Guide to key performance indicators Communicating the measures that matter*

*connectedthinking pwc Although narrative reporting requirements remain fl uid, reporting on KPIs is here to stay. I welcome this publication as a valuable contribution to helping companies choose which KPIs to report and what information will provide investors with a real understanding of corporate performance.

Peter Elwin Head of Accounting and Valuation Research Cazenove Equities

Using management’s own measures of success really helps deepen investors’ understanding of progress and movement in business. Whether contextual, fi nancial or non-fi nancial, these data points make the trends in the business transparent, and help keep management accountable. The illustrations of good practice reporting on KPIs shown in this publication bring alive what is required in a practical and effective way.

Roger Hirst Director of European Equity Research Bear Stearns International Introduction

Narrative reporting - whether in the form of an Operating and Financial Review (OFR), Management Discussion and Analysis (MD&A), a Business Review or other management commentary - is vital to corporate transparency. Key performance indicators (KPIs), both fi nancial and non-fi nancial, are an important component of the information needed to explain a company’s progress towards its stated goals, for all of these types of narrative reporting.

But despite this fact, KPIs are not well understood. What makes a performance indicator “key”? What type of information should be provided for each indicator? And how can it best be presented to provide effective narrative business reporting?

This publication continues our series and through initiatives such as of practical guides on aspects of ValueReportingTM and the Building transparent corporate reporting. Public Trust Awards. Following on from our “Guide to As a result, we seek to illustrate forward-looking information”, what good reporting of KPIs looks we address the UK legislative like. We bring to life our suggestions requirement for KPIs, as well as regarding both the content and providing answers to the questions presentation of KPIs with a collection highlighted above. of good practice examples, drawn In responding to these questions from the UK and elsewhere. we don’t just look at the guidance Together, these practical examples currently available on the details show how some companies are of narrative reporting and KPIs. already making a virtue of reporting Instead, like the previous guides in the measures that are critical to our series, this publication draws an understanding of business on the wealth of expertise that performance and delivery against PricewaterhouseCoopers has gained their chosen strategy. through several years of research among investors and directors,

This publication contains certain text and information extracted from third party documentation and so being out of context from the original third party documents; readers should bear this in mind when looking at this publication. The copyright in such third party text and information remains owned by the third parties concerned, and PricewaterhouseCoopers expresses its sincere appreciation to these companies for having allowed it to feature their information. For a more comprehensive view on each company’s communication, please read the entire document from which the extracts have been taken. Please note that the inclusion of a company in this publication does not imply any endorsement of that company by PricewaterhouseCoopers nor any verifi cation of the accuracy of the information contained in any of the examples. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specifi c professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2007 PricewaterhouseCoopers LLP. All rights reserved. ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, other member fi rms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. As someone working on ways to improve organisational performance measures, I know how important it is to look for guidance and the best of what others have done. Those looking to improve their choice and use of key performance indicators will fi nd thought provoking ideas and valuable examples of good practice.

Professor Sir Andrew Likierman London Business School Contents

Page

Narrative reporting 2 KPIs – a critical component

Choosing performance indicators 4 How many KPIs and which ones?

Reporting key performance indicators 8 A model for effective communication

Content and presentation of key performance indicators 10 Bringing KPI reporting alive

1 Narrative reporting

KPIs – a critical component

Regulatory environment The specifi c requirements for narrative reporting have been a point of debate for several years now. However one certainty remains: the requirement to report fi nancial and non-fi nancial key performance indicators.

At a minimum, UK companies have to comply with the Business Review legislation. Extracts from this legislation related to KPIs are shown in Exhibit 1 below. Directors of all companies − except those businesses defi ned as ‘small’ by statute − are currently required by law to include a Business Review in their Directors’ Report.

Exhibit 1: Directors’ Report: Business review: extracts from current legislation 6. The review must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include: (a) analysis using fi nancial key performance indicators, and (b) where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters.* “Key performance indicators” means factors by reference to which the development, performance or position of the business of the company can be measured effectively. Note: *There is an exemption from 6(b) for medium-sized companies Source: Companies Act 2006, section 417(6)

The rest of this guide will look at existing guidance on KPI reporting, show what these requirements mean in practice and provide examples from companies’ corporate reporting, illustrating both the content and presentation styles being used in effective KPI reporting.

2 Existing KPI guidance The Accounting Standards Board In determining what information to (ASB) Reporting Statement on report about KPIs, preparers should OFRs, released in January 2006 also bear in mind the overriding (which is virtually identical to the tenets of Business Reviews. These original Reporting Standard 1 (RS1) are that a Business Review should: for OFRs), provides useful insights ƒ be a balanced and into what represents good practice comprehensive analysis in narrative reporting, including guidance for KPI disclosures. ƒ be a fair review of the business In a press release issued on 29 ƒ provide information to the extent November 2005 the Financial necessary for an understanding Reporting Council (FRC) of the development, performance commented that: or position of the business “Regardless of whether or not an These three principles remain critical OFR is a statutory requirement, to transparent corporate reporting. the FRC’s view of best practice remains unchanged. RS1 is the most up-to-date and authoritative good source of best practice guidance for companies to follow.” Using both the Reporting Statement and our own research into the information needs of the capital markets and good practices in reporting, this publication sets out what we believe are the elements that should be included for effective reporting of KPIs, as well as what we consider to be the bare minimum information that companies should include on other performance indicators.

3 Choosing performance indicators

How many KPIs and which ones?

As we engage with companies around narrative reporting and how they might best respond, the same questions keep arising around KPIs. In this section we answer each in turn.

What is “key”? The starting point for choosing which key performance indicators, whereas performance indicators are key to a an oil and gas company might opt particular company should be those for measures of exploration success, that the Board uses to manage the such as the value of new reserves. business. In our experience, many However, management should Boards tend to receive fi nancial not feel compelled to create KPIs performance indicators, even to match those reported by their though they may be communicating peers. The overriding need is for strategies such as maximising the KPIs to be relevant to that customer experience, or attracting particular company. Management and retaining the best and brightest should explain their choice in the people. context of the chosen strategies and A challenge is whether the KPIs objectives and provide suffi cient currently presented to the Board detail on measurement methods to are those that allow them to allow readers to make comparisons assess progress against stated to other companies’ choices where strategies, and when reported they want to. externally, allow readers to make As our ongoing research has a similar assessment. If not, is this expanded across industries and because the information is simply as our experience in applying our not available or because it is not knowledge to the real world of yet escalated to the Board but may corporate reporting has grown, instead be assessed by management we have tailored our underlying of individual business units? Corporate Reporting Framework to In addition, the KPIs will to a degree refl ect the elements and measures be conditioned by the industry in that are most important for a which a company operates. So, for particular industry. Examples of the example, a company in the retail measures that matter to a sample of industry might use sales per square industries are shown in Exhibit 2. foot and customer satisfaction as

4 Exhibit 2: Measures that matter across industries

Banking Petroleum Retail

Customer retention Capital expenditure Capital expenditure

Customer penetration Exploration success rate Store portfolio changes

Asset quality Refi nery utilisation Expected return on new stores

Capital adequacy Refi nery capacity Customer satisfaction

Volume of proven and probable Assets under management Same store/like-for-like sales reserves

Loan loss Reserve replacement costs Sales per square foot/metre

More information on the Corporate Reporting Framework and our supporting industry-specifi c frameworks is available at www.corporatereporting.com.

How many KPIs? Giving the reader multiple company and its strategy; it is performance measures without therefore impossible to specify how explaining which ones are key many KPIs a company should have. to managing their business does However, our experience suggests not aid transparency. As noted that between four and ten measures previously, the choice of which are likely to be key for most types ones are key is unique to each of company.

Segmental or Management need to consider In some instances it may be more group KPIs? how KPIs are collated and reported appropriate to report separately KPIs internally – whether they make sense for each business segment if the when aggregated and reported at process of aggregation renders the a group level, or would be more output meaningless. For example it usefully reported at business is clearly more informative to report segment level. a retail business segment separately rather than combining it with a personal fi nancial services segment.

5 How rigid is the Management should refl ect on understanding of the business, or choice of KPIs? whether the KPIs chosen continue to changing how an existing KPI is be relevant over time. calculated. Strategies and objectives develop The choice of KPIs is not set in stone over time, making it inappropriate to for all time: but the reason for, and continue reporting on the same KPIs nature of, changes in KPIs and how as in previous periods. Equally, more they are measured and reported information may become available should be clearly explained. to management, facilitating reporting of new KPIs that provide a deeper

Does reliability Management may sometimes be information, we believe it is more matter? concerned about the reliability of important that the limitations of the some of the information reported data and any assumptions made in on KPIs, particularly as they are providing it are clearly explained. encouraged to move beyond the Readers can then judge the more traditional fi nancial KPIs which reliability for themselves and make are usually the output of established any necessary adjustments in their systems and controls processes own analysis. Where data has been and routine audit. Whilst there specifi cally assured by independent is no specifi c narrative reporting third parties, identifying this may requirement for KPIs to be reliable, it also assist the reader. is understandable that management It is also worth noting that our want the nature of the information experience shows that readers are to be clear to the users of narrative often as interested in the trend of reports. a KPI as the absolute performance In order to address this issue being reported. and provide readers with useful

6 Other performance Management may also disclose calculation and, where available, indicators other quantifi ed measures which the corresponding amounts for the they use to monitor trends and preceding fi nancial year. factors and which can provide Examples of such measures, which further context to their narrative are typically outside management’s reporting. control, include: However, if they are not deemed ƒ Advertising industry – advertising by management to be KPIs and/or growth rates are outside the control of the entity, the level of information about each ƒ Insurance industry – life one will generally be less than for expectancy demographic data a KPI. In our view this would, at a ƒ Oil and gas industry – commodity minimum include: its defi nition and prices and supply/demand data

Model for effective The following pages set out a model for reporting on KPIs to communication of KPIs ensure users can fully understand and interpret them. The information suggested for each KPI has been shown through our research to be useful to both investors and management. At the same time, the model also largely refl ects the disclosures advocated in the ASB’s Reporting Statement for KPIs.

We believe that this model provides companies with a sound basis for moving towards good practice, as they seek to improve their communication with stakeholders in their narrative reporting.

7 Reporting key performance indicators A model for effective communication

We have developed the guidance below from the ASB’s Reporting Statement and our own extensive knowledge from nearly a decade of research into how companies communicate effectively with their investors. The resulting model provides for the comprehensive communication of KPIs.

Link to strategy The primary reason for including KPIs presented in isolation from performance indicators in corporate strategies and objectives, or vice reporting is to enable readers to versa, cannot fulfi l this requirement, assess the strategies adopted by the and will fail to provide the reader company and their potential with the level of understanding to succeed. they need.

Defi nition and Given the rapidly increasing usage In the absence of standards for the calculation (1) of industry-specifi c terminology, measurement of many industry- clear defi nitions of performance specifi c indicators, and with many indicators add greatly to the companies also applying their own reader’s understanding of exactly indicators, an explanation of the what is being measured and allows components of a metric and how it comparisons between companies is calculated is vital. within an industry.

Purpose It is important for management The rationale for why certain to explain why they believe a quantifi ed measures are considered performance indicator is relevant. In “other performance indicators” many instances this will be because should also be communicated. it measures progress towards achieving a specifi c strategic objective.

Source, assumptions To enable readers to make their performance should be explained so and limitations own assessment of the reliability of that readers can reach an informed the information, it is important to view of judgements made by identify the sources of the data used management. in calculating performance indicators An indication of the level, if any, of and any limitations on that data. independent assurance of the data Any assumptions made in measuring would also be valuable.

Future targets Some performance indicators are Either way, a forward-looking best suited to a quantifi cation of orientation is essential for readers future targets. Expectations and to assess the potential for strategies aims for other indicators may be to succeed, and to give them a better explained in commentary. basis against which to assess future performance. 8 Reconciliation to GAAP Performance indicators may be A reconciliation should therefore fi nancial or non-fi nancial. Where the be provided between accounting amounts measured are fi nancial, measures and non-GAAP measures. but are not “traditional” measures required by accounting standards, eg GAAP, it is good practice to explain any differences. Trend data (1) Measurement of performance in It is also benefi cial to explain to the isolation over a single period does reader what a particular trend in not provide the reader with very the data means – for example, an useful information. An indication of increasing measure is not always how performance has improved or a sign of strength – and to explain worsened over time is much more management’s actions to address or valuable in assessing the success of maintain such trends. management’s strategies. Segmental Often KPIs make little sense when Performance indicators that are consolidated at group level. In those relevant to a specifi c segment’s instances corporate reporting users industry or strategy should therefore want more detailed segmental be provided in addition to those with information to assess progress a more group-wide focus. towards specifi c segmental strategic aims.

Changes in KPIs Comparability over time is a key When such changes are made to the principle of good corporate reporting. KPIs being monitored, either in terms It is recognised that KPIs may evolve of the KPIs used or how they are over time as strategies change or calculated, these changes need to more information becomes available. be explained.

Benchmarking Performance benchmarked against a This provides a clear indication relevant external peer group, with an of who management believes the explanation of why these peers were company’s competitors to be, as chosen, is considered extremely well as setting the company’s own valuable to users. performance in the context of a well-defi ned peer group.

Note: (1) According to the ASB’s Reporting Statement, this information is also recommended disclosure for performance indicators other than KPIs.

9 Content and presentation of key performance indicators Bringing KPI reporting alive

In our experience, real-life examples of progressive companies’ reporting are valuable in demonstrating the breadth of content and quality of presentation that can be achieved.

The following examples were chosen on the basis of their ability to align their KPIs with specifi c group strategies and objectives and to illustrate a variety of content aspects and presentation styles.

Which aspect of the model for content does each example demonstrate? nition and

Company Defi calculation Purpose Source and assumptions Future targets Reconciliation to GAAP Trend data Segmental Changes Benchmarking

Bankinter 999 99 9

BMO Financial Group 99 999 9

The Capita Group 99 9 9

Centrica 99 99

HBOS 999

TELUS 99 99

10 We have found that no single Capita, highlights the need for clear the Group and each of its business company communicates every fi nancial KPIs as being integral to segments. desirable aspect of KPI content. strategic success. The group then Other companies, such as Centrica Furthermore each company has uses a table to set out its KPIs, with provide a summary of their KPIs, chosen to present the information in more detailed information elsewhere fi nancial and non-fi nancial, including the way most appropriate for its own in the report. defi nitions and source upfront in business, thereby demonstrating the HBOS, on the other hand, applies their annual report. array of approaches that may be taken a consistent presentational style to in embracing the spirit of transparency provide a one page summary of the in reporting performance. strategy and corresponding KPIs for

How to get the most out The accompanying illustration serves as a guide for “reading” the examples of the real-life examples found in the following pages. To the companies that allowed us to feature their work, PricewaterhouseCoopers expresses its sincere appreciation. Benchmarking

PwC’s commentary HBOS plc

Changes on the extracts presented. The HBOS, the UK mortgage and savings provider, provide a comprehensive Annual Report and Accounts 2006 Images of the front set of financial and non-financial KPIs which are clearly linked to their comments indicate strategic priorities. A consistent presentational style is applied at both cover and selected the group and segmental level. how each example

Segmental demonstrates the pages of the document Our Key Performance Strategy Indicators Our Key Performance Our strategy is to be the UK’s leading Our Key Performance Indicators help us to insurance and investment group using our measure our progress against each element multi-channel, multi-brand operating model of our strategy. and accessing the signifi cant HBOS customer Strategy Indicators base to grow profi table market share. Our strategy has% of Group Mortgage General Insurance sales Our strategy has fi ve key elements to Our Key Performance Indicators help us to Growing market share of customers who have our (Gross Written Premiums £m) personal lines insurance Household Insurance create value. These are described in more measure our progress against each element characteristics of good There are signifi cant opportunities through the Group’s Retail network, throughfi ve intermediaries key and our jointelements venture detail in the Chief Executive’s Strategy of our strategy. from which the extracts with esure to grow market share in Household, Motor and 2006 13% 2006 £1,894m Overview on page 9. Repayment Insurance. In particular, we will use HBOS’s market leading positionto in mortgagescreate to grow market value share 2005 14% 2005 £1,977m of Household Insurance. KPIs discussed UK market shares Growing market share of Market share of Investment Investment Business sales Growing the UK franchise investment productsGrowing the UK franchise Sales (APE) and AUM (APE £m) The power of our brands, distribution and customer base 21% Mortgages As part of the UK’s largest liquid savings provider, our Sales demonstrates the potential we have for further market share 16% Savings Investment BusinessTargeted is well placed international to benefi t from growthhigher 2006 9% 13% Banking savings ratios, supporting demographics and increasing 2005 10% 2006 £1,817m directly linked to growth in the UK. Our goal, over time, is to grow the market recognition by individuals that they will need to save for their Assets under Management 9% Credit Cards Cost leadership 2005 £1,473m shares of our main products to 15%-20%. retirement themselves. 2006 5% 9% Personal Loans 5% practice KPI reporting Colleague development 2005 7% Household Insurance Driving customerCapital satisfaction discipline Telephony answer rates (%) Intermediary customer service 5% Business Banking are taken. The extracts (Household Insurance claims) Financial Adviser Award strategic priorities. Service is central to our growth ambitions, driving both new 5% Investment 15%-20% sales and improved retention. We are investing in technology 3% Motor Insurance Target to maximise effi ciency and to further enhance service 2006 97% 2006 standards. For example in General Insurance, responding 3 Star quickly when customers call to register a claim on their 2005 97% 2005 Targeted international growth Underlying profi t before tax (excluding Group Items) household insurance allows us to provide our customers 2 Star with peace of mind. Telephony answer rate is defi ned as calls answered as a % of calls answered Taking the strategy that has proven to be successful in the UK plus calls abandoned after 30 seconds. to other markets that fi t with our growth model. International Cost leadership Underlying ‘Jaws’ measure We seek to maximise effi ciency in our new business processing, 14% 12% existing business administration, claims handling and 2006 6% customer service, with investment in supporting technology and process improvements. may also have been 2006 2005 Jaws is defi ned as the difference between the rate of growth in underlying net operating income and underlying operating expenses. Cost leadership Cost:income ratio Cost leadership provides the strategic fl exibility to deliver further £581m revenue growth ahead of the competition. Underlying profi t 2006 40.9% Trend data before tax up 19% taken from pages not 2005 42.2% Colleague development Leadership index Our ability to execute our strategy relies very clearly on the capability, motivation and performance of our colleagues. To 2006 76% achieve this, we aim to have the best leadership teams in the industry and will offer all our colleagues the necessary training 2005 72% and personal development they need to do their jobs well. Our leadership index is a composite index showing the percentage of colleagues who agreed with 12 statements about good leadership in shown as separate HBOS in our annual colleague opinion survey, conducted by MORI. Capital discipline Tier 1 ratio 47 Capital is treated as a scarce resource and we ensure that capital is allocated to the parts of the business that will provide sustainable returns to shareholders. 2006 8.1%

2005 8.1% images 8% Target Our Key Performance

Strategy Indicators Reconciliation 7 Our strategy has fi ve key elements to Our Key Performance Indicators help us to to GAAP Side bar indicates create value. These are described in more measure our progress against each element detail in the Chief Executive’s Strategy of our strategy. Overview on page 9. which aspect of

Extracts selected Growing the UK franchise UK market shares The power of our brands, distribution and customer base 21% Mortgages recommended KPI demonstrates the potential we have for further market share 16% Savings to illustrate features growth in the UK. Our goal, over time, is to grow the market 13% Banking shares of our main products to 15%-20%. 9% Credit Cards 9% Personal Loans content is illustrated by 7% Household Insurance Future targets of content and 5% Business Banking 5% Investment 15%-20% Target the example presentation style, 3% Motor Insurance

Our Key Performance supported by specifi c Strategy Indicators Clearly sets out strategy and Our strategy is to be the UK’s leading Our Key Performance Indicators help us to insurance and investment group using our measure our progress against each element multi-channel, multi-brand operating model of our strategy. KPIs at the beginning of each and accessing the signifi cant HBOS customer base to grow profi table market share. Growing market share of % of Group Mortgage General Insurance sales section. Segments are clearly customers who have our (Gross Written Premiums £m) personal lines insurance Household Insurance commentary drawing There are signifi cant opportunities through the Group’s assumptions/limitations Retail network, through intermediaries and our joint venture with esure to grow market share in Household, Motor and 2006 13% 2006 £1,894m identified by different colours. Repayment Insurance. In particular, we will use HBOS’s market leading position in mortgages to grow market share 2005 14% 2005 £1,977m of Household Insurance. Growing market share of Market share of Investment Investment Business sales investment products Sales (APE) and AUM (APE £m) Source and As part of the UK’s largest liquid savings provider, our Sales out these features Investment Business is well placed to benefi t from higher 2006 9% savings ratios, supporting demographics and increasing 2005 10% 2006 £1,817m recognition by individuals that they will need to save for their Assets under Management 2005 £1,473m retirement themselves. 2006 5% 2005 5%

Telephony answer rates (%) Intermediary customer service Driving customer satisfaction (Household Insurance claims) Service is central to our growth ambitions, driving both new Financial Adviser Award sales and improved retention. We are investing in technology to maximise effi ciency and to further enhance service 2006 97% 2006 standards. For example in General Insurance, responding 3 Star quickly when customers call to register a claim on their 2005 97% 2005 household insurance allows us to provide our customers 2 Star with peace of mind. Telephony answer rate is defi ned as calls answered as a % of calls answered plus calls abandoned after 30 seconds. Cost leadership Underlying ‘Jaws’ measure We seek to maximise effi ciency in our new business processing, existing business administration, claims handling and Our Key Performance 2006 6% customer service, with investment in supporting technology and process improvements.

Jaws is defi ned as the difference between the rate of growth in underlying net operating income and underlying operating expenses. Strategy Indicators £581m Underlying profi t before tax up 19% Our strategy is to be the UK’s leading Our Key Performance Indicators help us to insurance and investment group using our measure our progress against each element multi-channel, multi-brand operating model of our strategy. and accessing the signifi cant HBOS customer Purpose base to grow profi table market share.

% of Group Mortgage General Insurance sales Growing market share of customers who have our (Gross Written Premiums £m) 47 personal lines insurance Household Insurance There are signifi cant opportunities through the Group’s Retail network, through intermediaries and our joint venture with esure to grow market share in Household, Motor and 2006 13% 2006 £1,894m Repayment Insurance. In particular, we will use HBOS’s Trend date is given for each KPI market leading position in mortgages to grow market share 2005 14% 2005 £1,977m of Household Insurance. Definition and calculation Company name and Source: HBOS plc Annual Report and Accounts 2006 source of information 19

11 Benchmarking

Bankinter

Changes Spanish fi nancial services group Bankinter provides detailed information on 2006 a set of KPIs based around each of their strategic pillars, including the pillar 365 days thinking about quality of service quality. Not only do they provide segmental data and benchmark 3,981originators of ideas information on customer satisfaction: the Group’s measure of service quality – they also suppport the disclosures by explaining the process and statistical Business Report ANUAL 16-47 ING.qxd 4/5/07 08:20 Página 19 validity of the customer surveys. Bankinter 2006 Business Report 01. Quality 19 ers

Segmental Our value proposal, based on service quality, innovation and multi-channel banking,

The measurement of this perception obtained from customers' opinions is checked against the different product indicators, the market research and the internal which is endorsed on a daily basis by the thousands of customers who choose to bank e they satisfaction survey, and this enables us to carry out actions for continuing y the improvement focused on customer relations and so to develop product solutions provide and enhanced procedures. s but also they Once again we reiterate our thanks to all our customers for the care, time with us, continues to be relevant. Rather than observing any signs of weakness in it, and effort they take to respond to our surveys. Their opinions enable us to develop the aspects and adjust the services that give them most satisfaction. our perception is that, if anything, it should be reinforced.

2005 2006 Overall satisfaction by network 2006 (ISN score out of 100) Branch network 77.83 77.55 83 .2 Telephone network 75.26 73.49 81 Internet network 77.85 77.42 That is why - because our value proposal continues to be valid in attracting and Virtual branches 81.26 79.27 79 Agents network 79.8 78.80 ationals 77 75 retaining customers and providing them with quality service - we at Bankinter 73 2004 2005 2006

Branch network Telephone network Internet network Virtual branch network Agents network 2006 continue to think that our future should be based on organic growth and in order to 76.90

77.55 2005 2006 Overall satisfaction by service platform 2006 (ISN score out of 100) 77.19 Telephone Banking 79.20 79.39 87 78.67 Bankinter Private individuals 80.55 80.33 85 achieve this we must continue to strengthen our proposal, endeavouring to 83.21 Broker Bankinter 79.09 79.23 83 the Bankinter Businesses 79.97 79.88 nthly. Cell phones 86.50 86.69 81 e ISN score more than 79 differentiate it clearly from that presented by the other banks. 77

75 2004 2005 2006

Telephone banking Broker Bankinter Businesses Cell phones

Trend data Bankinter Private Individuals This recipe for success, which has led us to where we are today, remains, in our opinion, a perfectly valid strategy with which to face the future and we are sure it will continue to give us excellent results. Service quality is clearly identifi ed as a core strategic priority. Quality in serving individual customers

to GAAP Using independent consultants we conduct market research on a quarterly basis Reconciliation that enables us to ascertain how satisfied financial service users (private 01 Quality individuals) are with the service they receive from their banks or savings banks. Provides headline +6.4 ISN points higher

Future targets disclosures on the KPI used than the market to measure progress. average

Customer satisfaction above market average; the result Bankinter vs Market. Private individuals of an intelligent effort.

80

78

Quality is Bankinter's most important competitive 76 Source and

advantage. In December 2006, net satisfaction with the 74 6.35

assumptions/limitations Bank continued to be 6.4 points above the market average; 72 a truly privileged position in the world of banking for private 70 individuals. 68 2004 2005 2006

Bankinter Market

2005 2006 Purpose Bankinter 77.76 76.81 Information on the scope Market 71.31 70.46 14 aspects of service surveyed; the most of the market research is Gap 6.45 6.35 highly rated would be: Treatment and attention provided, including frequency Training and professionalism and sampling error. Geographic scope: Nationwide, for towns of over Knowledge of customers' requirements 50,000 inhabitants. Information on conditions and costs Group: General public over 18 years of age, holding Advice demand deposits or savings accounts at a financial Employee’s attitude to incidents institution. Transaction speed Sample: 1,400 interviews per quarter. Clarity of statements Survey methodology: Computer-assisted telephone inter- Availability of human and technical Source: Bankinter Annual Report 2006 view. resources Sampling error: ±2.7%. nition and calculation

Defi 12 76.9 77.6 77.2 78.7 83.2

Private individuals Private banking SMEs Corporate banking Foreign nationals

ISN is measured on a scale of 0 through 100 2005 2006 and is interpreted as follows: Private individuals 78.11 76.90 Private banking 77.27 77.55 > 85 Very satisfied/excellent. SMEs 77.53 77.19 75-85 High level of satisfaction. Corporate banking 79.06 78.67 60-75 Needs improvement. Foreign Nationals 83.21

< 60 Needs action. (*) Due to the characteristics of its customers, the Personal Finance segment is not surveyed monthly. Instead an annual survey is conducted and the ISN score for 2006 was 82.4 points, which was 1.5 points more than in 2005.

Trend data on customer satisfaction The measurement of this perception obtained from customers' opinions is checked statistics is clearly presented and against the different product indicators, the market research and the internal segmented in several ways, as shown satisfaction survey, and this enables us to carry out actions for continuing improvement focused on customer relations and so to develop product solutions here by customer type, distribution and enhanced procedures. channel, and service platform.

Once again we reiterate our thanks to all our customers for the care, time and effort they take to respond to our surveys. Their opinions enable us to develop the aspects and adjust the services that give them most satisfaction.

2005 2006 Overall satisfaction by network 2006 (ISN score out of 100) Branch network 77.83 77.55 83 Telephone network 75.26 73.49 81 Internet network 77.85 77.42 Virtual branches 81.26 79.27 79 Agents network 79.8 78.80 77

75

73 2004 2005 2006

Branch network Telephone network Internet network Virtual branch network Agents network

2005 2006 Overall satisfaction by service platform 2006 (ISN score out of 100) Telephone Banking 79.20 79.39 87 Bankinter Private individuals 80.55 80.33 85 Broker Bankinter 79.09 79.23 Bankinter Businesses 79.97 79.88 83 Cell phones 86.50 86.69 81

79

77

75 2004 2005 2006

Telephone banking Bankinter Private Broker Bankinter Businesses Cell phones Individuals 13 Benchmarking

BMO Financial Group

Changes The set of KPIs provided by the Canadian fi nancial services group BMO are clearly linked to their strategic priorities. Not only does the Group provide target and trend data, but they also set out performance compared to two well-defi ned peer groups. Some of the KPIs complement fi nancial statement data, and OUR reconciliations of such information to GAAP is provided.

and Analysis

nce and Condition at a Glance

Our Performance Peer Group Comparison

Total Shareholder R Five-Year TSR (%) • BMO’s average annual fiv • BMO’s average annual five-year TSR of 19.1% was 13.8% a year ago and w 19.1 below the Canadian peer group average of 19.6% the financial services ind but substantially above the North American peer 13.8 MD&A • BMO’s one-year TSR of group average of 14.4%. of the Canadian peer gr • Our strong one-year TSR narrowed the gap to TSR and marks returns o the Canadian peer group average and improved five years. our advantage over the North American peer group average. 2005 2006 Segmental Further details are provided on page 3

EPS Growth (%) At BMO, we consider disclosure • BMO’s EPS growth of 11.2% in 2006 improved but was below a Canadian peer group average of 59.2% that was elevated by the impact of litigation provisions in 2005 and a significant gain on the sale of a business in 2006. These same factors contributed to a strong 11.2 5.2 North American peer group average of 21.0%.

2005 2006

ROE (%) to be an essential component ROE of 19.2% in 2006 was below the Canadian 19.2 • 18.8 peer group average of 23.2% but above the North American peer group average of 17.5%. BMO Financial Group 189th Annual Report 2006 • BMO has earned ROE of more than 13% in each of the past 17 years, the only major North American bank with this record of earnings consistency. 2005 2006 Recognise the Net Economic Profit (NEP) Growth NEP Growth (%) of effective corporate governance. • NEP, a measure of added economic value, grew 10.3% to a • NEP growth of 10.3% in 2006 was below the Canadian record $1,230 million. peer group average of 92.1% and the North American • Results in Private Client Group and Corporate Services drove peer group average of 37.7%. The averages were the improvement, as the other operating groups were allocated favourably affected by the 2005 litigation provisions and the 2006 gain on sale of a business. higher capital in 2006. 91.8 58.4 10.3 importance of good (15.2) 0.1

Canadian peer group NEP growth for 2002 (–104%) and Further details are provided on page 33. 2002 2003 2004 2005 2006 2003 (3,112%) is not to scale.

(%) We place a high value on Revenue Growth Revenue Growth • Revenue* increased $154 million or 1.5% in 2006, but increased • Revenue growth of 1.5% in 2006 was below disclosure. 5.9% excluding the effects of the sale of Harrisdirect and the Canadian peer group average of 7.2% and the the weaker U.S. dollar. On this basis, revenue in each of our strong North American peer group average of operating groups improved, with most of this improvement 3.7 8.4%. Excluding the sale of Harrisdirect and 4.7 5.0 reflected in P&C Canada and Private Client Group. 1.5 the impact of the weaker U.S. dollar, BMO’s revenue growth was 5.9%. (0.1) Further details are provided on page 36. 2002 2003 2004 2005 2006 stakeholders of the organization (%) Expense-to-Revenue Ratio (Productivity Ratio) 69.0 Expense-to-Revenue Ratio • The productivity ratio improved 77 basis points to 62.8% in • BMO’s productivity ratio of 62.8% was worse than 2006. The cash productivity ratio improved 25 basis points to the Canadian peer group average of 60.8% and the 66.5 65.0 63.6 62.4%, following 538 basis points of total improvement in 62.8 North American peer group average of 57.3%. the three previous years. We had targeted an improvement of • BMO is targeting to improve the cash productivity 100 to 150 basis points in the cash productivity ratio in 2006. ratio by 100–150 bps in 2007.

Further details are provided on page 40. 2002 2003 2004 2005 2006

BMO Financial Group See page 26 for further comments on peer being able to understand our *Revenue and income taxes are reported in the MD&A on a taxable equivalent basis. See pages 34, 36 and 41. Canadian peer group average group comparisons. North American peer group average Certain prior year data has been restated. See Note 1 on page 26.

24 • BMO Financial Group 189th Annual Report 2006 Trend data operations, goals and values, as well as our financial performance.

Clear link between objectives, Our Financial Targets KPI targets and results. BMO’s overall governing objective and annual targets for selected important financial performance measures are set out in the adjacent chart. Although our success in achieving our governing Our Governing Objective

to GAAP objective of delivering first-quartile total shareholder return is To maximize the total return to BMO shareholders and generate, over Reconciliation dependent on the relative performance of our peer group, we time, first-quartile total shareholder return relative to our Canadian and North American peer groups. believe that we will deliver first-quartile total shareholder return by meeting our medium-term financial objectives of increasing EPS by an average of at least 10% per year over time and by earning an average annual ROE of 18% to 20% over time (previously 18% Our Medium-Term Financial Objectives to 19%). Annual financial targets represent checkpoints in the To increase EPS by a minimum of 10% per year over time; to earn average achievement of our medium-term objectives, but they also reflect annual ROE of between 18% and 20% over time; and to maintain a strong economic conditions prevailing at the time and may be influenced regulatory capital position, consistent with our peers. by results in base years used for comparison purposes. As such, in any particular year our annual financial targets may be higher Future targets or lower than our medium-term financial objectives.

2006 Canadian Bank Scorecard 2006 Financial 2006 Financial Target 2007 Financial Reported basis, including one-time/special items (%) Targets Performance Met Targets

BMO RBC CIBC Scotia TD National • ROE of 17% • ROE of 19.2% • ROE of 18% to 19% to 20% Average annual total shareholder return 19.1 19.8 16.2 21.2 16.1 24.1 • Specific provision • Specific provision • Specific provision

Source and (five-year) for credit losses for credit losses for credit losses of $400 million of $211 million of $400 million EPS growth 39.7 1715 12.7 98.1 4.7 or less or less

assumptions/limitations 11.2

Return on equity 19.2 23.5 27.9 22.1 25.5 20.1

Net economic profit 2 10.3 79.8 340.6 18.1 23.3 (0.5) Seven KPIs are growth benchmarked against a defi ned Revenue growth1,2 1.5 10.0 (8.7) 8.6 23.9 5.0 peer group (see next page

Purpose for defi nition) with narrative Cash productivity ratio1,2 62.4 62.3 64.4 55.0 54.3 64.0 explanation also provided. Table notes those measures PCL as a % of that are non-GAAP. average net loans 0.09 0.16 0.33 0.10 0.21 0.14 and acceptances

1. On a taxable equivalent basis. 2. Non-GAAP measure. See page 34.

Source: BMO Financial Group 189th Annual Report 2006 nition and calculation

Defi 14 Net Economic Profit (NEP) Growth NEP Growth (%) • NEP, a measure of added economic value, grew 10.3% to a • NEP growth of 10.3% in 2006 was below the Canadian record $1,230 million. peer group average of 92.1% and the North American • Results in Private Client Group and Corporate Services drove peer group average of 37.7%. The averages were the improvement, as the other operating groups were allocated favourably affected by the 2005 litigation provisions and the 2006 gain on sale of a business. higher capital in 2006. 91.8 58.4 10.3 (15.2) 0.1

Canadian peer group NEP growth for 2002 (–104%) and Further details are provided on page 33. 2002 2003 2004 2005 2006 2003 (3,112%) is not to scale.

Net economic profit (NEP) Management’s Discussion and Analysis Management’s Discussion and Analysis represents cash net income Financial Performance and Condition at a Glance

available to common share- Our Performance Peer Group Comparison Our Performance Peer Group Comparison

holders, less a charge for Total Shareholder Return (TSR) Five-Year TSR (%) Credit Losses Provision for Credit Losses as a % of • BMO’s average annual five-year TSR of 19.1% improved from • BMO’s average annual five-year TSR of 19.1% was • Provisions for credit losses were low and stable, at $176 million. Average Net Loans and Acceptances 13.8% a year ago and was better than the average return from 18.9 19.1 below the Canadian peer group average of 19.6% Specific provisions were $211 million and there was a $35 million • BMO’s provision for credit losses of 0.09% of average MD&A the financial services industry and the broader market indices. but substantially above the North American peer reduction in the general allowance, both comparable to net loans and acceptances was better than the 13.8 capital. NEP is an effective MD&A • BMO’s one-year TSR of 24.1% in 2006 was the second best group average of 14.4%. a year ago. 0.56 Canadian peer group average of 0.17% and the North 12.9 Our strong one-year TSR narrowed the gap to 0.11 0.09 American peer group average of 0.53%. of the Canadian peer group. The result improved our five-year 7.9 • • The provision represented 9 basis points of average net loans 0.30 TSR and marks returns of more than 15% in four of the past the Canadian peer group average and improved and acceptances, down from 11 basis points in 2005. • BMO’s credit loss experience has been better than measure of economic value five years. our advantage over the North American peer (0.07) the average of the Canadian peer group in 14 of the group average. past 15 years. Further details are provided on page 31. 2002 2003 2004 2005 2006 Further details are provided on pages 39 and 68. 2002 2003 2004 2005 2006

added. NEP is a non-GAAP Earnings per Share (EPS) Growth EPS Growth (%) Impaired Loans Gross Impaired Loans and Acceptances as a % of • EPS rose 11.2% to $5.15 in 2006, the fourth consecutive • BMO’s EPS growth of 11.2% in 2006 improved but was • Gross impaired loans and acceptances were $666 million, 17.4 Equity and Allowances for Credit Losses year of record earnings. The increase was driven by business below a Canadian peer group average of 59.2% that compared with $804 million in 2005, and represented 13.9 • BMO’s ratio of 3.8% was better than the Canadian measure. See page 34. growth, low and stable provisions for credit losses and was elevated by the impact of litigation provisions in 3.8% of equity and allowances for credit losses, down from peer group average of 4.3% but worse than the 2005 and a significant gain on the sale of a business North American peer group average of 2.6%. a lower effective tax rate. 4.9% a year ago. 7.5 in 2006. These same factors contributed to a strong BMO’s ratio has approximated the Canadian average • Excluding changes in the general allowance for credit losses in 0.8 28.4 27.9 11.2 • Formations of new impaired loans and acceptances, a key driver 4.9 3.8 • North American peer group average of 21.0%. 2006 and 2005, EPS grew 11.6%, exceeding our 2006 target of 5.2 of credit provisions, were $420 million, in line with a year ago, but has been higher than the North American average 5% to 10% growth on this basis. as credit conditions remained favourable. in recent years. Further details are provided on page 32. 2002 2003 2004 2005 2006 Further details are provided on pages 39 and 68. 2002 2003 2004 2005 2006

Return on Equity (ROE) ROE (%) Cash and Securities-to-Total Assets Cash and Securities as a % of Total Assets (%) • ROE of 19.2% was up from 18.8% in 2005 and was the second • ROE of 19.2% in 2006 was below the Canadian • The cash and securities-to-total assets ratio was up slightly from • BMO’s liquidity ratio of 27.2% was below the 19.4 18.8 19.2 highest in the past 20 years, and above our 2006 target of 17% peer group average of 23.2% but above the North a year ago at 27.2%. 27.2 Canadian peer group average of 33.5% and the to 19%. In 2007, we are targeting ROE of 18% to 20%. 16.4 American peer group average of 17.5%. 29.1 26.0 26.5 North American peer group average of 31.2%. Consistently reports on • Liquidity remains sound and continues to be supported by broad 24.9 • We increased our medium-term target to 18% to 20% ROE from • BMO has earned ROE of more than 13% in each of diversification of deposits. • Our liquidity ratio was higher than a year ago and the past 17 years, the only major North American remains at an acceptable level. 18% to 19% ROE at the end of 2006. 13.4 12 KPIs against peer group bank with this record of earnings consistency. Further details are provided on page 33. 2002 2003 2004 2005 2006 Further details are provided on pages 71 and 72. 2002 2003 2004 2005 2006

Net Economic Profit (NEP) Growth NEP Growth (%) Capital Adequacy Tier 1 Capital Ratio (%) averages, as shown in detail 10.22 10.30 NEP growth of 10.3% in 2006 was below the Canadian Our Tier 1 Capital Ratio at 10.22% was slightly below • NEP, a measure of added economic value, grew 10.3% to a • • The Tier 1 Capital Ratio was 10.22%, down slightly from 10.30% 9.84 • record $1,230 million. peer group average of 92.1% and the North American last year but above our minimum target of 8.0%. the Canadian peer group average of 10.36%. 9.55 • Results in Private Client Group and Corporate Services drove peer group average of 37.7%. The averages were • The Total Capital Ratio was 11.76%, down slightly from 11.82% • On a U.S. regulatory basis, our Tier 1 Capital Ratio was here for NEP Growth. favourably affected by the 2005 litigation provisions the improvement, as the other operating groups were allocated in 2005. 8.80 9.93% and was above the North American peer group and the 2006 gain on sale of a business. average of 8.53%. higher capital in 2006. 91.8 58.4 10.3 (15.2) • BMO has $3.6 billion of excess capital relative to our targeted 0.1 minimum Tier 1 Capital Ratio. Canadian peer group NEP growth for 2002 (–104%) and Further details are provided on page 33. 2002 2003 2004 2005 2006 2003 (3,112%) is not to scale. Further details are provided on pages 58 and 59. 2002 2003 2004 2005 2006

Revenue Growth Revenue Growth (%) Credit Rating (Standard & Poor’s) Credit Rating (Standard & Poor’s) • Revenue* increased $154 million or 1.5% in 2006, but increased • Revenue growth of 1.5% in 2006 was below • Our credit rating, as measured by Standard & Poor’s AA– AA– AA– AA– AA– • BMO’s credit rating of AA–, as measured by S&P’s 5.9% excluding the effects of the sale of Harrisdirect and the Canadian peer group average of 7.2% and the (S&P) senior debt ratings, remained at AA–, matching two senior debt ratings, was in the upper half of the the weaker U.S. dollar. On this basis, revenue in each of our strong North American peer group average of competitors and exceeding the rating of the other three Canadian peer group, with two of the banks in operating groups improved, with most of this improvement 3.7 8.4%. Excluding the sale of Harrisdirect and major Canadian banks. A+ A+ A+ our peer group rated as highly as BMO and three 4.7 5.0 the impact of the weaker U.S. dollar, BMO’s rated lower. BMO’s rating was consistent with the reflected in P&C Canada and Private Client Group. 1.5 • S&P’s ratings outlook on BMO remains stable. revenue growth was 5.9%. median rating of the North American peer group. Provides detailed (0.1) Further details are provided on page 36. 2002 2003 2004 2005 2006 Further details are provided on page 59. 2002 2003 2004 2005 2006

(%) (Moody’s) (Moody’s) Expense-to-Revenue Ratio (Productivity Ratio) 69.0 Expense-to-Revenue Ratio Credit Rating Credit Rating explanation of non-GAAP • The productivity ratio improved 77 basis points to 62.8% in • BMO’s productivity ratio of 62.8% was worse than • Our credit rating, as measured by Moody’s senior debt ratings, Aa3 Aa3 Aa3 Aa3 Aa3 • BMO’s credit rating of Aa3, as measured by Moody’s 2006. The cash productivity ratio improved 25 basis points to the Canadian peer group average of 60.8% and the remained at Aa3, slightly below the highest-rated Canadian senior debt ratings, was comparable to the median of 66.5 65.0 63.6 62.4%, following 538 basis points of total improvement in 62.8 North American peer group average of 57.3%. bank and consistent with the highest-rated of the remaining the Canadian peer group but slightly higher than the measures, including a the three previous years. We had targeted an improvement of • BMO is targeting to improve the cash productivity major Canadian banks. Aa2 Aa2 North American peer group median. 100 to 150 basis points in the cash productivity ratio in 2006. ratio by 100–150 bps in 2007. • Moody’s ratings outlook on BMO remains stable.

reconciliation to fi nancial Further details are provided on page 40. 2002 2003 2004 2005 2006 Further details are provided on page 59. 2002 2003 2004 2005 2006

*Revenue and income taxes are reported in the MD&A on a taxable equivalent basis. BMO Financial Group See page 26 for further comments on peer BMO Financial Group See page 26 for further comments on peer See pages 34, 36 and 41. Canadian peer group average group comparisons. Canadian peer group average group comparisons. statements. North American peer group average Certain prior year data has been restated. North American peer group average Certain prior year data has been restated. See Note 1 on page 26. See Note 1 on page 26.

24 • BMO Financial Group 189th Annual Report 2006 BMO Financial Group 189th Annual Report 2006 • 25

Non-GAAP Measures GAAP and Related Non-GAAP Measures Used in the MD&A BMO uses both GAAP and non-GAAP measures to assess per- ($ millions, except as noted) 2006 2005 2004 formance. Securities regulators require that companies caution Net income 2,663 2,396 2,295 readers that earnings and other measures adjusted to a basis Amortization of intangible assets (net of income tax) 36 74 78 other than generally accepted accounting principles (GAAP) do Cash net income (1) 2,699 2,470 2,373 not have standardized meanings under GAAP and are unlikely Preferred share dividends (30) (30) (31) to be comparable to similar measures used by other companies. Charge for capital (1) (1,439) (1,324) (1,230) Net economic profit is another non-GAAP measure. It rep- resents cash earnings available to common shareholders less Net economic profit (1) 1,230 1,116 1,112 a charge for capital, and is considered an effective measure of added economic value.

The Canadian peer group averages are based on the performance of Canada’s six largest banks: BMO Financial Group, Canadian Imperial Bank of Commerce, National Bank of Canada, RBC Financial Group, Scotiabank and TD Bank Financial Group. The North American peer group averages are based on the performance of North America’s largest banks, consisting of 15 banks in North America having Defi nes the peer groups. shareholders’ equity that is at least 75% as large as BMO’s. It includes the Canadian peer group, except National Bank of Canada, as well as Bank of America Corporation, Citigroup Inc., J.P. Morgan Chase & Co., KeyCorp, National City Corporation, The PNC Financial Services Group Inc., SunTrust Banks Inc., U.S. Bancorp, Wachovia Corporation, and Wells Fargo & Company.

15 Benchmarking

The Capita Group

Changes The Capita Group, the UK business process outsourcing and professional services company, clearly summarises its areas of strategic focus, including h aiaGopPlc Group Capita The the need for clear fi nancial KPIs. The Group then sets out its fi nancial KPIs nulRpr n cons2006 Accounts and Report Annual in a table, supported by more detailed trend data and forward-looking information. The same approach is adopted for non-fi nancial KPIs, as shown here for its people measures.

gy gg We are the UK’s leading business process outsourcing and professional services company. Business review Governance Accounts We have successfully widened the margin 19 Segmental between the cost of our capital and the returns we generate by investing it. Our business strategy

The Capita Group Plc Annual Report and Accounts 2006 Capital expenditure Return on capital employed (ROCE) Aim: keep capital expenditure at or below 4% Aim: steadily increasing ROCE which exceeds our Our strategic focus is on 4 core elements: of revenue. This helps us focus investment on the cost of capital. This ensures that we add shareholder opportunities that generate greatest shareholder value over the long term. In recent years we have value and avoid tying up too much capital in long successfully widened the margin between the cost of term projects. our capital and the returns we generate by investing it. 1) Generating profitable growth In 2006, we met this objective with net capital During 2006, the post tax return on average capital expenditure being 3.6% of annual revenue. This was employed improved to 18.5%. achieved after significant investment in Capita’s both organically and through acquisition advanced IT platforms supporting, in particular, our life & pensions business. Net return on capital % p securing long term, recurring revenues from new and existing clients We believe capex at or below 4% is sustainable for the Actual WACC foreseeable future. There are currently no indications 18.5 p of significant capex requirements in our business 17.1 acquiring small to medium sized businesses that expand our existing capability and take us into new areas. forecasts or bid pipeline. But we would not rule out the 16.1* possibility of exceeding 4% if we saw an exceptional 14.6 opportunity to use Capita’s financial strength as a 13.2 competitive advantage. 11.6 2) Managing growth well Provides an overview 9.1 Capex as % turnover 8.5 8.5 8.58.2 8.4 through strong leadership and responsible business practices 2001 2002 2003 2004 2005 2006 6.3 of the four core elements p maintaining a robust management and operating structure, led by a stable, inspiring team 2006 2005 2004 2003 2002 2001 Trend data PBIT (normalised) 225 183 156* 131 107* 77 p 5.0 Avg capital (£m) 880 776 696 645 575 464 working to clear financial objectives with strong financial controls and effective governance. of the group’s strategy, 3.63.7 3.6 Tax (%) 27.7 27.7 28.1 28.1 29.1 29.8 *excluding exceptional items 3.4 expanding on each one in 2001 2002 2003 2004 2005 2006 3) Targeting the fast growing market

The Capita Group Plc Annual Report and Accounts 2006 for BPO and professional support services in the UK and Ireland a separate section. p seeking the best opportunities across both the public and private sectors p focusing on our 9 chosen market sectors.

4) Maintaining performance across our divisions by consistently delivering service excellence and sharing Group resources and scale benefits Our business strategy p aligning each business within our divisions with the Group’s overall objectives and strategy p maintaining a simple, pragmatic divisional structure to ensure the best resources are deployed Group-wide.2) How do we manage and measure our growth? Growth needs to be steady and controlled. Our goal: to deliver value to all our stakeholders

to GAAP We are committed to growing the business Our goal remains straightforward, to continue to develop Capita as a long term, sustainable business which can deliver value to all our stakeholders: Reconciliation in a transparent and socially responsible p Achieving a fair return for shareholders way, ensuring that it delivers a healthy p Delivering operational excellence and added value for all clientsreturn to investors and is sustainable for p Creating a supportive, rewarding and inspiring environment for employeesall stakeholders over the long term. p Developing mutually beneficial relationships with suppliers. So our growth is underpinned by: a) Strong structure and control b) Clear financial KPIs The Capita Group Plc Annual Report and Accounts 2006 c) Resource and operational controls d) Careful risk management. Future targets Clearly b) Clear financial key identifi es the group’s six performance indicators (KPIs) fi nancial KPIs. We are a financially focused business. We monitor and Identifi es the need challenge financial performance at all levels to probe for clear fi nancial KPIs to the health and progress of our businesses and promote underpin the group’s growth accountability. As well as profitability we use a range of strategy as well as resource financial measures at Group level. Collectively they form and operational controls.

Source and an integral part of building value for our shareholders on a consistent basis over the long term. assumptions/limitations

KPIs Aim Progress Identifi es, for each of the Year end 2006 Year end 2005 group’s fi nancial Operating margins Maintain and strengthen margins 12.9% 12.8% KPIs, the Free cash flow Maintain strong free cash flow £154m £127m group’s aim and performance

Purpose Capital expenditure Keep capital expenditure at or below 4% of revenue 3.6% 3.7% year-on-year. Return on capital employed (ROCE) Achieve steadily increasing ROCE which exceeds 18.5% 17.1% our cost of capital Gearing – interest cover Maintain a conservative and efficient capital structure, 9x 13x with a relatively low level of gearing Economic profit Achieve steadily increasing economic profit £89m £68m

Source: The Capital Group Plc Annual Report and Accounts 2006 nition and calculation

Defi 16 Capital expenditure Capex as % turnover Aim: keep capital expenditure at or below 4% of revenue. This helps us focus investment on the 6.3 opportunities that generate greatest shareholder Expands on each value and avoid tying up too much capital in long fi nancial KPI, including term projects. the provision of trend In 2006, we met this objective with net capital analysis. 5.0 expenditure being 3.6% of annual revenue. This was 3.63.7 3.6 achieved after significant investment in Capita’s advanced IT platforms supporting, in particular, our 3.4 life & pensions business.

We believe capex at or below 4% is sustainable for the 2001 2002 2003 2004 2005 2006 foreseeable future. There are currently no indications of significant capex requirements in our business forecasts or bid pipeline. But we would not rule out the Retaining and developing people possibility of exceeding 4% if we saw an exceptional To maintain our growth we need to demonstrate opportunity to use Capita’s financial strength as a our ability to deliver consistent, reliable service. competitive advantage. An essential element of this is retaining key people and providing appropriate training. c) Resource and operational controls Our people are key to Our continued growth and financial performance our development depends on having the right resources in place. Driving the strategic direction set by the Group To sustain our high contract win and retention rates, Board is a team of some 250 senior managers. we have to satisfy clients that we have the They are responsible for delivering growth across the operational scale and capability to deliver our Group and maintaining smooth operations and high promises – whether on relatively simple contracts or service levels. They focus on ensuring that the necessary large scale, multi-service packages. Through the MOB procedures, infrastructure and employees are in place. process we continuously assess the needs of each Their energy and leadership are key to creating a Explains how the business unit to ensure that we have the necessary productive working environment. group attracts, retains people, infrastructure and resources for current and future development. Our people are the engine room driving our success. and manages its Their hard work and commitment to service delivery people, supported by Each month, we monitor and review comprehensive are vital to meeting client expectations and supporting quantifi able metrics. operational management information enabling us our growth. to manage the business in a way that delivers our key financial aims. 21 years ago we had 33 people; today we have some 27,800, with numbers almost doubling in the last 5 years. This rapid growth has come from: Expands on the p Direct recruitment as a result of overall business importance of resource growth and to serve new greenfield outsourced and operational controls, service contracts specifi cally identifying p Employee transfers from customers under people as a critical outsourcing contracts resource. p Employee transfers as a result of acquisitions.

Priorities Aim Year end 2006 Year end 2005 Senior management retention To attract and retain the appropriate level 91% 92% (earning over £90k) of senior management to drive the strategic direction of the Group Overall employee retention To attract and retain the right people to 82% 81% deliver Group strategy, maintaining employee retention at or above industry average (81.7%) 17 Benchmarking

Centrica Centrica plc Changes Annual Report and Accounts 2006 Centrica, the UK utilities company, provides a clear set of fi nancial and non- Annual Report and Accounts 2006 fi nancial KPIs in an easy to read summary. The Group supports each KPI with a brief description of how the KPI is measured, its source, target and performance during the year.

Group Key Performance Indicators

In this section, as part of our commitment to enhanced narrative reporting, the Board and the Executive Committee have set out the key performance indicators (KPIs) that we use to monitor progress against our strategy. reportDirectors’ Report – Business Review p05 In this section, as part of our commitment to enhanced narrative reporting, the Measuring our performance Board and the Executive Committee have set out the key performance indicators Segmental Securing our Financial Adjusted basic Total shareholder Dividends per share

customers’ Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance earnings per share return (TSR) (EPS) (KPIs) that we use to monitor progress against our strategy.

energy needs Adjusted basic Total shareholder return indices Ordinary dividend pence earnings per share pence 200 06 11.15 06 19.4 175 05 10.5 05 18.2 150 04† 8.6 04 18.1 125 03 5.4 Adjusted EPS is disclosed and reconciled 100 02 4.0 in note 11 on page 64. 01 02 03 04 05 06 † Clearly identifi es excludes special dividend of 25p Years ended 31 December Centrica FTSE 100

Description This measure of performance Total shareholder return This is the total dividend is calculated as profit before measures the return to per share (excluding special the groups KPIs over a exceptional items and certain shareholders in terms of the dividends) paid in respect re-measurements for the growth of an investment in the of each financial year. year, attributable to equity Company’s shares, assuming shareholders of the parent that dividends and returns company, divided by the of capital are reinvested. We Measuring our performance weighted average number of compare the Company’s TSR two page spread. shares in issue during the year. with those of the other 99 members of the FTSE 100.

Target To deliver growth in adjusted TSR is used as one of the To deliver real growth EPS. This measure is used performance conditions in the per annum. as one of the performance Company’s Long Term Incentive conditions in the Company’s Scheme, details of which are Executive Share Option Scheme on page 35. and Long Term Incentive Scheme, details of which are on page 35.

Analysis/comment We have seen a 7% growth We have outperformed the The 2006 dividend shows an in adjusted EPS during a FTSE 100 Index by 31% over increase of 6% on the 2005 challenging year. a five year period. dividend which is in excess of the rise in the Retail Price Index. Group Key Performance Indicators

Source/verification The measure of adjusted EPS is Alithos Ltd. The dividend is reported reported on the Group Income as part of the audited Statement, part of the audited Financial Statements. Financial Statements. In this section, as part of our commitment to enhanced narrative reporting, the Board and the Executive Committee have set out the key performance indicators 10 Centrica plc Annual Report and Accounts 2006

Trend data (KPIs) that we use to monitor progress against our strategy. Directors’ Report – Business Review p05 Directors’ Report – Business Review p05

Measuring our performance

Financial Non-financial Adjusted basic Total shareholder Dividends per share Lost-time injuries Employee Group carbon

ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance earnings per share return (TSR) (LTI) engagement footprint Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance (EPS)

Adjusted basic Total shareholder return indices Ordinary dividend pence Lost-time injuries Engagement score earnings per share pence per 100,000 hours worked 200 06 11.15 19.4 0.8† 06 10.5 06 06 3.84 8.6m 175 05 05 18.2 05 0.73 05 3.78 150 04† 8.6 tonnes of CO2/ 04 18.1 04 1.1 04 3.73 125 03 5.4 CO equivalent** 12 3 45 2 Adjusted EPS is disclosed and reconciled 100 02 4.0 † this measure includes the LTI in note 11 on page 64. consequences of the incident at Rough. **data tolerance level of 10% 01 02 03 04 05 06 A further 8.3 million tonnes of † excludes special dividend of 25p See page 25 for commentary. Years ended 31 December CO2 emissions comes from UK purchased power. Centrica FTSE 100

Description This measure of performance Total shareholder return This is the total dividend We measure lost time injuries The Centrica annual employee We measure the carbon dioxide is calculated as profit before measures the return to per share (excluding special per 100,000 hours worked. survey measures engagement and other greenhouse gases to GAAP exceptional items and certain shareholders in terms of the dividends) paid in respect The majority of these are and commitment levels for every emitted from ourNon-financial activities. This Financial re-measurements for the growth of an investment in the of each financial year. incurred through slips, trips, team at all levels across the comprises emissions from power year, attributable to equity Company’s shares, assuming falls and manual handling. We Group. The overall engagement generation, gas production and Reconciliation shareholders of the parent that dividends and returns use both incidence rates and score reflects the attitudes and storage, energy usage, fleet company, divided by the of capital are reinvested. We active indicators to monitor opinions of our employees and operations and businessLost-time travel. injuries Adjusted basic weighted average number of compare the Company’s TSR the effectiveness of the health measures, on a scale of one to shares in issue during the year. with those of the other 99 and safety (H&S) preventative five, their feelings about working members of the FTSE 100. programmes that we run for Centrica. (LTI) earnings per share throughout the Group.

Target To deliver growth in adjusted TSR is used as one of the To deliver real growth Continue to target the reduction To improve employee Continue to provide a range (EPS) EPS. This measure is used performance conditions in the per annum. and elimination of lost time engagement as part of of energy efficiency services as one of the performance Company’s Long Term Incentive injuries across our business improving business to help our customers reduce conditions in the Company’s Scheme, details of which are and have increasingly sought performance. their carbon footprint. We will Executive Share Option Scheme on page 35. to adopt a ‘zero tolerance’ also look to deliverLost-time new energy injuries Adjusted basic and Long Term Incentive approach on prevention. saving programmes across Scheme, details of which the Group. per 100,000 hours worked earnings per share pence are on page 35. 06 0.8† 19.4 Analysis/comment We have seen a 7% growth We have outperformed the The 2006 dividend shows an We have established a solid Our score shows a 2006 was the first year that 06 in adjusted EPS during a FTSE 100 Index by 31% over increase of 6% on the 2005 track record of continual year-on-year increase and we have fully collated data to challenging year. a five year period. dividend which is in excess of improvement and our underlying several businesses have calculate our Group 05carbon Customer satisfaction0.73 05 18.2 the rise in the Retail Price Index. performance in 2006 continues seen significant improvement. footprint. We have the lowest In 2006, we used a variety of to indicate the beneficial impact carbon intensity profile04 of any measures across our business 1.1 18.1 of our H&S strategy. large UK power supplier and units to measure levels of customer 04 intend to further improve satisfaction. During 2007, a Group efficiency at all levels.† this measurecustomer includes KPI will be thedeveloped LTI Adjusted EPS is disclosed and reconciled that recognises our position as Source/verification The measure of adjusted EPS is Alithos Ltd. The dividend is reported Measured internally. The survey is managed by an Emissions data is collected consequencesa provider of of theenergy incident and related at Rough. in note 11 on page 64. reported on the Group Income as part of the audited external supplier. internally. UK carbon intensity See page services25 for to commentary.both domestic and Statement, part of the audited Financial Statements. figures are calculated by commercial markets. This Financial Statements. www.electricityinfo.org. information will be included in our 2007 Annual Report.

Future targets 10 Centrica plc Annual Report and Accounts 2006 Centrica plc Annual Report and Accounts 2006 11

We measure lost time injuries Description This measure of performance per 100,000 hours worked. is calculated as profit before The majority of these are exceptional items and certain incurred through slips, trips, re-measurements for the falls and manual handling. We year, attributable to equity use both incidence rates and shareholders of the parent active indicators to monitor company, divided by the the effectiveness of the health weighted average number of Expands on each key and safety (H&S) preventative shares in issue during the year. performance indicator, including programmes that we run trend analysis and a target. throughout the Group. Continue to target the reduction Source and Target To deliver growth in adjusted and elimination of lost time EPS. This measure is used injuries across our business as one of the performance and have increasingly sought assumptions/limitations conditions in the Company’s to adopt a ‘zero tolerance’ Executive Share Option Scheme approach on prevention. and Long Term Incentive Scheme, details of which are on page 35. We have established a solid Analysis/comment We have seen a 7% growth Customer satisfaction track record of continual in adjusted EPS during a In 2006, we used a variety of improvement and our underlying challenging year. Clearly explains measures across our business performance in 2006 continues that a new non-fi nancial units to measure levels of customer to indicate the beneficial impact of our H&S strategy. Purpose KPI will be introduced satisfaction. During 2007, a Group customer KPI will be developed during the year. that recognises our position as a provider of energy and related Measured internally. Source/verification The measure of adjusted EPS is services to both domestic and reported on the Group Income commercial markets. This Statement, part of the audited information will be included Financial Statements. in our 2007 Annual Report.

Source: Centrica plc Annual Report and Accounts 2006 nition and calculation

Defi 18 Benchmarking

HBOS Changes

HBOS, the UK mortgage and savings provider, provide a comprehensive Annual Report and Accounts 2006 set of fi nancial and non-fi nancial KPIs which are clearly linked to their strategic priorities. A consistent presentational style is applied at both the group and segmental level. Segmental Our Key Performance Strategy Indicators Our Key Performance Our strategy is to be the UK’s leading Our Key Performance Indicators help us to insurance and investment group using our measure our progress against each element multi-channel, multi-brand operating model of our strategy. KPI is directly and accessing the signifi cant HBOS customer Strategy Indicators base to grow profi table market share. Our strategy has% of Group Mortgage General Insurance sales Our strategy has fi ve key elements to Our Key Performance Indicators help us to Growing market share of customers who have our (Gross Written Premiums £m) personal lines insurance Household Insurance linked to a create value. These are described in more measure our progress against each element There are signifi cant opportunities through the Group’s Retail network, throughfi ve intermediaries key and our jointelements venture detail in the Chief Executive’s Strategy of our strategy. with esure to grow market share in Household, Motor and 2006 13% 2006 £1,894m Repayment Insurance. In particular, we will use HBOS’s Overview on page 9. market leading positionto in mortgagescreate to grow market value share 2005 14% 2005 £1,977m of Household Insurance. strategic priority. UK market shares Growing market share of Market share of Investment Investment Business sales Growing the UK franchise investment productsGrowing the UK franchise Sales (APE) and AUM (APE £m) The power of our brands, distribution and customer base 21% Mortgages As part of the UK’s largest liquid savings provider, our Sales demonstrates the potential we have for further market share 16% Savings Investment BusinessTargeted is well placed international to benefi t from growthhigher 2006 9% 13% Banking savings ratios, supporting demographics and increasing 2005 10% 2006 £1,817m growth in the UK. Our goal, over time, is to grow the market recognition by individuals that they will need to save for their Assets under Management 9% Credit Cards Cost leadership 2005 £1,473m shares of our main products to 15%-20%. retirement themselves. 2006 5% 9% Personal Loans Colleague development 2005 5% 7% Household Insurance Capital discipline Telephony answer rates (%) Intermediary customer service 5% Business Banking Driving customer satisfaction (Household Insurance claims) Service is central to our growth ambitions, driving both new Financial Adviser Award 5% Investment 15%-20% sales and improved retention. We are investing in technology 3% Motor Insurance Target to maximise effi ciency and to further enhance service 2006 97% 2006 standards. For example in General Insurance, responding 3 Star quickly when customers call to register a claim on their 2005 97% 2005 Targeted international growth Underlying profi t before tax (excluding Group Items) household insurance allows us to provide our customers 2 Star with peace of mind. Telephony answer rate is defi ned as calls answered as a % of calls answered Taking the strategy that has proven to be successful in the UK plus calls abandoned after 30 seconds. to other markets that fi t with our growth model. International Cost leadership Underlying ‘Jaws’ measure We seek to maximise effi ciency in our new business processing, 14% 12% existing business administration, claims handling and 2006 6% customer service, with investment in supporting technology and process improvements. 2006 2005

Jaws is defi ned as the difference between the rate of growth in underlying net operating income and underlying operating expenses. Cost leadership Cost:income ratio Cost leadership provides the strategic fl exibility to deliver further £581m revenue growth ahead of the competition. Underlying profi t 2006 40.9% Trend data before tax up 19% 2005 42.2%

Colleague development Leadership index Our ability to execute our strategy relies very clearly on the capability, motivation and performance of our colleagues. To 2006 76% achieve this, we aim to have the best leadership teams in the industry and will offer all our colleagues the necessary training 2005 72% and personal development they need to do their jobs well. Our leadership index is a composite index showing the percentage of colleagues who agreed with 12 statements about good leadership in HBOS in our annual colleague opinion survey, conducted by MORI. Capital discipline Tier 1 ratio 47 Capital is treated as a scarce resource and we ensure that capital is allocated to the parts of the business that will provide sustainable returns to shareholders. 2006 8.1%

2005 8.1%

8% Target Our Key Performance

Strategy Indicators Reconciliation 7 Our strategy has fi ve key elements to Our Key Performance Indicators help us to to GAAP create value. These are described in more measure our progress against each element detail in the Chief Executive’s Strategy of our strategy. Overview on page 9.

Growing the UK franchise UK market shares The power of our brands, distribution and customer base 21% Mortgages demonstrates the potential we have for further market share 16% Savings growth in the UK. Our goal, over time, is to grow the market 13% Banking shares of our main products to 15%-20%. 9% Credit Cards 9% Personal Loans 7% Household Insurance Future targets 5% Business Banking 5% Investment 15%-20% 3% Motor Insurance Target

Our Key Performance Strategy Indicators Applies the same Our strategy is to be the UK’s leading Our Key Performance Indicators help us to insurance and investment group using our measure our progress against each element multi-channel, multi-brand operating model of our strategy. and accessing the signifi cant HBOS customer presentational style, base to grow profi table market share. Growing market share of % of Group Mortgage General Insurance sales customers who have our (Gross Written Premiums £m) differentiated by colour, for personal lines insurance Household Insurance There are signifi cant opportunities through the Group’s assumptions/limitations Retail network, through intermediaries and our joint venture with esure to grow market share in Household, Motor and 2006 13% 2006 £1,894m each business segment. Repayment Insurance. In particular, we will use HBOS’s market leading position in mortgages to grow market share 2005 14% 2005 £1,977m of Household Insurance. Growing market share of Market share of Investment Investment Business sales investment products Sales (APE) and AUM (APE £m) Source and As part of the UK’s largest liquid savings provider, our Sales Investment Business is well placed to benefi t from higher 2006 9% savings ratios, supporting demographics and increasing 2005 10% 2006 £1,817m recognition by individuals that they will need to save for their Assets under Management 2005 £1,473m retirement themselves. 2006 5% 2005 5%

Telephony answer rates (%) Intermediary customer service Driving customer satisfaction (Household Insurance claims) Service is central to our growth ambitions, driving both new Financial Adviser Award sales and improved retention. We are investing in technology to maximise effi ciency and to further enhance service 2006 97% 2006 standards. For example in General Insurance, responding 3 Star quickly when customers call to register a claim on their 2005 97% 2005 household insurance allows us to provide our customers 2 Star with peace of mind. Telephony answer rate is defi ned as calls answered as a % of calls answered plus calls abandoned after 30 seconds. Cost leadership Underlying ‘Jaws’ measure We seek to maximise effi ciency in our new business processing, existing business administration, claims handling and Our Key Performance 2006 6% customer service, with investment in supporting technology and process improvements.

Jaws is defi ned as the difference between the rate of growth in underlying net operating income and underlying operating expenses. Strategy Indicators £581m Underlying profi t before tax up 19% Our strategy is to be the UK’s leading Our Key Performance Indicators help us to insurance and investment group using our measure our progress against each element multi-channel, multi-brand operating model of our strategy. and accessing the signifi cant HBOS customer Purpose base to grow profi table market share.

% of Group Mortgage General Insurance sales Growing market share of customers who have our (Gross Written Premiums £m) 47 personal lines insurance Household Insurance There are signifi cant opportunities through the Group’s Retail network, through intermediaries and our joint venture with esure to grow market share in Household, Motor and 2006 13% 2006 £1,894m Repayment Insurance. In particular, we will use HBOS’s market leading position in mortgages to grow market share 2005 14% 2005 £1,977m of Household Insurance. Defi calculation nition and nition Source: HBOS plc Annual Report and Accounts 2006 19 Benchmarking

TELUS

Changes TELUS, the Canadian telecommunications company provides detailed information growing on its performance scorecard. Not only does the Group set out its performance together against targets for a series of KPIs at group and business unit level, it also sets out the key assumptions that underpin both the 2006 and 2007 targets. 1

TELUS Wireline segment Offers the following solutions: voice (local, long distance, call IT and infrastructure solutions delivered through TELUS’ IP networks management and the sale, rental and maintenance of telephone connected to TELUS’ Internet Data Centres); security solutions equipment); Internet (high-speed or dial-up with security features); (managed and non-managed solutions to protect business networks, . TELUS TV (available in select neighbourhoods with Video on messaging and data, in addition to security consulting services); 1.5 Performance scorecard for 2006 results The number of wireless subscribers was approximately 3% lower Demand and Pay Per View); data (IP networks, private line, switched and customized solutions such as contact centre services including services, network wholesale, network management and hosting); Call Centre Anywhere™, conferencing services (webcasting, audio, converged voice and data solutions (TELUS IP-One Innovation® web and video) and human resource and health and safety and TELUS IP-One Evolution®); hosting and infrastructure (managed outsourcing solutions. Eleven of 15 original targets for 2006 were met or exceeded. than TELUS’ original target for 2006 as a result of market growth Wireline segment 2007 targets

See Forward-looking statements at the beginning of Management’s discussion and analysis. DISCUSSION & ANALYSIS: MANAGEMENT’S

wireline external revenue wireline EBITDA* wireline capital net additions of high-speed The following items were not met: being slower than originally expected, as discussed further below. ($ millions) ($ millions) expenditures ($ millions) Internet subscribers (000s) Segmental 4,850 to 154 4,847 4,900 4,769 4,823 1, 9 4 8 1,7 75 t o 1,191 ~ 1,200 1, 8 5 2 1, 8 3 9 135+ . 1, 8 2 5 128 Consolidated capital expenditures and wireline capital expenditures By retaining focus on profitable subscriber growth and retention 964 914 73 exceeded target ranges as a result of access growth requirements activity, the lifetime revenue per average subscriber increased by 2006 financial review 04 05 06 07 04 05 06 07 04 05 06 07 04 05 06 07 in Alberta and B.C. and other factors; $346 to $4,771 in 2006, when compared with 2005. Churn rates target target target target *Excluding an expense of $120 to $150 million for cash settlement of options in 2007 . Wireline external revenue was just under the bottom of the target remained low, while postpaid subscriber net additions in 2006 were TELUS Wireless segment Offers the following solutions: digital voice services (PCS postpaid, TELUS Mobile Music®, TELUS Mobile Radio™ and TELUS Mobile TV™, PCS Pay & Talk® prepaid, Mike® all-in-one (iDEN) and Push To Talk™ and Wi-Fi Hotspots); and data devices including PC cards and capability on both Mike (Direct Connect®) and PCS (Instant Talk®)); personal digital assistants (PDAs) available for use on wireless high- range; and 77% of the total net subscriber additions, comparing favourably Internet (TELUS SPARK™ services including wireless web, text, picture speed (EVDO), 1X and Mike packet data networks. and video messaging, music, ringtones, image and game downloads,

Wireless segment 2007 targets See Forward-looking statements at the beginning of Management’s discussion and analysis. to 73% in 2005.

wireless external revenue wireless EBITDA* wireless capital net additions of wireless ($ millions) ($ millions) expenditures ($ millions) subscribers (000s) ~ 550 1, 9 5 0 t o 4,325 to 2,000 584 4,375 427 535 550+ 1,751 405 512 3,858 1,4 4 3 355 3,296 2,812 1,14 2 The following table summarizes TELUS’ 2006 performance against its original targets and compares 2007 targets to 2006 results. For further detail on expectations for 2007, see Section 9: Looking forward to 2007.

04 05 06 07 04 05 06 07 04 05 06 07 04 05 06 07 target target target target *Excluding an expense of $30 to $50 million for cash settlement of options in 2007 Performance to 2006 targets and 2007 targets

TELUS 2006 Original targets

Trend data financial review 17 2006 results for 2006 Result Targets for 2007 Change from 2006

Consolidated Revenues $8.681 billion $8.6 to $8.7 billion ✓ $9.175 to $9.275 billion 6 to 7% Capital expenditures $1.618 billion $1.5 to $1.55 billion ✗ Approx. $1.75 billion 8% Free cash flow(4) $1.600 billion $1.55 to $1.65 billion ✓ No target – Wireline segment Revenue (external) $4.823 billion $4.825 to $4.875 billion ✗ $4.85 to $4.9 billion 1 to 2% Non-ILEC(5) revenue $657 million $650 to $700 million ✓ No target – Capital expenditures $1.191 billion $1.05 to $1.1 billion ✗ Approx. $1.2 billion Unchanged High-speed Internet subscriber Summarises net additions 153,700 More than 100,000 ✓✓ More than 135,000 (12)% or better performance against Wireless segment to GAAP targets for its KPIs at a Revenue (external) $3.858 billion $3.775 to $3.825 billion ✓✓ $4.325 to $4.375 billion 12 to 13% Reconciliation Capital expenditures $427 million Approx. $450 million ✓✓ Approx. $550 million 29% group and segmental level. Wireless subscriber net additions 535,200 More than 550,000 ✗ More than 550,000 3% or more

Wireless segment 2007 targets See Forward-looking statements at the beginning of Management’s discussion and analysis. Future targets

net additions of wireless subscribers (000s)

584 535 550+ 512 Uses graphical analysis to support the communication of

Source and performance against targets. assumptions/limitations

Purpose 04 05 06 07 target

Source: TELUS 2006 fi nancial review nition and calculation

Defi 20 The following key assumptions were made at the time the original targets for 2006 were announced on December 16, 2005.

Key assumption for 2006 targets Actual result and impact on results

Canadian real GDP growth of 3.1% 2.7% (estimate). Canadian real GDP growth was lower than originally expected, although recent estimates showed very high growth rates in Alberta and B.C. The modestly lower national growth rate did not affect results significantly. Increased wireline competition in both Confirmed. Examples of increased competition in the business market include bundling of business and consumer markets web-based and information technology services with access, wireless and other data services. Increased competition in the consumer market with cable-TV phone sales was one factor in the 5.2% decrease in residential access lines in 2006. Canadian wireless industry market penetration Estimated at 4.6 percentage points. Market growth was at the low end of expectations and gain would be approximately five percentage points contributed to achieving 3% fewer net additions of wireless subscribers than original targets. TELUS would record approximately $100 million $67.8 million. A lower charge was recorded primarily as a result of the restructuring initiatives of restructuring and workforce reduction charges being implemented more efficiently than expected with a greater number of staff being redeployed to growth areas of the business and therefore not requiring severance costs. An effective income tax rate of approximately 35% Approximately 24%. The tax rate was reduced by the revaluation of the future tax liability from the enactment of lower federal and provincial tax rates, elimination of the federal large corporations tax and reassessments relating to prior years. No prospective significant acquisitions or divestitures Confirmed. and no change in foreign ownership rules Maintenance or improvement in credit ratings Confirmed. Moody’s Investors Service placed its Baa2 rating for TELUS under review for possible upgrade.

The company sets out the six key assumptions underpinning the 2006 target setting process, together with the actual outcome.

Assumptions for 2007 targets include: . Economic growth consistent with recent provincial and national estimates by the Conference Board of Canada, including the revised 2007 real GDP growth of 2.7% in Canada; . Increased wireline competition in both business and consumer markets, particularly from cable-TV and VoIP companies; . Forbearance for local retail wireline services in major urban markets Sets out the assumptions underpinning the 2007 target by the second half of 2007; setting process. . No further price cap mandated consumer price reductions; . A wireless industry market penetration gain of 4.5 to five percentage points; . Approximately $50 million of restructuring and workforce reduction expenses ($67.8 million in 2006); . A statutory tax rate of approximately 33 to 34%; . A discount rate of 5.0% and an expected long-term average return of 7.25% for pension accounting, unchanged from 2006; and . Average shares outstanding of 330 to 335 million shares for the full year.

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