying a request to have Bell haltits traffic shaping (or throttling) measures on its wholesale ADSL accessservice. The CRTC’s review of traffic management practices included bothwholesale and retail services. The CRTC issued Telecom Regulatory Policy2009-657 on October 21, 2009 and will allow Canadian ISPs to continuetraffic shaping, however, the CRTC will continue to monitor traffic shapingpractices to ensure the practices are reasonableand have as little negative impact on the user experience as possible.

 

*Radiocommunicationlicences regulated by Industry Canada*

 

Allwireless communications depend on the use of radio transmissions and,therefore, require access to radio spectrum. Under the *RadiocommunicationAct*, Industry Canada regulates, manages and controls the allocationof spectrum in Canada and licenses frequency bands and/or radio channels withinvarious frequency bands to service providers and private users. Voice and datawireless communications via cellular, specialized mobile radio (SMR), enhancedspecialized mobile radio and PCS systems, among others, require such licences.TELUS’ PCS and cellular licences include various terms and conditions, such as:meeting Canadian ownership requirements, meeting obligations regarding coverageand build-out, spending at least 2% of certain PCS and cellular revenues onresearch and development, annual reporting and resale to competitors. WhileTELUS believes that it is substantially in compliance with its licenceconditions, there can be no assurance that it will be found to comply with alllicence conditions, or if found not to be compliant that a waiver will begranted, or that the costs to be incurred to achieve compliance will not besignificant. Initial licence fees and annual renewal fees are payable forlicences that have not been obtained via spectrum auction.

 

IndustryCanada has indicated its intention to rely increasingly on market-orientedprices for the charges associated with spectrum fees. In consultations relatedto the renewal of cellular and PCS spectrum licences and on the spectrumauction framework, Industry Canada announced that it would be consulting on thelevels of annual fees for existing spectrum licences for cellular and PCSspectrum, whether obtained by spectrum auction or other licensing processes,when these licences come up for renewal in 2011 and 2013. There is noindication as to the type or level of such a renewal fee at this time. TELUSexpects Industry Canada to consult on this renewal fee by mid 2010. There canbe no assurance as to the future level of the renewal fee.

 

*700 MHz spectrum:* The U.S. had a spectrum auction for the 700 MHz spectrum in January 2008.There is speculation that Industry Canada may also initiate an auctionconsultation process for spectrum at 700 MHz. There is no guarantee thatthe Canadian government will not reserve spectrum for new entrants or that itwill not adopt some open access provisions for some of this spectrum, as wasdone in the U.S.

 

*800 MHz re-banding:* In 2004, the U.S. Federal Communications Commission (FCC) released aReport and Order adopting a plan to resolve interference with public safetyradio systems in the 800 MHz band. Sprint-Nextel’s iDEN system wasidentified as the primary contributor to this interference. The U.S. isplanning to realign the band so that public safety systems would be relocatedto the bottom of the 800 MHz band and Sprint-Nextel’s iDEN system wouldoperate in the upper part of the band.

 

In Canada, the TELUS Mike (iDEN) network alsouses this same frequency spectrum. Because each site for the Mike network isanalyzed and licensed individually, TELUS and Industry Canada have been able tominimize the number of public safety interference issues to a few across thecountry versus more than 1,500 in the U.S.

 

However, TELUS has an existing specialco-ordination procedure (SCP), endorsed by both Industry Canada and the FCC,wherein TELUS and Sprint-Nextel utilize each other’s channels within theirrespective iDEN networks at specific border areas across the country. Thesechannels serve to increase the number of channels available to both networks tobetter serve the area. The re-alignment threatens the continued use of thechannels specified in the SCP.

 

While discussions with both the Canadian andU.S. regulators indicate that TELUS should be able to continue to have accessto a certain number of SCP channels in the border areas, until such time as theU.S. announces its final decision, there is no assurance that TELUS will beable to continue to use these channels.

 

*Foreignownership restrictions*

 

TELUSand its subsidiaries are subject to the foreign ownership restrictions imposedby the *Telecommunications Act*, the *Radiocommunication Act* and the *BroadcastingAct*. Although TELUS believes that TELUS Corporation and itssubsidiaries 

 

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arein compliance with the relevant legislation, there can be no assurancethat a future CRTC, Industry Canada or Heritage Canada determination, or eventsbeyond TELUS’ control, will not result in TELUS ceasing to comply with therelevant legislation. If such a development were to occur, the ability ofTELUS’ subsidiaries to operate as Canadian carriers under the *Telecommunications Act* or to maintain, renew or securelicences under the *Radiocommunication Act*and *Broadcasting Act*could be jeopardizedand TELUS’ business could be materially adversely affected.

 

In June 2008, the Competition Policy Review Panel provided itsfinal report to the Minister of Industry. The Panel made a number ofrecommendations to liberalize foreign ownership rules for thetelecommunications and broadcasting sectors. TELUS anticipates that the chances for removal of foreign ownershiprestrictions under a minority government are low. However, on December 10,2009, the Governor in Council (on behalf of the Federal Cabinet) issued Orderin Council P.C. 2009-2008 in which it overturned an October 29, 2009decision by the CRTC (Telecom Decision CRTC 2009-678) that found that wirelessnew entrant Globalive did not meet Canada’s foreign ownership laws due to thesubstantial capital backing of Egypt-based Orascom Telecom. Notwithstanding theGovernor in Council’s claim that the decision was particular to facts of theGlobalive case, it appears that a new precedent may have been set with respectto loosening foreign ownership restrictions in telecommunications, broadcastingand other sectors where the “control in fact” test has traditionally beenapplied. The Governor in Council’s decision creates the possibility of a doublestandard with respect to the application of the foreign ownership and controlrestrictions and may render these restrictions meaningless. Relaxation orelimination of foreign ownership restrictions increases the risk that newforeign-owned or financed telecommunications carriers will begin operating in Canada.

 

On January 8, 2010, Public Mobile Inc.filed an application for judicial review with the Federal Court seeking to overturnthe Governor in Council’s December 10, 2009 decision declaring thatGlobalive is eligible to operate as a Canadian carrier.

 

***Risk mitigation for regulatorymatters:*****TELUS advocates aregulatory environment that relies, to the greatest extent possible, on marketcompetition rather than regulatory intervention. TELUS believes this is in thebest interest of customers.TELUS has also supportedthe relaxation of foreign ownership restrictions in the past, but believes thatany such relaxation must be on an equal basis for all broadcasting andtelecommunications companies, without an artificial and unfair advantage beinghanded to one company.

 

### **10.4 Humanresources**

### ** **

*Reliance on key personnel*

 

The success of TELUS is largely dependent onthe abilities and experience of its employees. Competition for highly skilledand entrepreneurial management, and other key employees, is intense in thecommunications industry. The loss of certain key employees — or deteriorationin overall employee morale and engagement due to organizational changes,unresolved collective agreements or ongoing cost reduction — could have anadverse impact upon TELUS’ growth, business and profitability. In 2009, themeasure of employee engagement decreased, due to factors such as staff reductions,base compensation for management being frozen at 2008 levels and lowerperformance bonuses resulting from underperformance relative to scorecardtargets, as well as ongoing announced efficiency initiatives that includefurther domestic staff reductions in 2010. In addition, there is a near-termexpected increase in retirement by team members from Canada’s post-Second WorldWar baby boom generation and the changing competitive landscape given newentrants in the wireless services market.

 

The need to maintain operating margins and fundstrategic growth initiatives in 2009, along with economic pressures andincreased funding requirements for defined benefit pension plans, led to somedifficult decisions. This included a greater emphasis on efficiency initiativesthat reduced staff during 2009 and maintained base salaries and individualperformance bonus target percentages at 2008 levels. To help contain expensesfurther, the Company and its employees continue to share cost increasesassociated with the 2009 and 2010 benefits program.

 

The reduced value of shares and equityportfolios may reduce the effectiveness of some current retention incentives.With the drop in TELUS’ share prices at the end of 2008, the eligibility forlong-term incentive awards was made more stringent, with award values generallybeing lower.

 

Assuming the broad economic and competitivechallenges continue, the employee retention risk is expected to remain elevatedin 2010. TELUS aims to attract and retain key employees through both monetaryand non-monetary approaches, striving to both protect and improve engagementlevels. However, there can be no assurance that such approaches will be assuccessful as planned.

 

***Risk mitigation*****:**The compensation program at TELUS is designed to support itshigh-performance culture and is both market-driven and performance-based. Thisincludes:

 

·      Employee performance bonuses basedon individual contributions as well as a corporate component

·      Share options for eligibleemployees

·      Restricted stock units (RSUs) foreligible employees

 

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·      TELUS Employee Share Purchase planavailable to all domestic full-time and part-time employees.

 

Medium and long-term performance incentives(RSUs and share options) for certain key personnel generally have three-yearvesting periods. Where required, TELUS also continues to implement targetedretention solutions for employees with talents that are scarce in themarketplace.

 

As well, a benefits program is offered thatallows the tailoring of personal health, wellness, lifestyle and retirementchoices to suit individual and family needs.

 

By striving to ensure TELUS’ compensation andbenefits remain competitive, the Company seeks to maintain the ability toattract and retain key employees. With respect to ongoing program costmanagement, the Company hopes to manage engagement levels through direct andupfront communication to all employees as part of an overall business ownershipculture.

 

TELUS will continue to focus on othernon-monetary factors which have a clear alignment with engagement including:

 

·      Performance management

·      Career opportunities

·      Training and development

·      Recognition.

 

*National collectivebargaining in 2010*

 

The collective agreement between TELUS and theTelecommunications Workers Union (TWU) will expire on November 19, 2010.The TWU contract applies to approximately 11,800 employees across Canada inTELUS’ wireline and wireless business segments. Negotiations to renew thiscollective bargaining agreement are expected to commence in the second half of2010. Collective bargaining in the TELUS Québec region to renew the collectiveagreement with the Syndicat québécois des employés de TELUS (SQET) continuesinto 2010. The SQET agreement expired on December 31, 2009, and coversapproximately 1,000 trades, clerical and operator services team members.

 

In any set of labour negotiations, there can beno assurance that the negotiated compensation expenses or changes to operatingefficiency will be as planned or that reduced productivity and work disruptionswill not occur during the course of collective bargaining prior to settlement.

 

***Risk mitigation:*****A governance model is in place to ensure the financial and operatingimpact of any proposed terms of settlement are assessed and determined to bealigned with TELUS’ strategic direction. As is prudent in any round ofcollective bargaining, any potential need to continue operations in response towork disruptions will be addressed through contingency planning and emergencyoperations plans.

 

### **10.5 Processrisks**

### ** **

*Systemsand processes*

 

TELUS has numerous complex systems and processchange initiatives underway. For example, TELUS expects to make changes toseveral dozen systems and processes in order to accommodate the July 1,2010 implementation of harmonized sales tax (HST) by the provinces of BritishColumbia and Ontario. HST standardizes and integrates the collection offormerly separate provincial sales taxes and the federal goods and services tax(GST). The HST regime is expected to reduce future costs to TELUS as a resultof more consistent and streamlined sales tax rules, and the ability to claimadditional sales tax credits on business inputs. However, not all of theharmonization rules have been determined, which, combined with arelatively short implementation timeframe, may result in interpretation issuesand possible future reassessments that could increase costs. TELUS expects todedicate significant resources to transitioning numerous systems and processesto accommodate the HST. There can be no assurance that the full complement ofthe Company’s various systems and process change initiatives will besuccessfully implemented, or that sufficiently skilled resources will beavailable to complete all key initiatives planned for 2010 and beyond. There isrisk that certain projects may be deferred or cancelled, and the expectedbenefits of such projects may be deferred or unrealized.

 

***Risk mitigation:*** In general, TELUS strives to ensure that systemdevelopment priorities are selected in an optimal manner. TELUS’ projectmanagement approach includes extensive risk identification and contingencyplanning, scope and change control, and resource and quality management. Thequality assurance of the solutions includes extensive functional, performanceand revenue assurance testing, as well as capturing and utilizing lessonslearned. In addition, TELUS often moves its business continuity planning andemergency management operations centre to a heightened state of readiness inadvance of major systems conversions.

 

*Largeenterprise deals*

 

TELUS’operating efficiency and earnings may be negatively impacted by challenges with(or ineffective) implementation of large enterprise deals, which may becharacterized by service credits lowering revenues, significant upfrontexpenses and 

 

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capitalexpenditures, and a need to anticipate, understand and respond to complex andmulti-faceted enterprise customer-specific requirements and stakeholders. Therecan be no assurance that service implementation will proceed as planned andexpected efficiencies will be achieved, which may impact return on investmentor desired margins to be realized. The Company may also be constrained byavailable staff, system resources and co-operation of existing serviceproviders, which may limit the number of large contracts that can beimplemented concurrently in a given period and/or increase the cost to TELUSrelated to such implementations.

 

***Risk mitigation:*****In 2009, TELUS implemented internal reorganizations, including theconsolidation of three enabling units into two integrated teams: *Technology Strategy* and *Business Transformationand Technology Operations,*as well as the consolidation of**certain customer-facing business units. The expectedbenefits include streamlined operations, more effective deployment oftechnologies and supporting systems, cost efficiencies, improved customerservice, and better capability to implement large enterprise deals. TELUSfollows industry standard practices for rigorous project management, includingexecutive (senior) level governance and project oversight; appropriate projectresources, tools and supporting processes; and proactive project-specific riskassessments and risk mitigation planning. TELUS also conducts independentproject reviews and internal audits to help monitor progress and identify areasthat may require additional focus, and to identify systemic issues andlearnings in project implementations which may be shared among projects. In2010, TELUS intends to focus on the successful implementation of recent largeenterprise contract wins. In addition, the Company plans to be increasinglyselective as to which new large contracts it will bid on and to increase itsfocus on SMB market.

 

*Reorganizations*

 

Arisingfrom its operating efficiency program, the Company carries out a number ofoperational consolidation, rationalization and integration initiatives eachyear. For 2009 initiatives, see *Section 2.2 Strategicimperatives — Investing in internal capabilities.* The initiativesare aimed at improving the Company’s operating productivity andcompetitiveness. There can be no assurance that all planned efficiencyinitiatives will be completed, or that such initiatives will provide theexpected benefits, or will not have a negative impact on operating performance,employee engagement, financial results and customer service.

 

***Risk mitigation:*******TELUS focuses on and manages organizational changes through a formalizedbusiness transformation function by leveraging the expertise, key learnings andbest practices gained from mergers, business integrations andefficiency-related reorganizations in recent years.

 

*Foreignoperations*

 

TELUSInternational operations expanded in 2009 through an investment in contactcentre operations in Central America, as well as the opening of a Company-ownedcontact centre in Clark County, Nevada. These developments add criticalcapacity for TELUS International’s growing business, while meeting clientdemands for English- and Spanish-language support and geographic diversity.

 

Theincrease of resources in TELUS’ international operations presents unique risks,including country-specific risks (such as different political, legal andregulatory regimes and cultural values), lack of diversity in geographicallocations, concentration of customers, different taxation regimes,infrastructure and security challenges, different exposure to and frequency ofnatural disasters, and the requirement for system processes that work acrossmultiple time zones, cultures and countries. There can be no assurance thatinternational initiatives and risk mitigation efforts will provide the benefitsand efficiencies expected, or that there will not be significant difficultiesin combining the different management and cultures, which could result in anegative impact on operating and financial results.

 

***Risk mitigation:*******TELUS’ strategy is to improve the diversity and geographic distributionof its operations, customers and conduct of business process outsourcingactivities. The continued expansion of international operations, as notedabove, provides TELUS with more geographic diversity, spreads political riskamong the foreign jurisdictions, and provides the Company an ability to servecustomers in multiple languages and in multiple time zones. TELUS has also implementeda currency hedging program to reduce certain foreign currency exposures. Inaddition, the Company continues to work with its international operations toextend operational best practices, to integrate and align international anddomestic Canadian operations, as appropriate, and to ensure that internalcontrols are implemented, tested, monitored and maintained.

 

*Integrationof acquisitions*

 

Post-mergerand post-acquisition activities, such as those that followed the acquisition ofBlack’s Photo Corporation in 2009 and Emergis in 2008, include the review andalignment of accounting policies, employee transfers and moves, informationsystems integration, optimization of service offerings and establishment ofcontrol over new operations. Such activities may not be conducted efficientlyand effectively, negatively impacting service levels, competitive position andexpected financial results.

 

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***Risk mitigation:*** TELUS has a team that performs a post-mergerintegration (PMI) function. The PMI team applies an integration model, based onlearnings from numerous previous post-acquisition integrations, which enhancesand accelerates the standardization of TELUS’ business processes and strives topreserve the unique qualities of acquired operations. PMI begins withstrategic, pre-closing analysis and planning, and continues after closing withthe execution of a plan. Initial plans are re-evaluated and assessed regularly,based on timely feedback received from the integration teams.

 

*Dataprotection*

 

Some of the Company’s efficiency initiativesrely on internal offshoring to TELUS International’s operations and leveragingpartners domestically and abroad. Offshore and partner relationshipsnecessitate sharing TELUS data. Such activities could lead to data being lost,compromised or accessed by third parties potentially for inappropriate use,negatively impacting the Company’s competitive position, financial results andbrand.

 

***Risk mitigation:*** A core component of TELUS’ strategy is for the datato always reside in TELUS facilities in Canada and deploy infrastructure tosupport partner connectivity to TELUS systems. TELUS International and partnersare provided with remote views of the data without it being stored on localsystems.

 

Another core component is payment card industry(PCI) compliance, a rigorous set of standards leveraging the latest securitytechnology, such as encryption, to ensure the protection of customer creditcard information. These capabilities are being introduced and implemented byTELUS and TELUS International in accordance with the ongoing PCI certificationprogram.

 

### **10.6 Financingand debt requirements**

### ** **

*TELUS’ business plans andgrowth could be negatively affected if existing financing is not sufficient tocover funding requirements*

 

Riskfactors such as disruptions in the capital markets, increased bankcapitalization regulations, reduced lending in general, or a reduced number ofactive Canadian chartered banks as a result of reduced activity orconsolidation, could reduce capital available, or increase the cost of suchcapital, for investment grade corporate credits such as TELUS.

 

***Risk mitigation:*******TELUS may finance future capital requirements with internally generatedfunds as well as, from time to time, borrowings under the unutilized portion ofits bank credit facility, use of securitized accounts receivable, use ofcommercial paper or the issuance of debt or equity securities. On September 3,2009 TELUS renewed its shelf prospectus pursuant to which it could offer$4 billion of debt and equity. The Company subsequently issued$1 billion of debt under this prospectus and used the proceeds primarilyfor a partial, early redemption of Notes maturing June 2011. TELUSbelieves its adherence to its stated financial policies and resultinginvestment grade credit ratings, coupled with its efforts to maintain aconstructive relationship with banks, investors and credit rating agencies,continue to provide reasonable access to capital markets.

 

TheCompany had unutilized credit facilities of more than $1.7 billion at December 31,2009. These facilities include a $2 billion credit facility($1.4 billion available) that expires on May 1, 2012, a$300 million credit facility that expires on December 31, 2010. Thesefacilities allow the Company to continue to meet one of its financialobjectives, which is to generally maintain $1 billion in availableliquidity.

 

Asdescribed in *Section 7.6 Accounts receivable sale,*in May 2009 TELUS Communications Inc. (TCI) extended to May 2012 anagreement with an arm’s-length securitization trust under which it is able tosell an interest in certain of its trade receivables up to a maximum of$500 million. At December 31, 2009, TCI had received aggregate cashproceeds of $500 million. TCI is required to maintain at least a BBB (low)credit rating by DBRS Ltd — currently A (low) — failing which, the Company maybe required to wind down the program prior to the May 2012 terminationdate of the agreement.

 

*Ability to refinance maturingdebt*

 

TELUS operates a commercial paper program(maximum of $1.2 billion) that permits access to low-cost funding. At December 31,2009, TELUS had $467 million of commercial paper issued, which must berefinanced on an ongoing basis to enable the cost savings relative to borrowingon the 2012 credit facility to be realized. Capital market conditions mayprohibit the rolling of commercial paper at low rates.

 

***Risk mitigation*****:** The Company’s commercial paper program is fully backstopped by the 2012credit facility. TELUS may refinance amounts drawn on its credit facilitieswith longer-term maturities. In May 2009, the Company successfully closedan offering of 4.95% Notes due May 2014, for $700 million. The netproceeds of the offering were used for corporate purposes, including repaymentof amounts outstanding under the 2012 credit facility and outstandingcommercial paper. In December 2009, TELUS issued $1 billion of 5.05%Notes due December 4, 2019. The net proceeds of the sale of the Notes were usedto fund the redemption on December 31, 2009 of 30% orU.S.$583.5 million principal amount of the outstandingU.S.$1.945 billion 8% Notes due June 1, 2011, and for paymentsrequired to terminate cross currency interest rate swaps associated with thenotes redeemed. At December 31,2009, TELUS had no significant 

 

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amountsof long-term debt maturing until the remaining U.S.$1.35 billion of 8%Notes due in 2011. TELUS may pre-fund or refinance an additional portion ofthese 8% Notes prior to maturity.

 

*A reduction in TELUS creditratings could impact TELUS’ cost of capital and access to capital*

 

TheCompany’s cost of capital could increase and access to capital might beaffected by a reduction in the credit ratings of TELUS and/or TCI. There can beno assurance that TELUS can maintain or improve current credit ratings.

 

***Risk mitigation:*****TELUS seeks to achieve, over time, debt credit ratings in the range ofBBB+ to A-, or equivalent. The four credit rating agencies that rate TELUScurrently have ratings that are in line with this target with a stable outlook.TELUS has financial policies in place that were established to help maintain orimprove existing credit ratings. (See *Section 7.4 Liquidityand capital resource measures.*) TELUS’ credit ratings were confirmedin 2009 by the four credit rating agencies that cover the Company.

 

*Lower than expected freecash flow could constrain ability to invest in operations or reduce debt*

 

TELUSexpects to generate free cash flow in 2010, which would be available to, amongother things, pay dividends to the Company’s shareholders. While anticipatedcash flow is expected to be more than sufficient to meet current requirementsand remain in compliance with TELUS’ financial policies, these intentions couldconstrain TELUS’ ability to invest in its operations for future growth. Asdescribed in *Section 1.5,*payment of netcash income taxes and funding of defined benefit pension plans in the futurewill reduce the after-tax cash flow otherwise available to return capital tothe Company’s shareholders. If actual results are different from TELUS’expectations, there can be no assurance that TELUS will not need to change itsfinancing plans, including its intention to pay dividends according to thetarget payout guideline.

 

***Risk mitigation:*******The TELUS Board reviews the dividend each quarter, based on a number offactors including a target dividend payout ratio guideline of 45 to 55% ofsustainable net earnings. This review resulted in TELUS maintaining thequarterly dividend at $0.475 per share for 2010. Based on the beginning-of-yearlevel of quarterly dividend and shares outstanding, dividend payments wouldtotal approximately $600 million in 2010. Effective December 1, 2009,TELUS changed its dividend reinvestment program to issue shares from treasuryat a 3% discount from the average market price. Participation in this programwould effectively reduce the cash dividend payment estimate.

 

The Company’s financial instruments and the nature ofcredit risks, liquidity risks and market risks that they may be subject to aredescribed in *Financial instruments*in *Section 7.8*.

 

### **10.7 Tax matters**

### ** **

*Income andcommodity tax amounts, including tax expense, may be materially different thanexpected*

 

Theoperations of TELUS are complex and related tax interpretations, regulationsand legislation that pertain to TELUS’ activities are subject to continualchange. The Company collects and pays significant amounts of commodity taxes,such as provincial sales taxes and federal goods and services taxes, to varioustaxation authorities. The Company also accrues and pays significant amounts ofincome taxes and has significant future income tax liabilities and income taxexpense. Income tax amounts are based on TELUS management’s estimates, usingaccounting principles that recognize the benefit of income tax positions thatare more likely than not of being sustained upon examination on an issue-by-issuebasis. The benefit is measured at the largest amount with greater than 50%probability of being realized. The assessment of the likelihood and amount ofincome tax benefits, as well as the timing of realization of such amounts, canmaterially affect the determination of net income or cash flows. As noted in *Section 1.5 Financial and operating targets for 2010*,TELUS currently expects to make cash income tax payments, net of recoveries, ofapproximately $385 to $425 million. The 2010 blended statutory income tax rateis expected to be 28.5 to 29.5%. These expectations can change as a result ofchanges in interpretations, regulations, legislation or jurisprudence.

 

Thetiming concerning the monetization or realization of future income tax accountsis uncertain, as it is dependent on future earnings of TELUS and other events.The amounts of future income tax liabilities are also uncertain, as the amountsare based upon substantively enacted future income tax rates in effect at thetime, which can be changed by governments. The amounts of cash tax payments andfuture income tax liabilities are also based upon the Company’s anticipated mixof revenues among the jurisdictions in which it operates, which is also subjectto change.

 

Theaudit and review activities of the Canada Revenue Agency and otherjurisdictions’ tax authorities affect the ultimate determination of the actualamounts of commodity taxes payable or receivable, income taxes payable orreceivable, future income tax liabilities and income tax expense. Therefore,there can be no assurance that taxes will be payable as anticipated and/or theamount and timing of receipt or use of the tax-related assets will be ascurrently expected. Management’s experience indicates the taxation authoritiesare more aggressively pursuing perceived tax issues and have increased theresources they put to these efforts. The recent economic recession has onlyserved to exacerbate such aggressive practices.

 

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Inorder to provide comprehensive solutions to primarily Canadian-based customersoperating in foreign jurisdictions, the Company has entered into furtherarrangements for the supply of services in such foreign jurisdictions, thusexposing itself to multiple forms of taxation.

 

In2008, the Company continued to further expand its activities into the UnitedStates and other foreign jurisdictions including the United Kingdom,Philippines, Panama, Guatemala, El Salvador and Barbados. In 2009, as part ofits operational efficiency program, the Company increased its offshoring ofcertain business processes to the Philippines and India. In the U.S., federal,state and local jurisdictions have created varying complex regimes for income,revenue, sales and use, and property taxes. The number and variation of suchregimes in the U.S. jurisdictions where the Company has transactions causesadditional financial risk to the Company. Generally, each foreign jurisdictionhas its own taxation peculiarities in the forms of taxation imposed (such asvalue-added tax, gross receipts tax or income tax) and its own legislation andtax treaties with Canada, as well as currency and language differences.Notwithstanding the usual differences, the telecommunications industry hasunique issues that lead to uncertainty in the application or division of taxbetween domestic and foreign jurisdictions. Accordingly, TELUS’ foreignexpansion activities have increased the Company’s exposure to tax risks, fromboth financial and reputation perspectives.

 

***Risk mitigation:*****The Company maintains an internal Taxation department composed ofprofessionals who are trained and educated in taxation administration and whomaintain an up-to-date knowledge base of new developments in the underlyingCanadian law, its interpretations and jurisprudence. Some knowledge of U.S. andother foreign tax laws has been acquired and is also being developed tofacilitate communication with foreign external advisors, as well as to enableassessment of foreign tax issues and risks. This team is also responsible forthe specialized accounting required for income taxes, and accordingly, thisgroup is charged with maintaining state-of-the-art knowledge of tax accountingdevelopments and the implementation of such relevant measures as are requiredfrom time to time.

 

Thetransactions of the Company are under continual review by the Company’sTaxation department whereby transactions of an unusual or non-recurring nature,in particular, are assessed from multiple risk-based perspectives. Tax-relatedtransaction risks are regularly communicated to and reassessed by tax counselas a check to initial exposure assessment. As a matter of regular practice,large and international transactions are reviewed by external tax counsel,while other third-party advisors may also be engaged to express their view asto the potential for tax exigibility. At the end of 2009, the Company is in theprocess of completing**phase one ofthree of its enterprise-wide program to review its existing internationalstructure, systems and processes and to develop a future mode of operation thatwill mitigate its regulatory, legal and tax risks as it continues itsinternational expansion. In addition, during 2009, the Company successfullylaunched its U.S. automated regulatory and tax billing system for certainstandard products and services. Additionally in 2009, the Company’s Taxationdepartment has added internal resources with international income and indirecttax experience and expertise to provide tax advice on and coordination with theCompany’s international sales, procurement, outsourcing and offshoringcontracts and investments.

 

TheCompany engages external counsel and advisors as appropriate to provide adviceand to comply with tax laws in the jurisdictions outside of Canada in which ithas operations of any significance. The advice and returns provided by suchadvisors and counsel are reviewed for reasonableness by TELUS’ Taxation team.

 

### **10.8 Health,safety and environment**

### ** **

*Team member health, wellness and safety*

 

Lostwork time, resulting from the illness or injury of TELUS team members, cannegatively impact organizational productivity and employee benefit healthcarecosts.

 

***Risk mitigation:*** To minimize absences in the workplace, TELUS supports aholistic and proactive approach to team member health by providingcomprehensive wellness, disability, ergonomic and employee assistance programs.To promote safe work practices, the Company has long-standing training andorientation programs for team members, contractors and suppliers who accessTELUS facilities. However, there can be no assurance that these health andsafety programs and practices will be effective in all situations.

 

*Radio frequency emission concerns*

 

Some studies and variousmedia reports have asserted that radio frequency emissions from wirelesshandsets may be linked to certain adverse health effects. There can be noassurance that future health studies, government regulations or public concernsabout the health effects of radio frequency emissions will not have an adverseeffect on the business and prospects for TELUS. For example, public concernscould reduce subscriber growth and usage, and increase costs as a result ofmodifying handsets, relocating wireless towers, and addressing incrementallegal requirements and product liability lawsuits. TELUS continues to monitordevelopments in this area.

 

***Risk mitigation:*****Evidence in the scientific community, as determined andpublished in numerous studies worldwide, supports the conclusion that there isno demonstrated public health risk associated with the use of wireless phones.These 

 

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include a study published in the Journalof the National Cancer Institute in 2006, involving 420,000 cell phone users inDenmark. This study found that cell phone users are no more likely than anyoneelse to suffer a range of cancer types. Government agencies in Canadaresponsible for establishing safe limits for signal levels of radio devicesalso support the conclusion that wireless telephones are not a health risk.TELUS believes that the handsets it sells comply with all applicable Canadianand U.S. government safety standards.

 

*Responsible driving*

 

Research has shown anincrease in distraction levels for drivers using wireless devices whileoperating vehicles. Canadian provinces of B.C., Manitoba (proclamation expectedin 2010), Ontario, Quebec, Nova Scotia, and Newfoundland and Labrador havebanned the use of handheld mobile phones while driving, but do permit the useof hands-free devices. Alberta and Saskatchewan are also consideringlegislation that would include a ban on the use of handheld devices whiledriving. In addition, the Alliance of Automobile Manufacturers, a tradeassociation of 11 companies, announced its support for banning text messagingusing a handheld device or calling using a handheld device while driving avehicle. There can be no assurance that additional laws against using mobilephones or hands-free devices while driving will not be passed and that, ifpassed, such laws will not have a negative effect on subscriber growth rates,usage levels or wireless revenues.

 

***Risk mitigation:*** TELUS promotes responsibledriving and recommends that driving safely should be every wireless customer’sfirst responsibility. The Company provides and sells hands-free devices in itsretail channels.

 

*Concerns related to contaminated property and theassociated risk to human health or wildlife*

 

Toconduct business operations, TELUS owns or leases a large number of properties.The presence of fuel systems for back-up power generation enables the provisionof reliable service, but also poses an environmental risk for the Company.Spills or releases of fuel from these systems have occurred occasionally, withthe maximum cost incurred at any site to date rarely exceeding $1 million.In the telecommunications industry, small volumes of hazardous chemicals arecommonly used at many sites. As well, certain hazardous materials are found atsome locations. Based on the volume and the nature of some of the specificchemicals handled, there is a risk posed to the Company, its directors and itsofficers by the liability related to potential spills and releases of hazardouschemicals into the environment. A significant portion of this risk isassociated with the clean-up of sites contaminated by historic TELUS practicesor by previous owners. There were no significant changes to TELUS’environmental risks during 2009. Although TELUS takes proactive measures toidentify and mitigate environmental exposures and employs an environmentalmanagement system (EMS) based on ISO14001:2004, there can be no assurance thatspecific environmental incidents will not impact TELUS operations in thefuture.

 

***Risk mitigation:*****While TELUS’ environmental risks are considered immaterial to theCompany’s financial results, they are important from a corporate socialresponsibility perspective, which TELUS takes seriously. Poor environmentalperformance or ineffective risk mitigation could have negative legal, brand orcommunity relations impacts. The Company’s EMS is designed to proactivelyidentify and prioritize these risks. The specific risk posed by fuel systems isbeing addressed through a program to install containment and monitoringequipment at sites with systems of qualifying size. Further detailed assessmentof environmental risks and mitigation activities can be found in the TELUScorporate social responsibility report at **telus.com/csr**.

 

*Concerns related to climatechange*

 

TELUS recognizes and supports the general viewof the worldwide scientific community that anthropogenic sources of carbondioxide (CO2)and other greenhouse gases (GHGs) are accelerating the rate of global climatechange. If left unchecked, the continued increase in global GHG production mayhave far-reaching implications in terms of sea level rise, drought, flooding,propagation of disease, pestilence, increased frequency of severe weatherevents and many other potential effects. These changing circumstances couldlead to increased threats to network infrastructure that may negatively impactthe ability to provide telecommunications services. It may also lead toincreased insurance premiums that directly increase the cost of deliveringservice.

 

TELUS’ current estimate for its annual North AmericanCO2 emissions is 320,000 tonnes with the finalexternally reviewed figure to be published in the Company’s 2009 corporatesocial responsibility report. The majority of emissions are indirect, relatedto the consumption of electricity in the Company’s networks and real estate.Direct emissions include those from TELUS’ vehicle fleet and generators, whileother emissions include those associated with employee air travel.

 

***Risk mitigation*****:** While the Company’s CO2 and GHG emissions are notconsidered significant on an industrial scale, TELUS recognizes itsresponsibility to identify and act upon efficiency opportunities in itsbusiness that will minimize its contribution to climate change. Measures beingimplemented to address this include: mandating that all new real estateconstruction incorporate the principles of leadership in energy efficiency anddesign (LEED); optimizing real estate space; promoting alternative work stylessuch as teleworking; adopting server virtualization technology where multiplevirtual operating systems can run on one physical server; reducing employeetravel; increasing use of conventional and enhanced tele/video conferencing;replacing older fleet vehicles with new, more fuel-efficient models; andinvesting in 

 

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renewable energy. Further detailed assessmentof climate change risks and TELUS’ strategy can be found in the TELUS corporatesocial responsibility report at telus.com/csr.

 

### **10.9 Litigationand legal matters**

### ** **

*Investigations, claims and lawsuits*

 

Giventhe size of TELUS, investigations, claims and lawsuits seeking damages andother relief are regularly threatened or pending against the Company and itssubsidiaries. TELUS cannot predict with any certainty the outcome of suchactions and as such, there can be no assurance that results will not benegatively impacted.

 

*TELUS Corporation Pension Plan and TELUS EdmontonPension Plan*

 

The Company has disclosed in prior years theexistence of two lawsuits, commenced in Alberta in 2001 and 2002 respectively,by plaintiffs alleging to be either members or business agents of theTelecommunications Workers Union (TWU), and suing allegedly on behalf of allcurrent or future beneficiaries of the TELUS Corporation Pension Plan and the TELUSEdmonton Pension Plan, respectively. The TELUS Corporation Pension Plan relatedaction claimed damages in the sum of $445 million, while the TELUSEdmonton Pension Plan related action claimed damages in the sum of$15.5 million. After a number of years of inactivity, both lawsuits werediscontinued by the respective plaintiffs on a without costs basis as at November 16,2009. However, there is no guarantee that these or other plaintiffs would notattempt to commence similar actions or assert similar or related allegationsagainst the Company in the future.

 

*Certifiedclass action*

 

Aclass action was brought in 2004 under class action legislation in Saskatchewanagainst a number of past and present wireless service providers including theCompany. The claim alleges that each of the carrier defendants is in breach ofcontract and has violated competition, trade practices and consumer protectionlegislation across Canada in connection with the collection of system accessfees, and seeks to recover direct and punitive damages in an unspecifiedamount. Similar proceedings were commenced in other provinces. A national classwas certified on September 17, 2007 by the Saskatchewan Court of Queen’sBench. On February 20, 2008, the same court removed from the class allcustomers of the Company who are bound by an arbitration clause, applying two recentdecisions of the Supreme Court of Canada. The Company has applied for leave to appeal the 2007 certificationdecision. Certification is a procedural step. If the Company is unsuccessful onappeal of the certification decision, the plaintiff would still be required toprove the merits of the claim.

 

A new class action making substantially thesame allegations was brought in 2009 in Saskatchewan. The Company believes thiswas done in an attempt to take advantage of the expanded scope in class actionlegislation since 2004. The new class action has been stayed by the court uponan application by the defendants to dismiss it for abuse of process,conditional on possible future changes in circumstance.

 

***Risk mitigation:*******The Company believes that it has good defences to these actions. Shouldthe ultimate resolution of these actions differ from management’s assessmentsand assumptions, a material adjustment to the Company’s financial position andthe results of its operations could result.

 

*Uncertifiedclass actions*

 

TELUSand certain subsidiaries are defendants in a number of uncertified classactions. The Company has observed an increased willingness on the part ofclaimants to launch class actions whereby a representative plaintiff seeks topursue a legal claim on behalf of a large group of persons. A successful classaction lawsuit, by its nature, could result in a sizable damage award thatnegatively affects a defendant’s results.

 

Uncertifiedclass actions against the Company include a 2008 class action brought inSaskatchewan alleging that, among other things, Canadian telecommunicationscarriers including the Company have failed to provide proper notice of 911charges to the public and have been deceitfully passing it off as governmentcharges, as well as a 2008 class action brought in Ontario alleging that theCompany has misrepresented its practice of “rounding up” wireless airtime tothe nearest minute and charging for the full minute. The plaintiffs in theseactions seek direct and punitive damages and other relief. The Company isassessing the merits of these claims, but the potential for liability andmagnitude of potential loss cannot be readily determined at this time.

 

***Risk mitigation:*** The Company is vigorously defending certification of these actions.Certification is a procedural step that determines whether a particular lawsuitmay be prosecuted by a representative plaintiff on behalf of a class ofindividuals. Certification of a class action does not determine the merits ofthe claim, so that if the Company were unsuccessful in defeating certification,the plaintiffs would still be required to prove the merits of their claims. Inaddition, the Company believes that it has put in place reasonable policies,processes and awareness designed to enable compliance with legal obligationsand reduce exposure to legal claims.

 

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*Civil liability in the secondary market*

 

Likeother Canadian public companies, TELUS is subject to civil liability formisrepresentations in written disclosure and oral statements, and liability forfraud and market manipulation. Legislation creating liability was firstintroduced in Ontario in 2005. Since then, other provinces and territories haveadopted similar legislation.

 

Thelegislation creates a right of action for damages against TELUS, its directorsand certain of its officers in the event that TELUS or a person with actual,implied or apparent authority to act or speak on behalf of TELUS releases adocument or makes a public oral statement that contains a misrepresentation orTELUS fails to make timely disclosure of a material change.

 

Thelegislation permits action to be taken by any person or company that acquiresor disposes of TELUS securities in the secondary market during the period oftime that the misrepresentation remains uncorrected in the public or, in thecase of an omission, until such time as the material change has been disclosed.It is not necessary for the person or company to establish that they relied onthe misrepresentation in making the acquisition or disposition.

 

***Risk mitigation:*****When the legislation was first introduced, TELUS conducted a review ofits disclosure practices and procedures and the extent to which they aredocumented. As part of that review, TELUS consulted external advisors. Thisreview indicated that TELUS has well-documented and fulsome processes in place,including a corporate disclosure policy that restricts spokespersons tospecifically designated senior management, provides a protocol for dealing withanalysts and oral presentations, outlines the communication approach to issues,and has a disclosure committee to review and determine disclosure of materialinformation. TELUS monitors legal developments and re-evaluates annually itsdisclosure practices and procedures, including in 2009, and believes that theycontinue to be appropriate and prudent and that its risk exposure is reasonableand has not changed significantly over the past 12 months. However, there canbe no assurance that TELUS’ processes will be followed by all team members atall times.

 

*Legaland regulatory compliance*

 

TELUSrelies on its employees, officers, Board of Directors, key suppliers andpartners to demonstrate reasonable legal and ethical standards. Situationsmight occur where individuals do not adhere to TELUS policies or contractualobligations, or where personal information of a TELUS customer or employee isinadvertently collected, used or disclosed in a manner that is not fullycompliant with legislation or contractual obligations, thereby exposing TELUSto the possibility of damages, sanctions and fines, or negatively affectingfinancial or operating results and TELUS’ reputation. In the case of TELUSHealth Solutions, personal information includes highly sensitive healthinformation of individuals who are TELUS customers or their end customers. In2009, the Company continued to expand its activities into the United States andother foreign jurisdictions. Its subsidiaries that operate in foreignjurisdictions are required to comply with local laws and regulations, which maydiffer substantially from Canadian laws and add to the legal and tax exposuresthe Company faces.

 

***Risk mitigation:*****Although management cannot predict outcomes with certainty, managementbelieves it has reasonable policies, controls and processes, and awareness inplace for proper compliance and that these programs are having a positiveeffect on reducing risks. Since 2002, TELUS has instituted for its employees,officers and directors an ethics policy and in 2003, established a toll-freeEthics Line for anonymous reporting by anyone who has issues or complaints.Since 2003, TELUS has had a designated compliance officer, whose role is towork across the enterprise to ensure that the business has the appropriatecontrols and measurements in place to facilitate legal and regulatorycompliance, including compliance under privacy legislation. For example, as a proactivemeasure on privacy compliance, TELUS places a control in the projectdevelopment stage of major projects by requiring a privacy impact assessment tobe performed for all major projects involving the use of customer or teammember personal information.

 

In2009, and in response to the Company’s expansion of its activities into theUnited States and other foreign jurisdictions, the Company continued to enhanceand further test and implement major billing and financial reporting systemupgrades to accommodate present and future cross-border service requirements.Also in 2009, the Company advanced a program to support TELUS’ business plansfor limited expansion and service extension into additional foreignjurisdictions. In the first phase of this program, TELUS completed itsassessment of the Company’s business processes and gating controls that striveto ensure that all foreign expansion initiatives receive appropriate review byregulatory, legal and taxation advisors. Such reviews support ongoing compliancewith domestic and foreign regulatory, legal and taxation requirements. Also inthe first phase of this program, TELUS neared completion of design proposalsfor a mode of operation, including system designs, to support compliance withforeign regulatory, legal and taxation reporting and filing requirements aswell as future business requirements.

 

Thecompliance officer reports jointly to the Audit Committee and the SeniorVice-President and Chief General Counsel. This dual reporting provides direct line-of-sightreporting to the Audit Committee to address identified risks. In addition,legal counsels qualified in the relevant foreign jurisdictions are engaged byTELUS’ subsidiaries to provide legal advice as appropriate.

 

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*Defectsin software and failures in data and transaction processing*

 

TELUSHealth Solutions and TELUS Finance Solutions provide to their customers certainapplications and managed services that involve the processing and storing of data,including highly sensitive personal health data, and the transfer of largefunds. Software defects or failures in data or transaction processing couldlead to substantial damage claims. For instance, a defect in a TELUS HealthSolutions application could lead to personal injury, while a failure intransaction processing could result in the transfer of funds to the wrongrecipient.

 

***Risk Mitigation:*** Management believes that it has put in place reasonable policies,controls, processes (such as quality assurance programs in software developmentprocedures), contractual arrangements (such as disclaimers, indemnities andlimitations of liability), as well as insurance coverage to reduce exposure tolegal claims.

 

*Intellectualproperty and proprietary rights*

 

Technologyevolution also brings additional legal risks and uncertainties. Theintellectual property and proprietary rights of owners and developers ofhardware, software, business processes and other technologies may be protectedunder statute, such as patent, copyright and industrial design legislation, orunder common law, such as trade secrets. With the growth and development oftechnology-based industries, the value of these intellectual property andproprietary rights has increased. Significant damages may be awarded inintellectual property infringement claims advanced by rights holders. Inaddition, defendants may incur significant costs to defend such claims and thatpossibility may prompt defendants to settle claims more readily, in part to mitigatethose costs. Both of these factors may incent intellectual property rightsholders to more aggressively pursue infringement claims.

 

Giventhe vast array of technologies and systems used by TELUS and its affiliates todeliver their products and services, and with the rapid change and complexityof such technologies, disputes over intellectual property and proprietaryrights can reasonably be expected to increase. As a user of technology, TELUSand its affiliates receive from time to time communications, ranging fromsolicitations to demands and legal actions, from third parties claimingownership rights over intellectual property used by TELUS and its affiliatesand asking them to pay a settlement or licensing fees for the continued use ofsuch intellectual property. There can be no assurance that TELUS and itsaffiliates will not be faced with significant claims based on the allegedinfringement of intellectual property rights, whether such claims are based ona legitimate dispute over the validity of the intellectual property rights ortheir infringement, or whether such claims are advanced for the primary purposeof extracting a settlement. TELUS and its affiliates may incur significantcosts in defending infringement claims, and may suffer significant damages andlose the right to use technologies that are essential to their operationsshould any infringement claim prove successful. As a developer of technology,TELUS Health Solutions and TELUS Finance Solutions depend on their ability toprotect the proprietary aspects of their technology. The failure to do soadequately could materially affect their business. However, policingunauthorized use of TELUS’ intellectual property may be difficult and costly.

 

***Risk mitigation:*** While TELUS and its affiliates incorporate many technologies into theirproducts and services, other than TELUS Health Solutions and TELUS FinanceSolutions, they are not primarily in the business of creating or inventingtechnology. In acquiring products and services from suppliers, it is thepractice of TELUS and its affiliates to seek and obtain contractual protectionsconsistent with industry practices, to help mitigate the risks of intellectualproperty infringements. It is the practice of TELUS Health Solutions and TELUSFinance Solutions to vigorously protect their intellectual property rightsthrough litigation and other means.

 

### **10.10Human-caused and natural threats**

### ** **

*Concernsabout natural disasters and intentional threats to TELUS’ infrastructure, andits Canadian and international business operations*

 

TELUSis a key provider of critical communications infrastructure in Canada and hascertain supporting business functions located in several other countries(including the Philippines). The Company’s network, information technology,physical assets, team members and business results may be materially impactedby exogenous threats, including:

 

·      Natural disasters, seismic and severe weather-related events such asice, snow and wind storms, flooding, wildfires, typhoons/hurricanes, tornadoesand tsunamis

 

·      Intentional threats such as sabotage, terrorism, labour disputes, andpolitical and civil unrest

 

·      Dependence on the provision of service to the Company by otherinfrastructure providers (e.g. power)

 

·      Public health threats such as pandemics.

 

TheCompany recognizes that global climate change may exacerbate certain of thesethreats, including the frequency and severity of weather-related events.

 

***Risk mitigation:*** TELUS has an extensive ongoing enterprise-wide business continuity program(BCP) with resources dedicated to design, exercise, maintain, execute andmonitor business continuity/disaster recovery policies, plans and 

 

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processesthat address a range of scenarios. This approach is focused on supportingTELUS’ continued ability to serve customers, protect corporate assets, andstrive to ensure employee protection and safety by instituting resiliencyplanning in the Company’s day-to-day business operations. In regard to internationallysituated business support and outsourcing functions, TELUS has acquired and/orannounced expansion of these activities in additional countries in differentgeographic regions to mitigate the risk of locating these functions in onecountry. The TELUS BCP program was extended to include the Philippines, India,Nevada, U.S.A., and three Central American and Caribbean countries.

 

TELUShas had a pandemic plan in place for more than five years. In 2009, pandemicplans were audited, exercised and updated to address the threat and toaccommodate key lessons from the H1N1 influenza. In addition, TELUS continuesto sustain ongoing risk mitigations in regards to seismic upgrades, fireprotection, flood prevention and power provisioning. Although TELUS has businesscontinuity planning processes, there can be no assurance that specific eventsor a combination of events will not materially impact TELUS operations andresults.

 

*Security— Electronic attack*

 

Electronicattacks are intentional acts to gain unauthorized access to TELUS informationor to prevent legitimate users from gaining access. Such attacks may use arange of techniques, from social engineering (non-technical intrusion relyingheavily on human interaction and trickery to break normal security procedures)to the use of sophisticated software/hardware.

 

***Risk mitigation:*****Using a layered security approach, TELUS has implemented a number ofproactive, reactive and containment processes and systems to safeguard its ITinfrastructure, information repositories and information distribution. Securitypolicies and procedures are in place to govern the duties of those responsiblefor information confidentiality and integrity. Intrusion detection systems,access controls and incident response procedures are in place to providecontinuous monitoring of TELUS’ IT infrastructure.

 

*Security— Vandalism and theft*

 

TELUShas a number of publicly situated physical assets that are subject to vandalismand/or theft, including public payphones, copper cable, and network andtelephone switch centres.

 

***Risk mitigation:*** The Company has implemented an array of physical and electronicbarriers, controls and monitoring systems to protect its assets, consideringsuch factors as asset importance, exposure risks and potential costs incurredshould a particular asset be damaged or stolen. As an additional level of riskmanagement, TELUS has a corporate security group that continually investigatesand evaluates the risks and, in co-operation with law enforcement and otherexternal agencies, adjusts its protection to meet changing risks.

 

Although TELUS has IT and network securityplanning processes and thorough physical asset security planning processes,there can be no assurance that specific events will not materially impact TELUSoperations and results.

 

### **10.11 Economicgrowth and fluctuations**

### ** **

The Canadian economy moved into positiveeconomic growth territory during the third quarter of 2009, ending therecession that began in the fourth quarter of 2008. Unemployment levels rose toapproximately 8.6% in the fourth quarter of 2009, up from 6.4% one yearearlier, and it is expected that improvement in unemployment levels will lagthe economic recovery. The Bank of Canada’s January 2010 Monetary Reportstated the economy is expected to grow by 2.9% in 2010 and 3.5% in 2011, aftercontracting by an estimated 2.5% in 2009. Persistent strength in the Canadiandollar and a low level of absolute demand in the U.S. continue to act assignificant drags on the Canadian economy.

 

With recent strength in the Canadian naturalresource sector and growth in Asia, growth in Alberta and British Columbia maybe slightly stronger than in Central Canada. However, significant concernsremain around unemployment rates and new household formation, the timing andimpact of reduced government spending and the impact of expected increases ininterest rates from the Bank of Canada later in 2010.

 

*Resumptionof an economic recession may adversely impact TELUS*

 

An extended economic downturn may causeresidential and business telecommunications customers to delay new servicepurchases, reduce volumes of use, discontinue use of services or seeklower-priced alternatives. Significant economic downturns or recessions couldadversely impact TELUS’ profitability, free cash flow and bad debt expense, andpotentially require the Company to record impairments to the carrying value ofits assets including, but not limited to, its intangible assets with indefinitelives (spectrum licences) and its goodwill. Impairments to the carrying valueof assets would result in a charge to earnings and a reduction in owners’equity, but would not affect cash flow.

 

***Risk mitigation:*****The Company cannot completely mitigate economic risks. TELUS continuesto focus on five key vertical markets of the public sector, healthcare,financial services, energy and telecom wholesale. The public sector, healthcareand financial services vertical markets are generally expected to be lessexposed to economic cycles. TELUS continues to pursue cost reduction and efficiencyinitiatives. The Company expects its 2010 capital expenditures to be 19% lowerthan 

 

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in 2009, which included significant investmentsin wireless and wireline broadband. If necessary, the Company could consideradditional cost and efficiency initiatives and lower capital expenditure levelsin future years.

 

*Pensionfunding*

 

Economicand capital market fluctuations could also adversely impact the funding andexpense associated with the defined benefit pension plans that TELUS sponsors.There can be no assurance that TELUS’ pension expense and funding of itsdefined benefit pension plans will not increase in the future and therebynegatively impact earnings and/or cash flow. Defined benefit funding risks mayoccur if total pension liabilities exceed the total value of the respectivetrust funds. Unfunded differences may arise from lower than expected investmentreturns, reductions in the discount rate used to value pension liabilities, andactuarial loss experiences.

 

***Risk mitigation:*****TELUS seeks to mitigate this risk through the application of policiesand procedures designed to control investment risk and ongoing monitoring ofits funding position. At December 31, 2009, aggregate defined benefit pensionplan assets represented 99% of accrued benefit obligations. Pension expense andfunding for 2010 have been largely determined by the rates of return on the plans’ assets for2009 and interest rates atyear-end 2009, with revisions to expected funding based on recent actuarialreports. As at December 31, 2009, the Company’s best estimate for definedbenefit pension plans expense in 2010 was $28 million, as compared to$18 million in 2009, and the Company’s best estimate of cash contributionsto its defined benefit pension plans in 2010 was $143 million($179 million in 2009).

 

## **11. Definitions and reconciliations**

## ** **

### **11.1 Earningsbefore interest, taxes, depreciation and amortization (EBITDA)**

### ** **

TELUS has issued guidance on and reports EBITDAbecause it is a key measure that management uses to evaluate performance ofsegments and the Company. EBITDA is also utilized in measuring compliance withdebt covenants. (See *Section 11.4 — EBITDAexcluding restructuring costs.*)

 

EBITDA is a measure commonly reported and widely usedby investors as an indicator of a company’s operating performance and abilityto incur and service debt, and as a valuation metric. Management’s definitionis a top-down calculation.

 
| **EBITDA****(management’s definition)** | ** ** | **Years  ended December 31** | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                        | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| Operating revenues                           | ** ** | **9,606**                         |       | 9,653 |   |
| Deduct:                                      | ** ** | ** **                        |       |   |   |
| Operations expense                           | ** ** | **5,925**                         |       | 5,815 |   |
| Restructuring costs                          | ** ** | **190**                           |       | 59 |   |
| ** **                                   | ** ** | **3,491**                         |       | 3,779 |   |

 

Management believes EBITDA assists investors incomparing a company’s operating performance on a consistent basis, beforetaking into account financing decisions and before depreciation andamortization expenses, which are non-cash in nature and can vary significantlydepending upon accounting methods or non-operating factors such as historicalcost.

 

EBITDA is not a calculation based on Canadian or U.S.GAAP and should not be considered an alternative to Net income in measuring theCompany’s performance, nor should it be used as an exclusive measure of cashflow, because it does not consider the impact of working capital growth,capital expenditures, debt principal reductions and other sources and uses ofcash, which are disclosed in the Consolidated statements of cash flows.Investors should carefully consider the specific items included in TELUS’ computationof EBITDA. While EBITDA has been disclosed herein to permit a more completecomparative analysis of the Company’s operating performance and debt servicingability relative to other companies, investors are cautioned that EBITDA asreported by TELUS may not be comparable in all instances to EBITDA as reportedby other companies.

 

The CICA has defined standardized EBITDA in *Improved Communications with Non-GAAP Financial Measures* tofoster comparability of non-GAAP measures between entities. Similar tomanagement’s definition of EBITDA, standardized EBITDA is an indication of anentity’s capacity to generate income from operations before taking into accountmanagement’s financing decisions and costs of consuming tangible and intangiblecapital assets, which vary according to their vintage, technological currencyand management’s estimate of their useful life. Accordingly, standardizedEBITDA comprises revenue less operating costs before interest expense, capitalasset amortization and impairment charges, and income taxes. The followingreconciles management’s definition of EBITDA with Net income and standardizedEBITDA.

 

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| **EBITDA reconciliation**                 | ** ** | **Years  ended December 31** | ** ** |
|-------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                     | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| **Net income**                            | ** ** | **1,002**                         |       | 1,131 |   |
| Financing costs                           | ** ** | **532**                           |       | 463 |   |
| Income taxes                              | ** ** | **203**                           |       | 436 |   |
| Depreciation                              | ** ** | **1,341**                         |       | 1,384 |   |
| Amortization of  intangible assets        | ** ** | **381**                           |       | 329 |   |
| **Standardized  EBITDA (CICA guideline)** | ** ** | **3,459**                         |       | 3,743 |   |
| Other expense  (income)                   | ** ** | **32**                            |       | 36 |   |
| **EBITDA (management’s definition)** | ** ** | **3,491**                         |       | 3,779 |   |

 

Management also calculates EBITDA less capitalexpenditures as a simple proxy for cash flow at a consolidated level and in itstwo reportable segments. EBITDA less capital expenditures may be used forcomparison to the reported results for other telecommunications companies overtime and is subject to the potential comparability issues of EBITDA describedabove.

 
| ** **                                 | ** ** | **Years  ended December 31** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                      | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| **EBITDA**                                 | ** ** | **3,491**                         |       | 3,779 |   |
| Capital expenditures                       | ** ** | **(2,103**                        | **)**      | (1,859 | ) |
| **EBITDA less capital expenditures**       | ** ** | **1,388**                         |       | 1,920 |   |
| Payment for AWS  spectrum licences         | ** ** | **—**                        |       | (882 | ) |
| **EBITDA less total capital expenditures** | ** ** | **1,388**                         |       | 1,038 |   |

### ** **

### **11.2 Free cashflow**

### ** **

TELUS reports free cash flow because it is a keymeasure used by management to evaluate the Company’s performance. Free cashflow excludes certain working capital changes and other sources and uses ofcash, as found in the Consolidated statements of cash flows. Free cash flow isnot a calculation based on Canadian or U.S. GAAP and should not be consideredan alternative to the Consolidated statements of cash flows. Free cash flow canbe used to gauge TELUS’ performance over time. Investors are cautioned thatfree cash flow as reported by TELUS may not be comparable in all instances to freecash flow as reported by other companies, and differs from standardized freecash flow defined by the CICA. Management’s definition of free cash flowprovides an indication of how much cash generated by operations is availableafter capital expenditures, but before acquisitions, proceeds from divestedassets and changes in certain working capital items (such as trade receivables,which can be significantly distorted by securitization changes that do notreflect operating results, and trade payables).

 

The followingshows management’s calculation of free cash flow.

 
| **Free cash flow calculation**                              | ** ** | **Years  ended December 31** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                                       | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| **EBITDA (management’s definition)**                   | ** ** | **3,491**                         |       | 3,779 |   |
| Share-based  compensation                                   | ** ** | **(8**                            | **)**      | 5 |   |
| Net employee defined  benefit plans expense (recovery)      | ** ** | **20**                            |       | (102 | ) |
| Employer  contributions to employee defined benefit plans   | ** ** | **(180**                          | **)**      | (104 | ) |
| Restructuring costs  net of cash payments                   | ** ** | **84**                            |       | 16 |   |
| Donations and securitization fees included in Other expense | ** ** | **(25**                           | **)**      | (30 | ) |
| Cash interest paid                                          | ** ** | **(567**                          | **)**      | (457 | ) |
| Cash interest  received                                     | ** ** | **54**                            |       | 3 |   |
| Income taxes  refunded (paid), and other                    | ** ** | **(266**                          | **)**      | (8 | ) |
| Capital expenditures                                        | ** ** | **(2,103**                        | **)**      | (1,859 | ) |
| Payment for AWS  spectrum licences                          | ** ** | **—**                        |       | (882 | ) |
| **Free cash flow (management’s definition)**           | ** ** | **500**                           |       | 361 |   |

 

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The CICA defined standardized free cash flow in *Improved Communications with Non-GAAP Financial Measures* tofoster comparability of non-GAAP measures between entities. Standardized freecash flow is an indication of the entity’s capacity to generate discretionarycash from operations, comprising cash flows from operating activities less netcapital expenditures and those dividends that are more representative ofinterest costs. It does not necessarily represent the cash flow in the periodavailable for management to use at its discretion, which may be affected byother sources and non-discretionary uses of cash. The following reconcilesmanagement’s definition of free cash flow with standardized free cash flow andCash provided by operating activities.

 
| **Free cash flow reconciliation**                                                                                                                       | ** ** | **Years  ended December 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **($ millions)**                                                                                                                                   | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| **Cash provided by operating activities**                                                                                                               | ** ** | **2,904**                         |       | 2,819 |   |
| Deductions:                                                                                                                                             |       |                              |       |   |   |
| Capital expenditures                                                                                                                                    | ** ** | **(2,103**                        | **)**      | (1,859 | ) |
| Payment for AWS  spectrum licences                                                                                                                      | ** ** | **—**                        |       | (882 | ) |
| Stipulated dividends                                                                                                                                    |       | n/a                               |       | n/a |   |
| Proceeds from disposition of capital assets                                                                                                             |       | —                            |       | — |   |
| **Standardized free cash flow (CICA guideline)**                                                                                                        | ** ** | **801**                           |       | 78 |   |
| Amortization of  deferred gains on sale-leaseback of buildings, amortization of deferred charges  and other, net                                        | ** ** | **(8**                            | **)**      | — |   |
| Reduction (increase)  in securitized accounts receivable                                                                                                | ** ** | **(200**                          | **)**      | 200 |   |
| Non-cash working  capital changes except changes from income tax payments (receipts), interest  payments (receipts) and securitized accounts receivable | ** ** | **(93**                           | **)**      | 83 |   |
| Proceeds from disposition of capital assets                                                                                                             |       | —                            |       | — |   |
| **Free cash flow (management’s definition)**                                                                                                       | ** ** | **500**                           |       | 361 |   |

 

n/a– not applicable

 

### **11.3 Definitionsof wireless operating indicators**

### ** **

These measures are industry metrics and are useful inassessing the operating performance of a wireless company.

 

Average revenue per subscriber unit per month (ARPU) iscalculated as Network revenue divided by the average number of subscriber unitson the network during the period and expressed as a rate per month. Data ARPUis a component of ARPU, calculated on the same basis for revenue derived fromservices such as text messaging, mobile computing, personal digital assistancedevices, Internet browser activity and pay-per-use downloads.

 

Churnper month is calculated as the number of subscriber unitsdisconnected during a given period divided by the average number of subscriberunits on the network during the period, and expressed as a rate per month. Aprepaid subscriber is disconnected when the subscriber has no usage for 90 daysfollowing expiry of the prepaid card.

 

Cost of acquisition (COA)consists of the total of handset subsidies, commissions, and advertising andpromotion expenses related to the initial subscriber acquisition during a givenperiod. As defined, COA excludes costs to retain existing subscribers(retention spend).

 

COA per gross subscriber addition iscalculated as cost of acquisition divided by gross subscriber activationsduring the period.

 

EBITDAexcluding COA is a measure of operational profitabilitynormalized for the period costs of adding new customers.

 

Retention spend to Network revenuerepresents direct costs associated with marketing and promotional efforts aimedat the retention of the existing subscriber base divided by Network revenue.

 

### **11.4 Definitionsof liquidity and capital resource measures**

### ** **

Dividend payout ratio and dividendpayout ratio of sustainable net earnings: For actual earnings, the measureis defined as the quarterly dividend declared per Common Share and Non-VotingShare, as reported on the financial statements, multiplied by four and dividedby the sum of basic earnings per share for the most recent four quarters forinterim reporting periods (divided by annual earnings per share for fiscalyears). Thetarget guideline for the annual dividend payout ratio is on a prospectivebasis, rather than on a trailing basis, and is 45 to 55% of sustainable netearnings. The dividend payout ratio on an actual basis,excluding income tax-related adjustments and ongoing impacts of a net-cashsettlement feature introduced in 2007, is considered more representative of asustainable calculation.

 

EBITDA — excluding restructuring costs isused in the calculation of Net debt to EBITDA and EBITDA interest coverage,consistent with the calculation of the Leverage Ratio and the Coverage Ratio incredit facility covenants. Restructuring costs were $190 million and$59 million, respectively, for the years ended December 31, 2009 and2008.

 

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EBITDA — excluding restructuring costs interestcoverage is defined as EBITDA excluding restructuring costsdivided by Net interest cost. Historically, this measure is substantially thesame as the Coverage Ratio covenant in TELUS’ credit facilities.

 

Interest coverage on long-term debt(earnings coverage) is calculated on a 12-month trailing basis as Net incomebefore interest expense on long-term debt and income tax expense, divided byinterest expense on long-term debt. Interest expense on long-term debt includeslosses on redemption of long-term debt. The calculation is based on totallong-term debt, including long-term debt due within one year.

 

Net debt is a non-GAAPmeasure whose nearest GAAP measure is Long-term debt, including Currentmaturities of long-term debt, as reconciled below. Net debt is one component ofa ratio used to determine compliance with debt covenants (refer to thedescription of Net debt to EBITDA below).

 
| ** **                                                                                                                                                                                                | ** ** | **As at  December 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **($ millions)**                                                                                                                                                                                     | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| Long-term debt including current portion                                                                                                                                                                  | ** ** | **6,172**                   |       | 6,352 |   |
| Debt issuance costs netted against long-term debt                                                                                                                                                         | ** ** | **30**                      |       | 28 |   |
| Derivative liability                                                                                                                                                                                      | ** ** | **721**                     |       | 778 |   |
| Accumulated other  comprehensive income amounts arising from financial instruments used to  manage interest rate and currency risks associated with U.S. dollar  denominated debt (excluding tax effects) | ** ** | **(70**                     | **)**      | (168 | ) |
| Cash and temporary  investments                                                                                                                                                                           | ** ** | **(41**                     | **)**      | (4 | ) |
| Proceeds from securitized accounts receivable                                                                                                                                                             | ** ** | **500**                     |       | 300 |   |
| **Net debt**                                                                                                                                                                                              | ** ** | **7,312**                   |       | 7,286 |   |

 

Thederivative liability in the table above relates to cross currency interest rateswaps that effectively convert principal repayments and interest obligations toCanadian dollar obligations, and is in respect of the U.S.$1,348 milliondebenture, as at December 31, 2009 (U.S.$1,925 million at December 31,2008) that matures June 1, 2011. Management believes that Net debt isa useful measure because it incorporatesthe exchange rate impact of cross currency swaps put into place that fixthe value of U.S. dollar debt and because it represents the amount of long-termdebt obligations that are not covered by available cash and temporaryinvestments.

 

Net debt to EBITDA — excluding restructuring costs isdefined as Net debt as at the end of the period divided by the 12-monthtrailing EBITDA — excluding restructuring costs. TELUS’ long-term guidelinerange for Net debt to EBITDA is from 1.5 to 2.0 times. Historically, Net debtto EBITDA — excluding restructuring costs is substantially the same as theLeverage Ratio covenant in TELUS’ credit facilities.

 

Net debt to total capitalizationprovides a measure of the proportion of debt used in the Company’s capitalstructure.

 

Net interest cost is defined asFinancing costs before gains on redemption and repayment of debt, calculated ona 12-month trailing basis. No gains on redemption and repayment of debt wererecorded in the respective periods. Losses recorded on the redemption oflong-term debt are included in net interest cost. Net interest costs for theyears ended December 31, 2009 and 2008 are equivalent to Financing costsreported for those periods.

 

Totalcapitalization — book value is calculated as Net debt plus Owners’ equity,excluding accumulated other comprehensive income or loss:

 
| ** **                                    | ** ** | **As at  December 31** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| **($ millions)**                         | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| Net debt                                      | ** ** | **7,312**                   |       | 7,286 |   |
| Owners’ equity                           | ** ** | ** **                  |       |   |   |
| Common Share and Non-Voting Share equity      | ** ** | **7,554**                   |       | 7,085 |   |
| Add back Accumulated other comprehensive loss | ** ** | **72**                      |       | 130 |   |
| Non-controlling interests                     | ** ** | **21**                      |       | 23 |   |
| **Total capitalization – book value**    | ** ** | **14,959**                  |       | 14,524 |   |

 

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