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 _____October _________ 2004
(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:
Management's Discussion and Analysis
and
TELUS Corporation Financial Statements
Third Quarter
October 26, 2004
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Forward-looking statements
==========================================================================
This document and the management's 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. By their nature, forward-looking statements require the
Company to make assumptions and are subject to inherent risks and
uncertainties. There is significant risk that predictions and other
forward-looking statements will not prove to be accurate. Readers are
cautioned not to place undue reliance on forward-looking statements as a
number of factors could cause actual future results, conditions, actions
or events to differ materially from the targets, expectations, estimates
or intentions expressed in the forward-looking statements.
Factors that could cause actual results to differ materially include but
are not limited to: competition; economic fluctuations; financing and
debt requirements; tax matters; dividends; share repurchase
implementation; human resources (including the outcome of outstanding
labour relations issues); technology (including reliance on systems and
information technology); regulatory developments; process risks; health
and safety; strategic partners; litigation; business continuity events
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 (filed on SEDAR at www.sedar.com) and the United States
(filed on EDGAR at www.sec.gov).
For further information, see the Risks and uncertainties section in
TELUS' 2003 annual Management's discussion and analysis, and significant
updates in interim reports for the first, second and third quarters of
2004.
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 - October 26, 2004
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, 2004 and 2003, and should be read together with
TELUS' interim consolidated financial statements. This discussion contains
forward-looking information that is qualified by reference to, and should be
read together with, the discussion regarding forward-looking statements above.
TELUS' 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. The interim
consolidated financial statements and Management's discussion and analysis
have been reviewed by TELUS' Audit Committee and approved by TELUS' Board of
Directors. All amounts are in Canadian dollars unless otherwise specified.
The following discussion is comprised of significant updates since
Management's discussion and analysis reported in TELUS' 2003 Annual Report and
in interim reports for the first and second quarters of 2004:
1. Core business, vision and strategy
2. Key performance drivers
3. Capability to deliver results
4. Results
5. Risks and uncertainties
1. Core business, vision and strategy
1.1 Strategic imperatives
TELUS continues to be guided by its six strategic imperatives established
four years ago that serve as a guideline for the Company's actions. Some
recent examples of TELUS' activities in support of these imperatives
follow:
Building national capabilities across data, IP and wireless;
Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy;
Focusing relentlessly on the growth markets of data, IP and wireless
On May 13, 2004, the Company announced its intention to make unsolicited
offers to purchase for cash all of the issued and outstanding Class A
Restricted Voting Shares, Class B Non-Voting Shares, Warrants 2005 and
Warrants 2008 of Microcell Telecommunications Inc. ("Microcell"), which
offers were made May 17, 2004. The offers were extended in June, July and
August, pending outcome of the Competition Bureau's review. On
September 20, 2004, Rogers Wireless Communications Inc. ("Rogers
Wireless") announced an agreement with Microcell to make an all-cash
offer to purchase Microcell shares and warrants, supported by a
recommendation from Microcell's Board. The amount offered by Roger's
Wireless exceeded by 21% the amount offered by TELUS. In addition,
Roger's Wireless had negotiated the right to match any competing bids. On
the same day, TELUS extended its all-cash offers to October 12, 2004, in
order to evaluate the terms and conditions of the rival bid and to
maintain the offers in the event that the Roger's Wireless bid ran into
difficulty.
On October 12, 2004, TELUS announced that it was not extending its offers
to purchase shares and public warrants of Microcell and as a result would
not be taking up shares and public warrants previously deposited. TELUS
also cancelled a commitment for a $500 million credit facility, which was
to be available for general corporate purposes following the completion
of the offers.
TELUS Next Generation Network ("NGN") reached another milestone
Consistent with TELUS' strategy to build national capabilities across
voice, data, IP and wireless, the TELUS Next Generation Network team
achieved another milestone in the migration of long distance voice
traffic from competitors to the NGN, a migration that began in July 2003.
On September 8, 2004, all calls originating in B.C. and Alberta destined
to Ontario, that had previously been transported via the Stentor network,
were successfully migrated to the NGN. In May of 2004, all calls
originating in B.C. and Alberta destined to Quebec, were migrated to NGN.
The migration of calls is another step in the transformation of the TELUS
network to a single ubiquitous Internet Protocol ("IP") network designed
to carry high-quality voice, data and video applications. This should
eventually eliminate the need for separate networks to carry these
applications.
Going to the market as one team, under a common brand, executing a
single strategy
TELUS continues to execute on its commitment to being Canada's premier
corporate citizen by supporting the communities in which employees live
and work. During recent months the Company has announced sponsorships
including Hockey Canada and an eight-year $4 million Alpine Canada Alpin
partnership to boost the national ski organization's goal of again making
Canada a world-leading alpine ski racing country. Also announced was a
$9 million partnership with Science World in Vancouver that will be known
as TELUSphere. The Company also ran in September the TELUS Kits for Kids
program, which puts a backpack full of school supplies in the hands of
kids who need them in numerous communities.
2. Key performance drivers
TELUS is focused on addressing six 2004 corporate priorities to help
drive operational performance. An update on certain priorities follows:
2.1 Reaching a collective agreement
Contract negotiations between TELUS Communications Inc. ("TCI") and the
Telecommunications Workers Union ("TWU") remain at a standstill pending
the resolution of a number of outstanding appeals to the Canada
Industrial Relations Board ("CIRB") and the Federal Court of Appeal.
The parties have filed all the necessary submissions in these cases and
await the CIRB's decisions.
The CIRB reconsideration appeal by TELUS asks that the binding
arbitration order and communication ban be lifted to allow the parties to
resume negotiations towards achieving a new collective agreement covering
some 11,000 unionized employees in Western Canada.
TCI and TELUS Mobility have also appealed CIRB Decision 278, which
declared that TELUS Mobility's non-unionized team members, predominantly
located in Ontario and Quebec, performing work similar to their unionized
Mobility segment counterparts in Alberta and British Columbia, should be
included in the TWU bargaining unit represented by the TWU without a
representational vote. The TCI and TELUS Mobility application to the
Federal Court of Appeal for judicial review of Decision 278 was heard on
October 4-5, 2004. A decision from the Court is pending.
3. Capability to deliver results
3.1 Operational capabilities - TELUS Communications
The Communications segment organization structure was simplified during
the third quarter of 2004, reducing the number of customer-facing
business units from five to four. By early October 2004, the sales,
marketing, solutions development, customer care and shared services of
the two business customer-facing units (one that supported small and
mid-sized customers and one that supported large corporate and government
clients) were integrated. The new Business Solutions unit is expected to
provide improved operational efficiencies through reduced duplication as
well as improved effectiveness. In particular, having one point of
contact will facilitate more effective communication with business
customers. Internally, there will be fewer interfaces with enabling
departments, allowing more effective prioritization of initiatives and
better use of resources.
3.2 Operational capabilities - TELUS Mobility
With the wireless marketplace exhibiting strong growth, TELUS Mobility
has managed best-in-class results in many respects. Focus on customer
care, value-added solutions and superior network quality provides the
customer with an exceptional service experience. With the focus on
profitable wireless growth and operating scale efficiencies, TELUS
Mobility is generating significant EBITDA margins ahead of its peer
group. A significant proportion of every incremental network revenue
dollar earned continues to flow through to EBITDA. TELUS Mobility's
performance in the marketplace and its ability to efficiently provide
value to its customers, have resulted in TELUS Mobility being named the
top ranked wireless operator in North America by N. Moore Capital for the
second time.
3.3 Liquidity and capital resources
TELUS repaid approximately $210 million in debt which matured in August,
reduced the cash proceeds from the sale of securitized accounts
receivable by $150 million and redeemed $72.8 million in Preference and
Preferred shares during the first nine months of 2004. During the same
period, the cash balance increased by $616.0 million to $622.2 million.
TELUS also has access to undrawn credit facilities of $1.6 billion. The
Company believes it has sufficient internally generated cash flow from
operations and access to credit facilities to fund its requirements
including capital expenditures, planned debt repayments, payments under
restructuring programs, dividends and other uses as the need arises. With
the Net Debt to EBITDA ratio of 2.2 times and the Net debt to total
capitalization ratio of 49.7% at September 30, 2004, TELUS has achieved
ahead of schedule, not only its previous 2004 year-end guidance for Net
debt to EBITDA of 2.3 times or less, but also the long-term targets of
2.2 times or less for Net debt to EBITDA and 45 to 50% for Net debt to
total capitalization.
The Board of Directors declared a quarterly dividend of twenty cents
($0.20) per share on the outstanding Common Shares and Non-Voting Shares
of TELUS - an increase of one-third from the fifteen cents declared last
quarter. In addition, on October 29, 2004, TELUS is announcing that it
has received approval from its Board of Directors to make a Normal Course
Issuer Bid for the repurchase of up to 25.5 million in total of its
Common Shares and Non-Voting Shares, subject to obtaining all necessary
regulatory approvals. Refer to the discussion following the Liquidity and
capital resource measures table in section 4.6 Liquidity and Capital
Resources.
4. Results
4.1 Critical accounting estimates
---------------------------------
The Company's critical accounting estimates are discussed in
the Company's 2003 annual Management's discussion and analysis. The
preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
4.2 Accounting policy developments
----------------------------------
Share-based compensation (Note 2(a) of the interim consolidated
financial statements)
Commencing with the Company's 2004 fiscal year, the amended
recommendations of the CICA for accounting for share-based compensation
(such amendments arising in 2003) (CICA Handbook Section 3870) apply to
the Company. The Company has selected the modified-prospective
transition method (also referred to as the retroactive application
without restatement method), implemented effective January 1, 2004. To
reflect the fair value of options granted subsequent to 2001, and vesting
prior to 2004, certain components of common equity in the
December 31, 2003, Consolidated Balance Sheet balances have been
restated.
Equity settled obligations (Note 2(b) of the interim consolidated
financial statements)
Commencing with the Company's 2004 fiscal year, the Company early adopted
the amended recommendations of the CICA for the presentation and
disclosures of financial instruments (CICA Handbook Section 3860)
specifically concerning the classification of obligations that an issuer
can settle with its own equity instruments (such amendments arising in
2003). The amendments result in the Company's convertible debentures
being classified as a liability on the consolidated balance sheets
(previously classified as a component of equity) and the associated
interest expense correspondingly being classified with financing costs on
the consolidated statements of income (previously recorded net of income
taxes as an adjustment to retained earnings). The conversion option
embedded in the convertible debentures continues to be presented as a
component of shareholders' equity. As required, these amended
recommendations have been applied retroactively. As a result of the
reclassification of convertible debentures, minor changes were effected
in historical Net debt to EBITDA ratios, and historical Net debt to total
capitalization ratios. The reclassification of the associated interest
expense also resulted in minor changes in historical EBITDA interest
coverage ratios.
4.3 Materiality for disclosure
------------------------------
Management determines whether or not information is "material" based on
whether it believes a reasonable investor's decision to buy, sell or hold
securities in the Company would likely be influenced or changed if the
information were omitted or misstated.
4.4 Quarterly results summary
------------------------------
($ in millions, except per
share amounts) 2004 Q3 2004 Q2 2004 Q1
-------------------------------------------------------
Segmented revenue (external)
TELUS Communications segment 1,199.9 1,189.0 1,171.1
TELUS Mobility segment 747.0 676.6 632.7
------- ------- -------
Operating revenues
(consolidated) 1,946.9 1,865.6 1,803.8
Restructuring and workforce
reduction costs 16.2 0.7 15.9
Net income (loss) 156.6 172.3 101.3
Per weighted average Common
Share and Non-Voting Share
outstanding
- basic 0.44 0.48 0.28
- diluted 0.43 0.48 0.28
Dividends declared per Common
Share and Non-Voting Share
outstanding 0.15 0.15 0.15
-------------------------------------------------------
($ in millions, except per
share amounts) 2003 Q4 2003 Q3 2003 Q2 2003 Q1 2002 Q4
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Segmented revenue (external)
TELUS Communications segment 1,182.4 1,186.3 1,209.2 1,208.5 1,244.2
TELUS Mobility segment 643.2 619.9 564.1 532.4 550.2
------- ------- ------- ------- -------
Operating revenues
(consolidated) 1,825.6 1,806.2 1,773.3 1,740.9 1,794.4
Restructuring and workforce
reduction costs 16.2 2.3 3.3 6.5 241.0
Net income (loss) 47.8 114.1 73.0 89.5 (140.9)
Per weighted average Common
Share and Non-Voting Share
outstanding
- basic 0.13 0.32 0.21 0.26 (0.41)
- diluted 0.13 0.32 0.21 0.26 (0.41)
Dividends declared per Common
Share and Non-Voting Share
outstanding 0.15 0.15 0.15 0.15 0.15
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The trend in Operating revenues continued to reflect growing TELUS
Mobility segment revenues resulting from subscriber growth and increasing
average revenue per subscriber unit ("ARPU"). For two consecutive
quarters, Communications Segment revenues increased sequentially, as a
result of traction gained from new contracts. Communications segment
revenues also increased in the third quarter of 2004, when compared to
the same period in 2003 due to growth in data revenues. Partially
offsetting recent data revenue growth were decreasing voice local, long
distance, and equipment sales revenues, consistent with the Canadian
wireline industry. Communications segment revenues include the impacts of
regulatory price cap decisions.
Restructuring charges in 2002 and 2003 were recorded primarily as a
result of the Communications segment Operational Efficiency Program,
which contributed to improved operating profitability in 2003 and 2004.
Restructuring charges in 2004 were also for Communications segment
restructuring activities, including the consolidation of two
customer-facing business units in the third quarter of 2004. Net income
and earnings per share reflect improved wireline and wireless operating
profitability, as well as decreasing financing costs.
For five of the periods shown above, Net income and earnings per share
included significant favourable impacts for the settlement of tax matters
(including investment tax credits and related interest) and tax losses
carried back to prior years, as shown in the table below:
($ in millions, except
per share amounts) 2004 2004 2004 2003 2003 2003 2003 2002
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
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Approximate Net income
impact - 45 13 - 19 - 53 18
Approximate per share
impact - 0.13 0.04 - 0.05 - 0.15 0.05
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4.5 Results of operations
-------------------------
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Consolidated highlights
Quarters ended Nine-month periods
($ in millions September 30 ended Sept. 30
except per share
amounts) 2004 2003 Change 2004 2003 Change
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Operating revenues 1,946.9 1,806.2 7.8 % 5,616.3 5,320.4 5.6 %
EBITDA(1) 817.9 752.2 8.7 % 2,324.0 2,133.0 9.0 %
Net income 156.6 114.1 37.2 % 430.2 276.6 55.5 %
Earnings per share,
basic 0.44 0.32 37.5 % 1.20 0.79 51.9 %
Earnings per share,
diluted 0.43 0.32 34.4 % 1.19 0.78 52.6 %
Cash dividends
declared per share 0.15 0.15 - 0.45 0.45 -
Cash provided by
operating
activities 847.2 849.7 (0.3)% 1,924.3 1,724.0 11.6 %
Capital expenditures 319.8 304.0 5.2 % 975.6 817.3 19.4 %
Free cash flow(2) 502.6 440.3 14.1 % 1,175.4 773.4 52.0 %
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Non-GAAP measures used by management to evaluate performance of business
units and segments
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) is calculated as:
Quarters ended Nine-months ended
Sept. 30 Sept. 30
2004 2003 2004 2003
--------------------------------------------------------------------
Operating revenues 1,946.9 1,806.2 5,616.3 5,320.4
Less: Operations expense 1,112.8 1,051.7 3,259.5 3,175.3
Less: Restructuring and
workforce reduction costs 16.2 2.3 32.8 12.1
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EBITDA 817.9 752.2 2,324.0 2,133.0
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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. EBITDA is not a calculation based on Canadian or
U.S. GAAP 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) The following shows the calculation of Free cash Flow and reconciles
EBITDA and Free cash flow with Cash provided by operating activities:
Quarters ended Nine-months ended
Sept. 30 Sept. 30
2004 2003 2004 2003
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EBITDA 817.9 752.2 2,324.0 2,133.0
Restructuring and workforce
reduction costs, net of cash
payments 6.4 (29.8) (55.1) (221.5)
Share-based compensation 7.3 - 17.9 -
Cash interest paid (23.1) (27.7) (339.7) (362.5)
Cash interest received 2.1 13.7 23.3 15.0
Income taxes received (paid) 11.8 38.4 197.4 35.1
Capital expenditures (capex) (319.8) (304.0) (975.6) (817.3)
Investment tax credits received
(reported in current or prior
EBITDA or capex, and in Income
taxes received (paid)) - (2.5) (16.8) (8.4)
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Free cash flow 502.6 440.3 1,175.4 773.4
Add back capital expenditures 319.8 304.0 975.6 817.3
Net employee defined benefit
plans expense (credit) 4.9 13.2 14.7 39.5
Employer contributions to
employee defined benefit plans (25.8) (33.9) (112.3) (69.9)
Other net operating activities (3.9) 2.6 13.7 37.5
Non-cash working capital changes
except changes in taxes and
interest 49.6 123.5 (142.8) 126.2
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Cash provided by operating
activities 847.2 849.7 1,924.3 1,724.0
--------------------------------------------------------------------
Free cash flow excludes certain 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. GAAP 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. While the closest GAAP measure is Cash provided by
operating activities, Free cash flow is relevant because it provides
an indication of how much cash is available before changes in working
capital (such as trade payables, and trade receivables, which can be
significantly distorted by securitization changes that do not reflect
operating results) and after funding capital expenditures.
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Consolidated Operating revenue and EBITDA increased significantly in the
third quarter of 2004, when compared with the same period in 2003,
primarily as a result of 20.5% growth in TELUS Mobility total Operating
revenue, with a corresponding increase of only 13.2% in TELUS Mobility
Operations expense. The strong third quarter operating profitability
improvement included a significant cost of acquisition expense related to
a 21.2% increase in TELUS Mobility gross subscriber additions. TELUS'
Communications segment experienced a 1.1% increase in Operating revenue,
while its Operations expense increased by 1.8%. Restructuring charges
increased by $13.9 million primarily for consolidation of two
customer-facing business units in the Communications segment.
Consolidated Financing costs increased by $19.3 million in the third
quarter of 2004, when compared with the same period in 2003. The increase
was primarily due to lower interest income, which decreased by
$27.9 million, partly offset by a lower interest expense for long-term
and short-term debt. Income before taxes and non-controlling interest
increased by $56.8 million to $254.9 million in the third quarter of 2004
as compared with the third quarter of 2003, as a result of improved
operating profitability.
Basic earnings per share increased by 12 cents and diluted earnings
per share increased by 11 cents in the third quarter of 2004, as compared
with the same period last year as a result of higher Net income, partly
offset by a larger number of shares outstanding.
Cash provided by operating activities was flat in the third quarter of
2004, when compared with the third quarter of 2003, as higher EBITDA was
offset by changes in working capital. Free cash flow increased primarily
due to higher cash from operating activities and lower restructuring
payments, partly offset by lower interest and income taxes received and
higher capital expenditures.
The following discussion for Operating revenues, Operations expense,
Restructuring and workforce reduction costs, EBITDA and Capital
expenditures is presented on a segmented basis. All other discussion is
presented for the consolidated financial results.
Operating revenues - Quarters ended Nine-month periods
Communications September 30 ended Sept. 30
segment
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Voice local 538.3 542.9 (0.8)% 1,611.0 1,623.0 (0.7)%
Voice long
distance 233.5 238.5 (2.1)% 691.6 728.8 (5.1)%
Data 358.1 331.9 7.9 % 1,043.6 1,027.1 1.6 %
Other 70.0 73.0 (4.1)% 213.8 225.1 (5.0)%
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External operating
revenue 1,199.9 1,186.3 1.1 % 3,560.0 3,604.0 (1.2)%
Intersegment
revenue 24.9 24.6 1.2 % 72.0 71.4 0.8 %
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Total operating
revenue 1,224.8 1,210.9 1.1 % 3,632.0 3,675.4 (1.2)%
-------------------------------------------------------------------------
Key operating indicators - Communications segment
At September 30
(000s) 2004 2003 Change
----------------------------
Residential network
access lines 3,058 3,099 (1.3)%
Business network
access lines 1,759 1,784 (1.4)%
--------------------------
Total network
access lines(1) 4,817 4,883 (1.4)%
High-speed Internet
subscribers 654.9 516.0 26.9 %
Dial-up Internet
subscribers 292.7 333.7 (12.3)%
--------------------------
Total Internet
subscribers (2) 947.6 849.7 11.5 %
Quarters ended Nine-month periods
September 30 ended Sept. 30
(000s) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------
Change in
residential
network access
lines 5 3 (28) (23)
Change in business
network access
lines (15) (7) (21) (5)
------- ------- ------- -------
Change in total
network access
lines (10) (4) (150.0)% (49) (28) (75.0)%
High-speed
Internet net
additions 30.6 47.2 (35.2)% 93.3 106.0 (12.0)%
Dial-up Internet
net reductions (8.0) (18.1) 55.8 % (27.1) (58.0) 53.3 %
------- ------- ------- ------- ------- -------
Total Internet
subscriber net
additions 22.6 29.1 (22.3)% 66.2 48.0 37.9 %
-------------------------------------------------------------------------
(1) Network access lines are measured at the end of the reporting period
based on information in billing and other systems.
(2) Internet subscribers are measured at the end of the reporting period
based on Internet access counts from billing and other systems.
- Relative to a general industry trend of declining traditional
revenues, the Communications segment performed well due to slowing of
the rate of long distance revenue erosion and improving data service
revenues. Voice local revenue decreased slightly in the third quarter
and first nine months of 2004, when compared with the same periods in
2003. Local revenue for the first nine months of 2004 includes a
positive adjustment of $10.2 million recorded in the second quarter
of 2004 for CRTC Decision 2004-42. In the decision TELUS was allowed
to recover costs to support local number portability and local
competition capital investments for the period June 2002 to May 2004.
Excluding this adjustment, the local service decrease was primarily
as a result of fewer access lines, partly offset by implementation of
approved rate increases for business single and multi-line services
effective June 1, 2004. Interconnection revenue was flat in the third
quarter of 2004 as a result of reduced interconnection tariffs, but
increased modestly for the first nine months of 2004, when compared
with the same periods in 2003. Enhanced service revenues were
relatively unchanged in the third quarter and first nine months of
2004, when compared to the same periods in 2003.
Residential network access lines increased during the third quarters
of 2004 and 2003, as a result of normal seasonal changes when students
return to universities and colleges. Year-over-year, and for the first
nine months of 2004, residential network access lines continued to
decrease as a result of competitive activity and technological
substitution, including substitution to wireless services. Business
lines decreased primarily as a result of incumbent local exchange
carrier ("ILEC") Centrex line losses to competition and migration to
more efficient ISDN data services. Consistent with the general
industry experience, it is expected that the trend of declining
network access lines will continue.
- Voice long distance revenue continued to decrease, but the rate of
decline in the third quarter of 2004 was the lowest since the first
quarter of 2001. This was primarily a result of increased wholesale
revenues. For the first nine months of 2004, long distance revenue
decreased at a rate similar to the negative 5.4% observed for the
full year of 2003. The decreases for the third quarter and first nine
months were primarily a result of fewer consumer minutes, price
competition, and technological substitution, partly offset by a $1
increase this quarter in certain monthly long distance plan
administrative charges, effective June 2004, as well as increased
business and wholesale long distance minute volumes. Price
competition and substitution to alternative technologies are expected
to continue.
- Communications segment data revenue increased by 7.9% in the third
quarter of 2004, when compared to the third quarter of 2003, even
though the third quarter of 2003 included a small amount of revenues
from divested assets. Data revenues increased by $33.1 million or
3.3% for the first nine months of 2004, when normalized for the
disposal of assets in 2003. The revenues associated with disposal of
application development assets in 2003 that do not recur in the third
quarter and first nine months of 2004 were $3.0 million and
$16.7 million, respectively.
Internet and enhanced data service revenues increased by $18.4 million
and $35.9 million, respectively, for the third quarter and first nine
months of 2004, when compared with the same periods in 2003, primarily
as a result of the 26.9% increase in the high-speed Internet
subscriber base over the last 12 months, partly offset by the 12.3%
reduction in dial-up subscribers over the last 12 months. The decrease
in dial-up subscribers has slowed in 2004, and is attributed mainly to
a slower rate of conversion to high-speed Internet. Managed workplace
revenues were flat and increased by $21.5 million, respectively, due
to providing higher functional outsourcing services to TELUS'
customers. Other data services revenue increased by $7.5 million in
the third quarter of 2004, when compared with the same period in 2003,
as a result of an increase in equipment sales. Other data services
revenue decreased by $24.3 million for the first nine months of 2004,
due mainly to lower equipment sales.
- Other revenue decreased in the third quarter and first nine months of
2004, when compared with the same periods in 2003, primarily as a
result of lower voice equipment sales, lower late payment fees and
the conclusion in the first quarter of 2004 of recognition of
deferred individual line service grant revenues. The annual impact of
the conclusion of individual line service grants will be lower
revenues of $6.7 million in 2004, when compared with 2003. Individual
line service grants were provided in respect of the conversion of
multi-party lines to single lines in high cost rural areas in Alberta
in the early 1990s.
- Intersegment revenues represent services provided by the
Communications segment to the Mobility segment. These revenues are
eliminated upon consolidation together with the associated expense in
TELUS Mobility.
Total external operating revenue discussed above included Non-ILEC
revenues of $145.3 million and $404.3 million, respectively, for the third
quarter and first nine months of 2004, as compared with $138.4 million and
$417.7 million for the same periods in 2003. This represents an increase of
$6.9 million or 5.0% for the third quarter of 2004, and a decrease of
$13.4 million or 3.2% for the first nine months 2004. Normalized for asset
disposals, Non-ILEC revenues for the nine months of 2004 increased by
$3.0 million or 0.7%, respectively. The increase was primarily due to a shift
toward recurring longer-term revenues and a number of large contracts, which
were signed in 2003 and are being implemented in 2004, and to higher long
distance traffic volume. Although equipment sales increased in the third
quarter of 2004, when compared with the third quarter of 2003, equipment sales
for the first nine months of 2004 were significantly lower than the first nine
months of 2003.
Operating revenues - Quarters ended Nine-month periods
Mobility segment September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Network revenue 686.0 577.4 18.8 % 1,903.9 1,595.9 19.3 %
Equipment revenue 61.0 42.5 43.5 % 152.4 120.5 26.5 %
-------------------------------------------------------------------------
External operating
revenue 747.0 619.9 20.5 % 2,056.3 1,716.4 19.8 %
Intersegment
revenue 5.0 4.0 25.0 % 15.2 11.6 31.0 %
-------------------------------------------------------------------------
Total operating
revenue 752.0 623.9 20.5 % 2,071.5 1,728.0 19.9 %
-------------------------------------------------------------------------
Key operating indicators - Mobility segment
-------------------------------------------------------------------------
(000s) At September 30
2004 2003 Change
---------------------------
Subscribers
- postpaid 3,095.5 2,691.4 15.0 %
Subscribers
- prepaid 654.5 574.2 14.0 %
-------- -------- -------
Subscribers
- total(1) 3,750.0 3,265.6 14.8 %
Digital POPs(2)
covered including
roaming/resale
(millions)(3) 29.7 29.0 2.4 %
---------------------------
Quarters ended Nine-month periods
September 30 ended Sept. 30
(000s) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------
Subscriber net
additions
- postpaid 115.4 76.4 51.0 % 283.7 200.8 41.3 %
Subscriber net
additions
- prepaid 20.8 24.2 (14.0)% 42.3 69.3 (39.0)%
-------- ------ -------- ------- ------- --------
Subscriber net
additions
- total 136.2 100.6 35.4 % 326.0 270.1 20.7 %
Churn, per month
(%)(4a) 1.34 1.38 - 1.38 1.40 -
COA(4b) per gross
subscriber
addition ($)(4c) 374 406 (7.9)% 379 420 (9.8)%
ARPU ($)(4d) 62 60 3.3 % 59 57 3.5 %
Average minutes of
use per subscriber
per month ("MOU") 393 367 7.1 % 382 342 11.7 %
EBITDA to network
revenue (%) 47.2 42.5 4.7 pts 45.0 39.2 5.8 pts
Retention spend
to network
revenue(4e) (%) 4.1 3.9 0.2 pts 4.6 4.0 0.6 pts
EBITDA excluding COA
($ millions)(4f) 429.6 340.6 26.1 % 1,148.9 904.0 27.1 %
-------------------------------------------------------------------------
pts - percentage points
(1) Subscribers are measured at the end of the reporting period based on
information from billing and other systems.
(2) POPs is an acronym 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.
(3) At September 30, 2004, TELUS Mobility PCS digital population coverage
was 22.4 million and 29.7 million including the roaming/resale
agreements principally with Bell Mobility and Aliant Telecom
Wireless. TELUS Mobility has not activated all digital-roaming areas.
(4) 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
subscriber units on the network, expressed as a rate per month.
Prepaid subscribers are deactivated when the subscriber has no
usage for 90 days following expiry of the prepaid card.
(b) Cost of acquisition (COA) consists of the total of handset
subsidies, commissions, and advertising and promotion expenses
related to the initial customer acquisition during a given
period. As defined, COA excludes costs to retain existing
subscribers (Retention spend).
(c) COA per gross subscriber addition is COA divided by gross
subscriber activations during the period.
(d) ARPU is calculated as Network revenue divided by the average
number of subscriber units on the network during the period,
expressed as a rate per month.
(e) Retention Spend to Network revenue represents direct costs
associated with Marketing and promotional efforts aimed at the
retention of the existing subscriber base, divided by Network
revenue.
(f) EBITDA excluding COA is a measure for operational profitability
normalized for the period costs of adding new customers.
-------------------------------------------------------------------------
- TELUS 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 18.8% for the quarter ended
September 30, 2004 and 19.3% for the first nine months of 2004 as
compared with the same periods in 2003. This growth was a result of
the continued expansion of the subscriber base by 14.8% to
approximately 3.75 million subscribers combined with increased ARPU.
As a result of an overall 7.1% increase in average minutes of use
("MOU") per subscriber per month, pricing discipline, and increased
usage of data and Internet based products, including picture and text
messaging, ARPU increased to $62 in the third quarter of 2004 as
compared with $60 in 2003, representing a seventh successive quarter
of year over year increases.
Average minutes of use per subscriber per month increased in the third
quarter and first nine months of 2004 as shown in the table above. At
September 30, 2004, postpaid subscribers represented 82.5% of the
total cumulative subscriber base unchanged from one-year earlier,
contributing to the significant ARPU premium TELUS Mobility enjoys
over its competitors. Postpaid subscriber net additions of 115,400
for the third quarter of 2004 represented 84.7% of all net additions
as compared with 76,400 (75.9%) for the corresponding period in 2003.
This represents a significant increase of 51.0% in the post-paid
subscriber net additions when compared to the previous year.
Similarly, postpaid subscriber net additions of 283,700 for the first
nine months of 2004 represented 87.0% of total net additions as
compared with 74.3% for the same period in 2003. This was the fifth
consecutive quarter of year over year positive net postpaid subscriber
growth. Moreover, total subscriber net additions of 136,200
represented a record for all third quarters reported and improved by
35.4% over the same quarter in 2003.
Blended postpaid and prepaid churn improved slightly to 1.34% in the
third quarter of 2004 when compared with the same quarter in 2003.
Deactivations were 147,600 and 442,600 for the third quarter and first
nine months of 2004, respectively, as compared with 133,500 and
393,900 for the same periods last year. The improved churn rates in
the face of increased deactivations were notable accomplishments in a
market characterized by vigorous competition. These churn and
deactivation results reflect a high level of client satisfaction,
which can be attributed to improved network quality and coverage,
excellent client service levels, client contracts for one to three
years as part of loyalty and retention programs and specific
grandfathered rate plans.
- Equipment sales, rental and service revenue increased in the third
quarter and first nine months of 2004 as compared to the corresponding
periods in 2003. Handset revenue increased mainly due to subscriber
growth brought about by a stronger wireless market, increased
promotional, retention and contracting activity, and to a lesser
extent, a shift in product mix to higher price handsets. Gross
subscriber additions grew to 283,800 for the third quarter and 768,600
for the first nine months of 2004 as compared to 234,100 and 664,000
for the same periods in 2003. Handset revenues associated with gross
subscriber activations are included in COA.
- Intersegment revenues represent services provided by the Mobility
segment to the Communications segment and are eliminated upon
consolidation along with the associated expense in TELUS
Communications.
Operations expense - Quarters ended Nine-month periods
Communications September 30 ended Sept. 30
segment
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Salaries, benefits
and other employee-
related costs 412.4 396.2 4.1 % 1,220.2 1,214.8 0.4 %
Other operations
expenses 301.8 305.7 (1.3)% 912.5 940.9 (3.0)%
-------------------------------------------------------------------------
Total operations
expense 714.2 701.9 1.8 % 2,132.7 2,155.7 (1.1)%
-------------------------------------------------------------------------
Full-time
equivalent
employees, end of
period 18,857 18,937 (0.4)%
---------------------------------------------
Communications segment Total operations expense changed slightly in the
third quarter of 2004 and first nine months of 2004, when compared with
the same periods in 2003. The increase in salaries, benefits and related
costs was primarily the result of inflationary increases and costs
relating to assurance of a higher level of service, partly offset by a
lower pension expense and Operational Efficiency Program savings. The
decrease in Other operations expense was due mainly to lower facility
costs, partly offset by increased network support and maintenance costs
with third parties. Full-time equivalent employees at the end of
September 2004 included 528 staff for in-sourcing call centre services in
Montreal and a partnership with Calgary Health Region.
- Salaries, benefits and employee-related expenses increased in the
third quarter and first nine months of 2004, when compared with the
same periods in 2003. Costs associated with temporary staff,
overtime, training and travel increased by $2.4 million in the third
quarter and increased by $27.9 million for the first nine months of
2004, when compared with the same periods in 2003. The increase in
temporary staffing, overtime, training and travel was related to
activities to maintain high customer service levels, improve internal
processes, emergency operations training, and an increased focus on
leadership training and team development. Temporary staff, overtime,
training and travel costs decreased by $8.0 million when compared
with the fourth quarter of 2003, when extra effort was expended to
improve customer service and clear backlogs created in the third
quarter of 2003 by a number of natural disasters, staffing and system
conversion issues.
Additional costs for the new partnership with the Calgary Health
Region and establishment of the new Montreal call centre were
$6.2 million and $19.0 million, respectively, in the third quarter
and first nine months of 2004. These increased costs were partly
offset by savings on outsourcing of approximately $2.5 million and
$6.3 million, respectively, which are included in Other operations
expense. Non-cash share-based compensation expense recognized
commencing January 1, 2004, as discussed in Accounting policy
developments, was $6.9 million in the third quarter of 2004 and
$16.8 million during the first nine months of 2004 ($nil in 2003).
Partly offsetting the increases noted above were savings from the
Operational Efficiency Program (duration 2001 to 2003) of
approximately $11.0 million and $49.0 million for the third quarter
and first nine months of 2004. Pension expense for defined benefit
and defined contribution plans decreased by $4.5 million and $17.7
million, respectively for the third quarter and first nine months,
primarily as a result of increased investment returns. TELUS'
Communications segment annual pension expense is expected to decrease
by approximately $30 million for 2004, when compared with 2003. All
other costs collectively increased in line with inflation rates.
- Other operations expenses were inclusive of additional Operational
Efficiency Program savings of approximately $4 million in the third
quarter and $16 million year-to-date. Other operations expenses
decreased in the third quarter and first nine months of 2004, when
compared with the same periods in 2003, principally due to: (i)
reduced facilities, transit and termination costs, which decreased by
$6.3 million and $38.7 million, respectively, as a result of lower
rates for domestic, U.S. and international traffic termination, as
well as migration to the NGN, partially offset by higher outbound
traffic volumes; (ii) lower bad debt expense that decreased by
$2.4 million and $9.4 million, respectively, as a result of stringent
enforcement of credit policy, more effective collection practices and
reduced loss experience; (iii) decreased contract and consulting
costs of $6.8 million for the third quarter; and (iv) increased
capitalized labour of $5.7 million and $7.6 million, respectively,
related to higher capital expenditure activity. Product and services
cost of sales increased by $4.9 million and decreased by
$3.2 million, respectively, associated with higher equipment sales
for the quarter and lower equipment sales year-to-date. Partially
offsetting lower costs were increased network support and maintenance
costs with third parties of $7.3 million and $19.7 million,
respectively. Advertising and promotion costs increased by
$2.8 million and $5.8 million, respectively, due mainly to the
"premier corporate citizen campaign" and additional sponsorship
costs.
Included in the total segment expenses discussed above are Non-ILEC
operations expenses of $148.3 million and $430.2 million, respectively,
for the third quarter and first nine months of 2004, as compared with
$144.4 million and $444.3 million, respectively, for the same periods in
2003. Normalized for asset disposals, Non-ILEC operations expenses
decreased by $3.8 million or 0.8% in the first nine months of 2004, when
compared with the same periods in 2003. Operations expenses increased in
the third quarter of 2004, when compared with the same period in 2003,
due primarily to increased salaries and benefits, increased transit and
termination costs for higher outbound international and U.S. traffic
volumes, and increased cost of sales associated with higher equipment
sales. Salaries and benefits increased due the requirement for additional
resources in support of growing recurring revenues. Normalized operations
expense decreased for the first nine months of 2004, when compared with
the same period in 2003, primarily due to lower costs of sales associated
with lower equipment sales, migration to NGN and a lower bad debt
expense, partly offset by increased salaries and benefits, and increased
wholesale transit and termination costs for higher outbound international
and U.S. traffic volumes.
Operations expense - Quarters ended Nine-month periods
Mobility segment September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Equipment sales
expenses 111.2 86.4 28.7 % 299.6 259.2 15.6 %
Network operating
expenses 104.3 97.9 6.5 % 301.2 274.7 9.6 %
Marketing expenses 78.4 67.2 16.7 % 213.2 188.3 13.2 %
General and
administration
expenses 134.6 126.9 6.1 % 400.0 380.4 5.2 %
-------------------------------------------------------------------------
Total operations
expense 428.5 378.4 13.2 % 1,214.0 1,102.6 10.1 %
-------------------------------------------------------------------------
Full-time equivalent
employees, end of
period 5,681 5,175 9.8 %
---------------------------------------------
TELUS Mobility operations expense increased in the third quarter and
first nine months of 2004, when compared with the same periods last year.
TELUS Mobility has been able to achieve significant economies of scale as
evidenced by the 14.8% growth in subscribers compared to third quarter
Network revenue growth of 18.8% and a 13.2% increase in total operations
expense.
- Expenses related to equipment sales increased in the third quarter and
first nine months of 2004 when compared with the same periods in
2003, principally due to an increase in gross subscriber activations,
more expensive handset costs and higher retention activity. The
increase related in part to continued marketing promotions including
camera phones. Handset costs associated with gross subscriber
activations are included in 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.
Transmission and site-related expenses increased to support the
greater number of cell sites, a larger subscriber base, and improved
network quality and coverage. In addition, Industry Canada spectrum
licence fees were higher in 2004 principally due to a $0.8 million
and $7.3 million credit received in third quarter and first nine
months of 2003, respectively as part of a retroactive filing with
Industry Canada for years prior to 2003. Network costs, once
normalized for this event, increased by 5.7% and 6.8% over the same
periods last year. Further, Network roaming costs increased
$2.8 million in the third quarter and $12.3 million for the first
nine months of 2004 as compared to the same periods in 2003 largely
due to successful marketing efforts in non-urban roaming/resale
areas. TELUS Mobility believes this variable cost increase is
reflective of the overall positive industry trend of subscriber
growth and increased subscriber usage evidenced in the ongoing
strength of Network revenue growth. TELUS Mobility also continued to
build out microwave facilities aimed at reducing future leased line
transmission costs. The digital population coverage grew to
29.7 million at September 30, 2004, as a result of continued
activation of digital roaming regions and network expansion.
- Marketing expenses increased primarily due to higher dealer
compensation costs and advertising expenses associated with the
expanded subscriber base and increased re-contracting activity.
Despite the higher marketing expenses and significant subscriber
growth, COA per gross subscriber addition improved by 7.9% in the
third quarter to $374 and improved by 9.8% to $379 in first nine
months as compared with the same periods last year. Combined with the
higher ARPU and improved churn, COA per gross subscriber addition
over the lifetime revenue of the subscriber improved significantly in
the third quarter and first nine months of 2004 as compared with 2003.
- General and administration expenses consist of employee compensation
and benefits, facilities, client services, bad debt and various other
expenses. General and administration expenses increased by only 6.1%
in the third quarter and 5.2% for the first nine months of 2004.
TELUS Mobility increased full-time equivalent employees to support
the significant growth in the subscriber base and continued expansion
of the client care team and company-owned retail stores, partly
offset by a lower bad debt expense due to reduced loss experience.
Restructuring and Quarters ended Nine-month periods
workforce reduction September 30 ended Sept. 30
costs by segment
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications
segment 16.2 2.3 NM 32.8 12.1 171.1 %
Mobility segment - - - - - -
-------------------------------------------------------------------------
TELUS consolidated 16.2 2.3 NM 32.8 12.1 171.1 %
-------------------------------------------------------------------------
NM - not meaningful
Restructuring costs for the third quarter of 2004 were Communications
segment initiatives primarily related to the consolidation of the
Business Solutions and Client Solutions business units. The amount
recorded for the first nine months of 2004 include the following
activities in the Communications segment:
- A departmental reorganization was initiated, primarily in the
information technology resources area, consolidating from 15 locations
to 2 primary locations. This reorganization, which has an estimated
implementation cost in 2004 of approximately $13 million and is
planned for completion in 2004, is expected to enable greater
efficiencies of scale and effectiveness of program delivery. At
September 30, 2004, approximately $12 million of these costs have been
recorded.
- A departmental reorganization was initiated with the merging of two
customer-facing business units. The resulting integration and
consolidation aimed to improve the Company's competitiveness as well
as its operating and capital productivity. This reorganization has an
estimated implementation cost in 2004 of approximately $21 million and
is planned for completion in 2004. At September 30, 2004,
approximately $13 million of these costs have been recorded.
- In addition to the foregoing initiatives, the Company has undertaken
additional activities in 2004 aimed at improving its operating and
capital productivity and competitiveness. These additional activities
have an estimated cost in 2004 of $16 million. At September 30, 2004,
approximately $8 million of these costs have been recorded.
No future costs are expected to be recorded under the 2001 to 2003
Operational Efficiency Program, but variances from estimates currently
recorded may impact amounts ultimately recorded. Cumulative annual cost
structure reductions in the Communications segment under Operational
Efficiency Program were approximately $519 million by September 30, 2004.
The cumulative savings under this program are currently expected to be
between $530 million and $535 million at the end of 2004, or over 96% of
the $550 million target set in mid-2002.
EBITDA by segment Quarters ended Nine-month periods
September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications
segment 494.4 506.7 (2.4)% 1,466.5 1,507.6 (2.7)%
Mobility segment 323.5 245.5 31.8 % 857.5 625.4 37.1 %
-------------------------------------------------------------------------
TELUS consolidated 817.9 752.2 8.7 % 2,324.0 2,133.0 9.0 %
-------------------------------------------------------------------------
EBITDA margin(1) Quarters ended Nine-month periods
by segment September 30 ended Sept. 30
(%) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications
segment 40.4 41.8 (1.4)pts 40.4 41.0 (0.6)pts
Mobility segment 43.0 39.3 3.7 pts 41.4 36.2 5.2 pts
TELUS consolidated 42.0 41.6 0.4 pts 41.4 40.1 1.3 pts
-------------------------------------------------------------------------
(1) EBITDA divided by total revenue.
Communications segment EBITDA decreased for the third quarter due to
increased restructuring charges, inflationary increases in operations
expenses, partly offset by increased data revenues. For the first nine
months of 2004, Communication segment EBITDA decreased primarily due to
increased restructuring charges and lower revenues.
Significant growth in TELUS Mobility EBITDA and EBITDA margin was
attributed to profitable subscriber growth, increased ARPU, a lower cost
of acquisition per gross subscriber addition, a world-class churn rate,
and successful cost containment efforts. The EBITDA margin, when
calculated as a percentage of Network revenue, improved to 47.2% for the
third quarter and 45.0% for the first nine months of 2004 as compared
with 42.5% and 39.2% for the same periods in 2003, representing positive
increases of 4.7 and 5.8 percentage points, respectively.
Depreciation and Quarters ended Nine-month periods
amortization September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Depreciation 327.1 308.9 5.9 % 969.5 949.5 2.1 %
Amortization of
intangible assets 80.5 98.3 (18.1)% 256.1 278.9 (8.2)%
-------------------------------------------------------------------------
407.6 407.2 0.1 % 1,225.6 1,228.4 (0.2)%
-------------------------------------------------------------------------
Depreciation and amortization expenses, in total, were not significantly
changed in the third quarter and first nine months of 2004. Increased
depreciation and amortization for growth in data network and wireless
capital assets, increased depreciation for certain assets, as well as
write-offs of network equipment and software assets in 2004, were largely
matched by lower amortization resulting from certain software
applications becoming fully amortized and from the write-off of software
assets in 2003.
Other expense Quarters ended Nine-month periods
(income) September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
(3.2) 7.6 - - 19.8 (100.0)%
-------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense, income
(loss) or impairments in portfolio investments, gains and losses on
disposal of property, and charitable donations. Accounts receivable
securitization expense decreased by $2.5 million and $8.9 million,
respectively, for the third quarter and first nine months of 2004, when
compared to the same periods in 2003. This was due to the reduction in
the amount of securitized receivables since October 2003. See Liquidity
and capital resources - Accounts receivable sale. In addition, net gains
from portfolio investments and the sale of land and several buildings
were realized in the third quarter of 2004. Charitable donations expense
continues to reflect TELUS' objective of donating 1% or more of average
pre-tax income, as defined under the Imagine Caring Company formula.
Financing costs Quarters ended Nine-month periods
September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Interest on Long-
term Debt, short-
term obligations
and other 161.7 169.2 (4.4)% 494.6 517.5 (4.4)%
Foreign exchange
losses (gains) (0.3) 0.8 - (1.0) - -
Interest income (2.8) (30.7) 90.9 % (33.1) (41.9) 21.0 %
-------------------------------------------------------------------------
158.6 139.3 13.9 % 460.5 475.6 (3.2)%
-------------------------------------------------------------------------
Interest on long-term and short-term debt decreased primarily due to
repayment of bank facilities, Medium-term Notes and First Mortgage Bonds
during 2003. TELUS maintains a hedging program using cross currency
swaps, and as a result, long-term financing costs were generally
unaffected by fluctuations in the value of the Canadian dollar against
the U.S. dollar. Debt, which includes Long-term Debt, Current maturities
and the deferred hedging liability, but excludes cash-on-hand, was
$7,372 million at September 30, 2004, when compared with $7,577 million
at December 31, 2003 and $7,642 million at September 30, 2003. The
average debt outstanding in the first nine months of 2004 was $7,534
million, as compared with $8,085 million in the same period in 2003.
Interest income was recognized primarily as a result of tax refunds from
the settlement of various tax matters.
Income taxes Quarters ended Nine-month periods
September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Blended federal
and provincial
statutory income
tax 88.8 73.3 21.1 % 221.7 151.4 46.4 %
Tax rate
differential on
settlement of
prior year tax
issues (0.3) - - (36.1) (49.7) 27.4 %
Large corporations
tax and other 8.7 9.7 (10.3)% 19.1 28.2 (32.3)%
-------------------------------------------------------------------------
97.2 83.0 17.1 % 204.7 129.9 57.6 %
-------------------------------------------------------------------------
Blended federal
and provincial
statutory tax
rates (%) 34.8 37.0 (2.2)pts 34.8 37.0 (2.2)pts
Effective tax
rates (%) 38.1 41.9 (3.8)pts 32.1 31.7 0.4 pts
-------------------------------------------------------------------------
Blended federal and provincial statutory income tax increased in the
third quarter and first nine months of 2004, when compared with the same
periods in 2003, primarily due to the increase in income before taxes of
$56.8 million and $228.7 million for the same periods, partly offset by
lower blended tax rates. Lower tax recoveries in for the first nine
months of 2004, as compared to 2003, also contributed to higher income
taxes in 2004. The 2004 tax recoveries were related to losses carried
back and settlement of tax matters for prior years that had higher tax
rates. Similarly, 2003 tax recoveries were recorded for the settlement of
tax matters for prior years that had higher tax rates.
Non-controlling Quarters ended Nine-month periods
interest September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
1.1 1.0 10.0 % 3.0 2.7 11.1 %
-------------------------------------------------------------------------
Non-controlling interest primarily represents partners' interests in
several small subsidiaries.
Preference and Quarters ended Nine-month periods
preferred dividends September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
0.1 0.9 (88.9)% 1.8 2.6 (30.8)%
-------------------------------------------------------------------------
No further Preference and preferred dividends will be paid in future
periods as a result of the redemption of all of the publicly held TELUS
Communications Inc. Preference and Preferred Shares, completed on
August 3, 2004.
4.6 Liquidity and capital resources
-----------------------------------
Cash provided by Quarters ended Nine-month periods
operating activities September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
847.2 849.7 (0.3)% 1,924.3 1,724.0 11.6 %
Cash provided by operating activities was flat in the third quarter when
compared with the third quarter of 2003 as increased operating
profitability and lower restructuring payments were offset by working
capital changes and lower income tax recoveries. Cash provided by
operating activities increased for the first nine months of 2004, when
compared with the same period in 2003 principally due to improved
operating profitability, lower payments under restructuring programs, the
recovery of income taxes associated with settlement of tax matters
(including interest income), and lower interest expense, partly offset by
an increase in contributions to defined benefit plans.
- Cash recovery of income taxes associated with settlement of prior
years' tax matters was $16.8 million ($11.8 million net of tax
installments) in the third quarter of 2004, compared with net tax
recoveries of $38.4 million in the third quarter of 2003. For the
first nine months of 2004, tax recoveries and investment tax credits
collected were $213.9 million ($197.4 million net of tax
installments), compared with net tax recoveries of $35.1 million in
the first nine months of 2003.
- EBITDA increased by $65.7 million and $191.0 million, respectively, in
the third quarter and first nine months of 2004, when compared with
the same periods in 2003, reduced by offsetting increases in related
working capital. Included in EBITDA were non-cash share-based
compensation expenses of $7.3 million and $17.9 million,
respectively, for the third quarter and first nine months of 2004.
- Interest paid decreased by $4.6 million and $22.8 million
respectively, for the third quarter and first nine months of 2004,
when compared with the same periods in 2003.
- Payments under restructuring and workforce reduction initiatives
decreased by $22.3 million and $145.7 million, respectively, in the
third quarter and first nine months of 2004, compared with the same
periods in 2003.
- Interest received decreased by $11.6 million and increased by
$8.3 million respectively for the third quarter and first nine months
of 2004, when compared with the same periods in 2003, primarily from
the settlement of tax matters.
- Employer contributions to employee defined benefit plans decreased by
$8.1 million and increased by $42.4 million, respectively, for the
third quarter and first nine months of 2004, when compared with the
same periods in 2003. The increases reflect updated actuarial
valuations and the net acceleration of discretionary funding.
- Non-cash working capital included changes in proceeds from securitized
accounts receivable. Proceeds from securitized accounts receivables
did not change in the third quarter of 2004, but decreased by
$4.0 million in the same period in 2003. For the first nine months of
2004, the Company made payments of $150 million to reduce securitized
accounts receivables, compared with a net increase in securitized
accounts receivable of $6 million in the same period in 2003.
Cash used by Quarters ended Nine-month periods
investing September 30 ended Sept. 30
activities
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
316.5 307.8 2.8 % 956.7 776.4 23.2 %
-------------------------------------------------------------------------
Cash used by investing activities increased in the third quarter and
first nine months of 2004, when compared with the same periods in 2003,
primarily as a result of increased capital expenditures. The Company also
received proceeds of $1.8 million and $18.2 million, respectively, in the
third quarter and first nine months of 2004 from the sale of
non-strategic assets, including several real estate properties. In the
corresponding nine-month period in 2003, the Company disposed of
non-strategic properties and monetized an investment for total proceeds
of $38.3 million. The 2003 proceeds included those from the sale of an
administrative property under the terms of a sale and leaseback
transaction, on which an $8.2 million pre-tax gain was deferred and is
being amortized over the term of the lease.
Capital expenditures Quarters ended Nine-month periods
by segment September 30 ended Sept. 30
($ in millions,
except capital
expenditure
intensity) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications
segment 216.4 208.9 3.6 % 743.5 589.8 26.1 %
Mobility segment 103.4 95.1 8.7 % 232.1 227.5 2.0 %
-------------------------------------------------------------------------
TELUS consolidated 319.8 304.0 5.2 % 975.6 817.3 19.4 %
-------------------------------------------------------------------------
Capital expenditure
intensity(1) (%) 16.4 16.8 (0.4)pts 17.4 15.4 2.0 pts
-------------------------------------------------------------------------
(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 of varying size within the same industry.
- Communications segment ILEC capital expenditures were relatively
unchanged at $184.3 million in the third quarter of 2004 and
increased by 21.6% to $625.0 million in the first nine months of
2004, when compared with the same periods in 2003. The increase was
due to significant investments in network infrastructure to improve
customer service and network reliability, as well as investments in
internal systems and processes, delivery of services to new
customers, and the development of new services. In addition, capital
spending in 2003 was constrained by the impact of the Operational
Efficiency Program, which temporarily delayed certain projects.
Expenditures for high-speed Internet (ADSL) increased by
$20.5 million to $86.9 million for the first nine months in order to
support subscriber growth.
Non-ILEC capital expenditures increased by 43.3% to $32.1 million in
the third quarter of 2004 and increased by 55.9% to $118.5 million in
the first nine months of 2004, when compared with the same periods in
2003. The increase in Non-ILEC expenditures was primarily to support
the Company's IP strategy and delivery of services to new customers,
which included implementation of several large contracts.
The Communications segment capital expenditure intensity ratios were
17.7% and 20.5% in the third quarter and first nine months of 2004,
compared with 17.3% and 16.0%, respectively, in the same periods in
2003. Cash flow (EBITDA less capital expenditures) decreased by 6.6%
to $278.0 million in the third quarter of 2004, when compared to the
same period in 2003. For the first nine months of 2004, cash flow
decreased by 21.2% to $723.0 million mainly due to higher capital
spending, increased restructuring charges, and lower revenues for the
first nine months.
- Mobility segment capital expenditures increased by 8.7% in the third
quarter and remained relatively steady for the first nine months of
2004 when compared with same periods in 2003. TELUS Mobility
continued the enhancement of digital wireless coverage and continued
building microwave facilities in the third quarter of 2004 aimed at
reducing future leased line transmission costs. Capital spending
increased over last year principally as a result of higher spending
on network infrastructure equipment to support subscriber growth.
Capital expenditure intensity for TELUS Mobility decreased to 13.8%
in the third quarter of 2004 from 15.2% in the third quarter of 2003,
due primarily to significant growth in Network revenues. Similarly,
the capital expenditure intensity was 11.2% for the first nine months
of 2004 as compared to 13.2% last year. As a result of continued
strong growth in EBITDA and reduced capital expenditure intensity,
Mobility generated a record cash flow (EBITDA less capital
expenditures) of $220.1 million in the third quarter and $625.4
million for the first nine months of 2004 as compared with $150.4
million and $397.9 million, respectively, for the same periods last
year.
Consolidated cash flow (EBITDA less capital expenditures) increased by
11.1% to $498.1 million in the third quarter of 2004, when compared with
the same period in 2003, while for the first nine months, consolidated
cash flow increased by 2.5% to $1,348.4 million.
Cash used by Quarters ended Nine-month periods
financing September 30 ended Sept. 30
activities
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
266.2 456.2 (41.6)% 351.6 836.3 (58.0)%
-------------------------------------------------------------------------
Cash used by financing activities decreased in the third quarter and
first nine months of 2004, when compared with the same periods in 2003,
primarily as a result of greater debt redemptions in 2003. Financing
activities included the following:
- Proceeds from Common Shares and Non-Voting Shares issued increased by
$6.4 million and $9.1 million, respectively, for the third quarter and
first nine months of 2004. Shares were issued from treasury under the
employee share purchase plan and from share-based compensation plans
in 2004 and 2003. In addition, the first nine months of 2004 included
proceeds from the exercise of warrants. Effective November 1, 2004,
TELUS plans to purchase employee share purchase plan shares in the
market rather than issuing from treasury.
- Cash dividends paid to shareholders increased by $3.9 million and
$5.9 million, respectively, for the third quarter and first nine
months of 2004. The increase in cash dividends paid was a result of a
larger number of Common shares and Non-Voting shares outstanding and
a lower enrolment in dividend reinvestment plans. The 15-cent
quarterly dividend paid per Common share and Non-voting share was
unchanged during the third quarter of 2004. The approximate enrolment
in dividend reinvestment plans was 19% for the dividend paid in July
2004 as compared with 24% in July 2003. Effective with the dividend
to be paid January 1, 2005, and subject to regulatory approval, TELUS
plans to purchase dividend reinvestment plan shares in the market
rather than issuing from treasury. The previous 3% plan discount has
also been eliminated.
- The redemption of all of the publicly held TELUS Communications Inc.
Preference and Preferred Shares was completed by August 3, 2004.
Redeemed amounts were $37.0 million and $72.8 million for the third
quarter and first nine months of 2004.
- Debt redemptions in the third quarter of 2004 included $189.5 million
of TELUS Communications Inc. Series A Debentures and $20 million of
TELUS Communications Inc. Medium-term Notes. Debt redemptions for the
first nine months of 2004 also included the first quarter repayment
of the full outstanding bank facility balance of $34.0 million. Debt
redemptions for the first nine months of 2003 included repayment of
$585 million of bank facilities, $151 million of Medium-term Notes
and $30 million of First Mortgage Bonds.
Liquidity and capital resource measures
---------------------------------------
Sept. 30, Sept. 30, June 30,
Period ended 2004 2003 Change 2004
-------------------------------------------------------------------------
Components of debt and coverage
-------------------------------
ratios
------
Net debt(1) ($ millions) 6,749.4 7,539.8 (790.4) 7,223.2
Total capitalization(2) - book
value ($ millions) 13,588.8 14,044.0 (455.2) 13,920.2
EBITDA (excluding restructuring)(3)
(12-month trailing) ($ millions) 3,055.8 2,790.3 265.5 2,976.2
Net interest cost(4) (12-month
trailing) ($ millions) 621.5 628.8 (7.3) 602.2
Debt ratios
-----------
Fixed rate debt as a proportion of
total indebtedness (%) 93.2 100.0 (6.8) 93.4
Average term to maturity of debt
(years) 5.6 6.4 (0.8) 5.7
Net debt to total capitalization (%) 49.7 53.7 (4.0) 51.9
Net debt to EBITDA(5) 2.2 2.7 (0.5) 2.4
Coverage ratios
---------------
Earnings coverage(6) 2.1 1.3 0.8 2.0
EBITDA interest coverage(7) 4.9 4.4 0.5 4.9
Other measures
--------------
Free cash flow(8) (three-month
$ millions) 502.6 440.3 62.3 229.5
Free cash flow (12-month trailing,
$ millions) 1,246.9 592.6 654.3 1,184.6
-------------------------------------------------------------------------
(1) Net debt is defined as Long-term Debt plus current maturities of
Long-term Debt and cheques outstanding less Cash and temporary
investments plus cross currency foreign exchange hedge liability
(less cross currency foreign exchange hedge asset) related to U.S.
dollar notes. The cross currency foreign exchange hedge liability was
$853.6 million at September 30, 2004 (compared with deferred hedge
liabilities of $580.8 million at September 30, 2003 and
$630.6 million at June 30, 2004). Net debt is unaffected by foreign
exchange fluctuations because it includes (deducts) the net deferred
hedging liability (asset). Under TELUS' new credit facilities, a
notional amount related to accounts receivable securitization is no
longer added to the numerator of the Leverage Ratio covenant
calculation. Consistent with the new credit facility calculation, Net
debt for current and prior periods excludes notional accounts
receivable securitization amounts.
(2) Total capitalization is defined as net debt plus Non-controlling
interest and Shareholders' equity.
(3) EBITDA (excluding Restructuring and workforce reduction costs of
$49.0 million, $253.1 million and $35.1 million, respectively, for
the 12-month periods ended September 30, 2004, September 30, 2003,
and June 30, 2004). EBITDA (excluding restructuring) is used for the
calculation of Net debt to EBITDA and EBITDA interest coverage,
consistent with the calculation of the Leverage Ratio and the
Coverage Ratio in credit facility covenants.
(4) 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
fourth quarter of 2002.
(5) Net debt to EBITDA is defined as net debt as at the end of the period
divided by 12-month trailing EBITDA (excluding restructuring). This
measure is substantially the same as the Leverage Ratio covenant in
TELUS' credit facilities.
(6) 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.
(7) EBITDA interest coverage is defined as EBITDA (excluding
restructuring) divided by Net interest cost. This measure is
substantially the same as the Coverage Ratio covenant in TELUS' new
credit facilities.
(8) See Note 2 of the Financial highlights table.
-------------------------------------------------------------------------
The balance of Long-term Debt and Current maturities of Long-term Debt
was $6,518.0 million as at September 30, 2004, a decrease of
$312.9 million from December 31, 2003. The lower debt balance was due
to redemptions and a $107.9 million decrease in the Canadian dollar
value of U.S. dollar denominated Notes, as the Canadian dollar
appreciated against the U.S. dollar by approximately 2.8% during the
first nine months of 2004. TELUS' U.S. dollar debt is fully hedged,
resulting in a corresponding increase of $107.9 million being recorded in
the deferred hedging liability.
While the amount of utilized bank facilities decreased to $nil from
$70 million one year earlier, TELUS converted $500 million of debt from a
fixed rate to a floating rate basis during the first half of 2004,
reducing the proportion of fixed rate debt. The net debt to total
capitalization ratio measured at September 30, 2004 decreased, when
compared with one year earlier, primarily as a result of debt repayments
and increased retained earnings since the third quarter of 2003. The net
debt to EBITDA ratio measured at September 30, 2004 improved
significantly, when compared with one year earlier, as a result of debt
reduction and an increase in 12-month trailing EBITDA (excluding
restructuring). The earnings coverage ratio improved significantly
because of the improvement in income before interest and taxes and
decreased interest on total debt. The EBITDA interest coverage ratio
improved as a result of higher EBITDA (excluding restructuring) and lower
interest costs, partly offset by lower interest income.
Free cash flow measures for the three-month and 12-month periods ended
September 30, 2004, increased when compared with one year earlier
primarily because of improved EBITDA, lower payments under restructuring
programs and lower interest payments, partly offset by increased capital
expenditures. Free cash flow for the 12-month period ended September 30,
2004 also increased due to higher cash tax recoveries than the comparable
period one-year earlier.
The Board of Directors declared a quarterly dividend of twenty cents
($0.20) per share on the outstanding Common Shares and Non-Voting Shares
of TELUS. This represents an increase of one-third from the fifteen cents
declared last quarter. The dividend is payable on January 1, 2005 to
holders of record at the close of business on December 10, 2004. The
TELUS Board also announced that consistent with a dividend growth
approach, it has established a forward-looking dividend payout ratio
guideline of 45 to 55% of net earnings.
On October 29, 2004, TELUS is announcing that it has received approval
from its Board of Directors to make a Normal Course Issuer Bid for the
repurchase of its Common Shares and Non-Voting Shares, subject to
obtaining all necessary regulatory approvals. The repurchase program will
enable TELUS to repurchase, over approximately a 12-month period, up to a
maximum of 14.0 million Common Shares and 11.5 million Non-Voting Shares,
representing approximately 10 per cent of the public float of each of the
Common Shares and Non-Voting Shares. All shares purchased will be
cancelled.
4.7 Credit facilities
---------------------
The following are the credit facilities available to TELUS at
September 30, 2004:
Outstanding
Credit Facilities undrawn
At September 30, 2004 letters of
($ millions) Expiry Available Drawn credit
-------------------------------------------------------------------------
Revolving credit
facility (1) May 7, 2008 800.0 - 102.6
364-day revolving
facility (2) May 6, 2005 800.0 - -
Other bank facilities - 74.0 - 6.9
-------------------------------------------------------------------------
Total 1,674.0 - 109.5
-------------------------------------------------------------------------
(1) Canadian dollars or U.S. dollar equivalent.
(2) Canadian dollars or U.S. dollar equivalent, extendible at the
Company's option on a non-revolving basis for one year for any
amounts outstanding on the May 6, 2005 anniversary date.
Additionally, at September 30, 2004, the Company had accepted a fully
underwritten commitment for a $500 million (or U.S. Dollar equivalent)
unsecured bank credit facility for general corporate purposes. This
364-day credit facility, upon documentation, would have been available
until the earlier of October 31, 2005, and 364 days after the completion
date of the Company's offers to purchase Microcell Telecommunications
Inc., had that event in fact occurred. Subsequent to quarter end, in
conjunction with the expiry of the Company's offers to purchase
Microcell, this bank credit facility commitment was cancelled.
Including cash of $622.2 million and the credit facilities described in
the table above, TELUS had unutilized available liquidity in excess of
$2 billion at September 30, 2004. TELUS' credit facilities contain
customary covenants including a requirement that TELUS not permit its
consolidated Leverage Ratio (Funded Debt to trailing 12-month EBITDA) to
exceed 4.0:1 (approximately 2.2:1 as at September 30, 2004) and not
permit its consolidated Coverage Ratio (EBITDA to Interest Expense on a
trailing 12-month basis) to be less than 2.0:1 (approximately 4.9:1 as at
September 30, 2004) 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. The covenants
are not impacted by revaluation of capital assets, intangible assets and
goodwill for accounting purposes, and continued access to TELUS' credit
facilities is not contingent on the maintenance by TELUS of a specific
credit rating.
4.8 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 two levels at BBB(high) as of October 25, 2004. The
proceeds of securitized receivables were $150 million at September 30,
2004, as compared with $481 million one year earlier and $300 million at
December 31, 2003. TELUS Communications Inc. is required to retain a
minimum of $150 million proceeds under this program to keep it active.
Average proceeds from securitization were $191 million for the first nine
months of 2004, compared with $471 million in the same period in 2003.
4.9 Credit ratings
------------------
With the May 13, 2004 announcement of TELUS' bid for Microcell, the four
credit rating agencies covering TELUS issued press releases confirming or
placing under review TELUS' investment grade credit ratings. Following
the expiry of TELUS' bid for Microcell on October 12, 2004, Standard and
Poor's confirmed its BBB long-term credit ratings for TELUS and TELUS
Communications Inc. with a stable outlook. On October 20, 2004, Dominion
Bond Rating Service confirmed its long-term credit ratings of BBB(high)
for TELUS Communications Inc. and BBB for TELUS Corporation, each with a
stable trend. TELUS has an objective to preserve access to capital
markets at a reasonable cost by maintaining investment grade credit
ratings and targeting improved credit ratings in the range of BBB+ to A-,
in future.
4.10 Off-balance sheet arrangements and contractual liabilities
---------------------------------------------------------------
Financial instruments (Note 3 of the interim consolidated financial
statements)
During the first half of 2004, the Company entered into two series of
hedging relationships to which hedge accounting has been applied: one
series of hedging relationships results in fixing the Company's
compensation cost arising from a specific grant of restricted stock
units, and the other series of hedging relationships results in the
notional conversion of $500 million of the 2006 (Canadian Dollar) Notes
from a fixed interest rate of 7.5% to a floating interest rate based upon
the three-month Bankers' Acceptance Canadian Dollar Offered Rate plus a
spread.
As at September 30, 2004, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rates on
U.S.$52.5 million and U.S.$14.5 million of fiscal 2004 and fiscal 2005
purchase commitments, respectively; hedge accounting has been applied to
these foreign currency forward contracts, all of which relate to the
Mobility segment.
Fair value: The fair value of the Company's long-term debt, including the
convertible debentures, is 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. The fair value of the
Company's debt at September 30, 2004 was estimated at $8,559 million
($8,699 million at December 31, 2003).
Commitments and contingent liabilities (Note 15 of the interim
consolidated financial statements)
The Company has a number of commitments and contingent liabilities.
- The Company has $85.9 million in outstanding commitments for its
restructuring programs as at September 30, 2004.
- In accordance with CRTC Price Cap Decisions 2002-34 and 2002-43, the
Company defers a portion of revenues in a deferral account, which at
September 30, 2004, was $114 million. The mechanism for disposing of
balance in this deferral account, other than as already approved by
the CRTC, is currently the subject of a CRTC proceeding.
- On May 21, 2004, the CIRB declared TELE-MOBILE COMPANY and TELUS
Communications Inc. a single employer for labour relations purposes.
The Canadian Industrial Relations Board also determined that TELUS
Mobility's non-unionized team members, predominantly located in
Ontario and Quebec, performing work similar to their unionized TELUS
Mobility counterparts in Alberta and British Columbia, should be
included in the bargaining unit represented by the Telecommunications
Workers Union. TCI's and TELUS Mobility's application with the
Federal Court of Appeal for judicial review of this CIRB decision was
heard on October 4-5, 2004. A decision from the Court is expected
within three months. Should the ultimate operational and financial
impacts of the outcome of the Federal Court of Appeal process differ
from management's assessments and assumptions, a material adjustment
to the Company's financial position and the results of its operations
could result.
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.
As at September 30, 2004, the Company has no liability recorded in
respect of performance guarantees, $1.0 million (December 31, 2003 -
$1.5 million) recorded in respect of lease guarantees. The maximum
undiscounted guarantee amounts as at September 30, 2004, without regard
for the likelihood of having to make such payment, were not significant.
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 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. As at September 30, 2004, the Company
has no liability recorded in respect of indemnification obligations.
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 legal assessment and
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,
excepting items disclosed previously relating to pay equity, the TELUS
Corporation Pension Plan and TELUS Edmonton Pension Plan and updates
described in 5. Risks and Uncertainties.
4.11 Outstanding share information
----------------------------------
The following is a summary of the outstanding shares for each class of
equity at September 30, 2004 and at October 15, 2004. In addition, for
October 15, 2004, the total number of outstanding and issuable shares is
presented, assuming full conversion of convertible debentures, options
and warrants.
Class of equity security Common Non-Voting Total
Shares Shares Shares
outstanding outstanding outstanding
At September 30, 2004
Common equity - Common
Shares outstanding 193,089,342 - 193,089,342
Common equity -
Non-Voting Shares
outstanding - 163,233,857 163,233,857
----------- ----------- -----------
193,089,342 163,233,857 356,323,199 (1)
----------- ----------- -----------
At October 15, 2004
Common equity - Common
Shares outstanding 193,214,854 - 193,214,854
Common equity
Non-Voting Shares
outstanding - 163,883,312 163,883,312
----------- ----------- -----------
193,214,854 163,883,312 357,098,166
----------- ----------- -----------
Outstanding and issuable
shares(2) at October 15,
2004
Common Shares and
Non-Voting Shares
outstanding 193,214,854 163,883,312 357,098,166
TELUS Corporation
convertible
debentures - 3,765,819 3,765,819
Options (3) 3,253,538 22,206,691 25,460,219
Warrants - 667,412 667,412
Channel stock incentive
plan - 192,925 192,925
----------- ----------- -----------
196,468,382 190,716,159 387,184,541
-----------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share for the
third quarter of 2004, the number of shares outstanding at
September 30, 2004 was 361,814,289.
(2) Assuming full conversion and ignoring exercise prices.
(3) Not reduced by any options that may be forfeited or cancelled during
the period October 1, 2004 to October 15, 2004.
4.12 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 2005. As of September 30, 2004, in aggregate,
$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 agreement is U.S.$377 million for the
period 2001 to 2008 and the commitment remaining after September 30,
2004, is U.S.$87 million (December 31, 2003 - U.S.$102 million).
In the normal course of operations and on market terms and conditions,
ongoing services and other benefits have been received and expensed. In
connection with the 2001 disposition of TELUS' directory business to
Verizon, the Company bills customers, and collects, for directory
listings on Verizon's behalf. The Company owed Verizon, on a net basis
and including directory rebilling and collections done on Verizon's
behalf as well as dividends payable, $39.4 million at September 30, 2004
(December 31, 2003 - $40.9 million).
4.13 Revised Guidance for 2004
-------------------------------
Management has revised annual guidance for 2004:
- Increased Consolidated and TELUS Mobility revenue and EBITDA guidance,
while narrowing the range of TELUS Communications revenue and EBITDA
guidance. Within the Communications segment, previous Non-ILEC revenue
guidance was maintained, while the range for Non-ILEC EBITDA was
narrowed.
- Increased guidance for earnings per share.
- Updated guidance for Free cash flow and Net debt to EBITDA to reflect
early achievement of targets.
- Increased guidance for TELUS Mobility wireless subscriber net
additions, while maintaining expectations for TELUS Communications
high-speed Internet net additions.
-----------------------------------------------------
Revised guidance 2004 revised 2004 second 2004 original
summary guidance quarter guidance targets
-------------------------------------------------------------------------
Consolidated $7.5 to $7.575 $7.45 to $7.55
Revenues billion No change billion
-------------------------------------------------------------------------
EBITDA(1) $3.025 to $3.075 $2.975 to $3.075 $2.95 to $3.05
billion billion billion
-------------------------------------------------------------------------
Earnings per
share - basic $1.40 to $1.50 $1.30 to $1.50 $1.05 to $1.25
-------------------------------------------------------------------------
Capital Approx. $1.3 Approx. $1.225
expenditures No change billion billion
-------------------------------------------------------------------------
Free cash flow(2) $1.25 to $1.3 $1.15 to $1.25 $1.13 to $1.23
billion billion billion
-------------------------------------------------------------------------
Net debt to EBITDA(3) 2.2 times 2.3 times 2.5 times
or less or less or less
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Communications segment
Revenue (external) $4.725 to $4.775 $4.7 to $4.8 $4.8 to $4.85
billion billion billion
-------------------------------------------------------------------------
Non-ILEC revenue No change $525 to $550 Approx. $610
million million
-------------------------------------------------------------------------
EBITDA $1.925 to $1.95 $1.925 to $1.975 $1.975 to $2.025
billion billon billion
-------------------------------------------------------------------------
Non-ILEC EBITDA $(30) to $(35) $(30) to $(40) Approx. $5
million million million
-------------------------------------------------------------------------
Capital expenditures No change Approx. $950 Approx. $875
million million
-------------------------------------------------------------------------
High-speed Internet
net additions No change No change Approx. 125,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mobility segment
Revenue (external) $2.775 to $2.8 $2.675 to $2.725 $2.65 to $2.7
billion billion billion
-------------------------------------------------------------------------
EBITDA $1.1 to $1.125 $1.05 to $1.1 $975 million to
billion billion $1.025 billion
-------------------------------------------------------------------------
Capital expenditures No change No change Approx. $350
million
-------------------------------------------------------------------------
Wireless subscriber
net additions 425,000 to No change 375,000 to
475,000 425,000
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization as
calculated below. The reconciling items below are Management's best
estimates at this time and are not intended to provide guidance for
each individual reconciling item.
($millions) 2004 revised guidance 2004 original target
---------------------------------------------------------------------
Operating revenues 7,500 to 7,575 7,450 to 7,550
Less Operations expense
and restructuring and
workforce reduction costs 4,475 4,500 4,500 4,500
---------------------------------------------------------------------
EBITDA 3,025 to 3,075 2,950 to 3,050
---------------------------------------------------------------------
(2) Defined as EBITDA, adding Restructuring and workforce reduction
costs, cash interest received and excess of share compensation
expense over share compensation payments, subtracting cash interest
paid, cash taxes, capital expenditures, and cash restructuring
payments. The reconciling items below are Management's best estimates
at this time and are not intended to provide guidance for each
individual reconciling item.
($ millions) 2004 revised guidance 2004 original target
--------------------------------------------------------------------
EBITDA 3,025 to 3,075 2,950 to 3,050
--------------------------------------------------------------------
Restructuring and workforce
reduction costs, net of
cash payments (65) (65) (85) (85)
Excess of share compensation
expense over payments 25 25 35 35
Cash interest paid net of
cash interest received (610) (610) (650) (650)
Income taxes received (paid)
excluding investment tax
credits received 175 175 105 105
Capital expenditures
(capex) (1,300) (1,300) (1,225) (1,225)
--------------------------------------------------------------------
Free cash flow 1,250 to 1,300 1,130 to 1,230
--------------------------------------------------------------------
(3) Net Debt to 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. Risks and uncertainties
The following are updates to the risks and uncertainties described in
TELUS' 2003 Annual Report and 2004 first and second quarter Management's
discussion and analyses, including filings on SEDAR (www.sedar.com) and
filings on EDGAR (www.sec.gov).
5.1 Competition
Wireless competition
With Roger's Wireless bid for Microcell and the expected entry of the
Virgin Group to provide services on a resale basis from Bell Mobility,
the four national competitor market will likely be maintained. In
addition, other competitors may offer wireless services regionally or
nationally on a resale basis. There is risk that increased competition by
all industry players could lead to pricing pressures and higher costs of
acquisition in the future. TELUS Mobility intends to manage this risk by
continuing to focus on profitable subscriber growth.
5.2 Regulation - wireline operations
Proceedings under Telecom Public Notice CRTC 2004-2 - Regulatory
framework for voice communication services using Internet Protocol
In September 2004, TELUS made its oral presentation at the CRTC's public
hearings on the regulatory framework for voice communication services
using Internet Protocol, also known as VoIP. The decision on how to
regulate VoIP services will set the Canadian competitive rules for ILECs,
cable-TV companies, foreign-based competitors and others. The CRTC is
expected to announce its decision in the first quarter of 2005.
Positions presented at the hearings included:
- TELUS' argument that all access-independent providers of VoIP services
should be forborne from rate regulation.
- Bell Canada's position that all VoIP services, whether
access-dependent or access-independent, should be forborne from rate
regulation.
- Cable-TV companies' and Competitive Local Exchange Carriers' ("CLECs")
arguments that any VoIP services provided by an ILEC should be fully
regulated when offered in an ILEC territory.
5.3 Process risks
Integration of customer-facing business units in the Communications
Segment
There can be no assurance that the recent integration of sales,
marketing, solutions development, customer care and shared services of
Business Solutions and Client Solutions will result in the operational
efficiencies and organizational effectiveness that management currently
expects.
5.4 Claims and lawsuits
Uncertified class action
------------------------
A class action was brought August 9, 2004, under the Class Actions Act
(Saskatchewan), against a number of past and present wireless service
providers including the Company. The claim alleges that each of the
carriers is in breach of contract and has violated competition, trade
practices and consumer protection legislation across Canada in connection
with the collection of system access fees, and seeks to recover direct
and punitive damages in an unspecified amount. The class has not been
certified and procedural objections to certification have been
identified. The Company further believes the claim is unsound on the
merits. Should the ultimate resolution of this action differ from
management's assessments and assumptions, a material adjustment to the
Company's financial position and the results of its operations could
result.
/For further information:
Media Relations: Investor Relations:
Nick Culo, (780) 493-7236, John Wheeler,(780) 493-7310,
nick.culo(at)telus.com; ir(at)telus.com/
(T. T.NV. TU)
______________________________________________________________________________
TELUS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2004
______________________________________________________________________________
Consolidated statements of income
Three months Nine months
Periods ended September 30 (unaudited) (millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
OPERATING REVENUES $ 1,946.9 $ 1,806.2 $ 5,616.3 $ 5,320.4
---------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,112.8 1,051.7 3,259.5 3,175.3
Restructuring and workforce reduction costs (Note 4) 16.2 2.3 32.8 12.1
Depreciation 327.1 308.9 969.5 949.5
Amortization of intangible assets 80.5 98.3 256.1 278.9
---------------------------------------------------------------------------------------------------------------------------------
1,536.6 1,461.2 4,517.9 4,415.8
---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 410.3 345.0 1,098.4 904.6
Other (income) expense, net (3.2) 7.6 - 19.8
Financing costs (Note 5) 158.6 139.3 460.5 475.6
---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 254.9 198.1 637.9 409.2
Income taxes (Note 6) 97.2 83.0 204.7 129.9
Non-controlling interest 1.1 1.0 3.0 2.7
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME 156.6 114.1 430.2 276.6
Preference and preferred share dividends 0.1 0.9 1.8 2.6
---------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE AND NON-VOTING SHARE INCOME $ 156.5 $ 113.2 $ 428.4 $ 274.0
=================================================================================================================================
INCOME PER COMMON SHARE AND NON-VOTING
SHARE ($) (Note 7)
- Basic 0.44 0.32 1.20 0.79
- Diluted 0.43 0.32 1.19 0.78
DIVIDENDS DECLARED PER COMMON SHARE AND
NON-VOTING SHARE($) 0.15 0.15 0.45 0.45
TOTAL WEIGHTED AVERAGE COMMON SHARES AND
NON-VOTING SHARES OUTSTANDING (millions)
- Basic 355.7 350.1 354.4 348.5
- Diluted 361.8 353.2 356.7 350.8
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) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 741.7 $ 630.4
Transitional amount for share-based compensation arising from share options (Note 2(a)) (25.1) -
---------------------------------------------------------------------------------------------------------------------------------
Adjusted opening balance 716.6 630.4
Net income 430.2 276.6
---------------------------------------------------------------------------------------------------------------------------------
1,146.8 907.0
Less: Common Share and Non-Voting Share dividends paid, or payable, in cash 132.8 124.3
Common Share and Non-Voting Share dividends reinvested, or to be reinvested,
in shares issued from Treasury 26.9 32.5
Preference and preferred share dividends 1.8 2.6
Redemption premium on preference and preferred shares in excess of amount chargeable
to contributed surplus (Note 14(c)) 2.3 -
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD (Note 14) $ 983.0 $ 747.6
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements
Consolidated balance sheets
(unaudited) (millions) As at As at
September 30, December 31,
2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
ASSETS
Current Assets
Cash and temporary investments, net $ 622.2 $ 6.2
Accounts receivable (Notes 9) 815.1 723.8
Income and other taxes receivable 77.8 187.4
Inventories 84.7 123.5
Prepaid expenses and other (Note16(b)) 229.5 172.4
Current portion of future income taxes 368.0 304.0
---------------------------------------------------------------------------------------------------------------------------------
2,197.3 1,517.3
---------------------------------------------------------------------------------------------------------------------------------
Capital Assets, Net (Note 10)
Property, plant, equipment and other 7,623.3 7,764.3
Intangible assets subject to amortization 720.8 844.7
Intangible assets with indefinite lives 2,954.6 2,954.6
---------------------------------------------------------------------------------------------------------------------------------
11,298.7 11,563.6
---------------------------------------------------------------------------------------------------------------------------------
Other Assets
Deferred charges (Note 11) 713.3 610.7
Future income taxes 276.1 626.0
Investments 40.2 41.9
Goodwill 3,117.7 3,118.0
---------------------------------------------------------------------------------------------------------------------------------
4,147.3 4,396.6
---------------------------------------------------------------------------------------------------------------------------------
$17,643.3 $17,477.5
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities (Note 16(b)) $ 1,354.0 $ 1,294.5
Restructuring and workforce reduction accounts payable and accrued liabilities (Note 4) 85.9 141.0
Dividends payable 53.4 53.5
Advance billings and customer deposits (Note 16(b)) 485.5 445.0
Current maturities of long-term debt (Note 12) 4.0 221.1
---------------------------------------------------------------------------------------------------------------------------------
1,982.8 2,155.1
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (Note 12) 6,514.0 6,609.8
---------------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities (Note 13) 1,305.8 1,173.7
---------------------------------------------------------------------------------------------------------------------------------
Future Income Taxes 1,001.3 1,007.0
---------------------------------------------------------------------------------------------------------------------------------
Non-Controlling Interest 10.9 10.7
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Note 14)
Convertible debentures conversion option 8.8 8.8
Preference and preferred shares (Note14(c)) - 69.7
Common equity 6,819.7 6,442.7
---------------------------------------------------------------------------------------------------------------------------------
6,828.5 6,521.2
---------------------------------------------------------------------------------------------------------------------------------
$17,643.3 $17,477.5
=================================================================================================================================
Commitments and Contingent Liabilities (Note 15)
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) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
OPERATING ACTIVITIES
Net income $ 156.6 $ 114.1 $ 430.2 $ 276.6
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 407.6 407.2 1,225.6 1,228.4
Future income taxes 91.4 94.7 281.9 347.9
Share-based compensation 7.3 - 17.9 -
Net employee defined benefit plans expense 4.9 13.2 14.7 39.5
Employer contributions to employee defined
benefit plans (25.8) (33.9) (112.3) (69.9)
Restructuring and workforce reduction costs, net of
cash payments (Note 4) 6.4 (29.8) (55.1) (221.5)
Other, net (3.9) 2.6 13.7 37.5
Net change in non-cash working capital (Note 16(c)) 202.7 281.6 107.7 85.5
---------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 847.2 849.7 1,924.3 1,724.0
---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (Note 10) (319.8) (304.0) (975.6) (817.3)
Proceeds from the sale of property and other assets 1.8 1.3 18.2 39.6
Other 1.5 (5.1) 0.7 1.3
---------------------------------------------------------------------------------------------------------------------------------
Cash used by investing activities (316.5) (307.8) (956.7) (776.4)
---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 27.0 20.6 70.8 61.7
Dividends to shareholders (45.5) (41.6) (136.1) (130.2)
Payment for redemption of preference and preferred
shares (Note 14(c)) (37.0) - (72.8) -
Long-term debt issued (Note 12) - 56.0 37.8 365.4
Redemptions and repayment of long-term debt (Note 12) (210.7) (490.4) (247.7) (1,130.6)
Other - (0.8) (3.6) (2.6)
---------------------------------------------------------------------------------------------------------------------------------
Cash used by financing activities (266.2) (456.2) (351.6) (836.3)
---------------------------------------------------------------------------------------------------------------------------------
CASH POSITION
Increase in cash and temporary investments, net 264.5 85.7 616.0 111.3
Cash and temporary investments, net, beginning
of period 357.7 16.6 6.2 (9.0)
---------------------------------------------------------------------------------------------------------------------------------
Cash and temporary investments, net, end of period $ 622.2 $ 102.3 $ 622.2 $ 102.3
=================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Interest (paid) $ (23.1) $ (27.7) $ (339.7) $ (362.5)
=================================================================================================================================
Interest received $ 2.1 $ 13.7 $ 23.3 $ 15.0
=================================================================================================================================
Income taxes (inclusive of Investment Tax Credits
(Note 6)) received (paid) $ 11.8 $ 38.4 $ 197.4 $ 35.1
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements
Notes to interim consolidated financial statements
SEPTEMBER 30, 2004 (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, 2003. 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, 2003,
including that certain of the comparative amounts have been reclassified to
conform with the presentation adopted currently.
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) Share-Based Compensation
Commencing with the Company's 2004 fiscal year, the amended recommendations of
the Canadian Institute of Chartered Accountants ("CICA") for accounting for
share-based compensation (such amendments arising in 2003) (CICA Handbook
Section 3870) apply to the Company. The amendments result in the Company no
longer being able to use the intrinsic method of accounting for share options
granted to employees for purposes of Canadian Generally Accepted Accounting
Principles. The Company has selected the retroactive application without
restatement method (also referred to as the modified-prospective transition
method). The retroactive application without restatement method results in no
share option expense being recognized in the Consolidated Statements of Income
in fiscal years prior to 2004 (see Note 8(a)). The share option expense that is
recognized in fiscal years subsequent to 2003 will be in respect of share
options granted after 2001 and vesting in fiscal periods subsequent to 2003.
To reflect the fair value of options granted subsequent to 2001, and vesting
prior to 2004, certain components of common equity in the December 31, 2003,
Consolidated Balance Sheet balances would have been restated as follows (had
restatement occurred):
Cumulative transition
December 31, adjustment for share-
2003, as based compensation
previously arising from share January 1,
reported options 2004
(millions)
---------------------------------------------------------------------------------------------------------------------------------
Common equity
Common shares $ 2,349.1 $ - $ 2,349.1
Non-voting shares 3,296.6 0.4 3,297.0
Options and warrants 51.5 - 51.5
Accrual for shares issuable under channel
stock incentive plan 0.6 - 0.6
Cumulative foreign currency translation adjustment (2.7) - (2.7)
Retained earnings 741.7 (25.1) 716.6
Contributed surplus 5.9 24.7 30.6
---------------------------------------------------------------------------------------------------------------------------------
$ 6,442.7 $ - $ 6,442.7
=================================================================================================================================
(b) Equity Settled Obligations
Commencing with the Company's 2004 fiscal year, the Company early adopted the
amended recommendations of the CICA for the presentation and disclosures of
financial instruments (CICA Handbook Section 3860) specifically concerning the
classification of obligations that an issuer can settle with its own equity
instruments (such amendments arising in 2003). The amendments result in the
Company's convertible debentures being classified as a liability on the
Consolidated Balance Sheets and the associated interest expense correspondingly
being classified with financing costs on the Consolidated Statements of Income.
The conversion option embedded in the convertible debentures continues to be
presented as a component of shareholders' equity. As required, these amended
recommendations have been applied retroactively.
To reflect the reclassification of the convertible debentures as a liability,
certain items of the Consolidated Income Statement for the three-month and
nine-month periods ended September 30, 2003, have been restated as follows:
Periods ended September 30, 2003 Three months Nine months
-------------------------------------------------------------------------------- --------------------------------------------
Adjustment to Adjustment to
As reflect convertible As As reflect convertible As
previously debentures as a currently previously debentures as a currently
(millions except per share amounts) reported liability reported reported liability reported
---------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 1,806.2 $ - $ 1,806.2 $ 5,320.4 $ - $ 5,320.4
Operating expenses 1,461.2 - 1,461.2 4,415.8 - 4,415.8
---------------------------------------------------------------------------------------------------------------------------------
Operating income 345.0 - 345.0 904.6 - 904.6
Other expense, net 7.6 - 7.6 19.8 - 19.8
Financing costs 136.5 2.8 139.3 467.2 8.4 475.6
---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and non-
controlling interest 200.9 (2.8) 198.1 417.6 (8.4) 409.2
Income taxes (recovery) 84.0 (1.0) 83.0 133.0 (3.1) 129.9
Non-controlling interest 1.0 - 1.0 2.7 - 2.7
---------------------------------------------------------------------------------------------------------------------------------
Net income 115.9 (1.8) 114.1 281.9 (5.3) 276.6
Preference and preferred share
dividends 0.9 - 0.9 2.6 - 2.6
Interest on convertible debentures,
net of income taxes 1.8 (1.8) - 5.3 (5.3) -
---------------------------------------------------------------------------------------------------------------------------------
Common Share and Non-Voting Share
income $ 113.2 $ - $ 113.2 $ 274.0 $ - $ 274.0
=================================================================================================================================
Income per Common Share and Non-
Voting Share
- Basic $ 0.32 $ - $ 0.32 $ 0.79 $ - $ 0.79
- Diluted $ 0.32 $ - $ 0.32 $ 0.78 $ - $ 0.78
To reflect the reclassification of the convertible debentures as a liability,
certain line items of the December 31, 2003, Consolidated Balance Sheet
balances have been restated as follows:
December 31, Adjustment to December 31,
2003, as reflect convertible 2003, as
previously debentures as a currently
(millions) reported liability reported
---------------------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 1,294.1 $ 0.4 $ 1,294.5
Long-Term Debt $ 6,469.4 $ 140.4 $ 6,609.8
Shareholders' Equity
Convertible debentures conversion option $ - $ 8.8 $ 8.8
Convertible debentures $ 149.6 $ (149.6) $ -
---------------------------------------------------------------------------------------------------------------------------------
3. Financial Instruments
During the first half of 2004, the Company entered into two series of hedging
relationships to which hedge accounting has been applied: one series of hedging
relationships results in fixing the Company's compensation cost arising from a
specific grant of restricted stock units (see Note 8(b)) and the other series
of hedging relationships results in the notional conversion of $500 million of
the 2006 (Canadian Dollar) Notes from a fixed interest rate of 7.5% to a
floating interest rate based upon the three-month Bankers' Acceptance Canadian
Dollar Offered Rate plus a spread.
As at September 30, 2004, the Company had entered into foreign currency forward
contracts that have the effect of fixing the exchange rates on U.S.$52.5
million and U.S.$14.5 million of fiscal 2004 and fiscal 2005 purchase
commitments, respectively; hedge accounting has been applied to these foreign
currency forward contracts, all of which relate to the Mobility segment.
Fair value: The fair value of the Company's long-term debt, including the
convertible debentures, is 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, 2004 As at December 31, 2003
---------------------------------------------------------------------------------------------------------------------------------
Carrying Carrying
(millions) amount Fair value amount Fair value
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
Long-term debt(1) (Note 12) $ 6,526.8 $ 7,543.8 $ 6,839.7 $ 7,840.2
Derivative financial instruments(2) used to manage
interest rate and currency risks associated with
U.S. dollar denominated debt (Note 13) 848.3 1,011.8 739.6 858.6
Derivative financial instruments(2) used to manage
interest rate risk associated with Canadian dollar
denominated debt - 3.1 - -
---------------------------------------------------------------------------------------------------------------------------------
$ 7,375.1 $ 8,558.7 $ 7,579.3 $ 8,698.8
=================================================================================================================================
Derivative financial instruments(2) used to manage
currency risks arising from U.S. dollar
denominated purchases $ - $ 3.2 $ - $ 0.1
=================================================================================================================================
Derivative financial instruments(2) used to manage
changes in compensation costs arising from
restricted stock units (Note 8(b)) $ (0.2) $ 0.2 $ - $ -
=================================================================================================================================
(1) Carrying amount of long-term debt, for purposes of this table, includes the
carrying amount of the convertible debenture conversion option.
(2) Notional amount of all derivative financial instruments outstanding is
$5,412.5 (December 31, 2003 - $4,822.9).
4. Restructuring and Workforce Reduction Costs
(a) Overview
Three-month periods ended September 30
(millions) 2004 2003
------------------------------------------------------------------------------------------------------- ---------------------
Operational Operational
2004 Efficiency Program Efficiency Program
Initiatives(b) (2001- 2003)(c) Total (2001- 2003)(c)
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction costs
Workforce reduction
Voluntary $ - $ - $ - $ -
Involuntary 15.3 - 15.3 -
Lease termination - - - -
Other 0.4 0.5 0.9 2.3
---------------------------------------------------------------------------------------------------------------------------------
15.7 0.5 16.2 2.3
---------------------------------------------------------------------------------------------------------------------------------
Disbursements
Workforce reduction
Voluntary (Early Retirement Incentive Plan,
Voluntary Departure Incentive Plan and other) - 0.2 0.2 18.6
Involuntary and other 3.7 4.2 7.9 8.6
Lease termination - 0.8 0.8 2.2
Other 0.7 0.2 0.9 2.7
---------------------------------------------------------------------------------------------------------------------------------
4.4 5.4 9.8 32.1
---------------------------------------------------------------------------------------------------------------------------------
Expenses greater than (less than) disbursements 11.3 (4.9) 6.4 (29.8)
Restructuring and workforce reduction accounts
payable and accrued liabilities, beginning of period 11.2 68.3 79.5 208.7
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction accounts
payable and accrued liabilities, end of period $ 22.5 $ 63.4 $ 85.9 $ 178.9
=================================================================================================================================
Nine-month periods ended September 30
(millions) 2004 2003
------------------------------------------------------------------------------------------------------ ----------------------
Operational Operational
2004 Efficiency Program Efficiency Program
Initiatives(b) (2001- 2003)(c) Total (2001- 2003)(c)
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction costs
Workforce reduction
Voluntary $ - $ - $ - $ -
Involuntary 31.2 - 31.2 -
Lease termination - - - 3.4
Other 0.7 0.9 1.6 8.7
---------------------------------------------------------------------------------------------------------------------------------
31.9 0.9 32.8 12.1
---------------------------------------------------------------------------------------------------------------------------------
Disbursements
Workforce reduction
Voluntary (Early Retirement Incentive Plan,
Voluntary Departure Incentive Plan and other) - 46.8 46.8 144.8
Involuntary and other 8.7 27.5 36.2 71.7
Lease termination - 3.0 3.0 5.8
Other 0.7 1.2 1.9 11.3
9.4 78.5 87.9 233.6
---------------------------------------------------------------------------------------------------------------------------------
Expenses greater than (less than) disbursements 22.5 (77.6) (55.1) (221.5)
Restructuring and workforce reduction accounts
payable and accrued liabilities, beginning of period - 141.0 141.0 400.4
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction accounts
payable and accrued liabilities, end of period $ 22.5 $ 63.4 $ 85.9 $ 178.9
=================================================================================================================================
(b) 2004 Initiatives
In the first quarter of 2004, a departmental reorganization was initiated,
primarily in the Communications segment information technology resources area,
consolidating from 15 locations to 2 primary locations. This reorganization,
which has an estimated implementation cost in 2004 of approximately $13 million
and is planned for completion in 2004, is expected to enable greater
efficiencies of scale and effectiveness of program delivery; to September 30,
2004, approximately $12 million of these costs have been recorded.
In the third quarter of 2004, a departmental reorganization was initiated in
the Communications segment with the merging of two customer-facing business
units. The resulting integration and consolidation aimed to improve the
Company's competitiveness as well as its operating and capital productivity.
This reorganization has an estimated implementation cost in 2004 of
approximately $21 million and is planned for completion in 2004; to September
30, 2004, approximately $13 million of these costs have been recorded.
In addition to the foregoing initiatives, the Company has undertaken additional
activities in 2004 aimed at improving its operating and capital productivity
and competitiveness. These additional activities have an estimated cost in 2004
of $16 million; to September 30, 2004, approximately $8 million of these costs
have been recorded.
(c) Operational Efficiency Program (2001-2003)
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. 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. The third phase of the Operational Efficiency Program, which
commenced in the third quarter of 2002, was focused on operationalizing the
initiatives identified during the second phase review and included:
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.
As at September 30, 2004, no future costs remain to be recorded under the
Operational Efficiency Program (2001-2003), but variances from estimates
currently recorded may be recorded in subsequent periods.
5. Financing Costs
Periods ended September 30 Three months Nine months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
Interest on long-term debt $ 161.0 $ 168.3 $ 487.5 $ 512.2
Interest on short-term obligations and other 0.7 0.9 7.1 5.3
Foreign exchange(1) (0.3) 0.8 (1.0) -
---------------------------------------------------------------------------------------------------------------------------------
161.4 170.0 493.6 517.5
Interest income, including interest on tax refunds (2.8) (30.7) (33.1) (41.9)
---------------------------------------------------------------------------------------------------------------------------------
$ 158.6 $ 139.3 $ 460.5 $ 475.6
=================================================================================================================================
(1) For the three-month and nine-month periods ended September 30, 2004, these
amounts include gains (losses) of $(0.1) (2003 - NIL) and $(0.8)
(2003 - $0.6), respectively, in respect of hedge ineffectiveness.
6. Income Taxes
Periods ended September 30 Three months Nine months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
Current $ 5.8 $ (11.7) $ (77.2) $ (218.0)
Future 91.4 94.7 281.9 347.9
---------------------------------------------------------------------------------------------------------------------------------
$ 97.2 $ 83.0 $ 204.7 $ 129.9
=================================================================================================================================
The Company's income tax expense differs from that calculated by applying
statutory rates for the following reasons:
Three-month periods ended September 30
($ in millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
Basic blended federal and provincial tax at
statutory income tax rates $ 88.8 34.8% $ 73.3 37.0%
Tax rate differential on, and consequential
adjustments from, settlement of prior year
tax issues (0.3) -
Share option compensation 1.6 -
Other 1.6 3.9
---------------------------------------------------------------------------------------------------------------------------------
91.7 36.0% 77.2 39.0%
Large corporations tax 5.5 5.8
---------------------------------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated Statements
of Income $ 97.2 38.1% $ 83.0 41.9%
=================================================================================================================================
Nine-month periods ended September 30
($ in millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
Basic blended federal and provincial tax at
statutory income tax rates $ 221.7 34.8% $ 151.4 37.0%
Tax rate differential on, and consequential
adjustments from, settlement of prior year
tax issues (36.1) (49.7)
Share option compensation 5.0 -
Other (0.5) 11.6
---------------------------------------------------------------------------------------------------------------------------------
190.1 29.8% 113.3 27.7%
Large corporations tax 14.6 16.6
---------------------------------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated Statements of
Income $ 204.7 32.1% $ 129.9 31.7%
=================================================================================================================================
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, 2004, the Company recorded Investment Tax Credits of NIL
(2003 - NIL) and $0.5 million (2003 - $1.2 million), respectively, of which NIL
(2003 - NIL) and $0.5 million (2003 - $1.0 million), respectively, was recorded
as a reduction of "Operations expense" and the balance was recorded as a
reduction of capital expenditures.
7. Per Share Amounts
Basic income per Common Share and Non-Voting Share is calculated by dividing
Common Share and Non-Voting Share income by the total weighted average Common
Shares and Non-Voting Shares outstanding during the period. Diluted income 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) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
Net income $ 156.6 $ 114.1 $ 430.2 $ 276.6
Deduct:
Preference and preferred share dividends 0.1 0.9 1.8 2.6
Redemption premium on preference and
preferred shares in excess of amount
chargeable to contributed surplus (Note 14(c)) - - 2.3 -
---------------------------------------------------------------------------------------------------------------------------------
Basic Common Share and Non-Voting Share
income 156.5 113.2 426.1 274.0
Add: Interest charges applicable to convertible
debentures, net of income tax effects 1.4 - - -
---------------------------------------------------------------------------------------------------------------------------------
Diluted Common Share and Non-Voting Share
income $ 157.9 $ 113.2 $ 426.1 $ 274.0
=================================================================================================================================
Periods ended September 30 Three months Nine months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Basic total weighted average Common Shares and
Non-Voting Shares outstanding 355.7 350.1 354.4 348.5
Effect of dilutive securities
Exercise of share options and warrants 2.3 3.1 2.3 2.3
Exercise of convertible debentures conversion option 3.8 - - -
---------------------------------------------------------------------------------------------------------------------------------
Diluted total weighted average Common Shares and
Non-Voting Shares outstanding 361.8 353.2 356.7 350.8
=================================================================================================================================
For the three-month and nine-month periods ended September 30, 2004, certain
outstanding share options, in the amount of 17.9 million (2003 - 15.5 million)
and 18.2 million (2003 - 16.2 million), respectively, were not included in the
computation of diluted income per Common Share and Non-Voting Share because the
share options' exercise prices were greater than the average market price of
the Common Shares and Non-Voting Shares during the reported periods.
Convertible debentures, which were convertible into 3.8 million shares, were
not included in the computation of diluted income per Common Share and
Non-Voting Share, excepting the computation for the three-month period ended
September 30, 2004, as they were antidilutive.
8. Share-Based Compensation
(a) Share Options
Effective January 1, 2004, for purposes of Canadian Generally Accepted
Accounting Principles, the Company applies the fair value based method of
accounting for share-based compensation awards granted to employees. As the
Company has selected the retroactive application without restatement method
(see Note 2(a)), it must disclose the impact on net income and net income per
Common Share and Non-Voting Share as if the fair value based method of
accounting for the share-based compensation had been applied in the comparative
period.
Periods ended September 30 Three months Nine months
(millions except per share amounts) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
Net income
As reported $ 156.6 $ 114.1 $ 430.2 $ 276.6
Add: Share-based compensation arising from
share options included in reported net income 4.7 - 14.5 -
Deduct: Share-based compensation arising from
share options determined under the fair value
based method for all awards (4.7) (4.4) (14.5) (13.4)
---------------------------------------------------------------------------------------------------------------------------------
Pro forma $ 156.6 $ 109.7 $ 430.2 $ 263.2
=================================================================================================================================
Net income per Common Share and Non-Voting
Share
Basic
As reported (using fair value method) $ 0.44 N/A(2) $ 1.20 N/A(2)
As reported (using intrinsic value method) N/A(1)(2) $ 0.32 N/A(1)(2) $ 0.79
Pro forma (using fair value method) $ 0.44 $ 0.31 $ 1.20 $ 0.75
Diluted
As reported (using fair value method) $ 0.43 N/A(2) $ 1.19 N/A(2)
As reported (using intrinsic value method) N/A(1)(2) $ 0.32 N/A(1)(2) $ 0.78
Pro forma (using fair value method) $ 0.43 $ 0.31 $ 1.19 $ 0.74
(1) For the three-month and nine-month periods ended September 30, 2004,
the per share amount of share-based compensation arising from share
options determined under the fair value based method for all awards per
Common Share and Non-Voting Share would be $0.01 basic and diluted and
$0.04 basic and diluted, respectively.
(2) N/A - Net income per Common Share and Non-Voting Share have not been
presented using the method indicated in the period indicated.
As only share options granted after 2001 are included, these disclosures are
not likely to be representative of the effects on reported net income for
future years. These disclosures reflect weighted average fair values of $7.27
(2003 - $6.86) and $7.74 (2003 - $4.63) for options granted in the three-month
and nine-month periods ended September 30, 2004, respectively. Share options
typically vest over a three-year period and the vesting method of options,
which is determined at the date of grant, may be either cliff or graded. The
fair value of each option granted is estimated at the time of grant using the
Black-Scholes model with weighted average assumptions for grants as follows:
Periods ended September 30 Three months Nine months
2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Risk free interest rate 4.3% 3.9% 3.9% 4.9%
Expected lives (years) 4.5 4.5 4.5 4.5
Expected volatility 40.0% 40.0% 40.0% 40.0%
Dividend yield 2.6% 2.7% 2.4% 3.9%
---------------------------------------------------------------------------------------------------------------------------------
(b) Other Share-Based Compensation
The Company uses restricted stock units as a form of incentive compensation.
Each restricted stock unit is equal in value to one Non-Voting Share and the
dividends that would have arisen thereon had it been an issued and outstanding
Non-Voting Share are recorded as additional restricted stock units during the
life of the restricted stock unit. The restricted stock units become payable as
they vest over their lives (typically the vesting period is 33 months and the
vesting method, which is determined at the date of grant, may be either cliff
or graded). Reflected in the Consolidated Statements of Income as "Operations
expense" for the three-month and nine-month periods ended September 30, 2004,
is compensation expense arising from restricted stock units of $3.2 million
(2003 - $0.8 million) and $5.8 million (2003 - $0.6 million), respectively.
The following table presents a summary of the activity related to the Company's
restricted stock units for the three-month and nine-month periods ended
September 30, 2004.
Periods ended September 30, 2004 Three months Nine months
---------------------------------------------------------------------------------------------------------------------------------
Number of Number of
restricted Weighted restricted Weighted
stock units average price stock unit average price
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 1,090,708 316,630
Issued
Initial allocation 20,350 $ 22.89 871,799 $ 24.06
In lieu of dividends 6,670 24.11 21,690 22.54
Exercised (28,808) 21.86 (101,972) 23.58
Forfeited and cancelled (20,136) 25.10 (39,363) 25.10
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 1,068,784 1,068,784
=================================================================================================================================
With respect to restricted stock units issued in the first quarter of 2004, the
Company entered into a cash-settled equity forward agreement that fixes the
cost to the Company at $26.61 per restricted stock unit in respect of 652,550
restricted stock units.
9. Accounts Receivable
On July 26, 2002, TELUS Communications Inc., a wholly-owned subsidiary of
TELUS, entered into an agreement (the "2002 Securitization"), which was amended
September 30, 2002, 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 a result of selling the
interest in certain of the trade receivables on a fully-serviced basis, a
servicing liability is recognized on the date of sale and is, in turn,
amortized to earnings over the expected life of the trade receivables. This
"revolving-period" securitization agreement has an initial term ending July 18,
2007. TELUS Communications Inc. is required to maintain at least a BBB (low)
credit rating by Dominion Bond Rating Service or the securitization trust may
require the sale program to be wound down prior to the end of the initial term;
at September 30, 2004, the rating was BBB (high).
As at As at
(millions) September 30, December 31,
2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Total managed portfolio $ 970.7 $ 1,036.9
Securitized receivables (181.4) (369.5)
Retained interest in receivables sold 25.8 56.4
---------------------------------------------------------------------------------------------------------------------------------
Receivables held $ 815.1 $ 723.8
=================================================================================================================================
For the three-month and nine-month periods ended September 30, 2004, the
Company recognized losses of $0.2 million (2003 - $0.7 million) and $0.6
million (2003 - $3.7 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) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization,
beginning of period $ 150.0 $ 485.0 $ 300.0 $ 475.0
Proceeds from new securitizations - - - 34.0
Securitization reduction payments - (4.0) (150.0) (28.0)
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization,
end of period $ 150.0 $ 481.0 $ 150.0 $ 481.0
=================================================================================================================================
Proceeds from collections reinvested in revolving
period securitizations $ 347.3 $ 1,137.6 $ 1,402.3 $ 3,137.3
=================================================================================================================================
Proceeds from collections pertaining to retained
interest $ 57.4 $ 259.3 $ 257.9 $ 675.7
=================================================================================================================================
10. Capital Assets
(a) Capital Assets, Net
Accumulated
Depreciation and
Cost Amortization Net Book Value
---------------------------------------------------------------------------------------------------------------------------------
As at As at
September 30, December 31,
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Property, plant, equipment and other
Telecommunications assets $ 17,044.1 $11,192.4 $ 5,851.7 $ 6,002.4
Assets leased to customers 416.0 365.4 50.6 60.0
Buildings 1,631.5 800.3 831.2 832.0
Office equipment and furniture 934.7 686.9 247.8 265.0
Assets under capital lease 14.8 4.5 10.3 14.2
Other 331.2 236.5 94.7 113.8
Land 47.4 - 47.4 49.0
Plant under construction 465.5 - 465.5 405.0
Materials and supplies 24.1 - 24.1 22.9
---------------------------------------------------------------------------------------------------------------------------------
20,909.3 13,286.0 7,623.3 7,764.3
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscriber base 362.9 89.3 273.6 289.7
Software 1,077.8 710.9 366.9 473.7
Access to rights-of-way and other 121.2 40.9 80.3 81.3
---------------------------------------------------------------------------------------------------------------------------------
1,561.9 841.1 720.8 844.7
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 3,973.1 1,018.5 2,954.6 2,954.6
---------------------------------------------------------------------------------------------------------------------------------
$ 26,444.3 $15,145.6 $11,298.7 $11,563.6
=================================================================================================================================
(1) 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, 2004, were additions of intangible assets subject to
amortization of $41.9 million (2003 - $37.4 million) and $130.9 million (2003 -
$81.6 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, 2004, for
each of the next five fiscal years is as follows:
Years ending December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2004 (balance of year) $ 77.9
2005 222.5
2006 116.0
2007 40.4
2008 14.9
11. Deferred Charges
As at As at
September 30, December 31,
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Recognized transitional pension assets and pension plan contributions
in excess of charges to income $ 533.7 $ 426.8
Cost of issuing debt securities, less amortization 35.2 39.2
Deferred customer activation and installation costs(1) 89.9 80.8
Other 54.5 63.9
---------------------------------------------------------------------------------------------------------------------------------
$ 713.3 $ 610.7
=================================================================================================================================
(1) 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. Long-Term Debt
(a) Details of Long-Term Debt
($ in millions)
As at As at
September 30, December 31,
Series Rate Maturity 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
TELUS Corporation Notes
CA 7.5%(1) June 2006 $ 1,573.9 $ 1,572.1
U.S. 7.5%(1) June 2007 1,467.8 1,507.4
U.S. 8.0%(1) June 2011 2,418.3 2,484.4
---------------------------------------------------------------------------------------------------------------------------------
5,460.0 5,563.9
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Convertible Debentures
6.75%(1) June 2010 141.3 140.4
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Credit Facilities -%(2) May 2008 - 7.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Debentures
1 12.00%(1) May 2010 50.0 50.0
2 11.90%(1) November 2015 125.0 125.0
3 10.65%(1) June 2021 175.0 175.0
5 9.65%(1) April 2022 249.0 249.0
A 9.50%(1) August 2004 - 189.5
B 8.80%(1) September 2025 200.0 200.0
---------------------------------------------------------------------------------------------------------------------------------
799.0 988.5
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. First Mortgage Bonds(3)
U 11.50%(1) July 2010 30.0 30.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Medium Term Notes(3)
1 7.10%(1) February 2007 70.0 70.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Medium Term Note Debentures
96-9 6.375%(1) August 2004 - 20.0
99-1 7.25%(1) June 2030 0.1 0.1
---------------------------------------------------------------------------------------------------------------------------------
0.1 20.1
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Senior Discount Notes - 0.4
---------------------------------------------------------------------------------------------------------------------------------
Capital leases issued at varying rates of interest from 4.4% to 17.25% and
maturing on various dates up to 2008 9.2 10.3
Other 8.4 0.3
---------------------------------------------------------------------------------------------------------------------------------
Total debt 6,518.0 6,830.9
Less - current maturities 4.0 221.1
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 6,514.0 $ 6,609.8
=================================================================================================================================
(1) Interest is payable semi-annually.
(2) Weighted average rate as at September 30, 2004 (December 31, 2003 -
4.875%).
(3) Pursuant to a July 1, 2004, internal transaction between two wholly-owned
subsidiaries, these former TELUS Communications (Quebec) Inc. debts became
obligations of TELUS Communications Inc. on July 1, 2004.
(b) TELUS Corporation Credit Facilities
TELUS Corporation's syndicated bank credit facilities at September 30, 2004,
consist of: i) an $800 million (or U.S. Dollar equivalent) revolving credit
facility expiring on May 7, 2008, used for general corporate purposes, and ii)
an $800 million (or U.S. Dollar equivalent) 364-day revolving credit facility
which is extendible at the Company's option on a non-revolving basis for any
amounts outstanding on May 6, 2005, for one year on a non-revolving basis.
These new facilities, which were put in place in the second of quarter of 2004,
replaced the Company's existing committed credit facilities prior to the
availability termination dates of such facilities.
TELUS Corporation's credit facilities are unsecured and bear interest at prime
rate, U.S. Dollar Base Rate, a bankers' acceptance rate or London interbank
offered rate ("LIBOR") (all such terms as used or defined in the credit
facilities), plus applicable margins. The credit facilities contain customary
representations and warranties and covenants including two financial quarter
end financial ratio tests. The financial ratio tests are that the Company may
not permit its long-term debt to operating cash flow ratio to exceed 4.0:1 and
may not permit its operating cash flow to interest expense ratio to be less
than 2.0:1, each as defined under the credit facilities.
Continued access to TELUS Corporation's credit facilities is not contingent on
the maintenance by TELUS Corporation of a specific credit rating.
Additionally, at September 30, 2004, the Company has accepted a fully
underwritten commitment for a $500 million (or U.S. Dollar equivalent)
unsecured bank credit facility for general corporate purposes. This 364-day
credit facility, upon documentation, would be available until the earlier of
October 31, 2005, and 364 days after the completion date of the Company's
offers to purchase Microcell Telecommunications Inc. (see Note 15(c)). The
facility bears interest at prime rate, U.S. Dollar Base Rate, Bankers'
Acceptance rate or London interbank offered rate ("LIBOR"), plus applicable
margins. The facility also contains customary covenants. Subsequent to quarter
end, in conjunction with the expiry of the Company's offers to purchase
Microcell Telecommunications Inc., this bank credit facility commitment was
cancelled.
(c) Long-Term Debt Maturities
Anticipated requirements to meet long-term debt repayments during each of the
five years ending December 31 are as follows:
(millions) Total(1)
---------------------------------------------------------------------------------------------------------------------------------
2004 (balance of year) $ 2.0
2005 3.4
2006 1,586.1
2007 1,870.0
2008 2.4
(1) Where applicable, repayments reflect hedged foreign exchange rates
13. Other Long-Term Liabilities
As at As at
September 30, December 31,
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Deferred gain on sale-leaseback of buildings $ 101.3 $ 109.1
Pension and other post-retirement liabilities 170.5 161.3
Deferred hedging liability 848.3 739.6
Deferred customer activation and installation fees(1) 89.9 80.8
Other 95.8 82.9
---------------------------------------------------------------------------------------------------------------------------------
$ 1,305.8 $1,173.7
=================================================================================================================================
(1) Upfront customer activation fees, along with the corresponding direct
costs not in excess of revenues, are deferred and recognized over the
average expected term of the customer relationship.
14. Shareholders' Equity
(a) Details of Shareholders' Equity
As at As at
September 30, December 31,
($ in millions except per share amounts) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
Convertible debentures conversion option (b) $ 8.8 $ 8.8
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Preference Shares and Preferred Shares (c)
Authorized Amount
Non-voting first preferred shares Unlimited
Redemption
Issued Premium
Cumulative
$6.00 Preference - (Dec. 31, 2003 - 8,090) 10.0% - 0.8
$4.375 Preferred - (Dec. 31, 2003 - 53,000) 4.0% - 5.3
$4.50 Preferred - (Dec. 31, 2003 - 47,500) 4.0% - 4.8
$4.75 Preferred - (Dec. 31, 2003 - 71,250) 5.0% - 7.1
$4.75 Preferred (Series 1956) - (Dec. 31, 2003 - 71,250) 4.0% - 7.1
$5.15 Preferred - (Dec. 31, 2003 - 114,700) 5.0% - 11.5
$5.75 Preferred - (Dec. 31, 2003 - 96,400) 4.0% - 9.6
$6.00 Preferred - (Dec. 31, 2003 - 42,750) 5.0% - 4.3
$1.21 Preferred - (Dec. 31, 2003 - 768,400) 4.0% - 19.2
---------------------------------------------------------------------------------------------------------------------------------
- 69.7
---------------------------------------------------------------------------------------------------------------------------------
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 (d) 2,405.8 2,349.1
Non-Voting Shares (d) 3,349.9 3,296.6
Options and warrants (e) 40.8 51.5
Accrual for shares issuable under channel stock incentive plan (f) 0.6 0.6
Cumulative foreign currency translation adjustment (3.0) (2.7)
Retained earnings 983.0 741.7
Contributed surplus (g) 42.6 5.9
---------------------------------------------------------------------------------------------------------------------------------
6,819.7 6,442.7
---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 6,828.5 $ 6,521.2
=================================================================================================================================
(b) Convertible Debenture Conversion Option
At September 30, 2004, 3.8 million (December 31, 2003 - 3.8 million) Non-Voting
Shares are reserved for issuance upon exercise of convertible debenture
conversion options.
(c) 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. On March 25, 2004, TELUS
Communications Inc. issued notices of redemption for all nine classes of its
outstanding publicly traded preference and preferred shares for redemption
during the third quarter of 2004 for total consideration of approximately $72.8
million. Of the redemption premium of $3.1 million, $0.8 million is chargeable
against contributed surplus with the balance being charged to retained
earnings.
(d) Changes in Common Shares and Non-Voting Shares
Periods ended September 30, 2004 Three months Nine months
---------------------------------------------------------------------------------------------------------------------------------
Number of Amount Number Amount
shares (millions) of shares (millions)
---------------------------------------------------------------------------------------------------------------------------------
Common Shares
Beginning of period 192,253,334 $ 2,385.1 190,800,015 $ 2,349.1
Exercise of share options (h) 13,355 0.3 73,073 1.7
Employees' purchase of shares (i) 762,035 19.1 2,063,211 51.2
Dividends reinvested in shares 60,618 1.3 153,043 3.8
---------------------------------------------------------------------------------------------------------------------------------
End of period 193,089,342 $ 2,405.8 193,089,342 $ 2,405.8
=================================================================================================================================
Non-Voting Shares
Beginning of period 162,423,223 $ 3,333.5 161,042,369 $ 3,296.6
Transitional amount for share-based compensation
arising from share options (Note 2(a)) - - - 0.4
---------------------------------------------------------------------------------------------------------------------------------
Adjusted opening balance 162,423,223 3,333.5 161,042,369 3,297.0
Exercise of warrants (e) - - 76,000 2.8
Channel stock incentive plan (f) 10,375 0.3 33,975 0.8
Exercise of share options (h) 358,406 7.4 879,314 23.2
Dividend Reinvestment and Share Purchase Plan (j)
Dividends reinvested in shares 431,365 8.5 1,174,762 25.5
Optional cash payments 10,488 0.2 27,437 0.6
---------------------------------------------------------------------------------------------------------------------------------
End of period 163,233,857 $ 3,349.9 163,233,857 $ 3,349.9
=================================================================================================================================
On October 29, 2004, the Company announced that it has approval from its Board
of Directors to make a normal course issuer bid for the repurchase of up to
14.0 million Common Shares and 11.5 million Non-Voting Shares subject to
obtaining all necessary regulatory approvals.
(e) Options and Warrants
Upon its acquisition of Clearnet Communications Inc. ("Clearnet") in 2000, the
Company was required to record the intrinsic value of Clearnet options and
warrants outstanding at that time. As these options and warrants are exercised,
the corresponding intrinsic values are reclassified to share capital. As these
options and warrants are forfeited or expire, the corresponding intrinsic
values are reclassified to contributed surplus. Proceeds arising from the
exercise of these options and warrants are credited to share capital.
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. As at September 30,
2004, 0.7 million (December 31, 2003 - 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, 2003 -
0.2 million) Non-Voting Shares for issuance under the Plan. As at September 30,
2004, shares earned, but not yet issued, are accrued as a component of Common
Equity.
(g) Contributed Surplus
The following table presents a summary of the activity related to the Company's
contributed surplus for the three-month and nine-month periods ended September
30, 2004:
Periods ended September 30, 2004 (millions) Three months Nine months
---------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 38.9 $ 5.9
Transitional amount for share-based compensation arising from share options (Note 2(a)) - 24.7
---------------------------------------------------------------------------------------------------------------------------------
Adjusted opening balance 38.9 30.6
Share option expense recognized in period (Note 8(a)) 4.7 14.5
Share option expense reclassified to Non-Voting Share capital account upon exercise
of share options (1.0) (1.7)
Redemption premium on preference and preferred shares (c) - (0.8)
---------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 42.6 $ 42.6
=================================================================================================================================
(h) 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, 2004, 3.3 million (December 31,
2003 - 3.4 million) Common Shares and 27.3 million (December 31, 2003 - 26.1
million) Non-Voting 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 three-month and nine-month periods ended September
30, 2004.
Periods ended September 30, 2004 Three months Nine months
---------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Number of average option Number of average option
shares price shares price
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 26,216,294 $ 25.09 25,773,832 $ 24.85
Granted 32,350 23.08 1,769,141 24.66
Exercised (371,761) 17.07 (952,387) 14.89
Forfeited (304,734) 25.32 (887,456) 24.97
Expired and cancelled - - (130,981) 24.76
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 25,572,149 25.20 25,572,149 25.20
=================================================================================================================================
(i) Employee Share Purchase Plan
The Company has an employee share purchase plan under which eligible employees
can purchase Common Shares through regular payroll deductions by contributing
between 1% and 6% of their pay. The Company contributes two dollars for every
five dollars contributed by an employee. The Company records its contributions
as a component of operating expenses. For the three-month and nine-month
periods ended September 30, 2004, the Company contributed $6.1 million (2003 -
$4.9 million) and $17.9 million (2003 - $15.8 million), respectively, to this
plan. Under this plan, the Company has the option of offering shares from
Treasury or having the trustee acquire shares in the stock market. Prior to
February 2001, when the issuance of shares from Treasury commenced, all Common
Shares issued to employees under the plan were purchased on the market at
normal trading prices. At September 30, 2004, 1.2 million (December 31, 2003 -
3.5 million) Common Shares are reserved for issuance under the employee share
purchase plan.
(j) 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, the Company, at its
discretion, 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. At September 30, 2004, 1.1 million (December 31, 2003 - 2.3
million) Non-Voting Shares are reserved for issuance under the Dividend
Reinvestment and Share Purchase Plan.
15. Commitments and Contingent Liabilities
(a) CRTC Decisions 2002-34 and 2002-43 Deferral Accounts
On May 30, 2002, and on July 31, 2002, the Canadian Radio-television and
Telecommunications Commission ("CRTC") issued Decisions 2002-34 and 2002-43,
respectively, and introduced the concept of a deferral account. The Company
must make significant estimates and assumptions in respect of the deferral
accounts given the complexity and interpretation required of Decisions 2002-34
and 2002-43. Accordingly, the Company estimates, and records, a liability ($114
million as of September 30, 2004 (December 31, 2003 - $76 million)) to the
extent that activities it has undertaken, other qualifying events and realized
rate reductions for Competitor Services do not extinguish it. Management is
required to make estimates and assumptions in respect of the offsetting nature
of these items. If the CRTC, upon its annual review of the Company's deferral
account, disagrees with management's estimates and assumptions, the CRTC may
adjust the deferral account balance and such adjustment may be material.
On March 24, 2004, the CRTC issued Telecom Public Notice CRTC 2004-1 "Review
and disposition of the deferral accounts for the second price cap period" which
initiated a public proceeding inviting proposals on the disposition of the
amounts accumulated in the incumbent local exchange carriers' deferral accounts
during the first two years of the second price cap period. The Company
is uncertain when the CRTC will make its determination on this proceeding.
(b) Labour Negotiations
Collective bargaining with the Telecommunications Workers Union: In 2000, TELUS
commenced collective bargaining with the Telecommunications Workers Union for a
new collective agreement replacing the five 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 (see
Canadian Industrial Relations Board Decision Letter 1088 and Decision 278
following). 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. In the first quarter of
2004, the extended conciliation process, that included a global review of all
outstanding issues, concluded and the outstanding issues were not resolved.
On January 15, 2004, the Federal Minister of Labour appointed the two
conciliators as mediators to continue to work with the Company and the
Telecommunications Workers Union towards a possible resolution.
On January 28, 2004, the Canadian Industrial Relations Board ruled, in response
to an unfair labour practice complaint filed by the Telecommunications Workers
Union, that the Company must make an offer of binding arbitration to the
Telecommunications Workers Union to settle the collective agreement between the
parties. The Company made the offer of binding arbitration on January 29, 2004,
and on January 30, 2004, the Telecommunications Workers Union accepted the
offer. Under the provisions of binding arbitration, no legal labour disruption
can occur.
With the assistance of mediators, the Company and the Telecommunications
Workers Union have discussed the binding arbitration process including the
selection of an arbitrator, terms of reference/guiding principles that an
arbitrator would take into consideration, hearing location and dates, however,
many of these items remain unresolved.
The Company has filed an application for reconsideration with the Canadian
Industrial Relations Board and an appeal in the Federal Court of Appeal of the
Canadian Industrial Relations Board's decision directing the Company to offer
binding arbitration.
The operational and financial impacts of the outcome of the reconsideration and
appeal processes on the Company are not practicably determinable currently.
Canadian Industrial Relations Board Letter Decision 1088 and Decision 278: On
May 21, 2004, the Canadian Industrial Relations Board declared TELE-MOBILE
COMPANY and TELUS Communications Inc. a single employer for labour relations
purposes. The Canadian Industrial Relations Board also determined that the
Mobility segment's non-unionized team members, predominantly located in Ontario
and Quebec, performing work similar to their unionized Mobility segment
counterparts in British Columbia and Alberta, should be included in the
Telecommunications Workers Union bargaining unit without a representational
vote.
On June 23, 2004, both TELE-MOBILE COMPANY and TELUS Communications Inc. filed
an application to the Federal Court of Appeal for a stay and a judicial review
of the Canadian Industrial Relations Board Letter Decision 1088 and the
subsequent Decision 278. The stay application was granted in part on July 23,
2004. The Federal Court of Appeal held that the Mobility segment may
communicate with its eastern employees affected by the Canadian Industrial
Relations Board Letter Decision 1088 and Decision 278 (unlike the communication
ban that continues in respect of TELUS Communications Inc.'s unionized team
members represented by the Telecommunications Workers Union). The other aspects
of the stay application were otherwise denied by the Federal Court of Appeal.
However, the Federal Court of Appeal has invited TELE-MOBILE COMPANY and TELUS
Communications Inc. to bring a new application should circumstances change such
that irreparable harm becomes imminent. The judicial review of Canadian
Industrial Relations Board Letter Decision 1088 and Decision 278 was heard on
October 4-5, 2004, and a decision from the Federal Court of Appeal is pending.
Should the ultimate operational and financial impacts of the outcome of the
Federal Court of Appeal process differ from management's assessments and
assumptions, a material adjustment to the Company's financial position and the
results of its operations could result.
(c) Microcell Telecommunications Inc.
On May 13, 2004, the Company announced its intention to make unsolicited offers
to purchase for cash all of the issued and outstanding Class A Restricted
Voting Shares, Class B Non-Voting Shares, Warrants 2005 and Warrants 2008 of
Microcell Telecommunications Inc., which offers were made May 17, 2004. The
total equity value of the transaction is approximately $1.1 billion. The
offers, which were to expire on June 22, 2004, were further extended to July
22, 2004, August 20, 2004, September 20, 2004, and October 12, 2004, at which
time the offers expired.
(d) Guarantees
Canadian generally accepted accounting principles require 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 third parties' financial obligations as part of a
facility naming rights agreement. The guarantees, in total, run through to
August 31, 2008, on a declining-balance basis and are of limited recourse.
As at September 30, 2004, 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, 2004, the Company has a liability of $1.0 million
(December 31, 2003 - $1.5 million) recorded in respect of these lease
guarantees.
The following table quantifies the maximum undiscounted guarantee amounts as
at September 30, 2004, without regard for the likelihood of having to make
such payment.
---------------------------------------------------------------------------------------------------------------------------------
(millions) Performance Financial
guarantees(1)(2) guarantees(1) Total
---------------------------------------------------------------------------------------------------------------------------------
2004 (balance of year) $ 3.7 $ 3.2 $ 6.9
2005 1.8 3.1 4.9
2006 1.5 2.3 3.8
2007 1.0 1.2 2.2
2008 0.5 0.4 0.9
(1) Annual amounts for performance guarantees and financial guarantees include
the maximum guarantee amounts during any year of the term of the guarantee.
(2) Performance guarantees as at September 30, 2004, exclude amounts in 2004
(balance of year), 2005, 2006, 2007 and 2008 of $2.2 million, $2.0 million,
$1.8 million, $1.6 million and $1.4 million, respectively, as the
underlying guarantee, which was incurred pursuant to a facility naming
rights agreement, was contractually terminated on October 4, 2004.
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 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.
As at September 30, 2004, the Company has no liability recorded in respect of
indemnification obligations.
(e) Claims and Lawsuits
General: 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 legal assessment and 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, excepting the items enumerated
following.
Pay equity: On December 16, 1994, the Telecommunications Workers Union filed a
complaint against BC TEL, a predecessor of TELUS Communications Inc., with the
Canadian Human Rights Commission, alleging that wage differences between
unionized male and female employees in British Columbia were contrary to the
equal pay for work of equal value provisions in the Canadian Human Rights Act.
In December 1998, the Canadian Human Rights Commission advised that it would
commence an investigation of the Telecommunications Workers Union complaint. In
February 2003, the Canadian Human Rights Commission offered to mediate a
settlement of the complaint, but the Company declined the offer. In 2004, the
Canadian Human Rights Commission appointed a conciliator to attempt to bring
about a settlement of the complaint. If the conciliator is unable to settle the
complaint, the Canadian Human Rights Commission may refer the matter to the
Canadian Human Rights Tribunal for a formal hearing. The timing of the
resolution of this matter is not practicably determinable, but resolution is
not imminently expected. The Company believes that it has good defences to the
Telecommunications Workers Union's complaint. Should the ultimate resolution of
the pay equity complaint differ from management's assessment and assumptions, a
material adjustment to the Company's financial position and the results of its
operations could result.
TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan: In January
2002, the Company became aware of two statements of claim filed in the Alberta
Court of Queen's Bench on December 31, 2001, and January 2, 2002, by plaintiffs
alleging to be either members or business agents of the Telecommunications
Workers Union. In one action, the three plaintiffs alleged to be suing on
behalf of all current or future beneficiaries of the TELUS Corporation Pension
Plan and in the other action, the two plaintiffs allege to be suing on behalf
of all current or future beneficiaries of the TELUS Edmonton Pension Plan. The
statement of claim in the TELUS Corporation Pension Plan related action named
the Company, certain of its affiliates and certain present and former trustees
of the TELUS Corporation Pension Plan as defendants, and claims damages in the
sum of $445 million. The statement of claim in the TELUS Edmonton Pension Plan
related action named the Company, certain of its affiliates and certain
individuals who are alleged to be trustees of the TELUS Edmonton Pension Plan
and claims damages in the sum of $15.5 million. On February 19, 2002, the
Company filed statements of defence to both actions and also filed notices of
motion for certain relief, including an order striking out the actions as
representative or class actions. On May 17, 2002, the statements of claim were
amended by the plaintiffs and include allegations, inter alia, that benefits
provided under the TELUS Corporation Pension Plan and the TELUS Edmonton
Pension Plan are less advantageous than the benefits provided under the
respective former pension plans, contrary to applicable legislation, that
insufficient contributions were made to the plans and contribution holidays
were taken and that the defendants wrongfully used the diverted funds, and that
administration fees and expenses were improperly deducted. The Company filed
statements of defence to the amended statements of claim on June 3, 2002. An
application for an order striking out the actions as representative or class
actions was dismissed on December 17, 2003. The Company believes that it has
good defences to the actions. Should the ultimate resolution of these actions
differ from management's assessment and assumptions, a material adjustment to
the Company's financial position and the results of its operations could
result.
Uncertified class action: A class action was brought August 9, 2004, under the
Class Actions Act (Saskatchewan), against a number of past and present wireless
service providers including the Company. The claim alleges that each of the
carriers is in breach of contract and has violated competition, trade practices
and consumer protection legislation across Canada in connection with the
collection of system access fees, and seeks to recover direct and punitive
damages in an unspecified amount. The class has not been certified and
procedural objections to certification have been identified. The Company
further believes the claim is unsound on the merits. Should the ultimate
resolution of this action differ from management's assessments and assumptions,
a material adjustment to the Company's financial position and the results of
its operations could result.
16. Additional Financial Information
(a) Income Statement
Periods ended September 30 Three months Nine months
(millions) 2004 2003 2004 2003
=================================================================================================================================
Advertising expense $ 35.7 $ 30.3 $ 103.0 $ 90.7
=================================================================================================================================
(b) Balance Sheet
As at As at
September 30, December 31,
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Accounts receivable
Customer accounts receivable $ 671.3 $ 624.1
Accrued receivables 206.0 158.4
Allowance for doubtful accounts (71.6) (67.6)
Other 9.4 8.9
---------------------------------------------------------------------------------------------------------------------------------
$ 815.1 $ 723.8
=================================================================================================================================
Prepaid expense and other
Prepaid expenses $ 142.4 $ 86.6
Deferred customer activation and installation costs 47.1 77.2
Other 40.0 8.6
---------------------------------------------------------------------------------------------------------------------------------
$ 229.5 $ 172.4
=================================================================================================================================
Accounts payable and accrued liabilities
Trade accounts payable $ 292.9 $ 377.6
Accrued liabilities 395.6 384.1
Payroll and other employee-related liabilities 415.7 430.4
Interest payable 205.5 72.4
Other 44.3 30.0
---------------------------------------------------------------------------------------------------------------------------------
$ 1,354.0 $ 1,294.5
=================================================================================================================================
Advance billings and customer deposits
Advance billings $ 413.2 $ 340.9
Deferred customer activation and installation fees 47.1 77.2
Customer deposits 25.2 26.9
---------------------------------------------------------------------------------------------------------------------------------
$ 485.5 $ 445.0
=================================================================================================================================
(c) Supplementary Cash Flow Information
Periods ended September 30 Three months Nine months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Net change in non-cash working capital
Accounts receivable $ (14.9) $ (4.9) $ (91.3) $ 135.9
Income and other taxes receivable 17.1 8.8 109.6 (208.3)
Inventories 12.0 3.8 38.8 18.7
Prepaid expenses and other 39.5 71.5 (50.1) 11.4
Accounts payable and accrued liabilities 131.3 182.2 60.2 67.4
Advance billings and customer deposits 17.7 20.2 40.5 60.4
---------------------------------------------------------------------------------------------------------------------------------
$ 202.7 $ 281.6 $ 107.7 $ 85.5
=================================================================================================================================
17. Employee Future Benefits
(a) Defined benefit plans
The Company's net defined benefit plan costs were as follows:
Three months ended September 30
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
period adjustments(1) period period adjustments(1) period
---------------------------------------------------------------------------------------------------------------------------------
Pension benefit plans
Current service cost $ 17.6 $ - $ 17.6 $ 16.3 $ - $ 16.3
Interest cost 78.1 - 78.1 76.8 - 76.8
Return on plan assets (13.4) (79.9) (93.3) (172.0) 88.3 (83.7)
Past service costs - 0.1 0.1 - 0.2 0.2
Actuarial loss 6.2 - 6.2 7.4 - 7.4
Valuation allowance provided
against accrued benefit asset - 6.4 6.4 - 6.4 6.4
Amortization of transitional asset - (11.2) (11.2) - (11.2) (11.2)
---------------------------------------------------------------------------------------------------------------------------------
$ 88.5 $ (84.6) $ 3.9 $ (71.5) $ 83.7 $ 12.2
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as
to recognize the long-term nature of employee future benefits.
Nine months ended September 30
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
period adjustments(1) period period adjustments(1) period
---------------------------------------------------------------------------------------------------------------------------------
Pension benefit plans
Current service cost $ 52.8 $ - $ 52.8 $ 49.0 $ - $ 49.0
Interest cost 234.3 - 234.3 230.3 - 230.3
Return on plan assets (221.1) (58.7) (279.8) (286.5) 35.5 (251.0)
Past service costs - 0.5 0.5 - 0.5 0.5
Actuarial loss 18.5 - 18.5 22.0 - 22.0
Valuation allowance provided
against accrued benefit asset - 19.1 19.1 - 19.1 19.1
Amortization of transitional asset - (33.6) (33.6) - (33.6) (33.6)
---------------------------------------------------------------------------------------------------------------------------------
$ 84.5 $ (72.7) $ 11.8 $ 14.8 $ 21.5 $ 36.3
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as
to recognize the long-term nature of employee future benefits.
Three months ended September 30
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
period adjustments(1) period period adjustments(1) period
---------------------------------------------------------------------------------------------------------------------------------
Other benefit plans
Current service cost $ 1.2 $ - $ 1.2 $ 1.2 $ - $ 1.2
Interest cost 0.8 - 0.8 0.9 - 0.9
Return on plan assets (0.7) - (0.7) (0.2) (0.5) (0.7)
Actuarial gain (0.3) - (0.3) (0.3) - (0.3)
Amortization of transitional
obligation - 0.2 0.2 - 0.2 0.2
---------------------------------------------------------------------------------------------------------------------------------
$ 1.0 $ 0.2 $ 1.2 $ 1.6 $ (0.3) $ 1.3
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as
to recognize the long-term nature of employee future benefits.
Nine months ended September 30
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
period adjustments(1) period period adjustments(1) period
---------------------------------------------------------------------------------------------------------------------------------
Other benefit plans
Current service cost $ 3.6 $ - $ 3.6 $ 3.7 $ - $ 3.7
Interest cost 2.5 - 2.5 2.8 - 2.8
Return on plan assets (2.0) - (2.0) (0.6) (1.4) (2.0)
Actuarial gain (1.1) - (1.1) (0.9) - (0.9)
Amortization of transitional
obligation - 0.6 0.6 - 0.6 0.6
---------------------------------------------------------------------------------------------------------------------------------
$ 3.0 $ 0.6 $ 3.6 $ 5.0 $ (0.8) $ 4.2
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as
to recognize the long-term nature of employee future benefits.
(b) Employer contributions
The best estimate of fiscal 2004 employer contributions to the Company's
defined benefit pension plans has been revised to $136.6 million (the best
estimate at December 31, 2003, was - $104.8 million) to reflect updated
actuarial valuations and the net acceleration of discretionary funding.
(c) Defined contribution plans
The Company's total defined contribution pension plan costs recognized were a
follows:
Periods ended September 30 Three months Nine months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Union pension plan contributions $ 10.2 $ 8.5 $ 29.5 $ 27.8
Other defined contribution pension plans 2.6 1.4 10.7 8.0
---------------------------------------------------------------------------------------------------------------------------------
$ 12.8 $ 9.9 $ 40.2 $ 35.8
=================================================================================================================================
18. Segmented Information
The Company's reportable segments, which are used to manage the business, are
Communications and Mobility. The Communications segment includes voice local,
voice long distance, data and other telecommunication services excluding
wireless. The Mobility segment includes digital personal communications
services and wireless Internet 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 months ended
September 30 Communications Mobility Eliminations Consolidated
(millions) 2004 2003 2004 2003 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
External revenue $ 1,199.9 $ 1,186.3 $ 747.0 $ 619.9 $ - $ - $ 1,946.9 $ 1,806.2
Inter-segment
revenue 24.9 24.6 5.0 4.0 (29.9) (28.6) - -
---------------------------------------------------------------------------------------------------------------------------------
Total operating
revenue 1,224.8 1,210.9 752.0 623.9 (29.9) (28.6) 1,946.9 1,806.2
Operations expense 714.2 701.9 428.5 378.4 (29.9) (28.6) 1,112.8 1,051.7
Restructuring and
work-force
reduction costs 16.2 2.3 - - - - 16.2 2.3
---------------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $ 494.4 $ 506.7 $ 323.5 $ 245.5 $ - $ - $ 817.9 $ 752.2
=================================================================================================================================
CAPEX(2) $ 216.4 $ 208.9 $ 103.4 $ 95.1 $ - $ - $ 319.8 $ 304.0
=================================================================================================================================
EBITDA less CAPEX $ 278.0 $ 297.8 $ 220.1 $ 150.4 $ - $ - $ 498.1 $ 448.2
=================================================================================================================================
Nine months ended
September 30 Communications Mobility Eliminations Consolidated
(millions) 2004 2003 2004 2003 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
External revenue $ 3,560.0 $ 3,604.0 $ 2,056.3 $ 1,716.4 $ - $ - $ 5,616.3 $ 5,320.4
Inter-segment
revenue 72.0 71.4 15.2 11.6 (87.2) (83.0) - -
---------------------------------------------------------------------------------------------------------------------------------
Total operating
revenue 3,632.0 3,675.4 2,071.5 1,728.0 (87.2) (83.0) 5,616.3 5,320.4
Operations expense 2,132.7 2,155.7 1,214.0 1,102.6 (87.2) (83.0) 3,259.5 3,175.3
Restructuring and
work-force
reduction costs 32.8 12.1 - - - - 32.8 12.1
---------------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $ 1,466.5 $ 1,507.6 $ 857.5 $ 625.4 $ - $ - $ 2,324.0 $ 2,133.0
=================================================================================================================================
CAPEX(2) $ 743.5 $ 589.8 $ 232.1 $ 227.5 $ - $ - $ 975.6 $ 817.3
=================================================================================================================================
EBITDA less CAPEX $ 723.0 $ 917.8 $ 625.4 $ 397.9 $ - $ - $ 1,348.4 $ 1,315.7
=================================================================================================================================
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is defined by the Company as operating revenues less
operations expense and 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 certain debt
covenants.
(2) 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 2005. As of September 30,
2004, in aggregate, $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 agreement is U.S.$377 million for the
period 2001 to 2008 and the commitment remaining after September 30, 2004, is
U.S.$87 million (December 31, 2003 - U.S.$102 million).
In the normal course of operations and on market terms and conditions, ongoing
services and other benefits have been received and expensed. In connection with
the 2001 disposition of TELUS' directory business to Verizon, the Company bills
customers, and collects, for directory listings on Verizon's behalf. The
Company owed Verizon, on a net basis and including directory rebilling and
collections done on Verizon's behalf as well as dividends payable, $36.9
million at September 30, 2004 (December 31, 2003 - $40.9 million).
Periods ended September 30 Three months Nine months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Verizon agreement - Ongoing services and
benefits expensed $ 6.6 $ 6.9 $ 19.9 $ 21.2
Sales to Verizon (Verizon customers' usage of
TELUS' telecommunication infrastructure and other) $ 16.6 $ 14.8 $ 39.7 $ 35.9
Purchases from Verizon (TELUS customers' usage of
Verizon's telecommunication infrastructure and other)$ 5.4 $ 6.8 $ 25.8 $ 27.7
---------------------------------------------------------------------------------------------------------------------------------
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) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
Net income in accordance with Canadian GAAP $ 156.6 $ 114.1 $ 430.2 $ 276.6
Adjustments:
Operating expenses
Operations (b) 0.5 (4.2) 1.8 (12.7)
Depreciation (c) - 27.0 6.5 81.0
Amortization of intangible assets (d) (20.5) (20.5) (61.4) (61.4)
Financing costs (f) 2.1 2.4 6.2 7.2
Accounting for derivatives (g) (4.5) (0.1) (4.3) 0.2
Taxes on the above adjustments (h) 9.3 (1.6) 22.6 (5.1)
---------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP 143.5 117.1 401.6 285.8
Other comprehensive income (loss) (i) (15.3) (68.0) (31.5) (151.6)
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) in accordance
with U.S. GAAP $ 128.2 $ 49.1 $ 370.1 $ 134.2
=================================================================================================================================
Net income in accordance with U.S. GAAP per
Common Share and Non-Voting
- Basic $ 0.40 $ 0.33 $ 1.12 $ 0.81
- Diluted $ 0.40 $ 0.33 $ 1.12 $ 0.81
The following is a restatement of retained earnings (deficit) to reflect
the application of U.S. GAAP:
Periods ended September 30 Nine months
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ (844.7) $ (960.6)
Net income in accordance with U.S. GAAP 401.6 285.8
---------------------------------------------------------------------------------------------------------------------------------
(443.1) (674.8)
Less: Common Share and Non-Voting Share dividends paid, or payable, in cash 132.8 124.3
Common Share and Non-Voting Share dividends reinvested, or to be reinvested,
in shares issued from Treasury 26.9 32.5
Preference and preferred share dividends 1.8 2.6
Redemption premium on preference and preferred shares in excess of amount
chargeable to contributed surplus (Note 14(c)) 2.3 -
---------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ (606.9) $ (834.2)
=================================================================================================================================
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) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Current Assets $ 2,197.3 $ 1,517.3
Capital Assets
Property, plant, equipment and other 7,623.3 7,757.8
Intangible assets subject to amortization 2,480.7 2,666.0
Intangible assets with indefinite lives 2,954.6 2,954.6
Goodwill 3,536.3 3,536.6
Deferred Income Taxes 377.5 709.0
Other Assets 680.3 623.1
---------------------------------------------------------------------------------------------------------------------------------
$19,850.0 $19,764.4
=================================================================================================================================
Current Liabilities $ 1,982.8 $ 2,154.7
Long-Term Debt 6,523.2 6,628.4
Other Long-Term Liabilities 1,523.9 1,367.1
Deferred Income Taxes 1,611.8 1,638.8
Non-Controlling Interest 10.9 10.7
Shareholders' Equity 8,197.4 7,964.7
---------------------------------------------------------------------------------------------------------------------------------
$19,850.0 $19,764.4
=================================================================================================================================
The following is a reconciliation of shareholders' equity incorporating
the differences between Canadian and U.S. GAAP:
As at As at
September 30, December 31,
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
Shareholders' Equity under Canadian GAAP $ 6,828.5 $ 6,521.2
Adjustments:
Purchase versus Pooling Accounting (a), (c) - (f) 1,472.1 1,512.9
Additional goodwill on Clearnet purchase (e) 123.5 123.5
Convertible debentures (including conversion option) (f) (8.3) (8.8)
Accounting for derivatives (g) (2.9) (0.1)
Accumulated other comprehensive income (loss) (i) (215.5) (184.0)
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under U.S. GAAP $ 8,197.4 $ 7,964.7
=================================================================================================================================
Composition of Shareholders' Equity under U.S. GAAP
Preference and preferred shares
TELUS Communications Inc. Preference Shares and Preferred Shares (Note 14(c)) $ - $ 69.7
-------------------------------------------------------------------------------------------------------------------------------
Common equity
Common Shares 4,339.3 4,282.6
Non-Voting Shares 4,637.0 4,585.8
Options and warrants 40.8 51.5
Accrual for shares issuable under channel stock incentive plan 0.6 0.6
Cumulative foreign currency translation adjustment (3.0) (2.7)
Retained earnings (deficit) (606.9) (844.7)
Accumulated other comprehensive income (loss) (i) (215.5) (184.0)
Contributed surplus 5.1 5.9
---------------------------------------------------------------------------------------------------------------------------------
8,197.4 7,895.0
---------------------------------------------------------------------------------------------------------------------------------
$ 8,197.4 $ 7,964.7
=================================================================================================================================
(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) Operating Expenses - Operations
Periods ended September 30 Three months Nine months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Future employee benefits $ (4.2) $ (4.2) $ (12.7) $ (12.7)
Share-based compensation 4.7 - 14.5 -
---------------------------------------------------------------------------------------------------------------------------------
$ 0.5 $ (4.2) $ 1.8 $ (12.7)
=================================================================================================================================
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.
Share-based compensation: Effective January 1, 2004, Canadian GAAP required the
adoption of the fair value method of accounting for share-based compensation
for awards made after 2001 (see Note 2(a) and Note 8(a)). U.S. GAAP requires
disclosure of the impact on net income and net income per Common Share and
Non-Voting Share as if the fair value based method of accounting had been
applied for awards made after 1994. The fair values of the Company's options
granted in 2004 and 2003, and the weighted average assumptions used in
estimating the fair values, are set out in Note 8(a). Such impact, using the
fair values set out in Note 8(a) would approximate the pro forma amounts in the
following table.
Periods ended September 30 Three months Nine months
(millions except per share amounts) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP
As reported $ 143.5 $ 117.1 $ 401.6 $ 285.8
Deduct: Share-based compensation arising from
share options determined under fair value
based method for all awards (5.5) (10.5) (16.9) (34.1)
---------------------------------------------------------------------------------------------------------------------------------
Pro forma $ 138.0 $ 106.6 $ 384.7 $ 251.7
=================================================================================================================================
Net income in accordance with U.S. GAAP per
Common Share and Non-Voting Share
Basic
As reported (using intrinsic method) $ 0.40 $ 0.33 $ 1.12 $ 0.81
Pro forma (using fair value method) $ 0.39 $ 0.30 $ 1.07 $ 0.71
Diluted
As reported (using intrinsic method) $ 0.40 $ 0.33 $ 1.12 $ 0.81
Pro forma (using fair value method) $ 0.39 $ 0.30 $ 1.07 $ 0.71
(c) Operating Expenses - Depreciation
Periods ended September 30 Three months Nine months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Merger of BC TELECOM and TELUS $ - $ 9.0 $ 6.5 $ 26.9
Asset impairment - 18.0 - 54.1
---------------------------------------------------------------------------------------------------------------------------------
$ - $ 27.0 $ 6.5 $ 81.0
=================================================================================================================================
Merger of BC TELECOM and TELUS: 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). As
of March 31, 2004, the amortization of this difference had been completed.
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. As of December 31, 2003, the amortization of
this difference had been completed.
(d) Operating Expenses - Amortization of 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:
Accumulated
Cost Amortization Net Book Value
---------------------------------------------------------------------------------------------------------------------------------
As at As at
September 30, December 31,
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscribers - wireline $ 1,950.0 $ 247.8 $ 1,702.2 $ 1,731.0
Subscribers - wireless 250.0 192.3 57.7 90.3
---------------------------------------------------------------------------------------------------------------------------------
2,200.0 440.1 1,759.9 1,821.3
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 1,833.3 1,833.3 - -
---------------------------------------------------------------------------------------------------------------------------------
$ 4,033.3 $ 2,273.4 $ 1,759.9 $ 1,821.3
=================================================================================================================================
(1) 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, 2004, for
each of the next five fiscal years is as follows:
Years ending December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2004 (balance of year) $ 98.3
2005 304.3
2006 157.9
2007 78.8
2008 53.3
(e) Goodwill
Merger of BC TELECOM and TELUS: 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.
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.
(f) Financing Costs
Merger of BC TELECOM and TELUS: 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).
Convertible debentures: Under Canadian GAAP, the conversion option embedded in
the convertible debentures is presented separately as a component of
shareholders' equity. Under U.S. GAAP, the embedded conversion option is not
subject to bifurcation and is thus presented as a liability along with the
balance of the convertible debentures. The principal accretion occurring under
Canadian GAAP is not required under U.S. GAAP and the adjustment is included in
the interest expense adjustment in the reconciliation.
(g) Accounting for Derivatives
On January 1, 2001, the Company adopted, for U.S. GAAP purposes, the provisions
of Statement of Financial Accounting Standards No. 133, "Accounting For
Derivative Instruments and Hedging Activities." This standard requires that 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.
(h) Income Taxes
Periods ended September 30 Three months Nine months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Current $ 5.8 $ (11.7) $ (77.2) $ (218.0)
Deferred 82.1 96.3 259.3 353.0
---------------------------------------------------------------------------------------------------------------------------------
87.9 84.6 182.1 135.0
Investment Tax Credits - - (0.5) (1.0)
---------------------------------------------------------------------------------------------------------------------------------
$ 87.9 $ 84.6 $ 181.6 $ 134.0
=================================================================================================================================
The Company's income tax expense (recovery), for U.S. GAAP purposes, differs
from that calculated by applying statutory rates for the following reasons:
Three months ended September 30 ($ in millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 81.0 34.8% $ 74.9 37.0%
Tax rate differential on, and consequential
adjustments from, settlement of prior year tax issues (0.3) -
Investment Tax Credits - -
Other 1.7 3.9
---------------------------------------------------------------------------------------------------------------------------------
82.4 35.5% 78.8 38.9%
Large corporations tax 5.5 5.8
---------------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 87.9 37.8% $ 84.6 41.7%
=================================================================================================================================
Nine months ended September 30 ($ in millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 203.5 34.8% $ 156.3 37.0%
Tax rate differential on, and consequential
adjustments from, settlement of prior year tax issues (36.1) (49.7)
Investment Tax Credits (0.3) (0.6)
Other (0.1) 11.4
---------------------------------------------------------------------------------------------------------------------------------
167.0 28.5% 117.4 27.8%
Large corporations tax 14.6 16.6
---------------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 181.6 31.0% $ 134.0 31.7%
=================================================================================================================================
(i) Additional Disclosures Required Under U.S. GAAP - Comprehensive Income
Statement of Financial Accounting Standards No. 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.
Three-month periods ended
September 30 (millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Unrealized Unrealized
fair value of fair value of
derivative Minimum derivative Minimum
cash flow pension cash flow pension
hedges liability Total hedges liability Total
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
Amount arising $ (22.6) $ (0.9) $ (23.5) $ (109.6) $ (0.9) $ (110.5)
Income tax expense (recovery) (7.9) (0.3) (8.2) (40.8) (1.7) (42.5)
---------------------------------------------------------------------------------------------------------------------------------
Net (14.7) (0.6) (15.3) (68.8) 0.8 (68.0)
Accumulated other comprehensive
income (loss), beginning of period (88.7) (111.5) (200.2) 33.2 (95.8) (62.6)
---------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), end of period $ (103.4) $ (112.1) $ (215.5) $ (35.6) $ (95.0) $ (130.6)
=================================================================================================================================
Nine-month periods ended
September 30 (millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Unrealized Unrealized
fair value of fair value of
derivative Minimum derivative Minimum
cash flow pension cash flow pension
hedges liability Total hedges liability Total
---------------------------------------------------------------------------------------------------------------------------------
Amount arising $ (45.6) $ (2.7) $ (48.3) $ (247.4) $ (3.0) $ (250.4)
Income tax expense (recovery) (15.8) (1.0) (16.8) (96.1) (2.7) (98.8)
---------------------------------------------------------------------------------------------------------------------------------
Net (29.8) (1.7) (31.5) (151.3) (0.3) (151.6)
Accumulated other comprehensive
income (loss), beginning of period (73.6) (110.4) (184.0) 115.7 (94.7) 21.0
---------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), end of period $ (103.4) $ (112.1) $ (215.5) $ (35.6) $ (95.0) $ (130.6)
=================================================================================================================================
(j) Recently Issued Accounting Standards Not Yet Implemented
As would affect the Company, there are no U.S. accounting standards currently
issued and not yet implemented that would differ from Canadian accounting
standards currently issued and not yet implemented.
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 29, 2004
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary