Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of ____September ____ 2003
(Commission File No. 000-24876)
TELUS Corporation
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal registered offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
X
Form 20-F _____ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
X
Yes _____ No _____
This Form 6-K consists of the following:
TELUS Corporation Third Quarter Financial Statements and
Management Discussion and Analysis.
______________________________________________________________________________
TELUS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2003
______________________________________________________________________________
consolidated statements of income
Three months Nine months
Periods ended September 30 (unaudited) (millions) 2003 2002 2003 2002
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OPERATING REVENUES $ 1,806.2 $ 1,766.3 $ 5,320.4 $ 5,212.3
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OPERATING EXPENSES
Operations 1,051.7 1,103.2 3,175.3 3,338.9
Depreciation 308.9 307.3 949.5 898.5
Amortization of intangible assets 98.3 93.5 278.9 261.9
Restructuring and workforce reduction costs (Note 4) 2.3 313.3 12.1 328.9
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1,461.2 1,817.3 4,415.8 4,828.2
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OPERATING INCOME (LOSS) 345.0 (51.0) 904.6 384.1
Other expense 7.6 7.7 19.8 18.4
Financing costs (Note 5) 136.5 98.6 467.2 454.0
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INCOME (LOSS) BEFORE INCOME TAXES
AND NON-CONTROLLING INTEREST 200.9 (157.3) 417.6 (88.3)
Income taxes (recovery) (Note 6) 84.0 (50.5) 133.0 (0.9)
Non-controlling interest 1.0 0.6 2.7 2.4
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NET INCOME (LOSS) 115.9 (107.4) 281.9 (89.8)
Preference and preferred share dividends 0.9 0.8 2.6 2.6
Interest on convertible debentures,
net of income taxes 1.8 1.8 5.3 5.1
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COMMON SHARE AND NON-VOTING SHARE INCOME (LOSS) $ 113.2 $ (110.0) $ 274.0 $ (97.5)
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INCOME (LOSS) PER COMMON SHARE AND
NON-VOTING SHARE ($) (Note 7)
- Basic 0.32 (0.35) 0.79 (0.32)
- Diluted 0.32 (0.35) 0.78 (0.32)
DIVIDENDS DECLARED PER COMMON SHARE AND
NON-VOTING SHARE ($) 0.15 0.15 0.45 0.45
TOTAL WEIGHTED AVERAGE COMMON SHARES AND
NON-VOTING SHARES OUTSTANDING (millions)
- Basic 350.1 315.3 348.5 308.7
- Diluted 353.2 315.3 350.8 308.7
The accompanying notes are an integral part of these interim consolidated financial statements
consolidated statements of retained earnings
Nine months
Periods ended September 30 (unaudited) (millions) 2003 2002
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BALANCE AT BEGINNING OF YEAR $ 630.4 $ 1,654.8
Transitional impairment of intangible assets with indefinite lives - (595.2)
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Adjusted opening balance 630.4 1,059.6
Net income (loss) 281.9 (89.8)
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912.3 969.8
Less: Common Share and Non-Voting Share dividends paid in cash 124.3 105.9
Common Share and Non-Voting Share dividends reinvested in shares issued from Treasury 32.5 31.7
Preference and preferred share dividends 2.6 2.6
Interest on convertible debentures, net of income taxes 5.3 5.1
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BALANCE AT END OF PERIOD (Note 15) $ 747.6 $ 824.5
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements
consolidated balance sheets
As at As at
September 30, December 31,
(unaudited) (millions) 2003 2002
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ASSETS
Current Assets
Cash and temporary investments, net $ 102.3 $ -
Accounts receivable (Notes 9, 17(b)) 504.5 640.4
Income and other taxes receivable 342.1 134.0
Inventories 77.8 96.5
Prepaid expenses and other (Note 17(b)) 160.2 163.5
Current portion of future income taxes 219.4 138.8
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1,406.3 1,173.2
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Capital Assets, Net (Note 10)
Property, plant, equipment and other 7,763.0 8,025.9
Intangible assets subject to amortization 819.1 998.5
Intangible assets with indefinite lives 2,954.5 2,950.1
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11,536.6 11,974.5
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Other Assets
Deferred charges (Note 11) 615.0 729.1
Future income taxes 736.5 1,170.3
Investments 40.5 48.1
Goodwill (Note 12) 3,125.0 3,124.6
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4,517.0 5,072.1
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$17,459.9 $18,219.8
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ - $ 9.0
Accounts payable and accrued liabilities (Note 17(b)) 1,266.4 1,198.8
Restructuring and workforce reduction accounts payable and accrued liabilities (Note 4) 178.9 400.4
Dividends payable 53.3 52.2
Advance billings and customer deposits (Note 17(b)) 390.8 330.3
Current maturities of long-term debt (Note 13) 285.8 190.3
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2,175.2 2,181.0
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Long-Term Debt (Note 13) 6,632.5 8,197.4
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Other Long-Term Liabilities (Note 14) 1,018.7 405.3
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Future Income Taxes 986.3 992.3
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Non-Controlling Interest 10.5 11.2
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Shareholders' Equity (Note 15)
Convertible debentures 151.8 148.5
Preference and preferred shares 69.7 69.7
Common equity 6,415.2 6,214.4
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6,636.7 6,432.6
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$17,459.9 $18,219.8
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Commitments and Contingent Liabilities (Note 16)
The accompanying notes are an integral part of these interim consolidated financial statements
consolidated statements of cash flows
Three months Nine months
Periods ended September 30 (unaudited) (millions) 2003 2002 2003 2002
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OPERATING ACTIVITIES
Net income (loss) $ 115.9 $ (107.4) $ 281.9 $ (89.8)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization 407.2 400.8 1,228.4 1,160.4
Future income taxes 95.7 (57.1) 351.0 (37.8)
Gain on redemption of long-term debt - (82.4) - (82.4)
Net employee defined benefit plans expense (credits) 13.2 (2.1) 39.5 (11.8)
Employer contributions to employee defined
benefit plans (33.9) (11.7) (69.9) (36.2)
Other, net 2.3 (15.6) 36.7 (13.3)
Restructuring and workforce reduction costs,
net of cash payments (Note 4) (29.8) 256.6 (221.5) 194.9
Net change in non-cash working capital (Note 17(c)) 279.1 423.7 83.0 297.1
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Cash provided by operating activities 849.7 804.8 1,729.1 1,381.1
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INVESTING ACTIVITIES
Capital expenditures (Note 10(a)) (304.0) (327.2) (817.3) (1,281.7)
Proceeds from the sale of property (Note 10(c))
and other assets 1.3 7.8 39.6 7.8
Other (5.1) (2.7) 1.3 (36.4)
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Cash used by investing activities (307.8) (322.1) (776.4) (1,310.3)
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FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 20.6 16.6 61.7 73.9
Public issuance of Non-Voting Shares - 337.4 - 337.4
Cost of public issuance of Non-Voting Shares - (14.5) - (14.5)
Dividends to shareholders (41.6) (43.2) (130.2) (96.3)
Long-term debt issued (Note 13) 56.0 - 365.4 584.0
Redemptions and repayment of long-term debt (Note 13) (490.4) (779.1) (1,130.6) (892.7)
Change in short-term obligations
(commercial paper and bank borrowings) - - - (80.5)
Interest on convertible debentures - - (5.1) (5.1)
Other (0.8) 3.8 (2.6) 0.6
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Cash used by financing activities (456.2) (479.0) (841.4) (93.2)
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CASH POSITION
Increase (decrease) in cash and temporary
investments, net 85.7 3.7 111.3 (22.4)
Cash and temporary investments, net,
beginning of period 16.6 (9.0) (9.0) 17.1
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Cash and temporary investments, net,
end of period $ 102.3 $ (5.3) $ 102.3 $ (5.3)
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SUPPLEMENTAL DISCLOSURE
Interest paid $ 27.7 $ 48.6 $ 362.5 $ 392.9
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Income taxes (inclusive of Investment Tax
Credits (Note 6)) (received) paid $ (38.4) $ 4.2 $ (35.1) $ 24.0
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements
SEPTEMBER 30, 2003 (unaudited)
TELUS Corporation is one of Canada's largest telecommunications companies,
providing a full range of telecommunications products and services. The Company
is the largest incumbent telecommunications service provider in Western Canada
and provides data, Internet Protocol, voice and wireless services to Central
and Eastern Canada.
1. Interim Financial Statements
The notes presented in these interim consolidated financial statements include
only significant events and transactions and are not fully inclusive of all
matters normally disclosed in TELUS Corporation's annual audited financial
statements. As a result, these interim consolidated financial statements should
be read in conjunction with the TELUS Corporation audited consolidated
financial statements for the year ended December 31, 2002. These interim
consolidated financial statements follow the same accounting policies, other
than as set out in Note 2 to these interim consolidated financial statements,
and methods of their application as set out in the TELUS Corporation
consolidated financial statements for the year ended December 31, 2002.
The term "Company" is used to mean TELUS Corporation and, where the context of
the narrative permits or requires, its subsidiaries.
2. Accounting Policy Developments
(a) Disclosure of Guarantees
Commencing January 1, 2003, the new guidelines of the Canadian Institute of
Chartered Accountants ("CICA") for the disclosure of guarantees apply to the
Company (CICA Accounting Guideline AcG-14) (see Note 16(c)). The Guideline
elaborates on required disclosures by a guarantor in its financial statements
about obligations under certain types of guarantees that it has issued.
(b) Asset Retirement Obligations
Commencing with the Company's 2004 fiscal year, the new recommendations of the
CICA for accounting for asset retirement obligations (CICA Handbook Section
3110) apply to the Company. The new section focuses on the recognition and
measurement of liabilities for statutory, contractual or legal obligations,
normally when incurred, associated with the retirement of property, plant and
equipment when those obligations result from the acquisition, construction,
development or normal operation of the assets. The obligations are measured
initially at fair value (using present value methodology) and the resulting
costs capitalized into the carrying amount of the related asset. In subsequent
periods, the liability is adjusted for the accretion of discount and any
changes in the amount or timing of the underlying future cash flows. The
capitalized asset retirement cost is depreciated on the same basis as the
related asset; discount accretion is included in determining the results of
operations. The Company is currently evaluating the impact of this standard on
its financial statements.
(c) Hedging Relationships
Commencing with the Company's 2004 fiscal year, the new guidelines of the CICA
for accounting for hedging relationships apply to the Company (CICA Accounting
Guideline AcG-13). The Company's previously disclosed hedge accounting policy
is compliant with the new Guideline.
3. Financial Instruments
Price risk - currency: The Company is exposed to currency risks arising from
fluctuations in foreign exchange rates on its U.S. Dollar denominated long-term
debt. Currency hedging relationships have been established for the related
semi-annual interest payments and principal payments at maturity.
The Company's foreign exchange risk management includes the use of foreign
currency forward contracts to fix the exchange rates on short-term foreign
currency transactions and commitments. Hedge accounting is applied to these
short-term foreign currency forward contracts on an exception basis only.
During 2003, the Company entered into foreign currency forward contracts that
have the effect of fixing the exchange rates on, as at September 30, 2003,
U.S.$38 million of fiscal 2003 purchase commitments; hedge accounting has been
applied to these foreign currency forward contracts, all of which relate to the
Mobility segment.
Fair value: The fair values of the Company's long-term debt and convertible
debentures are estimated based on quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
maturity as well as the use of discounted future cash flows using current rates
for similar financial instruments subject to similar risks and maturities. The
fair values of the Company's derivative financial instruments used to manage
exposure to interest rate and currency risks are estimated similarly.
As at September 30, 2003 As at December 31, 2002
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Carrying Carrying
(millions) amount Fair value amount Fair value
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Long-term debt $ 6,918.3 $ 7,900.5 $ 8,387.7 $ 8,338.2
Convertible debentures $ 151.8 $ 153.4 $ 148.5 $ 137.6
Derivative financial instruments used to manage
exposure to interest rate and currency risks (a)
- Deferred hedging liability (Note 14) $ 574.4 $ 637.3 $ - $ -
- Deferred hedging asset (Note 11) $ - $ - $ 134.1 $ 315.7
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(a) Notional amount outstanding $4,890.4 (December 31, 2002 - $4,925.7).
4. Restructuring and Workforce Reduction Costs
In 2001, the Company initiated the phased Operational Efficiency Program aimed
at improving the Company's operating and capital productivity and
competitiveness. The first phase of the Operational Efficiency Program was to
complete merger-related restructuring activities in TELUS Mobility and the
reorganization for TELUS Communications. Approximately one-half of the 2001
charge was related to integration costs for TELUS Mobility including the
write-down of redundant capital assets, handset reconfiguration costs and
employee severance costs. The remaining charge was related to reorganization
costs in TELUS Communications, including employee severance costs and capital
asset impairment charges.
The second phase of the Operational Efficiency Program, which commenced at the
beginning of 2002, continued to focus on reducing staff, but also entailed a
comprehensive review of enterprise-wide processes to identify capital and
operational efficiency opportunities. Consequently, the Company initiated a
program offering an Early Retirement Incentive Plan and a Voluntary Departure
Incentive Plan to 11,000 of over 16,000 bargaining unit employees and announced
details on Operational Efficiency Program initiatives including: streamlining
of business processes; reducing the TELUS product portfolio and processes that
support them; optimizing the use of real estate, networks and other assets;
improving customer order management; reducing the scope of corporate support
functions; consolidating operational and administrative functions; and
consolidating customer contact centres.
The third phase of the Operational Efficiency Program, which commenced in the
third quarter of 2002, was focused on operationalizing the above noted
initiatives. Consolidation of administrative offices was largely completed by
December 31, 2002.
The following table presents the program costs to date and the changes in
program costs in the period as well as the corresponding liabilities and
changes in the corresponding liabilities for the period.
Program (a) Nine-month Program (a) Program (a)
inception to period ended inception to items not yet
December 31, September 30, September 30, eligible for Total
(millions) 2002 2003 2003 recording program (a)
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Workforce reduction costs
Voluntary (Early Retirement Incentive Plan,
Voluntary Departure Incentive Plan and other) $ 498.5 $ - $ 498.5 $ - $ 498.5
Involuntary and other 220.8 - 220.8 - 220.8
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719.3 - 719.3 - 719.3
Lease termination charges 16.1 3.4 19.5 - 19.5
Asset write-offs and other charges 32.9 8.7 41.6 7.3 48.9
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Restructuring and workforce reduction costs 768.3 12.1 780.4 $ 7.3 $ 787.7
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Less:
Payments (Note 17(c)) 332.0 222.3 554.3
Asset write-offs related to restructuring and other 30.5 11.3 41.8
Reclassified to other long-term liabilities (pension
and other post-retirement benefit liabilities) 5.4 - 5.4
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367.9 233.6 601.5
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Restructuring and workforce reduction accounts
payable and accrued liabilities $ 400.4 $ (221.5) $ 178.9
=================================================================================================================================
(a) Program includes phases 1, 2 and 3 of the Operational Efficiency Program.
The following table presents the status of various Operational Efficiency
Program initiatives. The expense and liability for the Early Retirement
Incentive Plan and Voluntary Departure Incentive Plan programs are recognized
when the employee accepts the Company's formalized offer. As a result,
Operational Efficiency Program costs may be, and have been, as appropriate and
required, recorded in advance of when the underlying event occurs.
Program (a) Nine-month Program (a)
inception to period ended inception to
December 31, September 30, September 30, Total
2002 2003 2003 Future program (a)
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Customer contact centre consolidation 24 15 39 7 46
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TELUS store closures 33 - 33 - 33
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Staff reductions (net of targeted hiring)
Phase 1 800 - 800 - 800
Phases 2 and 3 5,200 800 6,000 500 6,500
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6,000 800 6,800 500 7,300
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(a) Program includes phases 1, 2 and 3 of the Operational Efficiency Program.
5. Financing Costs
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
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Interest on long-term debt $ 165.5 $ 180.6 $ 503.8 $ 540.1
Interest on short-term obligations and other 0.9 0.3 5.3 3.0
Foreign exchange loss (a) 0.8 0.8 - 0.1
Gain on redemption of long-term debt (b) - (82.4) - (82.4)
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167.2 99.3 509.1 460.8
Capitalized interest during construction - (0.1) - (0.5)
Interest income (including interest on tax refunds) (30.7) (0.6) (41.9) (6.3)
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$ 136.5 $ 98.6 $ 467.2 $ 454.0
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(a) For the three-month and nine-month periods ended September 30, 2003,
these amounts include gains (losses) of NIL (2002 - $(0.1)) and $0.6 (2002
- $(0.4)), respectively, in respect of hedge ineffectiveness.
(b) This amount includes a gain of $4.3, which arose from the associated
settlement of financial instruments which hedged U.S. dollar denominated
long-term debt that was extinguished during the third quarter of 2002.
6. Income Taxes
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
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Current $ (11.7) $ 6.6 $ (218.0) $ 36.9
Future 95.7 (57.1) 351.0 (37.8)
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$ 84.0 $ (50.5) $ 133.0 $ (0.9)
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The Company's income tax expense (recovery) differs from that calculated by
applying statutory rates for the following reasons:
Three-month periods ended September 30
($ in millions) 2003 2002
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Basic blended federal and provincial tax at
statutory income tax rates $ 74.3 37.0% $ (61.2) 38.9%
Non-taxable portion of gains - (14.0)
Revaluation of future tax assets and
liabilities for decreases in statutory rates 1.1 16.0
Other 2.8 2.0
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78.2 38.9% (57.2) 36.4%
Large corporations tax 5.8 6.7
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Income tax expense (recovery) per Consolidated
Statements of Income $ 84.0 41.8% $ (50.5) 32.1%
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Nine-month periods ended September 30
($ in millions) 2003 2002
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Basic blended federal and provincial tax at
statutory income tax rates $ 154.6 37.0% $ (34.2) 38.7%
Non-taxable portion of gains - (14.0)
Revaluation of future tax assets and
liabilities for decreases in statutory rates 0.9 16.0
Prior year rates applied to settlement of tax issues (47.0) 2.0
Other 7.9 9.4
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116.4 27.9% (20.8) 23.6%
Large corporations tax 16.6 19.9
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Income tax expense (recovery) per Consolidated
Statements of Income $ 133.0 31.8% $ (0.9) 1.0%
=================================================================================================================================
The Company conducts research and development activities, which are eligible to
earn Investment Tax Credits. During the three-month and nine-month periods
ended September 30, 2003, the Company recorded Investment Tax Credits of NIL
(2002 - NIL) and $1.2 million (2002 - $40.0 million), respectively, of which
NIL (2002 - NIL) and $1.0 million (2002 - $40.0 million), respectively, were
recorded as a reduction of "Operations expense" and the balance was recorded as
a reduction of capital expenditures.
7. Per Share Amounts
Basic income (loss) per Common Share and Non-Voting Share is calculated by
dividing Common Share and Non-Voting Share income (loss) by the total weighted
average Common Shares and Non-Voting Shares outstanding during the period.
Diluted income (loss) per Common Share and Non-Voting Share is calculated to
give effect to share options and warrants and shares issuable on conversion of
debentures.
The following tables present the reconciliations of the numerators and
denominators of the basic and diluted per share computations.
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
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Net income (loss) $ 115.9 $ (107.4) $ 281.9 $ (89.8)
Deduct:
Preference and preferred share dividends 0.9 0.8 2.6 2.6
Interest on convertible debentures 1.8 1.8 5.3 5.1
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Basic and diluted Common Share and
Non-Voting Share income (loss) $ 113.2 $ (110.0) $ 274.0 $ (97.5)
=================================================================================================================================
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
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Basic total weighted average Common Shares
and Non-Voting Shares outstanding 350.1 315.3 348.5 308.7
Effect of dilutive securities
Exercise of share options and warrants 3.1 - 2.3 -
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Diluted total weighted average Common Shares
and Non-Voting Shares outstanding 353.2 315.3 350.8 308.7
=================================================================================================================================
Certain outstanding share options, in the amount of 15.5 million and 16.2
million for the three-month and nine-month periods ended September 30, 2003,
respectively, were not included in the computation of diluted income (loss) per
Common Share and Non-Voting Share because the options' exercise prices were
greater than the average market price of the Common Shares and Non-Voting
Shares during the reported periods. Similarly, convertible debentures, which
were convertible into 3.8 million shares in both the three-month and nine-month
periods ended September 30, 2003, were not included in the computation of
diluted income (loss) per Common Share and Non-Voting Share because the
conversion price was greater than the average market price of the Non-Voting
Shares during the reported periods.
8. Share-Based Compensation
The Company applies the intrinsic value based method of accounting for
share-based compensation awards granted to employees. Accordingly, no
compensation cost is recorded in the accounts in respect of its share option
plans. For share options granted after 2001, disclosure of the impact on
earnings and earnings per share as if the fair value based method of accounting
for the share-based compensation had been applied is required. Such impact,
using weighted average fair values of $6.86 (2002 - $1.68) and $4.63 (2002 -
$7.30) for options granted in the three-month and nine-month periods ended
September 30, 2003, respectively, would approximate the following pro forma
amounts:
Periods ended September 30 Three months Nine months
(millions except per share amounts) 2003 2002 2003 2002
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Compensation cost $ 4.4 $ 1.6 $ 13.4 $ 4.0
Net income (loss)
As reported $ 115.9 $ (107.4) $ 281.9 $ (89.8)
Pro forma $ 111.5 $ (109.0) $ 268.5 $ (93.8)
Net income (loss) per Common Share
and Non-Voting Share
Basic
As reported $ 0.32 $ (0.35) $ 0.79 $ (0.32)
Pro forma $ 0.31 $ (0.35) $ 0.75 $ (0.33)
Diluted
As reported $ 0.32 $ (0.35) $ 0.78 $ (0.32)
Pro forma $ 0.31 $ (0.35) $ 0.74 $ (0.33)
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Due to the fact that only share options granted after 2001 are included, these
pro forma disclosures are not likely to be representative of the effects on
reported net income for future years.
The fair value of each option granted is estimated at the time of grant using
the Black-Scholes model with weighted average assumption for grants as follows:
Periods ended September 30 Three months Nine months
2003 2002 2003 2002
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Risk free interest rate 3.9% 5.5% 4.9% 5.8%
Expected lives (years) 4.5 6.5 4.5 9.8
Expected volatility 40.0% 35.0% 40.0% 35.1%
Dividend yield 2.7% 7.1% 3.9% 3.8%
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Forfeitures of options are accounted for in the period of forfeiture.
9. Accounts Receivable
On July 26, 2002, TELUS Communications Inc., a wholly-owned subsidiary of
TELUS, entered into an agreement (the "2002 Securitization") with an
arm's-length securitization trust under which TELUS Communications Inc. is able
to sell an interest in certain of its trade receivables up to a maximum of $650
million.
As at As at
September 30, December 31,
2003 2002
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Total managed portfolio $ 1,007.4 $ 1,139.0
Securitized receivables (606.5) (595.4)
Retained interest in receivables sold 103.6 96.8
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Receivables held $ 504.5 $ 640.4
=================================================================================================================================
For the three-month and nine-month periods ended September 30, 2003, the
Company recognized losses of $0.7 million (2002 - $2.2 million) and $3.7
million (2002 - $2.2 million), respectively, on the sale of receivables,
arising from the 2002 Securitization.
Cash flows from the 2002 Securitization are as follows:
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
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Cumulative proceeds from securitization,
beginning of period $ 485.0 $ - $ 475.0 $ -
Proceeds from new securitizations - 430.0 34.0 430.0
Securitization reduction payments (4.0) - (28.0) -
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Cumulative proceeds from securitization,
end of period $ 481.0 $ 430.0 $ 481.0 $ 430.0
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Proceeds from collections reinvested in
revolving period securitizations $ 1,137.6 $ 425.2 $ 3,137.3 $ 425.2
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Proceeds from collections pertaining to
retained interest $ 259.3 $ 84.2 $ 675.7 $ 84.2
=================================================================================================================================
The Company delivered notice that, effective October 27, 2003, it would make a
securitization reduction payment of $106 million.
10. Capital Assets
(a) Capital Assets, Net
Accumulated
Depreciation and
Cost Amortization Net Book Value
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As at As at
September 30, December 31,
(millions) 2003 2002
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Property, plant, equipment and other
Telecommunications assets $16,275.9 $10,371.5 $ 5,904.4 $ 6,252.9
Assets leased to customers 415.3 352.0 63.3 77.5
Buildings 1,522.7 724.6 798.1 836.0
Office equipment and furniture 857.6 604.9 252.7 280.8
Assets under capital lease 28.4 13.6 14.8 10.3
Other 345.7 235.0 110.7 144.0
Land 49.0 - 49.0 55.4
Plant under construction 546.9 - 546.9 341.6
Materials and supplies 23.1 - 23.1 27.4
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20,064.6 12,301.6 7,763.0 8,025.9
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscriber base 362.9 67.9 295.0 311.6
Software 983.4 542.9 440.5 600.3
Access to rights-of-way and other 115.7 32.1 83.6 86.6
---------------------------------------------------------------------------------------------------------------------------------
1,462.0 642.9 819.1 998.5
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences* 3,973.0 1,018.5 2,954.5 2,950.1
---------------------------------------------------------------------------------------------------------------------------------
$25,499.6 $13,963.0 $11,536.6 $11,974.5
=================================================================================================================================
* Accumulated amortization of spectrum licences is amortization recorded prior
to 2002 and the transitional impairment amount.
Included in capital expenditures for the three-month and nine-month periods
ended September 30, 2003, were additions of intangible assets subject to
amortization of $37.4 million (2002 - $72.6 million) and $81.6 million (2002 -
$210.9 million), respectively.
Also included in capital expenditures for the three-month and nine-month
periods ended September 30, 2003, were additions of intangible assets with
indefinite lives of $1.4 million (2002 - $4.5 million) and $1.4 million (2002 -
$4.5 million), respectively.
(b) Intangible Assets Subject to Amortization
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at September 30, 2003, for
each of the next five fiscal years is as follows:
Years ended December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2003 (balance of year) $ 85.6
2004 262.0
2005 152.4
2006 52.5
2007 36.3
(c) Sale of Property
During the first quarter of 2003, the Company disposed of a non-strategic
property under the terms of a sale-leaseback transaction. The pre-tax gain of
$8.2 million, arising from net proceeds of $19.3 million, has been deferred and
will be amortized over the term of the lease.
During the second quarter of 2003, the Company disposed of non-strategic
properties and realized pre-tax gains totaling $7.3 million, arising from net
proceeds of $11.7 million.
11. Deferred Charges
As at As at
September 30, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Recognized transitional pension assets and pension plan contributions
in excess of charges to income $ 406.3 $ 367.9
Cost of issuing debt securities, less amortization 41.9 53.4
Deferred hedging asset - 134.1
Deferred customer activation and installation costs (a) 98.0 100.3
Other 68.8 73.4
---------------------------------------------------------------------------------------------------------------------------------
$ 615.0 $ 729.1
=================================================================================================================================
(a) Upfront customer activation fees, along with the corresponding direct
costs not in excess of revenues, are deferred and recognized over the
average expected term of the customer relationship.
12. Goodwill
For the three-month and nine-month periods ended September 30, 2003, goodwill
additions, arising from acquisitions, and in 2003, contingent consideration
paid in respect of a prior year's acquisition, were $0.3 million (2002 - NIL)
and $0.4 million (2002 - $2.9 million), respectively.
13. Long-Term Debt
(a) Details of Long-Term Debt
($ in millions) As at As at
September 30, December 31,
Series Rate Maturity 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Notes
CA 7.5% June 2006 $ 1,571.4 $ 1,569.7
U.S. 7.5% June 2007 1,569.4 1,835.5
U.S. 8.0% June 2011 2,586.8 3,026.6
---------------------------------------------------------------------------------------------------------------------------------
5,727.6 6,431.8
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Credit Facilities May 2004 70.0 655.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Debentures
1 12.00% May 2010 50.0 50.0
2 11.90% November 2015 125.0 125.0
3 10.65% June 2021 175.0 175.0
5 9.65% April 2022 249.0 249.0
A 9.50% August 2004 189.5 189.5
B 8.80% September 2025 200.0 200.0
---------------------------------------------------------------------------------------------------------------------------------
988.5 988.5
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Medium Term Note Debentures
96-9 6.25% August 2004 20.0 20.0
99-1 7.25% June 2030 0.1 151.0
---------------------------------------------------------------------------------------------------------------------------------
20.1 171.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Senior Discount Notes 0.4 0.8
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications (Quebec) Inc. First Mortgage Bonds
T 10.80% March 2003 - 30.0
U 11.50% July 2010 30.0 30.0
---------------------------------------------------------------------------------------------------------------------------------
30.0 60.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications (Quebec) Inc. Medium Term Notes
1 7.10% February 2007 70.0 70.0
---------------------------------------------------------------------------------------------------------------------------------
Capital leases issued at varying rates of interest from
5.3% to 18.0% and maturing on various dates up to 2008 10.8 10.1
---------------------------------------------------------------------------------------------------------------------------------
Other 0.9 0.5
---------------------------------------------------------------------------------------------------------------------------------
Total debt 6,918.3 8,387.7
Less - current maturities 285.8 190.3
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 6,632.5 $ 8,197.4
=================================================================================================================================
(b) Long-Term Debt Maturities
Anticipated requirements to meet long-term debt repayments during each of the
five years ended December 31, are as follows:
(millions) Credit facilities Other* Total*
---------------------------------------------------------------------------------------------------------------------------------
2003 (balance of year) $ - $ 5.9 $ 5.9
2004 70.0 210.9 280.9
2005 - 1.2 1.2
2006 - 1,579.8 1,579.8
2007 - 1,869.9 1,869.9
* Where applicable, repayments reflect hedged foreign exchange rates
Subsequent to September 30, 2003, the Company delivered notice that, effective
October 6, 2003, it would repay the credit facilities' balance outstanding and,
concurrently, would terminate the associated interest rate swap, which
effectively fixed the interest rate on the repaid debt.
14. Other Long-Term Liabilities
As at As at
September 30, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Deferred gain on sale-leaseback of buildings $ 111.6 $ 111.1
Pension and other post-retirement liabilities 156.8 149.7
Deferred hedging liability 574.4 -
Deferred customer activation and installation fees (a) 98.0 100.3
Other 77.9 44.2
---------------------------------------------------------------------------------------------------------------------------------
$ 1,018.7 $ 405.3
=================================================================================================================================
(a) Upfront customer activation fees, along with the corresponding direct
costs not in excess of revenues, are deferred and recognized over the
average expected term of the customer relationship.
15. Shareholders' Equity
(a) Details of Shareholders' Equity
As at As at
September 30, December 31,
($ in millions except per share amounts) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Convertible debentures $ 151.8 $ 148.5
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Preference Shares and Preferred Shares
Authorized Amount
Non-voting first preferred shares Unlimited
Redemption
Issued Premium (b)
Cumulative
$6.00 Preference 8,090 10.0% 0.8 0.8
$4.375 Preferred 53,000 4.0% 5.3 5.3
$4.50 Preferred 47,500 4.0% 4.8 4.8
$4.75 Preferred 71,250 5.0% 7.1 7.1
$4.75 Preferred (Series 1956) 71,250 4.0% 7.1 7.1
$5.15 Preferred 114,700 5.0% 11.5 11.5
$5.75 Preferred 96,400 4.0% 9.6 9.6
$6.00 Preferred 42,750 5.0% 4.3 4.3
$1.21 Preferred 768,400 4.0% 19.2 19.2
---------------------------------------------------------------------------------------------------------------------------------
69.7 69.7
---------------------------------------------------------------------------------------------------------------------------------
As at As at
September 30, December 31,
($ in millions except per share amounts) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Preferred equity
Authorized Amount
First Preferred Shares 1,000,000,000
Second Preferred Shares 1,000,000,000
Common equity
Shares
Authorized Amount
Common Shares 1,000,000,000
Non-Voting Shares 1,000,000,000
Issued
Common Shares (c) 2,329.6 2,275.1
Non-Voting Shares (c) 3,279.2 3,243.2
Options and warrants (d), (e) 53.9 56.8
Accrual for shares issuable under channel stock incentive plan (f) 0.5 0.3
Cumulative foreign currency translation adjustment (3.0) 1.2
Retained earnings 747.6 630.4
Contributed surplus 7.4 7.4
---------------------------------------------------------------------------------------------------------------------------------
6,415.2 6,214.4
---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 6,636.7 $ 6,432.6
=================================================================================================================================
(b) TELUS Communications Inc. Preference and Preferred Shares
TELUS Communications Inc. has the right to redeem the Preference and Preferred
shares upon giving three months' previous notice.
(c) Changes in Common Shares and Non-Voting Shares
Periods ended September 30, 2003 Three months Nine months
---------------------------------------------------------------------------------------------------------------------------------
Number of Amount Number of Amount
shares (millions) shares (millions)
---------------------------------------------------------------------------------------------------------------------------------
Common Shares
Beginning of period 189,386,078 $ 2,314.1 187,271,994 $ 2,275.1
Exercise of share options (d) - - 11,691 0.2
Employees' purchase of shares 555,712 13.9 2,468,324 49.5
Dividends reinvested in shares 64,650 1.6 254,431 4.8
---------------------------------------------------------------------------------------------------------------------------------
End of period 190,006,440 $ 2,329.6 190,006,440 $ 2,329.6
=================================================================================================================================
Non-Voting Shares
Beginning of period 159,614,463 $ 3,262.6 158,407,931 $ 3,243.2
Exercise of share options (d) 234,522 4.8 263,373 6.4
Channel stock incentive plan (f) 12,250 0.3 33,725 0.7
Dividend Reinvestment and Share Purchase Plan (g)
Dividends reinvested in shares 539,829 11.2 1,666,613 28.1
Optional cash payments 13,196 0.3 42,618 0.8
---------------------------------------------------------------------------------------------------------------------------------
End of period 160,414,260 $ 3,279.2 160,414,260 $ 3,279.2
=================================================================================================================================
(d) Share Option Plans
The Company has a number of share option plans under which directors, officers
and other employees receive options to purchase Common Shares and/or Non-Voting
Shares at a price equal to the fair market value at the time of grant. Options
granted under the plans may be exercised over specific periods not to exceed 10
years from the time of grant. At September 30, 2003, 26.5 million (December 31,
2002 - 25.8 million) shares are reserved for issuance under the share option
plans.
The following table presents a summary of the activity related to the Company's
share options plans for the periods ended September 30, 2003.
Periods ended September 30, 2003 Three months Nine months
---------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Number of average option Number of average option
shares price shares price
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 24,535,395 $ 25.13 24,689,860 $ 25.60
Granted 158,520 21.69 1,162,325 15.90
Exercised (234,522) 13.29 (275,064) 13.39
Forfeited and expired (236,753) 30.06 (1,354,481) 27.45
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 24,222,640 25.17 24,222,640 25.17
=================================================================================================================================
(e) Warrants
Under the terms of the arrangement to acquire Clearnet, effective January 18,
2001, TELUS Corporation exchanged the warrants held by former Clearnet warrant
holders. Each warrant entitles the holder to purchase a non-voting share at a
price of U.S.$10.00 per share until September 15, 2005. Proceeds arising from
the exercise of the warrants are credited to share capital. As at September 30,
2003, 0.8 million (December 31, 2002 - 0.8 million) warrants remained
outstanding.
(f) Channel Stock Incentive Plan
The Company initiated the Plan to increase sales of various products and
services by providing additional performance-based compensation in the form of
Non-Voting Shares. The Company has reserved 0.2 million (December 31, 2002 -
0.3 million) shares for issuance under the Plan. As at September 30, 2003,
shares earned, but not yet issued, are accrued as a component of Common Equity.
(g) Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase Plan under which
eligible shareholders may acquire Non-Voting Shares through the reinvestment of
dividends and additional optional cash payments. Excluding Non-Voting Shares
purchased by way of additional optional cash payments, at the Company's
discretion it may offer the Non-Voting Shares at up to a 5% discount from the
market price. Shares purchased through optional cash payments are subject to a
minimum investment of $100 per transaction and a maximum investment of $20,000
per calendar year. Under this Plan, the Company has the option of offering
shares from Treasury or having the trustee acquire shares in the market. Prior
to July 1, 2001, when the acquisition of shares from Treasury commenced, all
Non-Voting Shares were acquired in the market at normal trading prices.
16. Commitments and Contingent Liabilities
(a) Operational Efficiency Program Initiatives
As disclosed in Note 4, the Company estimates that an additional restructuring
amount of approximately $7.3 million may be recorded in 2003 in respect of the
Operational Efficiency Program for items that were not eligible to be recorded
prior to September 30, 2003.
(b) Labour Negotiations
In 2000, TELUS commenced collective bargaining with the Telecommunications
Workers Union for a new collective agreement replacing the legacy agreements
from BC TELECOM and Alberta-based TELUS. Following the Clearnet acquisition and
subsequent transactions, the Mobility business assumed responsibility for
separate negotiations for its unionized operations in British Columbia and
Alberta. This is the first round of collective bargaining since the merger of
BC TELECOM and TELUS Alberta and the Company's aim is to replace the multiple
legacy collective agreements with a single collective agreement for the new
bargaining unit.
During the fourth quarter of 2002, the Company's application to the Federal
Minister of Labour, as provided for under the Canada Labour Code, requesting
the appointment of a federal conciliator was granted. While the conciliation
process is underway, the Canada Labour Code prohibits a strike or lock out.
In January 2003, the Company and the Telecommunications Workers Union signed a
Maintenance of Activities agreement, as required by federal legislation. This
agreement ensures the continuation of services to 911 emergency, police, fire,
ambulance, hospitals and coast guard, with provisions to cover other potential
emergency services necessary to prevent immediate and serious danger to the
health or safety of the public, in the event of a work stoppage.
Also in January 2003, the Company and the Telecommunications Workers Union
agreed to an extension of the conciliation process to include a global review
of all outstanding issues and a subsequent 60-day conciliation period. In July
2003, the conciliators concluded their global review and released their action
plan, which was agreed to and accepted by the Company and the
Telecommunications Workers Union. The conciliators' action plan sets out that
the 60-day conciliation period will commence November 14, 2003, while, in the
interim, pensions and employee benefits discussions will continue. If the
outstanding issues are not resolved at the end of the 60-day period, the
parties may agree to extend this phase or, alternatively, following a 21-day
cooling off period, a legal work stoppage may occur no earlier than February
2004. If the outstanding issues are not resolved and a new collective agreement
is not achieved, there is the risk of a labour disruption. As a labour
disruption could occur in multiple forms, the operational and financial impacts
of a labour disruption on the Company are not practicably determinable
currently.
(c) Guarantees
Effective for reporting periods ending after December 31, 2002, Canadian GAAP
requires the disclosure of certain types of guarantees and their maximum,
undiscounted amounts. The maximum potential payments represent a "worst-case
scenario" and do not necessarily reflect results expected by the Company.
Guarantees requiring disclosure are those obligations that require payments
contingent on specified types of future events; in the normal course of its
operations, the Company enters into obligations which GAAP may consider to be
guarantees. As defined by Canadian GAAP, guarantees subject to these disclosure
guidelines do not include guarantees that relate to the future performance of
the Company.
Performance guarantees: Performance guarantees contingently require a guarantor
to make payments to a guaranteed party based on a third party's failure to
perform under an obligating agreement. TELUS provides sales price guarantees in
respect of employees' principal residences as part of its employee relocation
policies. In the event that the Company is required to honour such guarantees,
it purchases (for immediate resale) the property from the employee.
The Company has guaranteed a third party's financial obligation as a part of a
facility naming rights agreement. The guarantee runs through to December 31,
2014, on a declining-balance basis and is of limited recourse.
In 2003, the Company guaranteed a third party's performance in respect of a
customer contract that was assigned to the third party. The Company would be
required to make a payment to the customer should the performance requirements
of the contract not be met. The guarantee runs through to December 31, 2003 and
is of limited recourse.
In 2003, the Company guaranteed a customer's financial obligation to a third
party in respect of telecommunication equipment that the Company is supplying
to the customer. The Company could be required to make a payment to the third
party in the event that the customer does not accept the telecommunications
equipment as a result of a major failure of the equipment that prevents the
equipment from meeting specified service levels. The guarantee runs through to
July 1, 2004, and the Company has recourse to the underlying assets.
As at September 30, 2003, the Company has no liability recorded in respect of
the aforementioned performance guarantees.
Financial guarantees: In conjunction with its 2001 exit from the equipment
leasing business, the Company provided a guarantee to a third party with
respect to certain specified telecommunication asset and vehicle leases. If the
lessee were to default, the Company would be required to make a payment to the
extent that the realized value of the underlying asset is insufficient to pay
out the lease; in some instances, the Company could be required to pay out the
lease on a gross basis and realize the underlying value of the leased asset
itself. As at September 30, 2003, the Company has a liability of $1.8 million
recorded in respect of these lease guarantees.
The following table quantifies the maximum, undiscounted guarantee amounts, as
at September 30, 2003, without regard for the likelihood of having to make such
payment.
Performance Financial
(millions) guarantees (a) guarantees (a) Total
---------------------------------------------------------------------------------------------------------------------------------
2003 (balance of year) $ 6.5 $ 7.4 $ 13.9
2004 4.9 5.9 10.8
2005 2.0 4.4 6.4
2006 1.8 3.1 4.9
2007 1.6 1.5 3.1
(a) Annual amounts for performance guarantees and financial guarantees
include the maximum guarantee amounts during any year of the term of the
guarantee.
Indemnification obligations: In the normal course of operations, the Company
may provide indemnification in conjunction with certain transactions. The term
of these indemnification obligations range in duration and often are not
explicitly defined. Where appropriate, an indemnification obligation is
recorded as a liability. In many cases, there is no maximum limit on these
indemnification obligations and the overall maximum amount of the obligations
under such indemnification obligations cannot be reasonably estimated. Other
than obligations recorded as liabilities at the time of the transaction,
historically the Company has not made significant payments under these
indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the
Company agreed to bear a proportionate share of the purchaser's increased
directory publication costs if the increased costs were to arise from a change
in the applicable Canadian Radio-television and Telecommunications Commission
("CRTC") regulatory requirements. The Company's proportionate share would be
80% through May 2006, declining to 40% in the next five-year period and then to
15% in the final five years. As well, should the CRTC take any action which
would result in the purchaser being prevented from carrying on the directory
business as specified in the agreement, TELUS would indemnify the purchaser in
respect of any losses that the purchaser incurred.
The Company has no liability recorded, as at September 30, 2003, in respect of
indemnification obligations.
(d) Claims and Lawsuits
A number of claims and lawsuits seeking damages and other relief are pending
against the Company. It is impossible at this time for the Company to predict
with any certainty the outcome of such litigation. However, management is of
the opinion, based upon information presently available, that it is unlikely
that any liability, to the extent not provided for through insurance or
otherwise, would be material in relation to the Company's consolidated
financial position.
17. Additional Financial Information
(a) Income Statement
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Advertising expense $ 30.3 $ 29.8 $ 90.7 $ 105.1
(b) Balance Sheet
As at As at
September 30, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Accounts receivable
Customer accounts receivable $ 331.2 $ 524.7
Accrued receivables 227.0 179.2
Allowance for doubtful accounts (65.0) (71.8)
Other 11.3 8.3
---------------------------------------------------------------------------------------------------------------------------------
$ 504.5 $ 640.4
=================================================================================================================================
As at As at
September 30, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Prepaid expense and other
Prepaid expenses $ 107.4 $ 106.1
Deferred customer activation and installation costs 52.8 57.3
Other - 0.1
---------------------------------------------------------------------------------------------------------------------------------
$ 160.2 $ 163.5
=================================================================================================================================
Accounts payable and accrued liabilities
Trade accounts payable $ 308.8 $ 337.1
Accrued liabilities 337.4 388.1
Payroll and other employee related liabilities 381.3 359.7
Interest payable 206.1 75.4
Other 32.8 38.5
---------------------------------------------------------------------------------------------------------------------------------
$ 1,266.4 $ 1,198.8
=================================================================================================================================
Advance billings and customer deposits
Advance billings $ 365.9 $ 304.3
Customer deposits 24.9 26.0
---------------------------------------------------------------------------------------------------------------------------------
$ 390.8 $ 330.3
=================================================================================================================================
(c) Statement of Cash Flows
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Disbursements made in conjunction with
Operational Efficiency Program
Workforce reduction
Voluntary (Early Retirement Incentive Plan,
Voluntary Departure Incentive Plan and other) $ 18.6 $ 29.6 $ 144.8 $ 29.6
Involuntary and other 8.6 22.6 71.7 83.7
Lease termination charges 2.2 1.9 5.8 4.2
Other charges 2.7 2.6 11.3 16.5
---------------------------------------------------------------------------------------------------------------------------------
$ 32.1 $ 56.7 $ 233.6 $ 134.0
=================================================================================================================================
Net change in non-cash working capital
Accounts receivable $ (4.9) $ 259.2 $ 135.9 $ 301.5
Income and other taxes receivable 8.9 3.4 (208.2) (55.3)
Inventories 3.8 8.6 18.7 26.1
Prepaid expenses and other 64.7 84.2 4.6 32.6
Accounts payable and accrued liabilities 186.3 50.1 71.5 (11.5)
Advance billings and customer deposits 20.3 18.2 60.5 3.7
---------------------------------------------------------------------------------------------------------------------------------
$ 279.1 $ 423.7 $ 83.0 $ 297.1
=================================================================================================================================
18. Segmented Information
The Company's reportable segments, which are used to manage the business, are
Communications and Mobility. Communications includes: voice local, voice long
distance, data and other telecommunication services excluding wireless;
Mobility includes: cellular and paging services. Segmentation is based on
similarities in technology, the technical expertise required to deliver the
products and services, and the distribution channels used. Intersegment sales
are recorded at the exchange value, which is the amount agreed to by the
parties.
Three-month periods
ended September 30 Communications Mobility Eliminations Consolidated
(millions) 2003 2002 2003 2002 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
External revenue $ 1,186.3 $ 1,233.8 $ 619.9 $ 532.5 $ - $ - $ 1,806.2 $ 1,766.3
Inter-segment
revenue 24.6 24.5 4.0 4.9 (28.6) (29.4) - -
---------------------------------------------------------------------------------------------------------------------------------
Total operating
revenue 1,210.9 1,258.3 623.9 537.4 (28.6) (29.4) 1,806.2 1,766.3
Operations expenses 701.9 760.0 378.4 372.6 (28.6) (29.4) 1,051.7 1,103.2
---------------------------------------------------------------------------------------------------------------------------------
EBITDA (a) $ 509.0 $ 498.3 $ 245.5 $ 164.8 $ - $ - $ 754.5 $ 663.1
=================================================================================================================================
CAPEX (b) $ 208.9 $ 230.2 $ 95.1 $ 97.0 $ - $ - $ 304.0 $ 327.2
=================================================================================================================================
EBITDA less CAPEX $ 300.1 $ 268.1 $ 150.4 $ 67.8 $ - $ - $ 450.5 $ 335.9
=================================================================================================================================
Nine-month periods
ended September 30 Communications Mobility Eliminations Consolidated
(millions) 2003 2002 2003 2002 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
External revenue $ 3,604.0 $ 3,745.1 $ 1,716.4 $ 1,467.2 $ - $ - $ 5,320.4 $ 5,212.3
Inter-segment
revenue 71.4 72.5 11.6 13.2 (83.0) (85.7) - -
---------------------------------------------------------------------------------------------------------------------------------
Total operating
revenue 3,675.4 3,817.6 1,728.0 1,480.4 (83.0) (85.7) 5,320.4 5,212.3
Operations expenses 2,155.7 2,350.4 1,102.6 1,074.2 (83.0) (85.7) 3,175.3 3,338.9
---------------------------------------------------------------------------------------------------------------------------------
EBITDA (a) $ 1,519.7 $ 1,467.2 $ 625.4 $ 406.2 $ - $ - $ 2,145.1 $ 1,873.4
=================================================================================================================================
CAPEX (b) $ 589.8 $ 947.2 $ 227.5 $ 334.5 $ - $ - $ 817.3 $ 1,281.7
=================================================================================================================================
EBITDA less CAPEX $ 929.9 $ 520.0 $ 397.9 $ 71.7 $ - $ - $ 1,327.8 $ 591.7
=================================================================================================================================
(a) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is defined as operating revenues less operations expense and,
as defined, excludes restructuring and workforce reduction costs. The
Company has issued guidance on, and reports, EBITDA because it is a key
measure used by management to evaluate performance of its business
segments and is utilized in measuring compliance with debt covenants.
(b) Total capital expenditures ("CAPEX").
19. Related Party Transactions
In 2001, the Company entered into an agreement with Verizon Communications Inc.
("Verizon"), a significant shareholder, with respect to acquiring certain
rights to Verizon's software, technology, services and other benefits, thereby
replacing and amending a previous agreement between the Company and GTE
Corporation. The agreement is renewable annually at the Company's sole option
up to December 31, 2008, and it has been renewed for 2004. As of September 30,
2003, $312.1 million of specified software licences and a trademark licence
have been acquired and recorded as capital and other assets. These assets are
valued at fair market value at the date of acquisition as determined by an
arm's-length party's appraisal. Assuming renewal through to 2008, the total
commitment under the new agreement is U.S.$377 million for the period 2001 to
2008 and the commitment remaining after September 30, 2003, is U.S.$107
million. In addition, in the normal course of operations and on market terms
and conditions, ongoing services and other benefits have been received and
expensed; the Company owed Verizon, on a net basis and including dividends
payable, $41.8 million at September 30, 2003 (December 31, 2002 - $75.4
million).
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Verizon agreement
Ongoing services and benefits expensed $ 6.9 $ 10.1 $ 21.2 $ 35.4
Specified software licences and trademark licence
acquired and recorded as capital and other $ - $ 28.8 $ - $ 82.5
Sales to Verizon (Verizon customers' usage of TELUS'
telecommunication infrastructure and other) $ 14.8 $ 9.4 $ 35.9 $ 25.2
Purchases from Verizon (TELUS customers' usage of
Verizon's telecommunication infrastructure and other)$ 6.8 $ 11.1 $ 27.7 $ 25.5
---------------------------------------------------------------------------------------------------------------------------------
In common with, and on the same basis as, other shareholders of the Company,
Verizon is eligible to participate in the Company's Dividend Reinvestment and
Share Purchase Plan (see Note 15(g)). The following table presents a summary of
the Company's dividend transactions with Verizon, which are included elsewhere
in these financial statements in similarly captioned line item amounts.
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Declared dividends attributable to Verizon's
shareholdings
- to be paid in cash $ 11.0 $ 10.5 $ 32.5 $ 21.0
- to be reinvested in Treasury shares - 0.5 0.5 11.9
---------------------------------------------------------------------------------------------------------------------------------
11.0 11.0 33.0 32.9
---------------------------------------------------------------------------------------------------------------------------------
Cash payments 11.0 10.5 32.0 10.5
Reinvested in Treasury shares - 0.5 1.0 22.1
---------------------------------------------------------------------------------------------------------------------------------
11.0 11.0 33.0 32.6
---------------------------------------------------------------------------------------------------------------------------------
Change in dividends payable to Verizon - - - 0.3
Dividends payable to Verizon, beginning of period 11.0 11.0 11.0 10.7
---------------------------------------------------------------------------------------------------------------------------------
Dividends payable to Verizon, end of period $ 11.0 $ 11.0 $ 11.0 $ 11.0
=================================================================================================================================
20. Differences Between Canadian and United States Generally Accepted
Accounting Principles
The consolidated financial statements have been prepared in accordance with
Canadian GAAP. The principles adopted in these financial statements conform in
all material respects to those generally accepted in the United States except
as summarized below. Significant differences between Canadian GAAP and U.S.
GAAP would have the following effect on reported net income of the Company:
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with Canadian GAAP $ 115.9 $ (107.4) $ 281.9 $ (89.8)
Adjustments:
Decrease in depreciation expense (b) 9.0 9.0 26.9 26.9
Decrease in interest expense (c) 2.4 2.4 7.2 7.2
Amortization of intangible assets (d) (20.5) (20.5) (61.4) (61.4)
Change in future employee benefits (e) (4.2) (4.2) (12.7) (12.7)
Asset impairment - decrease in depreciation (f) 18.0 18.0 54.1 54.1
Interest on convertible debentures (g) (1.8) (1.8) (5.3) (5.1)
Accounting for derivatives (h) (0.1) 1.2 0.2 0.7
Taxes on the above adjustments (1.6) (1.3) (5.1) (5.5)
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before effect of change in
accounting principles 117.1 (104.6) 285.8 (85.6)
Effect of change in accounting principles for
intangible assets and goodwill (j) - - - (1,701.6)
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with U.S. GAAP 117.1 (104.6) 285.8 (1,787.2)
Other comprehensive income (loss) (h) (n) (68.0) 140.3 (151.6) 164.4
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) in accordance
with U.S. GAAP $ 49.1 $ 35.7 $ 134.2 $(1,622.8)
=================================================================================================================================
Income (loss) per share under U.S. GAAP
(basic and diluted):
Before effect of change in accounting principles
for intangible assets and goodwill $ 0.33 $ (0.33) $ 0.81 $ (0.29)
Effect of change in accounting principles for
intangible assets and goodwill (j) - - - (5.51)
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.33 $ (0.33) $ 0.81 $ (5.80)
=================================================================================================================================
The following is a restatement of major balance sheet categories to reflect the
application of U.S. GAAP:
As at As at
September 30, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Current Assets $ 1,406.3 $ 1,173.2
Capital Assets
Property, plant, equipment and other 7,744.1 7,926.0
Intangible assets subject to amortization 2,660.8 2,901.6
Intangible assets with indefinite lives 2,954.5 2,950.1
Goodwill 3,543.6 3,543.2
Deferred Income Taxes 811.8 1,174.7
Other Assets 644.7 979.9
---------------------------------------------------------------------------------------------------------------------------------
$19,765.8 $20,648.7
=================================================================================================================================
Current Liabilities $ 2,175.2 $ 2,181.0
Long-Term Debt 6,796.1 8,364.9
Other Long-Term Liabilities 1,162.5 499.7
Deferred Income Taxes 1,626.2 1,655.1
Non-Controlling Interest 10.5 11.2
Shareholders' Equity 7,995.3 7,936.8
---------------------------------------------------------------------------------------------------------------------------------
$19,765.8 $20,648.7
=================================================================================================================================
The following is a reconciliation of shareholders' equity incorporating the
differences between Canadian and U.S. GAAP:
As at September 30 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under Canadian GAAP $ 6,636.7 $ 6,600.9
Adjustments:
Purchase versus Pooling Accounting (a) - (e), (k) 1,520.9 1,554.7
Asset impairment (f) (2.2) (46.6)
Reclassification of convertible debentures from equity to debt (g) (151.8) (150.7)
Accounting for derivatives (h) (1.2) (2.0)
Additional goodwill on Clearnet purchase (l) 123.5 123.5
Accumulated other comprehensive income (loss) (n) (130.6) 144.5
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under U.S. GAAP $ 7,995.3 $ 8,224.3
=================================================================================================================================
Composition of Shareholders' Equity under U.S. GAAP
Preference and preferred shares
TELUS Communications Inc. Preference Shares and Preferred Shares $ 69.7 $ 69.7
Common equity
Common Shares 4,263.1 4,190.6
Non-Voting Shares 4,568.4 4,523.7
Options and warrants 53.9 56.8
Accrual for shares issuable under channel stock incentive plan and other .5 0.2
Cunulative foreign currency translation adjustment (3.0) -
Retained earnings (deficit) (834.1) (768.6)
Accumulated other comprehensive income (loss) (n) (130.6) 144.5
Contributed surplus 7.4 7.4
---------------------------------------------------------------------------------------------------------------------------------
7,925.6 8,154.6
---------------------------------------------------------------------------------------------------------------------------------
$ 7,995.3 $ 8,224.3
=================================================================================================================================
(a) Merger of BC TELECOM and TELUS
The business combination between BC TELECOM and TELUS Corporation (renamed
TELUS Holdings Inc. which was wound up June 1, 2001) was accounted for using
the pooling of interests method under Canadian GAAP. Under Canadian GAAP, the
application of the pooling of interests method of accounting for the merger of
BC TELECOM and TELUS Holdings Inc. resulted in a restatement of prior periods
as if the two companies had always been combined. Under U.S. GAAP, the merger
is accounted for using the purchase method. Use of the purchase method results
in TELUS (TELUS Holdings Inc.) being acquired by BC TELECOM for $4,662.4
million (including merger related costs of $51.9 million) effective January 31,
1999.
(b) Depreciation
Under the purchase method, TELUS' capital assets on acquisition have been
recorded at fair value rather than at their underlying cost (book values) to
TELUS. Therefore, depreciation of such assets based on fair values at the date
of acquisition under U.S. GAAP will be different than TELUS' depreciation based
on underlying cost (book values).
(c) Interest
Under the purchase method, TELUS' long-term debt on acquisition has been
recorded at its fair value rather than at its underlying cost (book value) to
TELUS. Therefore, interest expense calculated on the debt based on fair values
at the date of acquisition under U.S. GAAP will be different than TELUS'
interest expense based on underlying cost (book value).
(d) Intangible Assets
As TELUS' intangible assets on acquisition have been recorded at their fair
value, amortization of such assets, other than for those with indefinite lives,
needs to be included under U.S. GAAP; consistent with prior years, amortization
is calculated using the straight-line method.
The incremental amounts recorded as intangible assets arising from the TELUS
acquisition above are as follows:
Cost Accumulated Net Book Value
Amortization
---------------------------------------------------------------------------------------------------------------------------------
As at As at
September 30, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscribers - wireline $ 1,950.0 $ 209.4 $ 1,740.6 $ 1,769.4
Subscribers - wireless 250.0 148.9 101.1 133.7
---------------------------------------------------------------------------------------------------------------------------------
2,200.0 358.3 1,841.7 1,903.1
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences (a) 1,833.3 1,833.3 - -
---------------------------------------------------------------------------------------------------------------------------------
$ 4,033.3 $ 2,191.6 $ 1,841.7 $ 1,903.1
=================================================================================================================================
(a) Accumulated amortization of spectrum licences is amortization recorded
prior to 2002 and the transitional impairment amount.
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at September 30, 2003, for
each of the next five fiscal years is as follows:
Years ended December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2003 (balance of year) $ 106.0
2004 343.8
2005 234.2
2006 94.4
2007 74.7
(e) Future Employee Benefits
Under U.S. GAAP, TELUS' future employee benefit assets and obligations have
been recorded at their fair values on acquisition. Accounting for future
employee benefits under Canadian GAAP changed to become more consistent with
U.S. GAAP effective January 1, 2000. Canadian GAAP provides that the
transitional balances can be accounted for prospectively. Therefore, to conform
to U.S. GAAP, the amortization of the transitional amount needs to be removed
from the future employee benefit expense.
(f) Asset Impairment
In the first quarter of 1998, BC TELECOM took an asset impairment charge. In
assessing if a capital asset is impaired, estimated future net cash flows are
not discounted in computing the net recoverable amount. Under Canadian GAAP, at
the time the assessment took place, the impairment amount recorded was the
excess of the carrying amount over the recoverable amount; under U.S. GAAP the
impairment amount recorded was the excess of the carrying amount over the
discounted estimated future net cash flows that were used to determine the net
recoverable amount. Under U.S. GAAP the net of tax charge taken in 1998 would
be $232.2 million higher and would not be considered an extraordinary item. The
annual depreciation expense would be approximately $72 million lower subsequent
to when the increased impairment charge was taken under U.S. GAAP.
(g) Convertible Debentures
Under Canadian GAAP, financial instruments such as the convertible debentures
are classified as debt or equity according to their substance rather than their
legal form. Accordingly, due to the substance of the transaction the
convertible debentures have currently been classified as equity and the
corresponding interest expense and the amortization of issue costs has been
charged to the retained earnings rather than to the Consolidated Statements of
Income. Pursuant to U.S. GAAP, the convertible debentures would be included in
long-term debt. The corresponding interest expense on the convertible
debentures and the amortization of issue costs are charged to the Consolidated
Statements of Income.
(h) Accounting for Derivatives
On January 1, 2001, the Company adopted the provisions of SFAS 133, "Accounting
For Derivative Instruments and Hedging Activities." This standard requires all
derivatives be recognized as either assets or liabilities and measured at fair
value. This is different from the Canadian GAAP treatment for financial
instruments. Under U.S. GAAP, derivatives, which are fair value hedges,
together with the financial instrument being hedged, will be marked to market
with adjustments reflected in income and derivatives, which are cash flow
hedges, will be marked to market with adjustments reflected in comprehensive
income.
(i) Income Taxes
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Current $ (11.7) $ 6.6 $ (218.0) $ 36.9
Deferred 96.3 (57.0) 353.0 (35.6)
---------------------------------------------------------------------------------------------------------------------------------
84.6 (50.4) 135.0 1.3
Investment Tax Credits - - (1.0) (40.0)
---------------------------------------------------------------------------------------------------------------------------------
$ 84.6 $ (50.4) $ 134.0 $ (38.7)
=================================================================================================================================
The Company's income tax expense (recovery) differs from that calculated
by applying statutory rates for the following reasons:
Three-month periods ended September 30
($ in millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at statutory
income tax rates $ 74.9 37.0% $ (60.4) 38.9%
Non-taxable portion of gains - (14.0)
Revaluation of deferred income tax assets and
liabilities for decreases in statutory rates 1.0 15.6
Other 2.9 1.7
---------------------------------------------------------------------------------------------------------------------------------
78.8 38.9% (57.1) 36.8%
Large corporations tax 5.8 6.7
---------------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 84.6 41.7% $ (50.4) 32.5%
=================================================================================================================================
Nine-month periods ended September 30
($ in millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at statutory
income tax rates $ 156.3 37.0% $ (47.5) 38.7%
Non-taxable portion of gains - (14.0)
Revaluation of deferred income tax assets and
liabilities for decreases in statutory rates 0.8 16.0
Prior year rates applied to settlement of tax issues (47.0) 2.0
Investment Tax Credits (0.6) (24.3)
Other 7.9 9.2
---------------------------------------------------------------------------------------------------------------------------------
117.4 27.8% (58.6) 47.8%
Large corporations tax 16.6 19.9
---------------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 134.0 31.7% $ (38.7) 31.6%
=================================================================================================================================
(j) Intangible Asset Transitional Impairment Amount and Goodwill
Commencing January 1, 2002, in Canada and the United States, new Generally
Accepted Accounting Principles for intangible assets with an indefinite life
and goodwill apply to the Company (SFAS 142, "Goodwill and Other Intangible
Assets"). As one part of the transitional implementation, intangible assets
with indefinite lives were tested for impairment as at January 1, 2002. Any
such transitional impairment amount arising is considered to arise from a
change in accounting policy and is charged to earnings, in the period the
change is effected, after determining net income from operations. As a result
of the differing accounting treatment afforded the merger of BC TELECOM and
TELUS (see (a) and (d)), the recorded value of intangible assets with
indefinite lives differs materially between Canadian and U.S. GAAP. The Company
has assessed its intangible assets with indefinite lives and determined it
necessary to record a transitional impairment amount of $595.2 million ($910.0
million before tax) for purposes of Canadian GAAP; a transitional impairment of
$1,701.6 million ($2,609.7 million before tax) was required under U.S. GAAP.
The transitional impairment amount, under both Canadian and U.S. GAAP, reduced
the carrying values of the intangible assets with indefinite lives to the same
amounts, thus eliminating the corresponding GAAP difference.
Similarly, goodwill was also to be tested for impairment as at January 1, 2002,
and any transitional impairment amount would also be considered to arise from a
change in accounting policy and is charged to earnings, in the period the
change is effected, after determining net income from operations. The Company
completed this test in the first quarter of 2002. By applying the prescribed
method of comparing the fair value of its reporting units to the carrying
amounts of its reporting units, the Company has assessed its goodwill and
determined that there was no goodwill transitional impairment amount.
Consistent with current industry-specific valuation methods, the Company used a
combination of the discounted cash flow model and the market comparable
approach for determining the fair value of its reporting units.
(k) Goodwill
Under the purchase method of accounting, TELUS' assets and liabilities at
acquisition (see (a)) have been recorded at their fair values with the excess
purchase price being allocated to goodwill in the amount of $403.1 million.
Commencing January 1, 2002, rather than being systematically amortized, the
carrying value of goodwill is periodically tested for impairment.
(l) Additional Goodwill on Clearnet purchase
Under U.S. GAAP, shares issued by the acquirer to affect an acquisition are
measured at the date the acquisition was announced; however, under Canadian
GAAP, at the time the transaction took place, shares issued to effect an
acquisition were measured at the transaction date. This results in the purchase
price under U.S. GAAP being $131.4 million higher than under Canadian GAAP. The
resulting difference is assigned to goodwill. Commencing January 1, 2002,
rather than being systematically amortized, the carrying value of goodwill is
periodically tested for impairment.
(m) Share-Based Compensation
Generally Accepted Accounting Principles require disclosure of the impact on
earnings and earnings per share as if the fair value based method of accounting
had been applied for share-based compensation. Under Canadian GAAP, this is
required in respect of awards made after 2001; under U.S. GAAP, this is
required in respect of awards made after 1994. The fair values of the Company's
options granted in 2003 and 2002, and the weighted average assumptions used in
estimating the fair values, are set out in Note 8. Such impact, using the fair
values set out in Note 8 would approximate the following pro forma amounts:
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Compensation cost $ 10.5 $ 17.1 $ 34.1 $ 53.8
Net income (loss)
As reported $ 117.1 $ (104.6) $ 285.8 $ (85.6)
Pro forma $ 106.6 $ (121.7) $ 251.7 $ (139.4)
Net income (loss) per Common Share and Non-Voting Share
Basic and diluted
As reported $ 0.33 $ (0.33) $ 0.81 $ (5.80)
Pro forma $ 0.30 $ (0.39) $ 0.71 $ (5.96)
---------------------------------------------------------------------------------------------------------------------------------
(n) Additional Disclosures Required Under U.S. GAAP - Comprehensive Income
SFAS 130, "Reporting Comprehensive Income", requires that a statement of
comprehensive income be displayed with the same prominence as other financial
statements. Comprehensive income, which incorporates net income, includes all
changes in equity during a period except those resulting from investments by
and distributions to owners. There is currently no requirement to disclose
comprehensive income under Canadian GAAP.
Periods ended September 30 Three months Nine months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Change in unrealized fair value of derivative
cash flow hedges (h) $ (109.6) $ 251.2 $ (247.4) $ 293.6
Minimum pension liability (0.9) - (3.0) -
---------------------------------------------------------------------------------------------------------------------------------
(110.5) 251.2 (250.4) 293.6
Income tax expense (recovery) (42.5) 110.9 (98.8) 129.2
---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (68.0) 140.3 (151.6) 164.4
Accumulated other comprehensive income (loss),
beginning of period (62.6) 4.2 21.0 (19.9)
---------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss),
end of period $ (130.6) $ 144.5 $ (130.6) $ 144.5
=================================================================================================================================
(o) Asset Retirement Obligations
Commencing January 1, 2003, new Generally Accepted Accounting Principles for
asset retirement obligations apply to the Company (SFAS 143, "Accounting for
Asset Retirement Obligations"). The new standard focuses on the recognition and
measurement of liabilities for statutory, contractual or legal obligations,
normally when incurred, associated with the retirement of property, plant and
equipment when those obligations result from the acquisition, construction,
development or normal operation of the assets. The obligations are measured
initially at fair value (using present value methodology) and the resulting
costs capitalized into the carrying amount of the related asset. In subsequent
periods, the liability is adjusted for the accretion of discount and any
changes in the amount or timing of the underlying future cash flows. The
capitalized asset retirement cost is depreciated on the same basis as the
related asset; discount accretion is also included in determining the results
of operations.
All amounts arising from the application of this accounting policy are not
significant.
21. Prior Period Presentation
Certain of the comparative amounts have been reclassified to conform to the
presentation adopted in the current period.
Forward-Looking Statements
==============================================================================
This document and the management discussion and analysis contain
statements about expected future events and financial and operating results of
TELUS Corporation ("TELUS" or the "Company") that are forward-looking and
subject to risks and uncertainties. TELUS' actual results, performance or
achievement could differ materially from those expressed or implied by such
statements. Such statements are qualified in their entirety by the inherent
risks and uncertainties surrounding future expectations and may not reflect
the potential impact of any future acquisitions, mergers or divestitures.
Factors that could cause actual results to differ materially include but are
not limited to: general business and economic conditions in TELUS' service
territories across Canada and future demand for services; competition in
wireline and wireless services, including voice, data and Internet services
and within the Canadian telecommunications industry generally; re-emergence
from receivership of newly restructured competitors; levels of capital
expenditures; corporate restructurings; success of operational and capital
efficiency programs including maintenance of customer service levels; success
of integrating acquisitions; network upgrades, billing system conversions, and
reliance on legacy systems; implementation of new customer relationship
management software; development and introduction of new products and
services; supplier/vendor reliability and viability; realization of tax
savings; the impact of credit rating changes; availability and cost of capital
including renewal of credit facilities; financial condition and credit risk of
customers affecting collectibility of receivables; ability to maintain an
accounts receivable securitization program; legal and regulatory compliance of
employees and key stakeholders; adverse regulatory action; attraction and
retention of key personnel; collective labour agreement negotiations and
outcome of conciliation efforts; future costs of retirement and pension
obligations and returns on invested pension assets; technological advances;
the final outcome of pending or future litigation; the effect of
environmental, health and safety concerns; man-made and natural disasters; and
other risk factors discussed herein and listed from time to time in TELUS'
reports, comprehensive public disclosure documents, including the Annual
Information Form, and in other filings with securities commissions in Canada
and the U.S.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
==============================================================================
Management's Discussion and Analysis
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month and nine-month
periods ended September 30, 2003 and 2002. This discussion contains forward-
looking information that is qualified by reference to, and should be read
together with, the Company's discussion regarding forward-looking statements
(see "Forward-Looking Statements" above). TELUS' most significant accounting
policies are discussed in the annual and interim financial statements of
TELUS. These policies and disclosures are important to the understanding of
the following discussion. The following should also be read together with the
interim and annual consolidated financial statements of TELUS. The interim
consolidated financial statements have been prepared in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP"), which differ in
certain respects from U.S. GAAP. See Note 20 to the interim consolidated
financial statements for a summary of the principal differences between
Canadian and U.S. GAAP as they relate to TELUS.
Management's discussion and analysis is comprised of the following:
1. Vision, Core Business and Strategy
2. Capability to Deliver Results
3. Results and Key Performance Indicators
4. Risks and Uncertainties
1. Vision, Core Business and Strategy
TELUS will continue to be guided by its six strategic imperatives
established in 2000. TELUS is focusing and moving forward on the following
priorities in 2003:
Continuing to deliver on our efficiency improvement objectives
- Communications segment operating costs were significantly reduced and
fifteen customer contact centres were closed and consolidated in the
first nine months of 2003. Net staff levels decreased by 835 since the
beginning of the year and an additional net 500 reduction is expected
during the fourth quarter of 2003 to meet the planned Operational
Efficiency Program cumulative staff reduction target of 7,300. During
the third quarter of 2003, staff reductions under the Operational
Efficiency Program were offset by planned hiring to accommodate an
anticipated seasonal volume increase. Additional temporary staff were
also hired and planned departures were deferred in response to
unprecedented emergency situations.
Improving customer service
Service levels in most areas have improved in 2003 compared with 2002,
with 15 of 19 retail Canadian Radio-telephone and Telecommunications
Commission ("CRTC") quality of service measures meeting or exceeding targets
at September 30, 2003. Three of the four remaining retail service quality
measures showed steady improvement until July 2003. Recent process and system
changes that are having a positive impact, include:
- Launch and roll-out of an interactive voice recognition tool that
directs callers to the appropriate destination for four contact centre
numbers (ADSL, Customer Care, Business billing and Credit). The number
of misdirected calls has been reduced substantially and productivity
and quality of service measures have improved significantly in recent
weeks;
- Integration of the Internet support and online billing information
Web site, TELUS.net, with the Company's portal myTELUS.com, providing
a more seamless look and feel. The integrated Web site provides
customers with 24 hours per day, 7 days per week access to support,
information and self-serve tools via a single, common access at
myTELUS.com. The benefits to TELUS of an integrated Web site include
more efficient Web management and customer support data analysis.
However, at the end of the third quarter of 2003, TELUS was below minimum
standards for 4 of 19 retail CRTC quality of service measures, namely: "Access
to Repair Bureau", "Out of Service Cleared in 24 Hours", "Repair Appointments
Met", and "Access to the Business Office". Access to the business office was
of particular concern, with too many customers experiencing long wait times.
Service levels were affected by a number of concurrent factors, including:
- Unprecedented emergency situations (discussed in "2. Capability to
Deliver Results") and heavy seasonal volumes challenged the Company's
goal to improve customer service levels.
- TELUS hired temporary and regular staff to replace a portion of
Operational Efficiency Program departures to remedy customer care
staff levels in order to improve service delivery; however an
inability to backfill Operational Efficiency Program departures as
quickly as planned occurred in certain customer contact centres as a
result of introducing more rigorous hiring and training criteria.
- The Company had implemented a new trouble management system in July
that integrated eight formerly separate systems in order to cut down
customer wait times, and resolve issues the first time they are
reported. Performance and stability problems were experienced with
this system, reducing employee productivity and creating delays in
processing customer work orders. Many of these problems are being
remediated and we are seeing consistent weekly improvement. Additional
actions taken to meet repair demands included re-allocating resources
geographically and across departments and the use of overtime.
Improvements in response times are being made and the Company expects
the four quality of service metrics to improve by the end of 2003.
Enhancing our leadership position in the North American wireless
industry
- TELUS Mobility continued to build on its industry-leading performance
from the first half of 2003. Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) increased by 49% and 54% for
the third quarter and first nine months of 2003, respectively, when
compared with the same periods a year ago. As a result of continued
EBITDA growth and reduced capital expenditures, Mobility generated
substantially improved cash flow (EBITDA less capital expenditures) of
$150.4 million and $397.9 million for the third quarter and first nine
months of 2003, respectively, as compared with $67.8 million and $71.7
million for the same periods in 2002.
- Mobility EBITDA margin expanded by 9 percentage points to a record
42.5% of Network revenue.
- TELUS Mobility continues to lead the industry with average revenue per
subscriber unit per month ("ARPU") of $60 and $57 for the third
quarter and first nine months of 2003, respectively, while maintaining
a world-class churn rate of 1.4% for both periods.
Strengthen our financial position, based on improved operating
performance
- The Company reduced net debt and continued to improve its financial
ratios in the third quarter and nine months ended September 30, 2003.
The Net debt to EBITDA ratio decreased from 3.3:1 at the end of 2002
to reach the original 2003 year-end target of 3.0:1 by June 30, 2003,
and was further reduced to 2.7:1 at September 30, 2003. Management has
further revised its guidance to 2.7:1 or less for the end of 2003 from
the 2.8:1 or less set at the end of July;
- During the third quarter of 2003, Moody's changed its outlook for
TELUS debt to 'positive' from 'stable', and Standard & Poor's changed
its outlook to 'stable' from 'negative'. Collectively, the debt rating
agencies have improved their outlooks or trend for TELUS debt to one
'positive' and three 'stable' assessments from four 'negative'
assessments at the beginning of the year. In the bond markets, prices
on TELUS Corporation notes have appreciated by approximately 15%,
while interest rate spreads over the relevant benchmark government
bonds have narrowed by 60% on average as at September 30, 2003, when
compared with December 31, 2002.
Achieving a settlement with our unionized employees
In 2000, TELUS commenced collective bargaining with the
Telecommunications Workers Union ("TWU") for a new collective agreement
replacing the legacy agreements from BC TELECOM and Alberta-based TELUS. Since
January 2003, the Company and the TWU continue to participate in a
conciliation process, which includes a global review of all outstanding issues
and a subsequent 60-day conciliation period. In July 2003, the conciliators
concluded their global review and released their action plan, which was agreed
to and accepted by the Company and the TWU. The conciliators' action plan sets
out that the 60-day conciliation period will commence November 14, 2003,
while, in the interim, pensions and employee benefits discussions will
continue. If the outstanding issues are not resolved at the end of the 60-day
period, the parties may agree to extend this phase or, alternatively,
following a 21 day cooling off period, a legal work stoppage may occur no
earlier than February 2004.
If the outstanding issues are not resolved and a new collective agreement
is not achieved, there is the risk of a labour disruption. While the financial
and operational impacts of a labour disruption are difficult to estimate, the
Company expects that in the short-term, profitability would be reduced, but
cash flow would increase due to reduced capital expenditures.
2. Capability to Deliver Results
Impact of Forest Fires in Western Canada, the Power Grid Failure in
Eastern Canada, and computer viruses
A number of natural disasters and other emergencies occurred during the
third quarter of 2003, which tested TELUS' emergency response capability.
TELUS activated its Emergency Operations Centre on four separate occasions
during the month of August 2003 in response to forest fires and wind storms in
B.C. and Alberta, the 'Niagara loop' power grid failure affecting Ontario, and
the spread of computer viruses over the Internet. The Emergency Operations
Centre provided strategic direction and support to local TELUS staff dealing
with various situations, and assisted in determining short-term priorities and
developing solutions. The total value of lost revenues and indirect costs of
responding to these events have not been quantified.
The B.C. forest fires in August destroyed approximately 80 km of fibre
optic cable, approximately 100 km of copper cable, one cable junction box, and
one TELUS Mobility cellular site. In the Kamloops area, approximately 5,000
lines were out of service - all but 65 lines were restored within 72 hours. In
the Kelowna area, the damage to TELUS facilities was less severe and service
was restored prior to evacuation orders being lifted. The total capital and
financial losses from the various fires is currently estimated at over $2
million and is reflected in the September 30, 2003 quarterly results; however,
as each fire is a separate insurance event, little if any of the losses will
be recovered from insurance.
During the electrical blackout that affected parts of Ontario in mid-
August, TELUS' wireline network and emergency 911 services were fully
operational. Customers with hosting services in TELUS' Intelligent Internet
Data Centres in Toronto experienced no outages during the power grid failure.
The TELUS Mobility network in the affected areas did experience heavy call
volume, which affected performance of the network. TELUS Mobility experienced
some site outages as the blackout endured. Additional power supply was sent to
sites to help minimize the impact, especially where customers providing
emergency services were affected.
August and September is traditionally a busy time of year for the
wireline business, with student moves and customers back from summer holidays.
Call volumes to TELUS' customer contact centres increased as a result of the
situations described above and as a result of the spread of computer viruses
over the Internet to many of TELUS' Internet customers. Despite having added
staff to customer care and technical help functions in July, the Company could
not provide enough customer help resources to deal with all of these
situations concurrently.
Despite these circumstances, TELUS is meeting 15 of 19 of its retail
quality of service indicators filed monthly with the CRTC. TELUS remains
committed to not only maintaining but also improving customer service levels
in coming quarters.
Regulatory updates
Approval for National video-on-demand service (Broadcasting Decision
2003-453) and Regional broadcasting distribution undertakings in Alberta
and British Columbia (Broadcasting Decision 2003-407)
On August 20, 2003, the CRTC approved applications by TELUS
Communications Inc. ("TCI") to operate terrestrial broadcasting distribution
undertakings to serve various communities in Alberta and British Columbia. On
September 9, 2003, the CRTC approved TELUS' application for a video-on-demand
undertaking licence with the same terms and conditions as previously licensed
video-on-demand undertakings in Canada. The licence is national in scope and
extends for a seven-year term. TCI continues to test and assess this
opportunity and no launch date has been set.
Access to Municipal Rights-of-Way (Supreme Court of Canada dismisses of
Appeal of Telecom Decision 2001-23 - Ledcor/Vancouver - Construction,
operation and maintenance of transmission lines in Vancouver)
In Telecom Decision 2001-23, the CRTC resolved a dispute between the City
of Vancouver and Ledcor over the access to municipal rights-of-way, granting
permission to Ledcor to construct, maintain and operate transmission lines
that Ledcor has constructed in Vancouver, and prescribing terms and conditions
related to that permission. The Federal Court of Appeal later dismissed an
appeal of Decision 2001-23. Subsequently, the Federation of Canadian
Municipalities, the City of Vancouver and other appellants sought leave to
appeal the Federal Court of Appeal's decision with the Supreme Court of
Canada.
On September 4, 2003, the Supreme Court of Canada decided to not hear the
appeal. The significant claims for annual fees by the cities (estimated at
between $30 to $60 million annually for TELUS) will not be payable.
Accordingly, the CRTC's jurisdiction to grant access to municipal rights-of-
way has been affirmed and TELUS, other telecommunications carriers and
broadcast distribution companies will be in a better position to negotiate
fair and reasonable terms of access to municipal rights-of-way for placement
of facilities.
Appeal of Telecom Decision 2003-45 - Provision of telecommunications
services to customers in multi-dwelling units
On July 30, 2003, the Canadian Institute of Public and Private Real
Estate Companies and the Building Owners and Managers Association - Canada
filed a motion for leave to appeal Telecom Decision 2003-45 with the Federal
Court of Appeal. In Decision 2003-45, the CRTC announced principles that allow
for access by all local telephone companies to equipment and wire in buildings
known as multi-dwelling units. The decision reduced considerably the
uncertainty TELUS had faced in gaining access to such buildings, both where
TELUS is an entrant in the market and in its incumbent territory where onerous
terms and conditions of access, including fees, were being demanded by
building owners. From a financial perspective, the decision reduced TELUS'
exposure to potential significantly increased costs of building access. This
matter is still before the courts.
Telecom Decision 2003-49 - CRTC directs incumbent telephone companies to
offer high-speed Internet services to competitors' residential telephone
customers
On July 21, 2003, the CRTC directed the incumbent telephone companies to
provide their retail high-speed Internet services to residential customers
receiving primary local telephone service from competitors upon request.
Currently the provision of high-speed service is directly linked to the local
telephone line. TELUS has determined a plan to reconfigure numerous automated
systems and processes to effect this decision by the second quarter of 2004
for estimated capital and operating costs of up to $10 million. In the
meantime, a manual process should begin to be rolled out towards the end of
2003.
Telecom Decision 2003-64 - TELUS' revised service improvement plan
On September 25, 2003, the CRTC approved TELUS' $21.4 million total
service improvement program, including high cost and non-high cost service
areas, to be completed over four years ending in 2006, and approved recovery
of this amount from the Deferral Account. TELUS continues to defer revenues in
accordance with Telecom Decision CRTC 2002-34 as the CRTC has not determined
the process for disposal of the balance of deferral account liability.
Public Notice 2003-8 - Review of Price Floor Safeguards for Retail
Tariffed Services and Related Issues
On October 23, 2003, the CRTC issued a public notice requesting comments
on its current imputation test, bundling rules and other matters. The CRTC
also proposed interim rules that could be effective in the first quarter of
2004. A public process to consider final rules may extend into the second half
of 2004. These interim rules would have the effect of increasing the floor
price that TELUS is subject to when pricing new tariffed (non-forborne)
services and when offering new bundles of services that include at least one
tariffed service. TELUS intends to fully participate in these public
proceedings and present its perspective on the issues addressed.
3. Results and Key Performance Indicators
Accounting Policy Developments
Guarantees
In the normal course of its operations, the Company enters into
obligations which GAAP may consider to be guarantees. Effective for reporting
periods ending after December 31, 2002, Canadian GAAP requires the disclosure
of these guarantees and their maximum, undiscounted amounts, even when the
likelihood of the Company having to make any payments under the guarantees is
slight. See Note 2a and Note 16c to the interim consolidated financial
statements.
Asset Retirement Obligations
Commencing with the Company's 2004 fiscal year, the new recommendations
of the Canadian Institute of Chartered Accountants ("CICA") for accounting for
asset retirement obligations (CICA Handbook Section 3110) will apply. The new
section focuses on the recognition and measurement of liabilities for
statutory, contractual or legal obligations, normally when incurred,
associated with the retirement of property, plant and equipment when those
obligations result from the acquisition, construction, development or normal
operation of the assets. The Company is currently evaluating the impact of
this standard on its financial statements.
Hedging Relationships
Commencing with the Company's 2004 fiscal year, the new guidelines of the
CICA for accounting for hedging relationships apply to the Company (CICA
Accounting Guideline AcG-13). The Company's previously disclosed hedge
accounting policy is compliant with the new Guideline.
Financial Impact of Price Cap Decisions
On May 30, 2002 and July 31, 2002, the CRTC announced its decisions on
the Regulatory Framework for the Second Price Cap Period for the ILECs
(Incumbent Local Exchange Carriers), or Telecom Decision 2002-34 and Telecom
Decision 2002-43, which established the framework for regulation of ILECs,
including TELUS. These decisions cover a four-year period beginning June 2002
for TELUS Communications Inc. and beginning August 2002 for TELUS
Communications (Quebec) Inc. ("TCQI").
On March 18, 2003, the CRTC issued Telecom Decision 2003-11, which
finalized for the industry the assignment of tariffed services to the service
baskets established in Regulatory Framework for the Second Price Cap Period.
Also on March 18, 2003, the CRTC released Telecom Decision 2003-18, TELUS
Communications Inc. - 2002 Annual price cap filing, in which it approved, on a
final basis, the majority of the applications filed in 2002 by TELUS proposing
rate changes pursuant to Decision 2002-34. On August 27, 2003, the CRTC
released Telecom Order 2003-352 - 2003 Annual Price Cap Filing. This order
approved all of TCI's tariff applications, for implementation on a prospective
basis, to meet its 2003 price cap commitments.
On August 22, 2003, the CRTC issued Telecom Decision 2003-56, which
finalized for TCQI the assignment of tariffed services to the service baskets
established in Decision 2002-43. The assignment was made in a manner very
similar with the assignments for large ILECs in Decision 2003-11. Also on
August 22, 2003, the CRTC issued Telecom Decision 2003-57 which approved, with
changes, applications filed by TCQI for rate changes and directed TCQI to file
further rate changes to meet its 2002 price cap commitment. All other TCQI
rates were approved on a final basis.
The impact of these decisions on TELUS was a decrease in Communications
segment Operating revenues of $11.7 million and $58.7 million, respectively,
for the third quarter and nine month period ended September 30, 2003, when
compared with the same periods in 2002. In addition, the Communications
segment EBITDA decreased by $10.6 million and $57.7 million, respectively, for
the third quarter and nine month period ended September 30, 2003, when
compared to the same period one year earlier.
Results of Operations
Highlights
Quarter ended September 30 2003 2002 Change %
--------------------------------------------------------------------------
($ in millions except per
share amounts)
Operating revenues 1,806.2 1,766.3 39.9 2.3
EBITDA(1) 754.5 663.1 91.4 13.8
Restructuring and workforce
reduction costs 2.3 313.3 (311.0) (99.3)
Income taxes (recovery) 84.0 (50.5) 134.5 -
Net income (loss) 115.9 (107.4) 223.3 -
Common Share and
Non-Voting Share income (loss) 113.2 (110.0) 223.2 -
Earnings (loss) per share (EPS) 0.32 (0.35) 0.67 -
Capital expenditures 304.0 327.2 (23.2) (7.1)
Free cash flow(2) 417.1 239.9 177.2 73.8
--------------------------------------------------------------------------
Nine months ended September 30 2003 2002 Change %
--------------------------------------------------------------------------
($ in millions except per share amounts)
Operating revenues 5,320.4 5,212.3 108.1 2.1
EBITDA 2,145.1 1,873.4 271.7 14.5
Restructuring and workforce
reduction costs 12.1 328.9 (316.8) (96.3)
Income taxes (recovery) 133.0 (0.9) 133.9 -
Net income (loss) 281.9 (89.8) 371.7 -
Common Share and
Non-Voting Share income (loss) 274.0 (97.5) 371.5 -
Earnings (loss) per share (EPS),
basic 0.79 (0.32) 1.11 -
Capital expenditures 817.3 1,281.7 (464.4) (36.2)
Free cash flow 861.8 79.1 782.7 -
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) is defined as Operating revenues ($1,806.2 million and
$1,766.3 million, respectively, for the third quarter of 2003 and
2002) less Operations expense ($1,051.8 million and $1,103.2
million, respectively, for the third quarter of 2003 and 2002). As
defined, EBITDA excludes Restructuring and workforce reduction costs
of $2.3 million and $313.3 million, respectively, for the third
quarter of 2003 and 2002.
The Company has issued guidance on and reports EBITDA because it is
a key measure used by management to evaluate performance of business
units and it is utilized in measuring compliance with debt
covenants. The Company also believes EBITDA is a measure commonly
reported and widely used by investors as an indicator of a company's
operating performance and ability to incur and service debt. The
Company believes EBITDA assists investors in comparing a company's
performance on a consistent basis without regard to depreciation and
amortization, which are non-cash in nature and can vary
significantly depending upon accounting methods or non-operating
factors such as historical cost; and without regard to Restructuring
and workforce reduction costs, which are transitional in nature.
EBITDA is not a calculation based on Canadian or U.S. Generally
Accepted Accounting Principles and should not be considered an
alternative to Operating income or Net income in measuring the
Company's performance or used as an exclusive measure of cash flow
because it does not consider the impact of working capital growth,
capital expenditures, debt principal reductions and other sources
and uses of cash which are disclosed in the Consolidated Statements
of Cash Flows. Investors should carefully consider the specific
items included in TELUS' computation of EBITDA. While EBITDA has
been disclosed herein to permit a more complete comparative analysis
of the Company's operating performance and debt servicing ability
relative to other companies, investors should be cautioned that
EBITDA as reported by TELUS may not be comparable in all instances
to EBITDA as reported by other companies.
(2) Free cash flow is defined as EBITDA less Capital expenditures, cash
interest paid, cash taxes and cash dividends. For the third quarter
of 2003 and 2002, the calculation is:
($ in millions) 2003 2002 Reference
---- ---- ---------
EBITDA 754.5 663.1 Defined above
Less: Capital Consolidated statements
expenditures 304.0 327.2 of cash flows
Less: Cash interest paid 27.7 48.6 Consolidated statements
of cash flows
Less: Cash income taxes Consolidated statements
(recov.) (38.4) 4.2 of cash flows
Less: Cash dividends 41.6 43.2 Consolidated statements
of cash flows
Less: Investment tax Included in EBITDA and Cash
credits received 2.5 -.- income taxes (recov.)
--- ---
417.1 239.9
----- -------
This measure is used to provide an indication of underlying cash
flows in the business for the items identified. As defined, free
cash flow excludes Restructuring and workforce reduction costs,
working capital changes, and other sources and uses of cash, which
are disclosed in the consolidated statements of cash flows. Free
cash flow is not a calculation based on Canadian or U.S. Generally
Accepted Accounting Principles and should not be considered an
alternative to consolidated statements of cash flows. Free cash flow
is a measure that can be used to gauge TELUS' performance over time.
Investors should be cautioned that Free cash flow as reported by
TELUS may not be comparable in all instances to Free cash flow as
reported by other companies.
Significant changes included in the third quarter 2003 financial results,
when compared with the third quarter of 2002, were:
- Communications segment revenues decreased by $47.4 million or 3.8%.
Normalized for incremental year-over-year $11.7 million negative price
cap decision impacts, revenues decreased by $35.7 million or 2.8%,
primarily as a result of lower voice equipment sales, lower long
distance revenues from reduced long distance minutes and prices, and
reduced application development revenues due to the disposal of
certain assets earlier in 2003;
- Communications segment EBITDA improved by $10.7 million or 2.1%, as
the decrease in revenues was more than offset by a $58.1 million
decrease in operations expense. The decrease in operations expense was
primarily a result of Operational Efficiency Program savings partially
offset by increased pension and other expenses;
- Communications segment high-speed Internet net additions of 47,200
exceeded net additions of the same period in 2002 as well as net
additions for the first and second quarters of 2003;
- Mobility Network revenue continued its strong growth, increasing
$83.5 million or 16.9%. Mobility Network revenue growth, combined with
significant operating efficiencies and economies of scale, flowed
through to EBITDA at a rate of 96.6%. TELUS' Canadian industry-leading
ARPU increased $2 to $60;
- Mobility EBITDA increased $80.7 million or 49.0% as a result of strong
ARPU and subscriber growth combined with a significant reduction in
the churn rate and cost containment efforts;
- Mobility EBITDA margin expanded by 9 percentage points to a record
42.5% of Network revenue;
- Mobility net subscriber additions for the third quarter were 100,600,
an increase of 7.4% continuing the positive trend experienced in the
second quarter of 2003. Notably, higher revenue-generating net
postpaid subscriber additions increased by 13.5% over the third
quarter of 2002;
- Mobility blended postpaid and prepaid churn declined to 1.4% per
month, a considerable improvement from 1.7% for the same quarter last
year, driving the 7.4% year-over-year net subscriber additions
increase despite gross additions being flat.
- Interest expense on long-term and short-term debt decreased by
$14.5 million as a result of lower debt balances, while $30.7 million
of interest income was recorded in the third quarter of 2003 primarily
with respect to the settlement of tax matters. Interest income, net of
related income taxes, contributed five cents to earnings per share in
the third quarter of 2003;
- Consolidated Free cash flow increased to $417.1 million, exceeding
cash payments of $32.1 million under Restructuring and workforce
reduction initiatives; and
- Net debt decreased by $516.4 million in the third quarter of 2003 and
decreased by $810.0 million during the last twelve months.
The discussion below for Operating revenues, Operations expense, EBITDA
and Capital expenditures is presented on a segmented basis. All other
discussion is presented for the consolidated interim financial results.
Operating revenues - Communications segment
-------------------------------------------------------------------------
Quarter ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Voice local(1) 526.2 524.4 1.8 0.3
Voice contribution 16.7 24.9 (8.2) (32.9)
Voice long distance(2) 238.5 252.3 (13.8) (5.5)
Data(3) 331.9 332.2 (0.3) (0.1)
Other(4) 73.0 100.0 (27.0) (27.0)
-------------------------------------------------------------------------
External operating revenue 1,186.3 1,233.8 (47.5) (3.8)
Intersegment revenue 24.6 24.5 0.1 0.4
-------------------------------------------------------------------------
Total operating revenue 1,210.9 1,258.3 (47.4) (3.8)
-------------------------------------------------------------------------
Nine months ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Voice local(1) 1,574.4 1,580.9 (6.5) (0.4)
Voice contribution 48.6 62.8 (14.2) (22.6)
Voice long distance(2) 728.8 772.2 (43.4) (5.6)
Data(3) 1,027.1 1,026.7 0.4 0.0
Other(4) 225.1 302.5 (77.4) (25.6)
-------------------------------------------------------------------------
External operating revenue 3,604.0 3,745.1 (141.1) (3.8)
Intersegment revenue 71.4 72.5 (1.1) (1.5)
-------------------------------------------------------------------------
Total operating revenue 3,675.4 3,817.6 (142.2) (3.7)
-------------------------------------------------------------------------
(1) Voice local - incremental price cap reductions of $1.5 million for
the third quarter and $32.2 million for the nine months ended
September 30, 2003.
(2) Voice long distance - incremental price cap changes of positive
$0.4 million for the third quarter and negative $1.2 million for the
nine months ended September 30, 2003.
(3) Data - incremental price cap reductions of $10.4 million for the
third quarter and $25.1 million for the nine months ended September
30, 2003.
(4) Other - incremental price cap reductions of $0.2 million for the
third quarter and $0.2 million for the nine months ended September
30, 2003.
TELUS Communications continued its strategic focus on driving increased
profitability by focusing on operational efficiency and cost control in the
face of declining revenues.
Voice local revenue is generated from access to the Company's network,
which is provided to customers on a monthly subscription basis, and from the
Company's optional and pay-per-use enhanced services. Local access revenue
decreased by $0.5 million and $16.7 million, respectively, for the third
quarter and first nine months of 2003, when compared with the same periods
last year, due to price cap decision impacts and fewer access lines than one
year ago were partly offset by growth in Non-ILEC business. Increased local
enhanced services revenue of $2.3 million and $10.2 million, respectively, for
the third quarter and first nine months, partly offset the decline in local
access revenues. Excluding the negative price cap impacts, voice local revenue
increased by $3.3 million or 0.6% and $25.7 million or 1.6%, respectively, for
the third quarter and first nine months of 2003 as compared to 2002.
Network access lines decreased by 4,000 lines during the third quarter of
2003 as compared with an increase of 7,000 in the third quarter of 2002.
Consumer lines increased by 3,000 and 7,000, respectively, for the third
quarter of 2003 and 2002, which primarily reflects seasonal increases
associated with students returning to university and college. Lower seasonal
growth in 2003 was a result of increased competitive line losses. Business
lines decreased by 7,000 during the third quarter of 2003 and were unchanged
during the same period in 2002. Business lines decreased primarily as a result
of competitive losses in Western Canada exceeding gains in Central and Eastern
Canada, as well as continued migration to more efficient ISDN services. For
the nine-month period ended September 30, 2003, network access lines decreased
by 28,000 as compared with a decrease of 46,000 for the same period in 2002.
Network access lines decreased by 0.8% in the twelve-month period ended
September 30, 2003, an improvement from the 1.1% rate for the twelve months
ended December 31, 2002. The combined ILEC business and local consumer market
share was estimated to be 96.2% at September 30, 2003 (97.0% one year
earlier).
Voice contribution revenue, which represents TELUS' share of contribution
pool funds for providing service in high cost rural service areas, decreased
for the quarter and nine-month periods ended September 30, 2003, when compared
with the same periods one year ago. The decrease was a result of a lower
shortfall calculated according to the methods prescribed by the CRTC for TELUS
and other industry competitors.
Voice long distance revenue decreased for the third quarter and nine-
month period ended September 30, 2003, when compared with the same periods
last year, primarily as a result of fewer consumer and business minutes and
price competition. Consumer revenues decreased as a result of competitive
pressures including 'dial-around' services; partly offset by an increase in
the monthly long distance plan administration fee from $1.25 to $2.95 in
February of this year. Business revenues decreased as a result of fewer
minutes and lower rates. Wholesale settlement revenues were relatively
unchanged in the third quarter and the first nine months of 2003 as higher
volumes were offset by lower prices. Substitution to alternative technologies
such as e-mail, Internet and wireless contributed to long distance revenue and
minute erosion.
Data revenues include Internet access, hosting and applications, LAN/WAN,
gateway service, internetworking and remote access, managed information
technology (IT) services and legacy data services such as private line,
switched data services, data local access, data settlements and data equipment
sales. Wireless data revenues are included in Mobility segment Network
revenues. Communications segment data revenue growth was relatively flat as
increased Internet-related revenues were offset by price cap impacts and lower
revenues for data equipment sales and other services. This included a
reduction of application development revenues by approximately $7 million and
$14 million, respectively, for the third quarter and first nine months of
2003, when compared with the prior year, due to the disposal of certain assets
during the second quarter of 2003. Data revenue growth excluding the negative
price cap impacts was $10.1 million or 3.0% and $25.5 million or 2.5%,
respectively, for the third quarter and first nine months of 2003 as compared
to 2002. Internet service revenues increased by $14.8 million and $62.2
million, respectively, primarily as a result of growth in the Internet
subscriber base. TELUS high-speed Internet subscriber additions were a strong
47,200 during the third quarter of 2003 due in part to a new introductory
offer. This is in contrast to an industry trend of lower net additions each
quarter.
Other revenue decreased for the third quarter and first nine months of
2003, when compared with the same periods in 2002, primarily as a result of
lower voice equipment rental and sales, as well as lower rent from support
structures, lower installation and contract services, and lower individual
line service grants in respect of the conversion of multi-party lines to
single lines in high cost rural areas in Alberta in the early 1990s.
Total external operating revenue discussed above included Non-ILEC
revenues of $138.4 million for the third quarter of 2003 and $135.9 million
for the third quarter of 2002, an increase of $2.5 million or 1.8%. Non-ILEC
revenues for the nine-month period ended September 30, 2003 were $417.7
million, compared with $375.0 million for the same period last year - an
increase of $42.7 million or 11.4%. Growth in Non-ILEC application development
revenues was affected by the disposal of certain assets discussed in data
revenues above, reducing the revenues by approximately $7 million and $14
million, respectively, for the quarter and nine months ending September 30,
2003, when compared with the same periods in 2002. Normalized for such asset
disposal, Non-ILEC revenues increased by approximately $9.5 million or 7% in
the third quarter and approximately $56.7 million or 15% respectively.
Intersegment revenues represent services provided by the Communications
segment to the Mobility segment. These revenues are eliminated upon
consolidation together with the associated expense from the Mobility segment.
Key operating indicators - Communications segment
(000s for subscribers and additions) 2003 2002 Change %
-------------------------------------------------------------------------
As at September 30
------------------
Network access lines, end of period 4,883 4,921 (38) (0.8)
Total Internet subscribers(1),
end of period 849.7 783.0 66.7 8.5
Dial-up 333.7 416.2 (82.5) (19.8)
High-speed 516.0 366.8 149.2 40.7
Quarter ended September 30
--------------------------
Change in Network access lines (4) 7 (11) (157.1)
Total Internet subscriber
net additions 29.1 25.4 3.7 14.6
Dial-up (18.1) (15.4) (2.7) (17.5)
High-speed 47.2 40.8 6.4 15.7
Nine months ended September 30
------------------------------
Change in Network access lines (28) (46) 18 39.1
Total Internet subscriber
net additions(1) 48.0 113.1 (65.1) (57.6)
Dial-up (58.0) (38.9) (19.1) (49.1)
High-speed 106.0 152.0 (46.0) (30.3)
-------------------------------------------------------------------------
(1) As a result of a subscriber audit following a billing system
conversion in the third quarter of 2002, Internet subscriber counts
and net additions for the first six months of 2003 are net of
reductions of approximately 13,000 dial-up subscribers and
approximately 4,700 high-speed Internet subscribers.
Operating revenues - Mobility segment
Quarter ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Network revenue 577.4 493.9 83.5 16.9
Equipment revenue 42.5 38.6 3.9 10.1
-------------------------------------------------------------------------
External operating revenue 619.9 532.5 87.4 16.4
Intersegment revenue 4.0 4.9 (0.9) (18.4)
-------------------------------------------------------------------------
Total operating revenue 623.9 537.4 86.5 16.1
-------------------------------------------------------------------------
Nine months ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Network revenue 1,595.9 1,362.2 233.7 17.2
Equipment revenue 120.5 105.0 15.5 14.8
-------------------------------------------------------------------------
External operating revenue 1,716.4 1,467.2 249.2 17.0
Intersegment revenue 11.6 13.2 (1.6) (12.1)
-------------------------------------------------------------------------
Total operating revenue 1,728.0 1,480.4 247.6 16.7
-------------------------------------------------------------------------
Mobility Network revenue is generated from monthly billings for access
fees, incremental airtime charges, prepaid time consumed or expired, wireless
Internet services and fees for value-added services. Network revenue increased
for the three months ended September 30, 2003 as compared to the same period
in 2002 as a result of increased ARPU and the continued expansion of TELUS
Mobility's subscriber base by 14.0% to approximately 3.3 million subscribers
from 2.9 million one year ago. ARPU increased to $60 from $58 for the same
quarter last year.
TELUS Mobility's execution of its strategic focus on profitable revenue
growth and subscriber retention resulted in a higher ARPU and a substantially
improved churn rate year-over-year. The $2 increase in ARPU continued to build
upon the year-over-year increases experienced in the first half of 2003,
reversing the previously declining trend. Similarly, ARPU for the first nine
months of 2003 was $57 as compared to $55 for the same period last year. The
improved ARPU was a result of increased usage and disciplined pricing changes
including per-minute billing and the reduction of eligible hours included in
certain 'free evening and weekend' rate plan features. Average minutes of use
("MOU") per subscriber per month were 367 for the third quarter of 2003 and
342 for the first nine months of 2003 as compared to 297 and 286,
respectively, for the same periods in 2002. As of September 30, 2003, postpaid
subscribers accounted for 82.4% of the total cumulative subscriber base as
compared to 84.1% one year earlier and have been stable during the current
year. Net postpaid subscriber additions of 76,400 for the third quarter of
2003 represented 75.9% of all net additions in the period as compared to
67,300 (71.8%) for the corresponding period one year ago. Moreover, net
postpaid additions increased by 13.5% in the current period, reversing a
negative trend experienced since the third quarter of 2002. For the first nine
months of 2003, net postpaid additions represented 74.3% of all net additions
as compared to 76.7% in the same period one year earlier. Total net subscriber
additions for the third quarter increased 7.4%.
Blended postpaid and prepaid churn rate averaged 1.4% per month in the
third quarter of 2003, a considerable improvement from 1.7% for the comparable
period one year earlier, and up only slightly from 1.3% in the second quarter
of 2003. The churn rate for the first nine months of 2003 was 1.4% as compared
to 1.8% for the same period last year. Deactivations declined 6.6% to 133,500
for the third quarter 2003 as compared to 142,900 for the same period in 2002
despite a 14.0% increase in the subscriber base. Deactivations for the first
nine months of 2003 were 393,900 as compared to 451,700 for the same period
last year representing a 12.8% decline. The decline in churn can be attributed
to improved network quality and coverage, improved client service levels,
client contracting as part of loyalty and retention programs, and specific
grandfathered rate plans related to per-second billing and the change to
certain 'free evening and weekend' rate plan features.
Equipment sales, rental and service revenue in the three-month period
ended September 30, 2003, was $42.5 million as compared to $38.6 million for
the same period in 2002. Equipment revenue for the first nine months of 2003
was $120.5 million representing an increase of $15.5 million or 14.8% over the
same period in 2002. The increase occurred despite a decline in gross
subscriber additions to 234,100 and 664,000 for the third quarter and first
nine months of 2003, respectively, as compared to 236,600 and 738,500 for the
same periods in 2002. The increase in revenue was principally due to handset
price increases, product mix, and increased retention and upgrade activity.
Intersegment revenues represent services provided by the Mobility segment
to the Communications segment. These revenues are eliminated upon
consolidation together with the associated expense from the Communications
segment.
Key operating indicators - Mobility segment
(000s for subscribers and additions) 2003 2002 Change %
-------------------------------------------------------------------------
As at September 30
------------------
Subscribers - postpaid 2,691.4 2,408.9 282.5 11.7
Subscribers - prepaid 574.2 455.6 118.6 26.0
--------- --------- ------- ------
Subscribers - total 3,265.6 2,864.5 401.1 14.0
Total POPs(1) covered including
roaming/resale (millions)(2) 29.1 26.9 2.2 8.2
Quarter ended September 30
--------------------------
Net subscriber additions - postpaid 76.4 67.3 9.1 13.5
Net subscriber additions - prepaid 24.2 26.4 (2.2) (8.3)
--------- --------- ------- ------
Net subscriber additions - total 100.6 93.7 6.9 7.4
Churn, per month (%)(3a) 1.4 1.7 (0.3) -
Acquisition COA(3b) per
gross subscriber add. ($)(3c) 406 391 15 3.8
ARPU ($)(3d) 60 58 2 3.4
EBITDA to network revenue (%) 42.5 33.4 9.1 -
Retention COA to network revenue (%) 3.9 3.6 0.3 -
EBITDA excluding
Acquisition COA ($ millions)(3e) 340.6 256.8 83.8 32.6
Nine months ended September 30
------------------------------
Net subscriber additions - postpaid 200.8 219.9 (19.1) (8.7)
Net subscriber additions - prepaid 69.3 66.9 2.4 3.6
--------- --------- ------- ------
Net subscriber additions - total 270.1 286.8 (16.7) (5.8)
Churn, per month (%) 1.4 1.8 (0.4) -
Acquisition COA per gross
subscriber add. ($)(4) 420 405 15 3.7
ARPU ($) 57 55 2 3.6
EBITDA to network revenue (%) 39.2 29.8 9.4 -
Retention COA to network revenue (%) 4.0 4.0 - -
EBITDA excluding Acquisition COA
($ millions) 904.0 683.0 221.0 32.4
-------------------------------------------------------------------------
(1) POPs is an abbreviation for Population. A POP refers to one person
living in a population area, which in whole or substantial part is
included in the coverage areas.
(2) TELUS Mobility has not activated all digital-roaming areas. As at
September 30, 2003, TELUS Mobility PCS digital population coverage
was 21.7 million and 29.0 million including the roaming/resale
agreements principally with Bell Mobility and Aliant Telecom
Wireless.
(3) The following are not measures under accounting principles generally
accepted in Canada and the U.S. These measures are industry metrics
and are useful in assessing the operating performance of a wireless
company. The definitions of these measures are as follows:
a. Churn is calculated as the number of subscriber units
disconnected during the period divided by the average number
of units on the network, expressed as a rate per month.
b. Acquisition COA consists of the total of handset subsidies,
commissions, and advertising & promotion expenses related to
the initial customer acquisition during a given period.
c. Acquisition COA per gross subscriber add - Acquisition COA
divided by gross subscriber activations during the period.
d. ARPU is calculated as network service revenue divided by the
average number of units on the network during the period,
expressed as a rate per month.
e. EBITDA excluding Acquisition COA is a measure for operational
profitability normalized for the period costs of adding new
customers.
(4) For the nine-month period ended September 30, 2002, Acquisition COA
of $405 excluded the $21.0 million favourable clarification of tax
legislation by the Ontario Provincial Sales Tax authorities,
representing a reversal of a cumulative COA liability.
Operations expense - Communications segment
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 701.9 760.0 (58.1) (7.6)
Nine months ended September 30 2,155.7 2,350.4 (194.7) (8.3)
-------------------------------------------------------------------------
Operations expense for the Communications segment decreased in the
quarter and nine-month periods ended September 30, 2003, when compared with
the same periods last year, primarily due to the traction of the Operational
Efficiency Program that became significant beginning in the third quarter last
year, as well as lower Non-ILEC expenses and lower equipment costs of sales,
partly offset by an increased pension expense in 2003. In addition, expenses
in the nine-month period last year were reduced by a $40 million investment
tax credit.
The significant changes in operating expenses for the third quarter and
nine months ended September 30, 2003, when compared with the same periods in
2002, were:
- Incremental Operational Efficiency Program savings from lower salaries
and benefits of $73.0 million and $225.0 million, respectively. Staff
levels, including hiring of temporary and regular customer contact
centre staff, increased by 38 in the third quarter of 2003, but have
decreased by 835 and 3,339, respectively, when compared with the end
of 2002 and with September 2002. During the fourth quarter of 2003,
over 500 net staff reductions are expected to occur so that the
Company achieves the planned targets announced under Operational
Efficiency Program initiatives;
- Incremental Operational Efficiency Program non salary-related savings
were $7.0 million and $54.0 million, respectively. The non salary-
related savings were from lower employee-related overhead costs, use
of fewer contractors, and lower advertising and promotions expense;
- Equipment cost of sales decreased by $9.7 million and $45.2 million,
respectively, primarily as a result of lower sales of voice and data
equipment. This included approximately $12 million year-to-date, of
lower high-speed Internet cost of sales as a result of reduced gross
additions of high-speed Internet subscribers, lower modem prices, and
recognition of certain promotional discounts to customers recorded as
an offset against revenues;
- Bad debt expense decreased by $4.5 million and $2.2 million,
respectively;
- The expense for the Software and Related Technology and Service
Agreements with Verizon Communications Inc. ("Verizon"), was lower by
$1.2 million and $8.1 million, respectively;
- Expenses for the nine-month period ended September 30, 2003 increased
by $38.8 million, when compared with 2002, as a result of significant
investment tax credits recorded in 2002 ($40.0 million in 2002;
$1.2 million in 2003). The investment tax credits were recognized as a
result of a settlement with tax authorities for previous years' claims
and were recorded as a reduction to operations expense;
- Increased pension expense for defined benefit and defined contribution
plans of $11.5 million and $39.3 million, respectively;
- Expenses increased by $3.8 million and $30.6 million, respectively, as
a result of lower labour capitalization representing lower capital
build activities consistent with lower salaries and benefits as a
result of Operational Efficiency Program savings;
- Overtime expenses increased by $3.8 million in the third quarter and
first nine months of 2003, as compared with 2002 in response to a
number of natural disasters and other emergencies;
- All other changes increased expenses by $18.2 million for the quarter
and $27.3 million for the nine-month period.
Included in the total segment expenses discussed above, Non-ILEC
operations expenses for the quarter and nine-month periods ended September 30,
2003 were $144.4 million and $444.3 million, respectively, compared with
$159.2 million and $464.5 million, respectively, in the same periods last
year. This represented decreases of $14.8 million or 9.3% and $20.2 million or
4.3%, respectively as a result of operating efficiencies and the greater use
of on-net facilities, despite increasing revenues.
Operations expense - Mobility segment
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 378.4 372.6 5.8 1.6
Nine months ended September 30 1,102.6 1,074.2 28.4 2.6
-------------------------------------------------------------------------
Mobility operations expense in the third quarter increased by $5.8
million or 1.6% and increased (after normalizing for the $21.0 million
favourable PST ruling in 2002) by $7.4 million or 0.7% for the first nine
months of 2003, when compared with the same periods in 2002. TELUS Mobility
has been able to achieve significant economies of scale as evidenced by growth
in subscribers of 14.0% and Network revenue of 16.9% in the third quarter
while maintaining flat operating expenses year-over-year.
Expenses related to equipment sales increased $1.1 million (1.3%) to
$86.4 million in the third quarter as compared to $85.3 million for the same
period one year earlier. Despite a decline in gross subscriber additions in
the third quarter from 236,600 to 234,100, the increase in equipment expense
was due to higher retention activity. For the first nine months of 2003,
equipment expenses increased by $8.5 million or 3.4% over the same period last
year. However, prior year expenses included a $21.0 million reduction
resulting from a clarification of provincial sales tax legislation related to
handset subsidies, which represented the reversal of a cumulative liability
previously recorded in marketing cost of acquisition ("COA"). Once normalized
to exclude the 2002 provincial sales tax credit, equipment expense for the
first nine months of 2003 decreased $12.5 million or 4.6% as compared with the
same period in 2002. This decrease was principally due to a decline in gross
subscriber activations and improved handset pricing including favourable
exchange rates. Gross subscriber activations were 664,000 for the first nine
months of 2003 as compared to 738,500 for the same period last year. The cost
improvement due to the reduction in gross subscriber additions was partially
offset by increased retention activity in the first nine months of 2003.
Handset costs are included in marketing cost of acquisition (COA).
Network operating expenses consist of site-related expenses, transmission
costs, spectrum licence fees, contribution revenue taxes, and other direct
costs related to network operations. Network operating expenses remained
relatively flat at $97.9 million and $274.7 million for the third quarter and
first nine months of 2003, respectively, compared to $97.9 million and $274.6
million for the same periods last year. This occurred despite increases in
transmission and site-related expenses to support the increased cell sites,
subscriber base, and improved network quality and coverage. These costs were
offset by a reduction in Industry Canada spectrum licence fees of
approximately $7.0 million for the first nine months. TELUS Mobility has
focused efforts on containing these costs through negotiating improved leased
transmission rates, roaming rates, and maintenance rates with a number of
telecommunications carriers and key vendors. PCS digital population coverage
expanded by 7.3 million (principally due to roaming with Bell - 5.1 million
and Aliant - 1.5 million) to 29.0 million during the year.
Marketing expenses excluding handset subsidies were $67.2 million for the
third quarter and $188.3 million for the first nine months of 2003 as compared
to $56.7 million and $164.3 million for the same periods in 2002. The
increases were primarily due to higher dealer compensation costs associated
with the expanded cumulative subscriber base and to increased re-contracting
activity. Acquisition COA was $406 for the third quarter of 2003 as compared
to $391 for the same period last year. However, Acquisition COA for the third
quarter of 2003 declined $22 from $428 in the second quarter of 2003.
Acquisition COA for the first nine months of 2003 was $420 as compared to $405
(excluding any benefit from the $21.0 million PST clarification) for the same
period in 2002. The small increases in acquisition COA were principally due to
higher marketing costs and lower gross subscriber additions partially offset
by lower handset subsidies.
General and Administration ("G&A") expenses consist of employee
compensation and benefits, facilities, client services, bad debt and various
other expenses. G&A expenses declined in the third quarter and for the first
nine months of 2003 despite a subscriber base growth of 14.0% and Network
revenue growth of 16.9% in the quarter. G&A expenses were $126.9 million and
$380.4 million for the third quarter and first nine months of 2003,
respectively, as compared to $132.7 million and $384.6 million for the same
periods in 2002. The declines of $5.8 million in the third quarter and $4.2
million for the first nine months of 2003 were primarily due to lower bad
debts. The improvements in bad debts can be attributed to the completion of
billing system conversions in 2002 and improvement in credit and collections.
TELUS Mobility completed five major billing system conversions by October 2002
after an 18-month period. TELUS Mobility only slightly increased full-time
equivalent employees (FTE's) to 5,175 from 5,149 one year earlier despite the
increase in the subscriber base and the number of retail store personnel over
the same period.
Earnings(1) Before Interest, Taxes, Depreciation and Amortization
(EBITDA) by segment
Quarter ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 509.0 498.3 10.7 2.1
Mobility segment 245.5 164.8 80.7 49.0
-------------------------------------------------------------------------
TELUS Consolidated 754.5 663.1 91.4 13.8
-------------------------------------------------------------------------
Nine months ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 1,519.7 1,467.2 52.5 3.6
Mobility segment 625.4 406.2 219.2 54.0
-------------------------------------------------------------------------
TELUS Consolidated 2,145.1 1,873.4 271.7 14.5
-------------------------------------------------------------------------
(1) Excluding Restructuring and workforce reduction costs.
EBITDA(1) margin(2) by segment (%)
Quarter ended September 30 2003 2002 Change
---------------------------------------------------------------
($ in millions)
Communications segment 42.0 39.6 2.4
Mobility segment(3) 39.3 30.7 8.6
TELUS Consolidated 41.8 37.5 4.3
---------------------------------------------------------------
Nine months ended September 30 2003 2002 Change
---------------------------------------------------------------
($ in millions)
Communications segment 41.3 38.4 2.9
Mobility segment(3) 36.2 27.4 8.8
TELUS Consolidated 40.3 35.9 4.4
---------------------------------------------------------------
(1) Excluding Restructuring and workforce reduction costs.
(2) EBITDA divided by total revenue.
(3) EBITDA margin as a percentage of network revenue was 42.5% and 39.2%
for the third quarter and year-to-date 2003, respectively, as
compared to 33.4% and 29.8% (28.3% before PST clarification) for the
same periods last year.
Communications segment EBITDA and EBITDA margin excluding Restructuring
and workforce reduction costs improved for the third quarter and nine months
ended September 30, 2003, when compared with the same periods in 2002,
primarily as a result of:
- Operational Efficiency Program savings of $80 million and
$279 million, respectively;
- Non-ILEC EBITDA improved by $17.3 million and $62.9 million,
respectively; and
- Partly offset by negative price cap decision impacts, decreasing
long distance and other revenues, increased pension costs, and the
investment tax credits received in 2002.
Normalized for price cap decision impacts, Communications segment EBITDA
increased by $21.3 million or 4.3% and $110.2 million or 7.5%, respectively,
for the third quarter and first nine months of 2003 as compared to 2002.
TELUS Mobility segment EBITDA and EBITDA margin improvement for the third
quarter and first nine months of 2003 was attributed to strong ARPU and
subscriber growth combined with a significant reduction in the churn rate and
cost containment.
TELUS Mobility EBITDA growth for the third quarter represented a
flow-through rate of 96.6% of Network revenue growth. Consequently, EBITDA for
the first nine months of 2003 grew 54.0% to $625.4 million. When the
$21.0 million favourable PST clarification is excluded, EBITDA for the first
nine months of 2003 increased by 62.4%. EBITDA margin, when calculated as a
percentage of network revenue, improved to 42.5% for the third quarter and
39.2% for the first nine months of 2003 as compared to 33.4% and 29.8% (28.3%
before the PST clarification), respectively, for the same periods one year
earlier.
Depreciation and amortization
Quarter ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Depreciation 308.9 307.3 1.6 0.5
Amortization of intangible assets 98.3 93.5 4.8 5.1
-------------------------------------------------------------------------
Nine months ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Depreciation 949.5 898.5 51.0 5.7
Amortization of intangible assets 278.9 261.9 17.0 6.5
-------------------------------------------------------------------------
Depreciation and amortization expenses increased by $6.4 million and
$68.0 million, respectively, in the quarter and nine-month periods ended
September 30, 2003, when compared with the same periods in 2002, primarily as
a result of growth in shorter life capital assets, including billing system
and customer relationship management software, data network capital assets.
Restructuring and workforce reduction costs
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 2.3 313.3 (311.0) (99.3)
Nine months ended September 30 12.1 328.9 (316.8) (96.3)
-------------------------------------------------------------------------
Restructuring and workforce reduction costs were recorded for initiatives
under the Company's Operational Efficiency Program. In 2001, the Company
initiated the phased Operational Efficiency Program aimed at improving
operating and capital productivity and competitiveness. The second and third
phases commenced in 2002, with the third phase continuing into 2003. Thirty-
nine customer contact centres have been closed and consolidated to date, and
it is currently expected that the Company will achieve its target for closing
or consolidating 44 customer contact centres by the end of 2003. It is
estimated that additional restructuring charges of approximately $7 million
may be recorded in 2003. For further detail, refer to Note 4 to the interim
consolidated financial statements.
Net staff reductions since the beginning of 2002 through to September 30,
2003 were approximately 6,000. Since the inception of the Operational
Efficiency Program in 2001 through September 30, 2003, the Company has reduced
its staff count by approximately 6,800, comprised of 4,900 bargaining unit
positions and 1,900 management positions. TELUS believes it will attain the
500 additional net employee reductions in 2003 required to meet the
Operational Efficiency Program targeted reduction of 7,300 net positions since
inception or 6,500 since the beginning of 2002.
EBITDA savings since inception of the Operational Efficiency Program have
increased to approximately $429 million by the end of the third quarter of
2003. The annual savings for 2003 are currently expected to be approximately
$450 million. Thereafter, annual recurring savings are currently estimated to
be approximately $550 million.
Other expense
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 7.6 7.7 (0.1) (1.3)
Nine months ended September 30 19.8 18.4 1.4 7.6
-------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense,
charitable donations, income or impairments in portfolio investments, gains
and losses on disposal of property, and 2002 discontinued operations. The
Company recorded $2.4 million lower losses on portfolio investments and asset
sales for the third quarter of 2003 as compared with the same period in 2002,
offset by later timing of charitable donations in 2003. For the first nine
months of 2003, gains from the sale of properties were $7.7 million compared
with $1.3 million for the same period in 2002. Accounts receivable
securitization expense decreased by $0.6 million and increased by
$5.4 million, respectively, for the third quarter and nine-month period ended
September 30, 2003, when compared with the same periods in 2002. The increase
for the nine month period was as a result of expanding the securitization
program in July 2002. Proceeds from securitization averaged $471 million for
the first nine months of 2003, compared with $191 million in the same period
last year.
Financing costs
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 136.5 98.6 37.9 38.4
Nine months ended September 30 467.2 454.0 13.2 2.9
-------------------------------------------------------------------------
Financing costs include interest expense on long-term and short-term
debt, gains on debt repurchase (in 2002), interest income, foreign exchange
gains and losses and amortization of debt issue costs. See note 5 to the
interim consolidated financial statements.
- Financing costs in the third quarter of 2002, were net of an
$82.4 million pre-tax gain on debt redemption. The gain in 2002 arose
from the repurchase of approximately $402 million principal amount of
notes and debentures of TELUS Corporation and TELUS Communications
Inc. for a cash outlay of approximately $310 million including
commissions and net of cross currency swap unwind proceeds.
- Interest on long-term and short-term debt decreased by $14.5 million
and $34.0 million, respectively, in the third quarter and nine month
periods ended September 30, 2003, when compared with the same periods
in 2002. This was primarily a result of debt repurchases and
retirements. TELUS maintains a hedging program using cross-currency
swaps, and as a result, financing costs were generally unaffected by
the appreciation of the Canadian dollar against the U.S. dollar in
2003.
- Interest income, which has the effect of reducing financing costs,
increased by $30.1 million and $35.6 million, respectively, for the
third quarter and first nine months of 2003, when compared with the
same periods in 2002. Interest income in 2003 and in 2002 was
recognized primarily as a result of tax refunds received from the
settlement of various tax matters.
The average debt principal outstanding was $7,750 million in the third
quarter of 2003 ($8,899 million in the third quarter of 2002), while the
effective interest rate on the average debt outstanding was 8.3% (7.9% in
2002). During the first nine months of 2003, the average debt principal
outstanding was $7,993 million ($8,836 million during the first nine months of
2002), while the effective interest rate on the average debt outstanding was
8.2% (8.0% in 2002).
Income taxes (recovery)
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 84.0 (50.5) 134.5 -
Nine months ended September 30 133.0 (0.9) 133.9 -
-------------------------------------------------------------------------
The increase in Income taxes for the quarter and nine-month periods ended
September 30, 2003, when compared with the same periods in 2002, were
primarily related to increases in income before taxes of $358.2 million and
$505.9 million, respectively. In addition, for the nine-month period ended
September 30, 2003, TELUS, recorded a $47.0 million income tax recovery for
settlement of previous years' tax matters, which significantly impacted the
year-to-date effective tax rate. See note 6 to the interim consolidated
financial statements.
Non-controlling interest
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 1.0 0.6 0.4 66.7
Nine months ended September 30 2.7 2.4 0.3 12.5
-------------------------------------------------------------------------
Non-controlling interest primarily represents a partner's interest in a
small foreign subsidiary.
Preferred dividends
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 0.9 0.8 0.1 -
Nine months ended September 30 2.6 2.6 - -
-------------------------------------------------------------------------
There were no significant changes to quarterly dividends on preferred
shares.
Interest on convertible debentures
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 1.8 1.8 - -
Nine months ended September 30 5.3 5.1 0.2 3.9
-------------------------------------------------------------------------
The interest on convertible debentures is presented net of related income
taxes. As these debentures are convertible into non-voting shares and are
classified as equity on the balance sheet, the related interest is recorded as
a charge to retained earnings rather than an interest expense.
Liquidity and capital resources
Cash provided by operating activities
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 849.7 804.8 44.9 5.6
Nine months ended September 30 1,729.1 1,381.1 348.0 25.2
-------------------------------------------------------------------------
Cash provided by operating activities increased for the quarter and nine
month period ended September 30, 2003, when compared with the same periods
last year principally as a result of improvement in operating profitability,
lower cash interest from debt reduction, and recovery of income taxes in 2003
associated with settlement of tax matters. This was partially offset by
reduced investment in accounts receivable in 2002 from expanding the accounts
receivable securitization program. Payments under restructuring and workforce
reduction initiatives in 2003 were $32.1 million for the third quarter and
$233.6 million for nine-month period, compared with $56.7 million and $134.0
million, respectively, in the same periods in 2002. Contributions to defined
benefit pension plans net of defined benefit plan expenses (credits) increased
by $6.9 million for the third quarter and decreased by $17.6 million for the
nine-month period. Other working capital changes included: (i) increased
Accounts payable for the third quarter of 2003 and 2002 for accrual of
interest to be paid in the fourth quarter, partly offset in 2002 by a drop in
accounts payable due to Operational Efficiency Program initiatives and timing
of payments to vendors; (ii) increased Advance billings and customer deposits
primarily from the price cap deferral account.
During the third quarter the Company delivered notice that, effective
October 27, 2003, it would make an accounts receivable securitization
reduction payment of $106 million. In October 2003, TELUS received a $162
million refund of income taxes as a result of previously announced settlements
with income tax authorities. Cash flow from operations in the fourth quarter
of 2003 will include the tax refund and the securitization reduction payment.
Cash provided (used) by investing activities
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 (307.8) (322.1) 14.3 4.4
Nine months ended September 30 (776.4) (1,310.3) 533.9 40.7
-------------------------------------------------------------------------
Net cash used by investing activities decreased for the third quarter and
nine-month period ended September 30, 2003, when compared with the same
periods last year, primarily as a result of reduced capital spending. In
addition, the Company disposed of non-strategic properties and monetized an
investment for net proceeds of $19.0 million in the second quarter of 2003. In
the first quarter of 2003, the Company disposed of an administrative property
under the terms of a sale and leaseback transaction. An $8.2 million pre-tax
gain on the administrative property sale, on total cash proceeds of $19.3
million, was deferred and is amortized over the term of the lease. In the
third quarter of 2002, the Company disposed of its remaining directory
operations in the U.S. for proceeds of $7.8 million.
Capital expenditures by segment
Quarter ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 208.9 230.2 (21.3) (9.3)
Mobility segment 93.7 92.5 1.2 1.3
-------------------------------------------------------------------------
Capital expenditures - general 302.6 322.7 (20.1) (6.2)
Mobility segment - wireless spectrum 1.4 4.5 (3.1) (68.9)
-------------------------------------------------------------------------
Total capital expenditures 304.0 327.2 (23.2) (7.1)
-------------------------------------------------------------------------
-----------------------------------------------------------------
Capital expenditure intensity(1)(%) 16.8 18.5 (1.7)
-----------------------------------------------------------------
Nine months ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 589.8 947.2 (357.4) (37.7)
Mobility segment 226.1 330.0 (103.9) (31.5)
-------------------------------------------------------------------------
Capital expenditures - general 815.9 1,277.2 (461.3) (36.1)
Mobility segment - wireless spectrum 1.4 4.5 (3.1) (68.9)
-------------------------------------------------------------------------
Total capital expenditures 817.3 1,281.7 (464.4) (36.2)
-------------------------------------------------------------------------
-----------------------------------------------------------------
Capital expenditure intensity(1)(%) 15.4 24.6 (9.2)
-----------------------------------------------------------------
(1) Capital Intensity is measured by dividing capital expenditures into
operating revenues, expressed as a percentage. This measure provides
a method of comparing the level of capital expenditures to other
companies within the same industry.
Capital spending decreased in the Communications segment in the third
quarter and first nine months of 2003, when compared to the same periods in
2002. For the third quarter, Non-ILEC expenditures decreased by $27.9 million
to $22.4 million, and for the first nine months Non-ILEC expenditures
decreased by $97.6 million to $76.0 million. Non-ILEC capital expenditures
decreased as a result of the Company concentrating its deployment activity on
meeting growth demands through the use of assets in place. ILEC capital
expenditures increased by $6.6 million to $186.5 million for the third
quarter, and decreased by $259.8 million to $513.8 million for the first nine
months, when compared with the same periods in 2002. The primary changes in
ILEC capital expenditures were:
- High-speed Internet ("ADSL") facilities and systems expenditures
increased by $2.2 million to $25.2 million for the third quarter and
decreased by $96.2 million, to $66.4 million for the first nine
months of 2003, when compared to the same periods in 2002. Lower
spending on ADSL in 2003 was due to a focus on higher utilization of
existing facilities, the completion of accelerated facility
deployment and system in 2002, and slowing growth in the industry;
- There were no purchases from Verizon in 2003 for software licences
and trademark licences compared with $55.5 million in the first nine
months of 2002; and
- Increased spending on new service development was partly offset by
reductions in other spending in the third quarter of 2003. For the
first nine months of 2003, spending on network infrastructure
decreased due to lower demand for facilities and spending on internal
systems and processes also decreased due to completion of initiatives
in 2002, as planned, such as the national long distance and card
service platform and internal web enablement projects, partly offset
increased spending on new service development.
The Communications segment capital intensity ratios for the quarter and
nine-month period ended September 30, 2003 were 17.3% and 16.0%, respectively,
when compared with 18.3% and 24.8%, respectively, for the same periods last
year. As a result of reduced capital expenditures and improved EBITDA, the
Communications segment contribution to Cash flow (EBITDA less capital
expenditures) for the quarter and nine months ended September 30, 2003
increased to $300.1 million and $929.9 million, respectively, from
$268.1 million and $520.0 million, respectively, in the same periods last
year.
Mobility capital expenditures were relatively flat for the third quarter
and significantly lower for the first nine months of 2003 as compared to the
same periods in 2002. TELUS Mobility continued the enhancement of digital
wireless coverage during the third quarter of 2003. Also, TELUS Mobility has
started building out a significant amount of Microwave in 2003 aimed at
reducing future leased line costs. Capital spending declined significantly
year-over-year principally as a result of:
- Implementation of the 1X digital network in 2002;
- Digital conversion of analogue networks in 2002;
- Reduced coverage expansion costs in 2003 due to operationalized
roaming/resale agreements in 2002 with Bell Mobility and Aliant
Telecom Wireless; and
- Timing of network capital expenditures in 2003, lower planned net
subscriber additions, improved infrastructure equipment costs, and a
stronger Canadian dollar.
Capital expenditure intensity for TELUS Mobility was 15.2% and 13.2% for
the third quarter and first nine months of 2003, respectively, as compared to
18.0% and 22.6% for the same periods one year ago due to both lower capital
spending and significant growth in network revenues. As a result of continued
EBITDA growth and reduced capital expenditure intensity, Mobility generated
substantially improved cash flow (EBITDA less capital expenditures) of $150.4
million and $397.9 million, or 26.0% and 24.9% of Network revenue, for the
third quarter and first nine months of 2003, respectively, as compared with
$67.8 million and $71.7 million, or 13.7% and 5.3%, for the same periods in
2002, respectively.
Both segments have contributed to significantly improved consolidated
cash flow (EBITDA less capital expenditures) to $450.5 million and $1,327.8
million, respectively, for the quarter and nine-month periods ended September
30, 2003, when compared with the $335.9 million and $591.7 million,
respectively, in same periods in 2002.
Cash provided (used) by financing activities
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 (456.2) (479.0) 22.8 4.8
Nine months ended September 30 (841.4) (93.2) (748.2) -
-------------------------------------------------------------------------
Cash used by financing activities decreased in the third quarter of 2003
and increased in the first nine months of 2003, when compared with the same
periods one year ago.
- Common and Non-voting shares issued - Proceeds received from shares
issued from Treasury under the employee share purchase plan and from
share option plans were $20.6 million and $61.7 million respectively
for the third quarter and first nine months of 2003, compared with
proceeds of $16.6 million and $73.9 million, respectively, in the
same periods in 2002 under the same plans, from exercised warrants
and from additional shares purchased by Verizon pursuant to anti-
dilutive rights.
- Public issuance of Non-voting shares - $nil in 2003; $337.4 million
in 2002. In September 2002, a public issuance of 34.25 million Non-
voting shares was offered concurrently in Canada and the U.S. at a
share price of $9.85 (Canadian dollars) for aggregate gross proceeds
of $337.4 million. The net proceeds of $322.9 million were used to
repurchase and repay debt, including bank debt incurred to repurchase
notes of TELUS Corporation and notes and debentures of TELUS
Communications Inc. and for general corporate purposes. The debt was
repurchased at an average discount of 21%, while equity dilution was
limited to 10% from the September 2002 public share issuance.
- Dividends to shareholders - Cash dividends paid to shareholders
decreased by $1.6 million and increased by $33.9 million,
respectively, for the third quarter and first nine months of 2003,
when compared with the same periods in 2002. The increase in cash
dividends for the nine month period resulted from an increased number
of shares outstanding, partly offset by a higher enrolment in
dividend reinvestment plans (approximately 24% for the dividend paid
in July 2003, compared with approximately 10% one year earlier). The
15-cent dividend paid per Common share and Non-voting share remained
unchanged from one year ago.
- Net debt redemptions (Long-term debt issued net of Redemptions and
repayment of long-term debt and Change in short-term obligations) -
were $434.4 million and $765.2 million, respectively, for the quarter
and nine-month periods ended September 30, 2003, compared with net
debt repurchases and redemptions of $779.1 million and $389.2
million, respectively, for the same periods in 2002. Net debt
redemptions in the first nine months of 2003 included approximately
$585 million of bank facilities, $151 million of medium-term notes,
and $30 million of First Mortgage Bonds. In the third quarter of
2002, the Company repurchased approximately $402 million principal
amount of notes and bank debt for a cash outlay of approximately
$310 million including commissions and net of cross-currency swap
unwind proceeds.
Liquidity and capital resource measures
Sept. 30, Sept. 30, June 30,
Period ended 2003 2002 Change 2003
-------------------------------------------------------------------------
Components of debt and coverage ratios
--------------------------------------
Net debt(1)($ millions) 7,522.3 8,332.3 (810.0) 8,038.7
Total capitalization(2)
- book value ($ millions) 14,169.5 14,942.6 (773.1) 14,593.6
EBITDA (12-month trailing,
$ millions) 2,790.3 2,471.7 318.6 2,698.9
Net interest cost(3)
(12-month trailing, $ millions) 617.6 716.8 (99.2) 662.1
Debt ratios
-----------
Fixed rate debt as a
proportion of total
indebtedness (%) 100.0 94.1 5.9 94.6
Average term to maturity
of debt (years) 6.4 6.6 (0.2) 6.4
Net debt(1) to total
capitalization(2)(%) 53.1 55.8 (2.7) 55.1
Net debt to EBITDA(4) 2.7 3.4 (0.7) 3.0
Coverage ratios
---------------
Earnings coverage(5) 1.3 0.8 0.5 0.8
EBITDA interest coverage(6) 4.5 3.4 1.1 4.1
Other measures
--------------
Free cash flow(7)(3-month,
$ millions) 417.1 239.9 177.2 69.0
Free cash flow(7)(12-month
trailing, $ millions) 757.4 (431.0) 1,188.4 579.6
-------------------------------------------------------------------------
(1) Net debt is defined as Long-term debt plus current obligations and
cheques outstanding less Cash and temporary investments and cross-
currency foreign exchange hedge asset (plus cross-currency foreign
exchange hedge liability) related to U.S. dollar notes. The cross-
currency foreign exchange hedge liability as at September 30, 2003
was $580.8 million ($123.7 million hedge asset as at September 30,
2002; $588.2 million hedge liability as at June 30, 2003). Net Debt
as calculated herein, includes a notional amount related to accounts
receivable securitization of approximately $125.5 million at
September 30, 2003 ($106.3 million at September 30, 2002, and
$124.1 million at June 30, 2003), which is required to be included in
the numerator of the Leverage Ratio covenant calculation in TELUS'
credit facilities. Net debt is unaffected by foreign exchange
fluctuations because it includes (deducts) the net deferred hedging
liability (asset).
(2) Total capitalization is defined as Net debt plus Non-controlling
interest and Shareholders' Equity.
(3) Net Interest Cost is defined as Net financing cost before gains on
redemption and repayment of debt, calculated on a 12-month trailing
basis. Gains on redemption and repayment of debt were recorded in the
third and fourth quarters of 2002. Excluding $61.5 million of
interest income recorded in the twelve month period ended September
30, 2003, net interest cost is $679.1 million. Excluding interest
income, the comparable net interest cost for the twelve month period
ended September 30, 2002 was $723.1 million and for the twelve-month
period ended June 30, 2003 was $693.5 million.
(4) Net debt to EBITDA is defined as Net debt as at the end of the period
divided by 12-month trailing EBITDA, where EBITDA excludes
Restructuring and workforce reduction costs. This measure is
substantially the same as the Leverage Ratio covenant in TELUS'
credit facilities.
(5) Earnings coverage ratio is calculated on a 12-month trailing basis as
Net income before interest expense on total debt and income tax
expense divided by interest expense on total debt.
(6) EBITDA interest coverage is defined as EBITDA excluding Restructuring
and workforce reduction costs divided by Net interest cost. Excluding
$61.5 million of interest income recorded in the twelve months ending
September 30, 2003, this ratio is 4.1 for September 2003. Excluding
$30.4 million of interest income for the twelve months ended June 30,
2003, this ratio was 3.9 for June 2003. This measure is substantially
the same as the Coverage Ratio covenant in TELUS' credit facilities.
(7) Free cash flow is defined as EBITDA excluding Restructuring and
workforce reduction costs less Capital expenditures, cash interest
paid, cash taxes and cash dividends. This measure is used to provide
an indication of underlying cash flows in the business for the items
identified. As defined, free cash flow excludes Restructuring and
workforce reduction costs, working capital changes, and other sources
and uses of cash, which are disclosed in the consolidated statements
of cash flows.
The short-term obligation and long-term debt balance as at September 30,
2003 decreased by $1,470 million to $6,918 million from $8,388 million as at
December 31, 2002. This reduction in the debt balance included a $707 million
decrease in the Canadian dollar value of U.S. dollar denominated Notes as a
result of an approximate 17% appreciation of the Canadian dollar between
December 31, 2002 and September 30, 2003. TELUS' U.S. dollar debt is fully
hedged, resulting in a corresponding increase of $707 million being recorded
in the net Deferred hedging liability (the Deferred hedging asset of $126.8
million as at December 31, 2002 has become a Deferred hedging liability of
$580.8 million as at September 30, 2003). The remaining reduction was from
debt repayment and repurchases. TELUS expects to continue applying surplus
cash flow to reduce accounts receivable securitization and possible other
repurchases of debt.
The proportion of debt with fixed interest rates increased as at
September 30, 2003, when compared with September 30, 2002, as the amount of
utilized bank facilities at September 30, 2003 decreased to $70 million from
approximately $655 million since the beginning of the year. The remaining $70
million bank facility amount was repaid on October 6, 2003.
The primary reasons for a reduction in the net debt to total
capitalization ratio measured at September 30, 2003, when compared to a year
ago, were the net debt repayments in 2003. The Company's Operational
Efficiency Program, improved Non-ILEC margins, reduced capital expenditures,
improved Mobility cash generation and tax refunds resulted in significant
increased free cash flow allowing for additional debt reduction in 2003. Free
cash flow for the third quarter and first nine months of 2003 exceeded cash
payments for Restructuring and workforce reduction of $32.1 million and $233.6
million, respectively. The $350.6 million increase in Free cash flow in the
third quarter of 2003, when compared with the second quarter of 2003, was due
primarily to lower cash interest payments (significant semi-annual interest
payments are made in the second and fourth quarters), lower third quarter cash
taxes and higher third quarter EBITDA.
The net debt to EBITDA ratio measured at September 30, 2003 improved
significantly, when compared with September 30, 2002 and June 30, 2003, as a
result of debt reduction and an increase in twelve-month trailing EBITDA. The
EBITDA interest coverage ratio measured at September 30, 2003 improved, when
compared with September 30, 2002 and June 30, 2003, as a result of higher
twelve-month trailing EBITDA and lower twelve-month trailing net interest
costs including significant interest income.
Credit Facilities
TELUS' credit facilities at September 30, 2003 consisted of a $1.5
billion (or U.S. dollar equivalent) revolving credit facility expiring on May
30, 2004 ($70 million drawn along with $98.2 million in outstanding undrawn
letters of credit), an undrawn $600 million (or the U.S. dollar equivalent)
364 day-revolving credit facility extendible at TELUS' option for any amount
outstanding as at May 26, 2004 for one year on a non-revolving basis, and
approximately $74 million in other bank facilities (nil drawn and
approximately $9.4 million in committed and outstanding undrawn letters of
credit). On October 6, 2003, TELUS repaid the remaining $70 million drawn
against the $1.5 billion facility.
At September 30, 2003, TELUS had unutilized available liquidity well in
excess of $1 billion. TELUS' credit facilities contain customary covenants
including a requirement that TELUS not permit its consolidated Leverage Ratio
(Funded Debt and Asset Securitization Amount to trailing 12-month EBITDA) to
exceed 4.0:1 (approximately 2.7:1 as at September 30, 2003) and not permit its
consolidated Coverage Ratio (EBITDA to Interest Expense and Asset
Securitization Charges on a trailing 12-month basis) to be less than 2.5:1
(approximately 4.1:1 as at September 30, 2003) at the end of any financial
quarter. There are certain minor differences in the calculation of the
Leverage Ratio and Coverage Ratio under the credit agreement as compared with
the calculation of Net debt to EBITDA and EBITDA interest coverage. The
calculations are not expected to be materially different. Continued access to
TELUS' credit facilities is not contingent on the maintenance by TELUS of a
specific credit rating.
Accounts Receivable Sale
TELUS Communications Inc., a wholly owned subsidiary of TELUS, is able to
sell an interest in certain of its receivables up to a maximum of $650 million
and is required to maintain at least a BBB(low) credit rating by Dominion Bond
Rating Service (DBRS), or the purchaser may require the sale program to be
wound down. The necessary credit rating was exceeded by one level at BBB as of
October 28, 2003. The proceeds of securitized receivables were $481 million at
September 30, 2003. The Company also delivered notice that, effective October
27, 2003, it would make a securitization reduction payment of $106 million.
See Note 9 to the interim consolidated financial statements.
TELUS' credit facilities require that a portion of sold accounts
receivable be added to debt for purposes of calculating the Leverage Ratio
covenant under the credit agreement. This portion is calculated on a monthly
basis and is a function of the ongoing collection performance of the
receivables pool. At September 30, 2003, this amount, defined as the Asset
Securitization Amount, was $125.5 million.
Credit Ratings
The following rating actions occurred during 2003:
- On September 12, 2003, Moody's Investor Service affirmed its Ba1
rating and changed its outlook for TELUS Corporation's senior
unsecured credit to 'positive' from 'stable'. Earlier, on April 16,
2003, Moody's changed the outlook for TELUS Corporation's senior
unsecured credit rating to 'stable' from 'negative';
- On August 8, 2003, Standard & Poor's Rating Services ("S&P") affirmed
its 'BBB' long-term corporate credit rating for TELUS Corporation and
revised its outlook to 'stable' from 'negative'. The revised outlook
also applied to TELUS Communications Inc. and TELUS Communications
(Quebec) Inc. Earlier in the year, on May 29, 2003, S&P had affirmed
its 'BBB' long-term corporate credit rating for TELUS Corporation,
TELUS Communications Inc. and TELUS Communications (Quebec) Inc.,
each with a 'negative' outlook. S&P withdrew its short-term corporate
credit rating on TELUS due to the discontinuance of commercial paper
programs. S&P also raised the issue rating on TELUS Communications
(Quebec) Inc.'s first mortgage bonds from BBB+ to A-.
- On June 17, 2003, Dominion Bond Rating Service ("DBRS") revised the
trend from 'negative' to 'stable' for its ratings on TELUS
Corporation, TELUS Communications Inc. and TELUS Communications
(Quebec) Inc. On May 1, 2003, DBRS discontinued its rating on
commercial paper programs of TELUS Corporation, TELUS Communications
Inc. and TELUS Communications (Quebec) Inc. as TELUS had no issues
outstanding; and
- On May 28, 2003, Fitch Ratings changed the outlook to 'stable' from
'negative' for its ratings on TELUS Corporation and TELUS
Communications Inc.
TELUS has an objective to preserve access to capital markets at a
reasonable cost by maintaining investment grade credit ratings.
Credit rating summary
DBRS(1) S&P(1) Moody's(2) Fitch(1)
----------------------------------------------------------------------
TELUS Corporation
Senior bank debt --- --- --- BBB
Notes BBB BBB Ba1 BBB
TELUS Communications Inc.
Debentures BBB BBB --- BBB
Medium-term Notes BBB BBB --- BBB
Preferred shares Pfd-3 P-3(high) --- ---
TELUS Communications
(Quebec) Inc.
First mortgage bonds BBB A- --- ---
Medium-term Notes BBB BBB --- ---
--------------------------------------------------------------------
(1) Outlook or trend 'stable'
(2) Outlook 'positive'
Off-Balance Sheet Arrangements and Contractual Liabilities
Financial Instruments
TELUS uses various financial instruments, the fair values of which are
not reflected on the balance sheet, to reduce or eliminate exposure to
interest rate and currency risks. These instruments are accounted for on the
same basis as the underlying exposure being hedged.
The Company is exposed to interest rate risk arising from fluctuations in
interest rates on its temporary investments, short-term obligations and long-
term debt. On October 6, 2003, the Company terminated an interest rate swap
that had the effect of fixing the interest rate on $70 million of floating
rate debt that was repaid.
The Company is exposed to currency risks arising from fluctuations in
foreign exchange rates on its U.S. Dollar denominated long-term debt. Currency
hedging relationships have been established for the related semi-annual
interest payments and principal payments at maturity. The Company's foreign
exchange risk management also includes the use of foreign currency forwards to
fix the exchange rates on short-term foreign currency transactions and
commitments. Hedge accounting is not generally applied to these foreign
currency forwards. The Company entered into foreign currency forward contracts
that have the effect of fixing the exchange rates on, as at September 30,
2003, U.S. $38 million of fiscal 2003 purchase commitments; hedge accounting
has been applied to these foreign currency forward contracts all of which
relate to the Mobility segment.
The Company is exposed to credit risk with respect to its short-term
deposits, accounts and leases receivable, interest rate swap agreements and
foreign exchange hedges. Credit risk associated with short-term deposits is
minimized substantially by ensuring that these financial assets are placed
with governments, well-capitalized financial institutions and other
creditworthy counterparties. An ongoing review is performed to evaluate
changes in the status of counterparties.
The carrying value of cash and temporary investments, bank indebtedness,
accounts receivable, leases receivable, accounts payable, restructuring and
workforce reduction accounts payable, dividends payable and short-term
obligations approximates their fair values due to the immediate or short-term
maturity of these financial instruments.
Commitments and Contingent Liabilities (Note 16 of the interim
consolidated financial statements)
The Company has a number of commitments and contingent liabilities. The
Company has $178.9 million in outstanding commitments for its Operational
Efficiency Program as at September 30, 2003, and approximately $7 million of
additional Restructuring and workforce reduction expense may be recorded for
items that were not eligible to be recorded prior to September 30, 2003. The
Company occupies leased premises in various centres and has land, buildings
and equipment under operating leases. The Company is currently engaged in
contract negotiations through the federal conciliation process. In the normal
course of the Company's operations, it enters into commercial agreements that
require, as a part of normal terms, guarantees by the Company.
Revised Guidance for 2003
The Company publicly set certain estimated financial and operational
targets for 2003 in December 2002. Each quarter, management reviews the
targets and updates the guidance, if deemed necessary. The third quarter
revised guidance for 2003 is shown:
Third Second 2003
quarter quarter original
revised 2003 revised 2003 targets
guidance guidance
----------------------------------------------------------------------
Consolidated
Revenues no change $7.1 to $7.2 $7.2 to $7.3
billion billion
EBITDA(1) $2.8 to $2.75 to $2.7 to $2.8
$2.85 $2.85 billion
billion billion
Earnings (loss) per 85 to 95 80 to 90 35 to 55
share cents cents cents
Capital expenditures $1.2 to $1.2 to $1.3 Approx. $1.5
$1.25 billion billion
billion
Free cash flow $900 $800 million $300 to $600
million to to $1 million(2)
$1 billion billion
Net debt to EBITDA 2.7 times 2.8 times or 3.0 times
or less less
Communications segment
Revenue (external) $4.8 to $4.85 to $5.0 to
$4.85 $4.9 billion $5.05
billion billion
Non-ILEC revenue no change no change $575 million
EBITDA(1) $2.025 to $2.0 to $2.075 to
$2.05 $2.075 $2.15
billion billion billion
Non-ILEC EBITDA no change Approx. Approx.
$(30) $(60)
million million
Capital expenditures $850 to $875 $850 to $900 Approx.
million million $1.05
billion
High-speed Internet Approx. Approx. 150,000 to
subscriber net adds 150,000 125,000 175,000
Mobility segment
Revenue (external) $2.3 to $2.25 to $2.2 to
$2.35 $2.3 billion $2.25
billion billion
EBITDA(1) $775 to $750 to $775 $625 to $650
$800 million million
million
Capital expenditures $350 to $375 $350 to $400 Approx. $450
million million million
Wireless subscriber net Approx. 350,000 to 400,000 to
additions 400,000 375,000 450,000
----------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization,
excluding Restructuring and workforce reduction costs.
(2) Original target of $300 to $600 million was revised in the 2002
Annual Report to $500 to $600 million as a result of a settlement
with tax authorities in late February 2003.
4. Risks and Uncertainties
A comprehensive discussion of the risks and uncertainties can be found in
Management's Discussion and Analysis in TELUS' Annual Information Form, TELUS'
2002 Annual Report, and filings on www.sedar.com and on Edgar at www.sec.gov.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: October 31, 2003
TELUS Corporation
__ "James W. Peters"___
Name: James W. Peters
Title: Corporate Secretary