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 November 2002
(Commission File No. 000-24876)
TELUS Corporation
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal registered offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
X
Form 20-F _____ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
X
Yes _____ No _____
This Form 6-K consists of the following:
TELUS Corporation Third quarter financial statements
and management discussion and analysis.
TELUS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002
______________________________________________________________________________
consolidated statements of income
Periods ended September 30 Three months Nine months
(Unaudited) (millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 1,766.3 $ 1,823.2 $ 5,212.3 $ 5,212.5
--------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,103.2 1,123.9 3,338.9 3,281.2
Depreciation 307.3 282.9 898.5 850.2
Amortization of intangible assets (Note 2(a)) 93.5 92.6 261.9 249.6
Restructuring and workforce reduction costs (Note 3) 313.3 - 328.9 198.4
--------------------------------------------------------------------------------------------------------------------------------
1,817.3 1,499.4 4,828.2 4,579.4
--------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME FROM CONTINUING OPERATIONS (51.0) 323.8 384.1 633.1
Other income (expense), net (5.6) 0.6 (16.5) 19.6
Financing costs (Note 4) 98.6 175.2 454.0 444.1
Refinancing charge from debt restructuring - - - 96.5
--------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES, NON-CONTROLLING
INTEREST AND GOODWILL AMORTIZATION (155.2) 149.2 (86.4) 112.1
Income taxes (recovery) (Note 5) (50.5) 79.0 (0.9) 74.0
Non-controlling interest 0.6 - 2.4 3.6
Goodwill amortization (Note 2(a)) - 46.2 - 129.7
--------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (105.3) 24.0 (87.9) (95.2)
Discontinued operations (Note 6) (2.1) 556.7 (1.9) 595.4
--------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (107.4) 580.7 (89.8) 500.2
Preference and preferred share dividends 0.8 0.8 2.6 2.6
Interest on convertible debentures, net of income taxes 1.8 1.4 5.1 4.7
--------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE AND NON-VOTING SHARE INCOME (LOSS) $ (110.0) $ 578.5 $ (97.5) $ 492.9
================================================================================================================================
INCOME (LOSS) PER COMMON SHARE AND
NON-VOTING SHARE ($) (NOTE 7)
Basic - Continuing operations (0.34) 0.07 (0.31) (0.35)
- Discontinued operations (0.01) 1.87 (0.01) 2.04
- Net income (loss) (Note 2(a)) (0.35) 1.94 (0.32) 1.69
Diluted - Continuing operations (0.34) 0.07 (0.31) (0.35)
- Discontinued operations (0.01) 1.87 (0.01) 2.04
- Net income (loss) (Note 2(a)) (0.35) 1.94 (0.32) 1.69
DIVIDENDS DECLARED PER COMMON SHARE AND
NON-VOTING SHARE ($) 0.15 0.35 0.45 1.05
TOTAL WEIGHTED AVERAGE COMMON SHARES AND
NON-VOTING SHARES OUTSTANDING (MILLIONS)
- BASIC 315.3 297.4 308.7 291.7
- DILUTED 315.3 298.0 308.7 291.7
--------------------------------------------------------------------------------------------------------------------------------
consolidated statements of retained earnings
Nine months ended September 30,
(Unaudited) (millions) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 1,654.8 $ 1,563.4
Transitional impairment of intangible assets with indefinite lives (Note 2(a)) (595.2) -
--------------------------------------------------------------------------------------------------------------------------------
Adjusted opening balance 1,059.6 1,563.4
Net income (loss) (89.8) 500.2
--------------------------------------------------------------------------------------------------------------------------------
969.8 2,063.6
Less: Common Share and Non-Voting Share dividends paid in cash 105.9 220.2
Common Share and Non-Voting Share dividends reinvested in shares issued from Treasury 31.7 85.4
Preference and preferred share dividends 2.6 2.6
Interest on convertible debentures 5.1 4.7
--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD (Note 16) $ 824.5 $ 1,750.7
================================================================================================================================
The accompanying notes are an integral part of these interim
consolidated financial statements
consolidated balance sheets
As at As at
September 30, December 31,
(Unaudited) (millions) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments $ - $ 17.1
Accounts receivable (Notes 2(e), 9) 666.5 972.1
Income and other taxes receivable 62.4 7.1
Inventories 92.2 118.6
Current portion of future income taxes 152.9 147.0
Prepaid expenses and other 174.4 180.7
--------------------------------------------------------------------------------------------------------------------------------
1,148.4 1,442.6
--------------------------------------------------------------------------------------------------------------------------------
Capital Assets, Net (Note 10)
Property, plant, equipment and other 8,113.1 7,924.2
Intangible assets subject to amortization (Note 2(a)) 942.5 982.0
Intangible assets with indefinite lives (Note 2(a)) 2,948.1 3,853.6
--------------------------------------------------------------------------------------------------------------------------------
12,003.7 12,759.8
--------------------------------------------------------------------------------------------------------------------------------
Other Assets
Deferred charges (Note 11) 699.8 685.2
Future income taxes 1,150.2 996.9
Investments 62.6 56.4
Goodwill (Note 12) 3,187.9 3,320.9
Other 3.1 3.8
--------------------------------------------------------------------------------------------------------------------------------
5,103.6 5,063.2
--------------------------------------------------------------------------------------------------------------------------------
$ 18,255.7 $ 19,265.6
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net of outstanding items (Note 13) $ 5.3 $ -
Accounts payable and accrued liabilities 1,196.2 1,164.2
Restructuring and workforce reduction accounts payable and accrued liabilities 304.3 109.7
Dividends payable 46.5 45.5
Advance billings and customer deposits 314.5 310.8
Short-term obligations 218.5 229.9
--------------------------------------------------------------------------------------------------------------------------------
2,085.3 1,860.1
--------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (Note 14) 8,125.9 8,651.4
--------------------------------------------------------------------------------------------------------------------------------
Future Income Taxes 1,000.4 1,326.6
--------------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities (Note 15) 433.8 432.6
--------------------------------------------------------------------------------------------------------------------------------
Non-Controlling Interest 10.5 8.0
--------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Note 16)
Common equity 6,380.5 6,767.6
Convertible debentures 149.6 149.6
Preference and preferred shares 69.7 69.7
--------------------------------------------------------------------------------------------------------------------------------
6,599.8 6,986.9
--------------------------------------------------------------------------------------------------------------------------------
$ 18,255.7 $ 19,265.6
================================================================================================================================
Commitments and Contingent Liabilities (Note 17)
The accompanying notes are an integral part of these interim consolidated
financial statements
consolidated statements of cash flows
Periods ended September 30 Three months Nine months
(Unaudited) (millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Income (loss) from continuing operations $ (105.3) $ 24.0 $ (87.9) $ (95.2)
Items not affecting cash:
Depreciation and amortization 400.8 375.5 1,160.4 1,099.8
Goodwill amortization - 46.2 - 129.7
Future income taxes (57.1) 48.7 (37.8) (165.0)
Gain on redemption of long-term debt (82.4) (7.0) (82.4) (65.9)
Asset write-off related to restructuring 1.1 - 1.1 30.5
Refinancing charge from debt restructuring - - - 96.5
Net pension credits (2.1) (11.9) (11.8) (53.5)
Other, net 12.5 (61.8) 5.7 (24.2)
--------------------------------------------------------------------------------------------------------------------------------
Operating cash flow 167.5 413.7 947.3 952.7
Restructuring and workforce reduction costs,
net of cash payments (Note 3) 248.3 (23.4) 194.6 99.3
--------------------------------------------------------------------------------------------------------------------------------
Operating cash flow adjusted for restructuring
and workforce reduction costs 415.8 390.3 1,141.9 1,052.0
Net change in non-cash working capital from
continuing operations (Note 18(a)) 393.1 322.9 235.7 287.7
Operating cash flow and net change in non-cash working
capital from discontinued operations (Note 18(b)) (4.6) (154.9) (4.4) (117.0)
--------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 804.3 558.3 1,373.2 1,222.7
--------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (Note 10) (322.7) (587.1) (1,277.2) (1,657.8)
Purchase of spectrum (4.5) - (4.5) (355.9)
Acquisitions, net of cash acquired - (65.3) - (200.9)
Proceeds from the sale of property - - - 228.4
Proceeds from divestitures (Note 6) 7.8 810.0 7.8 810.0
Other (2.7) (37.0) (36.4) (81.3)
--------------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by investing activities (322.1) 120.6 (1,310.3) (1,257.5)
--------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 16.6 23.9 73.9 66.9
Public issuance of Non-Voting Shares (Note 16(f)) 337.4 - 337.4 -
Cost of public issuance of Non-Voting Shares (Note 16(f)) (14.5) - (14.5) -
Dividends to shareholders (43.2) (62.6) (96.3) (263.4)
Long-term debt issued - 110.0 584.0 6,692.8
Redemptions and repayment of long-term debt
(Notes 14(b)-(c)) (779.1) (20.0) (892.7) (1,823.8)
Change in short-term obligations - (839.6) (80.5) (4,625.2)
Amortization of debt issue costs and other 4.3 21.1 3.4 (30.5)
--------------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by financing activities (478.5) (767.2) (85.3) 16.8
--------------------------------------------------------------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in cash and cash equivalents 3.7 (88.3) (22.4) (18.0)
Cash and temporary investments (cash and temporary
investments, net of outstanding items),
beginning of period (9.0) 170.5 17.1 100.2
--------------------------------------------------------------------------------------------------------------------------------
Cash and temporary investments (cash and temporary
investments, net of outstanding items),
end of period (Note 13) $ (5.3) $ 82.2 $ (5.3) $ 82.2
================================================================================================================================
SUPPLEMENTAL DISCLOSURE
Interest paid $ 48.6 $ 23.0 $ 392.9 $ 292.8
================================================================================================================================
Income taxes paid $ 3.5 $ 92.9 $ 24.0 $ 250.2
================================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements
notes to interim consolidated financial statements
SEPTEMBER 30, 2002 (unaudited)
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 consolidated financial
statements for the year ended December 31, 2001. 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, 2001.
The term "Company" is used to mean TELUS Corporation and, where the context of
the narrative permits or requires, its subsidiaries.
2. Change in Accounting Policies
(a) Intangible Assets and Goodwill
Commencing January 1, 2002, the new recommendations of the Canadian Institute of
Chartered Accountants (CICA) for intangible assets and goodwill apply to the
Company (CICA Handbook Section 3062). Rather than being systematically
amortized, the carrying value of intangible assets with indefinite lives, and
goodwill, will be periodically tested for impairment. Intangible assets with
finite lives ("intangible assets subject to amortization") will be annually
reviewed in respect of their useful lives. The frequency of the impairment test
generally would be the reciprocal of the stability of the relevant events and
circumstances, but intangible assets with indefinite lives must, at a minimum,
be tested annually. The test is applied to each of the Company's two reporting
units (the reporting units being identified in accordance with the criteria in
the CICA Handbook section for intangible assets and goodwill): Communications
and Mobility.
The Company's intangible assets with indefinite lives, which are its spectrum
licences, were tested for impairment as at January 1, 2002, and the impairment
amount (the "transitional impairment amount") of $595.2 million ($910.0 million
before tax) was considered to arise from a change in accounting policy and was
charged directly to opening retained earnings. Consistent with current
industry-specific valuation methods, the Company used a discounted cash flow
model for determining the fair value of its spectrum licences. Recent declines
in the wireless asset market values have negatively affected the fair value of
the spectrum licences, which the Company obtained primarily through
acquisitions.
Similarly, goodwill was also to be tested for impairment as at January 1, 2002,
by June 30, 2002, and any transitional impairment amount would also be
considered to have arisen from a change in accounting policy and would be
charged directly to opening retained earnings. The Company completed this test
in the first quarter of 2002. By applying the prescribed method of comparing the
fair value of its reporting units to the carrying amounts of its reporting
units, the Company has assessed its goodwill and determined that there was no
goodwill transitional impairment amount. Consistent with current
industry-specific valuation methods, the Company used a combination of the
discounted cash flow model and the market comparable approach for determining
the fair value of its reporting units.
In accordance with the new requirements, net income (loss) for prior periods
presented is to be adjusted to exclude amortization expense (including any
related tax effects) recognized in those periods related to goodwill and
intangible assets with indefinite lives; the corresponding per share amounts are
also required to be adjusted.
Periods ended September 30 Three months Nine months
(millions except per share amounts) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
As reported $ (107.4) $ 580.7 $ (89.8) $ 500.2
Add back: Goodwill amortization - 46.2 - 129.7
Amortization of intangible assets
with indefinite lives (a) - 12.7 - 38.0
--------------------------------------------------------------------------------------------------------------------------------
As adjusted $ (107.4) $ 639.6 $ (89.8) $ 667.9
================================================================================================================================
Income (loss) per Common Share and Non-Voting
Share - basic and diluted
As reported $ (0.35) $ 1.94 $ (0.32) $ 1.69
Add back: Goodwill amortization - 0.16 - 0.45
Amortization of intangible assets
with indefinite lives (a) - 0.04 - 0.13
--------------------------------------------------------------------------------------------------------------------------------
As adjusted $ (0.35) $ 2.14 $ (0.32) $ 2.27
================================================================================================================================
(a) Net of taxes of $9.8 and $29.1 for three-month and nine-month periods
ended September 30, 2001, respectively.
As required, TELUS has reviewed the estimated useful lives associated with its
intangible assets that are subject to amortization; consistent with prior years,
amortization is calculated using the straight-line method. Generally Accepted
Accounting Principles require that changes in estimates, such as the useful
lives of assets, be applied prospectively. The Company's review resulted in the
following changes, effected in the first quarter of 2002, to the estimated
useful lives of intangible assets that are subject to amortization:
Estimated useful lives
Current Former
--------------------------------------------------------------------------------------------------------------------------------
Subscribers - wireline 50 years 40 years
Subscribers - wireless 7 years 7-10 years
--------------------------------------------------------------------------------------------------------------------------------
(b) Revenue Recognition - Consideration Given by a Vendor to a Customer
Commencing January 1, 2002, the Company adopted the provisions of the Financial
Accounting Standards Board's Emerging Issues Task Force dealing with accounting
for consideration given by a vendor to a customer (EITF 01-9), on a retroactive
basis. The Company considers this accounting change, which is required for U.S.
GAAP reporting purposes, to result in a more appropriate presentation of
transactions in the financial statements. For the three months ended September
30, 2002, the impact of the change was to reduce operating revenues and
operating expenses, for Mobility operations (both in 2002 and 2001) and Internet
operations (in 2002 only), by $37.6 million (2001 - $26.6 million); for the nine
months ended September 30, 2002, the impact was $98.8 million (2001 - $85.7
million). The impact for the year ended December 31, 2001, was a $122.1 million
reduction in both operating revenues and operating expenses. The adoption of
EITF 01-9 did not have an effect on the Company's financial position, key
operating measures or cash flows.
(c) Revenue Recognition - Non-HCSA Deferral Account
On May 30, 2002, and on July 31, 2002, the Canadian Radio-television and
Telecommunications Commission ("CRTC") issued Decision 2002 - 34 and Decision
2002 - 43, respectively, pronouncements that will affect the Company's wireline
revenues for four-year periods beginning June 1, 2002, and August 1, 2002,
respectively. In an effort to foster competition for residential basic service
in non-high cost service areas ("non-HCSAs"), the concept of a deferral account
mechanism was introduced by the CRTC, instead of price reductions.
The deferral account arises from the CRTC requiring the Company to defer the
income statement recognition of a small portion of the monies received in
respect of residential basic services provided to non-HCSAs. The revenue
deferral is based on the rate of inflation, less a productivity offset of 3.5%,
and an "exogenous factor" that is associated with allowed recoveries in previous
price cap regimes that have now expired. The Company may recognize the deferred
amounts upon the undertaking of qualifying actions, such as Service Improvement
Programs ("SIPs"), rate reductions and/or rebates to customers. In an effort to
stimulate competition, the CRTC required rate reductions for Competitor
Services; the Company is allowed to use the "exogenous factor" recoveries to
offset the realized rate reductions for Competitor Services. To the extent that
a balance remains in the deferral account, interest is required to be accrued at
the Company's short-term cost of borrowing.
The Company has adopted the liability method of accounting for the deferral
account. This results in the Company recording a liability to the extent that
activities it has undertaken, realized rate reductions for Competitor Services
and other future qualifying events do not extinguish the balance of the deferral
account. As at September 30, 2002, a liability of $14.1 million has been
recorded and is included with advance billings and customer deposits. Other than
for the interest accrued on the balance of the deferral account, which would be
included in financing costs, all income statement effects of the deferral
account are included in operating revenues.
(d) Share-Based Compensation
Commencing January 1, 2002, the new recommendations of the CICA for share-based
compensation apply to the Company (CICA Handbook Section 3870). The new
recommendations require that a fair value be determined for options at the date
of grant and that such fair value be recognized in the financial statements. In
respect of share options awarded to employees, it is permissible to use either
the fair value based method or the intrinsic value based method, however, if the
intrinsic based method is used, pro forma disclosure is required so as to show
what the effect would have been had the fair value based method been applied.
The Company applies the intrinsic value based method of accounting for
share-based compensation awards granted to employees. Accordingly, no
compensation cost is recorded in the accounts for its share option plans and the
requisite pro forma disclosures are made (see Note 8). Proceeds arising from the
exercise of share options are credited to share capital.
(e) Sales of Receivables
For transfers of receivables occurring on, or after, July 1, 2001, (see Note 9)
the new accounting guidelines of the CICA apply to the Company (CICA Accounting
Guideline AcG-12). Since July 1, 2001, transfers of receivables in
securitization transactions are recognized as sales when the Company is deemed
to have surrendered control over the transferred receivables and consideration,
other than for its beneficial interests in the transferred receivables, has been
received. When the Company sells its receivables, it retains reserve accounts,
which are retained interests in the securitized receivables, and servicing
rights. When a transfer is considered a sale, the Company derecognizes all
receivables sold, recognizes at fair value the assets received and the
liabilities incurred and records the gain or loss on sale in "Other income
(expense) net". Such gain or loss recognized on the sale of receivables depends
in part on the previous carrying amount of the receivables involved in the
transfer, allocated between the receivables sold and the retained interests
based upon their relative fair market value at the sale date. The Company
estimates the fair value for its retained interests based on the present value
of future expected cash flows using management's best estimates of the key
assumptions - credit losses, the weighted average life of the receivables sold
and discount rates commensurate with the risks involved.
For transfers of receivables occurring prior to July 1, 2001, the transactions
were recognized as sales of receivables when the significant risks and rewards
of ownership were transferred to the purchasers.
3. Restructuring and Workforce Reduction Costs
In 2001, the Company initiated a phased Operational Efficiency Program ("OEP")
aimed at improving the Company's operating and capital productivity and
competitiveness. The first phase of the OEP was to complete merger-related
restructuring activities in TELUS Mobility and the reorganization for TELUS
Communications. In the first quarter of 2001, a restructuring charge of $198.4
million was recorded. Approximately one-half of the 2001 charge was related to
integration costs for TELUS Mobility including the write-down of redundant
capital assets, handset reconfiguration costs and employee severance costs. The
remaining charge was related to reorganization costs in TELUS Communications,
including employee severance costs and capital asset impairment charges. In the
first quarter of 2002 the Company recorded a $12.5 million expense in respect of
workforce reduction costs incurred in excess of the 2001 provision. By December
31, 2001, excluding the impacts of staff increases associated with acquisitions,
there were approximately 800 net staff reductions as a result of the OEP.
The second phase of the OEP, which commenced at the beginning of 2002,
continued to focus on reducing staff, but also entailed a comprehensive review
of enterprise-wide processes to identify capital and operational efficiency
opportunities. Consequently, on June 7, 2002, the Company offered an Early
Retirement Incentive Plan ("ERIP") and a Voluntary Departure Incentive Plan
("VDIP") to 11,000 of over 16,000 bargaining unit employees and on July 11,
2002, the Company announced details on OEP initiatives including: streamlining
of business processes; reducing the TELUS product portfolio and processes that
support them; optimizing the use of real estate, networks and other assets;
improving customer order management; reducing the scope of corporate support
functions; consolidating operational and administrative functions; and
consolidating customer contact centres, currently from 66 offices in 20
communities to 19 offices in 6 communities. Three of the 47 customer contact
centres targeted for consolidation have been consolidated by September 30,
2002. All 33 of the TELUS stores targeted for closure have been closed by
September 30, 2002. Consolidation of administrative offices will be largely
completed by December 31, 2002, with other changes implemented throughout 2003.
The third phase of the OEP commenced in the third quarter of 2002 and was
focused on operationalizing the above noted initiatives. In total for the second
and third phases of the OEP, TELUS is expecting a further net reduction of
approximately 6,500 positions involving approximately 5,200 bargaining unit
and 1,300 management positions in 2002 and 2003. These reductions are somewhat
higher than the 6,000 net positions originally announced due to higher than
anticipated enrollment to the ERIP and VDIP program and higher management
departures. In the third quarter, TELUS reduced its staff count by approximately
1,700 positions and 2,700 on a year to date basis. Since the inception of the
OEP in 2001, the Company has reduced its staff count by approximately 3,500,
comprised of 2,200 bargaining unit positions and 1,300 management positions.
The expense and liability for the ERIP and VDIP programs are recognized when the
employee accepts the Company's formalized offer. The Company recorded incentive
package costs of $3.1 million in the second quarter of 2002 for employees who
departed during the second quarter of 2002. During the third quarter of 2002,
the Company recorded $313.3 million of restructuring and workforce reduction
costs, representing approximately 3,500 management and bargaining unit ERIP and
VDIP employee acceptances and planned involuntary terminations (of which
approximately 1,700 had left the Company as of September 30, 2002), qualifying
lease termination and other costs. Additional restructuring and workforce
reduction costs are expected to be incurred subsequent to September 30, 2002,
but did not qualify for accrual at the current balance sheet date. The total
cost (inclusive of the items already recorded) of all the phase two and phase
three initiatives, including management, ERIP, VDIP and other operational
efficiency pursuits, is currently estimated to be $560 million.
Periods ended September 30 Three months Nine months
(millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Workforce reduction costs
Voluntary (Early Retirement Incentive Plan,
Voluntary Departure Incentive Plan and other) $ 214.4 $ - $ 217.5 $ 94.6
Involuntary and other 87.3 - 99.8 73.3
--------------------------------------------------------------------------------------------------------------------------------
301.7 - 317.3 167.9
Lease termination charges 10.1 - 10.1 -
Asset write-off and other charges 1.5 - 1.5 30.5
--------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction costs 313.3 - 328.9 198.4
Less: Current payments 65.0 23.4 134.3 50.4
Asset write-off related to restructuring
and other - - - 48.7
--------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction costs,
net of cash payments $ 248.3 $ (23.4) $ 194.6 $ 99.3
================================================================================================================================
4. Financing Costs
Periods ended September 30 Three months Nine months
(millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt $ 180.6 $ 175.9 $ 540.1 $ 360.2
Interest on short-term obligations and other 0.3 9.0 3.0 168.2
Foreign exchange (gain) loss 0.8 5.0 0.1 (0.1)
Gain on redemption of long-term debt (a) (82.4) (7.0) (82.4) (65.9)
--------------------------------------------------------------------------------------------------------------------------------
99.3 182.9 460.8 462.4
Capitalized interest during construction (0.1) (0.2) (0.5) (3.2)
Interest income (0.6) (7.5) (6.3) (15.1)
--------------------------------------------------------------------------------------------------------------------------------
$ 98.6 $ 175.2 $ 454.0 $ 444.1
================================================================================================================================
(a) In the third quarter of 2002, the Company repurchased long-term debt
and realized a gain on the redemption (see Note 14(b)).
5. Income Taxes
Provisions for large corporations tax of $6.7 million (2001 - $5.5 million) and
$19.9 million (2001 - $11.2 million) for the three-month and nine-month periods
ended September 30, 2002, respectively, are included in the Company's income tax
expense.
6. Discontinued Operations
Pursuant to two agreements, one effective August 14, 2002, and one effective
August 31, 2002, the Company sold its U.S. directory business to two
arm's-length parties, for total proceeds of $7.8 million and recognized a loss
of $2.2 million (before and after tax) on the sale.
On June 1, 2001, the Company entered into an agreement that closed on July 31,
2001, to sell substantially all of TELUS Advertising Services directory business
and TELUS Quebec directory business to Dominion Information Services Inc., a
wholly-owned subsidiary of a related party, Verizon Communications Inc., for
total proceeds of $810 million representing fair market value. In the third
quarter of 2001, the Company recognized a gain of $547.4 million ($712.9 million
before tax) on the sale.
Effective September 30, 2001, the Company exited the equipment leasing business
by securitizing its equipment leasing portfolio to an arm's-length trust through
a concurrent lease agreement. The equipment leasing portfolio will be financed,
administered and serviced by a third party on behalf of the trust. As part of
this transaction, the Company has entered into a long-term agreement whereby the
third party will become the preferred provider of future equipment financing for
TELUS customers. The gain and other income on the transaction was $4.4 million
($7.9 million before tax) based on proceeds of $147 million received in October
2001.
As a result of these transactions, the operating results of the affected
directory and equipment leasing operations have been included in the
Consolidated Statements of Income as "discontinued operations".
At September 30, 2002 and December 31, 2001, no material assets or liabilities
of the discontinued operations remained. Income statement disclosures for
discontinued operations are as follows:
Three months ended September 30, TELUS Advertising
Services Equipment Leasing Total
(millions) 2002 2001 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Revenues $ 1.9 $ 26.8 $ - $ 3.2 $ 1.9 $ 30.0
================================================================================================================================
Operating results to measurement date
Income (loss) before income taxes $ 0.1 $ 7.7 $ - $ 1.1 $ 0.1 $ 8.8
Income taxes - 3.3 - 0.6 - 3.9
--------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations to
measurement date 0.1 4.4 - 0.5 0.1 4.9
Gain (loss) and other
- Gross (2.2) 712.9 - 7.9 (2.2) 720.8
- Income tax - 165.5 - 3.5 - 169.0
--------------------------------------------------------------------------------------------------------------------------------
- Net (2.2) 547.4 - 4.4 (2.2) 551.8
--------------------------------------------------------------------------------------------------------------------------------
Discontinued operations $ (2.1) $ 551.8 $ - $ 4.9 $ (2.1) $ 556.7
================================================================================================================================
Nine months ended September 30, TELUS Advertising
Services Equipment Leasing Total
(millions) 2002 2001 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Revenues $ 5.0 $ 190.0 $ - $ 9.4 $ 5.0 $ 199.4
================================================================================================================================
Operating results to measurement date
Income (loss) before income taxes $ 0.3 $ 75.9 $ - $ 3.2 $ 0.3 $ 79.1
Income taxes - 33.8 - 1.7 - 35.5
--------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations
to measurement date 0.3 42.1 - 1.5 0.3 43.6
Gain (loss) and other
- Gross (2.2) 712.9 - 7.9 (2.2) 720.8
- Income tax - 165.5 - 3.5 - 169.0
--------------------------------------------------------------------------------------------------------------------------------
- Net (2.2) 547.4 - 4.4 (2.2) 551.8
--------------------------------------------------------------------------------------------------------------------------------
Discontinued operations $ (1.9) $ 589.5 $ - $ 5.9 $ (1.9) $ 595.4
================================================================================================================================
7. Per Share Amounts
Basic net income (loss) from continuing operations per Common Share and
Non-Voting Share is calculated by dividing Common Share and Non-Voting Share
income (loss) from continuing operations by the total weighted average Common
Shares and Non-Voting Shares outstanding during the period. Basic net income
(loss) per Common Share and Non-Voting Share is calculated by dividing Common
Share and Non-Voting Share income (loss) by the total weighted average Common
Shares and Non-Voting Shares outstanding during the period. Diluted income 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 convertible
debentures had no dilutive effect in the periods presented. Per share amount
calculations for discontinued operations employ the same number of Common Shares
and Non-Voting Shares as used in the income (loss) from continuing operations
calculations.
The following tables present the reconciliations of the numerators and
denominators of the basic and diluted per share computations for income before
discontinued operations.
Periods ended September 30 Three months Nine months
(millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ (105.3) $ 24.0 $ (87.9) $ (95.2)
Deduct:
Preference and preferred share dividends 0.8 0.8 2.6 2.6
Interest on convertible debentures 1.8 1.4 5.1 4.7
--------------------------------------------------------------------------------------------------------------------------------
Basic and diluted Common Share and Non-Voting
Share income (loss) from continuing operations $ (107.9) $ 21.8 $ (95.6) $ (102.5)
================================================================================================================================
Periods ended September 30 Three months Nine months
(millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Basic total weighted average Common Shares
and Non-Voting Shares outstanding 315.3 297.4 308.7 291.7
Effect of dilutive securities
Exercise of share options and warrants (a) - 0.6 - -
--------------------------------------------------------------------------------------------------------------------------------
Diluted total weighted average Common Shares
and Non-Voting Shares outstanding 315.3 298.0 308.7 291.7
================================================================================================================================
(a) Share options, in the amount of 1.1 for the nine-month period ended September
30, 2001, were excluded from the calculations as they were anti-dilutive.
8. Share-Based Compensation
The Company applies the intrinsic value based method of accounting for
share-based compensation awards granted to employees. Accordingly, no
compensation cost is recorded in the accounts for its share option plans. For
share options granted after 2001, disclosure of the impact on earnings and
earnings per share as if the fair value based method of accounting for the
share-based compensation had been applied is required. Such impact, using
weighted average fair values of $1.68 and $7.30 for options granted in the
three-month and nine-month periods ended September 30, 2002, respectively, would
approximate the following pro forma amounts:
Periods ended September 30, 2002 Three months Nine months
(millions except per share amounts)
--------------------------------------------------------------------------------------------------------------------------------
Compensation cost $ 1.6 $ 4.0
Net income (loss)
As reported $ (107.4) $ (89.8)
Pro forma $ (109.0) $ (93.8)
Net income per Common Share and Non-Voting Share
Basic and diluted - net income (loss)
As reported $ (0.35) $ (0.32)
Pro forma $ (0.35) $ (0.33)
--------------------------------------------------------------------------------------------------------------------------------
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes model with weighted average assumption for grants as follows:
Periods ended September 30, 2002 Three months Nine months
--------------------------------------------------------------------------------------------------------------------------------
Risk free interest rate 5.5% 5.8%
Expected lives (years) 6.5 9.8
Expected volatility 35% 35%
Dividend rate 7.1% 3.8%
--------------------------------------------------------------------------------------------------------------------------------
Forfeitures of options are accounted for in the period of forfeiture.
9. Accounts Receivable
On July 26, 2002, TELUS Communications Inc. ("TCI"), a wholly-owned subsidiary
of TELUS, entered into an agreement with an arm's-length securitization trust
under which TCI 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. TCI 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.
On September 30, 2002, this securitization agreement was amended in order to
make available for purchase by the securitization trust an interest in a certain
class of TCI's trade receivables, which were previously of the type sold to a
different arm's-length securitization trust under a prior securitization
agreement dated November 20, 1997. During the third quarter of 2002, TCI
delivered a notice of termination in respect of this prior securitization;
collection and final remittances of the corresponding accounts receivable had
been completed by September 27, 2002.
As at As at
September 30, December 31,
(millions) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Total managed portfolio $ 1,119.7 $ 1,122.8
Securitized receivables (536.3) (158.2)
Retained interest in receivables sold (a) 83.1 7.5
--------------------------------------------------------------------------------------------------------------------------------
Receivables held $ 666.5 $ 972.1
================================================================================================================================
(a) Includes receivables sold pre and post adoption of AcG-12 (see Note 2(e)).
Income statement effects of the current year's securitization (see Note 2(e))
are as follows:
Periods ended September 30, 2002 Three months Nine months
(millions)
S>
--------------------------------------------------------------------------------------------------------------------------------
Loss on sale of receivables (a) $ 2.2 $ 2.2
--------------------------------------------------------------------------------------------------------------------------------
(a) The loss on sale of receivables is comprised of the discount on sale of
receivables, the adjustment arising from the fair valuation of the Company's
retained interest and servicing.
Cash flows from the current year's securitization (see Note 2(e)) are as
follows:
Periods ended September 30, 2002 Three months Nine months
(millions)
S>
--------------------------------------------------------------------------------------------------------------------------------
Proceeds from new securitizations $ 430.0 $ 430.0
Proceeds from collections reinvested in revolving period securitizations $ 425.2 $ 425.2
Proceeds from collections pertaining to retained interest $ 84.2 $ 84.2
--------------------------------------------------------------------------------------------------------------------------------
The key economic assumptions used to determine the loss on sale of receivables,
the future cash flows and fair values attributed to the retained interest (see
Note 2(e)) are as follows:
Periods ended September 30, 2002 Three months Nine months
--------------------------------------------------------------------------------------------------------------------------------
Expected credit losses as a percentage of accounts receivable sold 2.5% 2.5%
Weighted average life of the receivables sold (days) 39 39
Effective annual discount rate 4.3% 4.3%
Servicing 1.0% 1.0%
--------------------------------------------------------------------------------------------------------------------------------
Generally, the sold trade receivables do not experience prepayments.
At September 30, 2002, key economic assumptions and the sensitivity of the
current fair value of residual cash flows to immediate 10 per cent and 20 per
cent changes in those assumptions are as follows:
As at Hypothetical change in
September 30, assumptions (a)
(dollars in millions) 2002 10% 20%
--------------------------------------------------------------------------------------------------------------------------------
Carrying amount/fair value of future cash flows $ 83.1
Expected credit losses as a percentage of accounts receivable sold 2.4% $ 1.3 $ 2.6
Weighted average life of the receivables sold (days) 40 $ - $ 0.1
Effective annual discount rate 4.2% $ - $ 0.1
--------------------------------------------------------------------------------------------------------------------------------
(a) These sensitivities are hypothetical and should be used with caution.
Favourable hypothetical changes in the assumptions result in an increased
value, and unfavourable hypothetical changes in the assumptions result in a
decreased value, of the retained interest in receivables sold. As the figures
indicate, changes in fair value based on a 10 per cent variation in assumptions
generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, in this table,
the effect of a variation in a particular assumption on the fair value of the
retained interest is calculated without changing any other assumption; in
reality, changes in one factor may result in change in another (for example,
increases in market interest rates may result in increased credit losses),
which might magnify or counteract the sensitivities.
10. Capital Assets, Net
Accumulated
Depreciation and
Cost Amortization Net Book Value
--------------------------------------------------------------------------------------------------------------------------------
As at As at
September 30, December 31,
(millions) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Property, plant, equipment and other
Telecommunications assets $ 15,648.9 $ 9,446.0 $ 6,202.9 $ 6,009.2
Assets leased to customers 411.2 332.6 78.6 95.9
Buildings 1,464.7 671.9 792.8 779.6
Office equipment and furniture 789.9 527.2 262.7 261.2
Assets under capital lease 49.2 36.2 13.0 25.1
Other 387.6 240.0 147.6 127.8
Land 55.4 - 55.4 58.9
Plant under construction 523.8 - 523.8 512.9
Materials and supplies 36.3 - 36.3 53.6
--------------------------------------------------------------------------------------------------------------------------------
19,367.0 11,253.9 8,113.1 7,924.2
--------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscriber base 359.5 42.3 317.2 332.4
Software 1,003.3 467.9 535.4 553.8
Access to rights-of-way and other 116.1 26.2 89.9 95.8
--------------------------------------------------------------------------------------------------------------------------------
1,478.9 536.4 942.5 982.0
--------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences (a) 3,966.4 1,018.3 2,948.1 3,853.6
--------------------------------------------------------------------------------------------------------------------------------
$ 24,812.3 $ 12,808.6 $ 12,003.7 $ 12,759.8
================================================================================================================================-
(a) Accumulated amortization of spectrum licences is amortization recorded prior
to 2002 and the transitional impairment amount (see Note 2(a)).
Included in capital expenditures for the three-month and nine-month periods
ended September 30, 2002, were additions of intangible assets subject to
amortization of $72.6 million (2001 - $255.2 million) and $210.9 million (2001 -
$356.8 million), respectively.
11. Deferred Charges
As at As at
September 30, December 31,
(millions) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Recognized transitional pension assets and pension plan contributions
in excess of charges to income $ 324.9 $ 271.5
Cost of issuing debt securities, less amortization 55.6 68.7
Deferred hedging asset 131.3 190.1
Deferred customer activation, installation and end-user wireless handset costs (a) 129.6 122.5
Other 58.4 32.4
--------------------------------------------------------------------------------------------------------------------------------
$ 699.8 $ 685.2
================================================================================================================================
(a) Upfront customer activation fees and wireless handset revenues arising from
sales to end-users, along with the corresponding direct costs not in excess of
revenues, are deferred and recognized over the average expected term of the
customer relationship.
12. Goodwill
During the first quarter of 2002, the Company updated its estimate of the net
income tax benefits that were obtained in the course of acquiring Clearnet
Communications Inc. on October 19, 2000. This has resulted in an increase to the
future income tax asset of $126.2 million, which has been recorded as a
reduction of the unamortized balance of goodwill arising from the acquisition.
Goodwill additions, arising from acquisitions, for the three-month and
nine-month periods ended September 30, 2002, were $NIL (2001 - $8.0 million) and
$2.9 million (2001 - $204.8 million), respectively.
13. Cash and Temporary Investments, Net of Outstanding Items
Cash and temporary investments, net of outstanding items, represents outstanding
cheques written but not cleared by the bank as at the balance sheet date and is
supported by an unsecured overdraft facility.
14. Long-Term Debt
(a) Details of Long-Term Debt
(millions) As at As at
September 30, December 31,
Series Rate Maturity 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Notes (b)
CA 7.5% June 2006 $ 1,568.9 $ 1,589.1
U.S. 7.5% June 2007 1,789.7 2,062.1
U.S. 8.0% June 2011 3,067.8 3,171.1
--------------------------------------------------------------------------------------------------------------------------------
6,426.4 6,822.3
--------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Bank Facility May 2004 594.8 485.0
--------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Debentures (b)
1 12.00% May 2010 50.0 50.0
2 11.90% November 2015 125.0 125.0
3 10.65% June 2021 175.0 175.0
4 9.15% April 2002 - 1.0
5 9.65% April 2022 249.0 249.0
A 9.50% August 2004 197.5 200.0
B 8.80% September 2025 200.0 200.0
--------------------------------------------------------------------------------------------------------------------------------
996.5 1,000.0
--------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Medium Term Note Debentures (b)
96-3 6.25% February 2002 - 20.0
96-5 7.25% April 2002 - 30.0
96-6 6.00% January 2002 - 25.0
96-7 6.125% January 2002 - 30.0
96-9 6.25% August 2003 20.0 20.0
99-1 6.40% June 2003 151.0 200.0
--------------------------------------------------------------------------------------------------------------------------------
171.0 325.0
--------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Senior Discount Notes (c) 0.8 1.5
--------------------------------------------------------------------------------------------------------------------------------
TELUS Communications (Quebec) Inc. First Mortgage Bonds
T 10.80% March 2003 30.0 30.0
U 11.50% July 2010 30.0 30.0
--------------------------------------------------------------------------------------------------------------------------------
60.0 60.0
--------------------------------------------------------------------------------------------------------------------------------
TELUS Communications (Quebec) Inc. Medium Term Notes
1 7.10% February 2007 70.0 70.0
--------------------------------------------------------------------------------------------------------------------------------
Capital leases issued at varying rates of interest from 3.16% to 15.5% and maturing
on various dates up to 2006 13.8 24.8
--------------------------------------------------------------------------------------------------------------------------------
Other 7.0 8.2
--------------------------------------------------------------------------------------------------------------------------------
Total debt 8,340.3 8,796.8
Less - current maturities 214.4 145.4
--------------------------------------------------------------------------------------------------------------------------------
Long-term Debt $ 8,125.9 $ 8,651.4
================================================================================================================================
(b) TELUS Corporation Notes, TELUS Communications Inc. Debentures and TELUS
Communications Inc. Medium Term Notes
During the third quarter of 2002, the Company repurchased 2006 (Canadian Dollar)
Notes, 2007 and 2011 (U.S. Dollar) Notes, TELUS Communications Inc. Debenture,
due August 2004, and TELUS Communications Inc. 6.4% Medium Term Notes with face
values of $22.0 million, U.S.$133.5 million, U.S.$75.0 million, $2.5 million and
$49.0 million, respectively. Proceeds from the public issuance of Non-Voting
Shares (Note 16(f)) in the third quarter of 2002 were, effectively, used to
repurchase these Notes. The gain on repurchasing these Notes and the gain on the
corresponding amount of the 2007 and 2011 Cross Currency Interest Rate Swaps
terminated have been included as a component of financing costs (gain on
redemption on long-term debt)(Note 4).
(c) TELUS Communications Inc. Senior Discount Notes
During the third quarter of 2002, the 11.75% Senior Discount Notes, due 2007,
were called for redemption and were redeemed. Pursuant to a corporate
reorganization effected September 30, 2002, the outstanding Clearnet Inc. Senior
Discount Notes, which mature in 2008 and 2009, became obligations of TELUS
Communications Inc.
(d) Long-Term Maturities
Anticipated requirements to meet long-term debt repayments during each of the
five years from September 30, 2002 are as follows:
(millions)
--------------------------------------------------------------------------------------------------------------------------------
2003 $ 208.8
2004 794.2
2005 -
2006 1,578.0
2007 1,795.2
15. Other Long-Term Liabilities
As at As at
September 30, December 31,
(millions) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Deferred gain on sale-leaseback of buildings $ 114.2 $ 121.4
Pension and other post-retirement liabilities 144.1 139.1
Deferred customer activation and installation fees and wireless handset
revenues arising from sales to end-users (a) 129.6 122.5
Other 45.9 49.6
--------------------------------------------------------------------------------------------------------------------------------
$ 433.8 $ 432.6
================================================================================================================================
(a) Upfront customer activation fees and wireless handset revenues arising from
sales to end-users, along with the corresponding direct costs not in excess
of revenues, are deferred and recognized over the average expected term of
the customer relationship.
16. Common Equity
(a) Details of Common Equity
As at As at
September 30, December 31,
(millions) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Common equity
Common Shares (b) $ 2,257.1 $ 2,186.4
Non-Voting Shares (b) 3,234.5 2,861.4
Options and warrants (c) 56.8 57.6
Accrual for shares issuable under channel stock incentive plan (d) 0.2 -
Retained earnings 824.5 1,654.8
Contributed surplus 7.4 7.4
--------------------------------------------------------------------------------------------------------------------------------
$ 6,380.5 $ 6,767.6
================================================================================================================================
(b) Changes in Common Shares and Non-Voting Shares
Periods ended September 30, 2002 Three months Nine months
--------------------------------------------------------------------------------------------------------------------------------
Number of Amount Number of Amount
shares (millions) shares (millions)
--------------------------------------------------------------------------------------------------------------------------------
Common Shares
Beginning of period 184,342,070 $ 2,241.2 181,386,310 $ 2,186.4
Exercise of share options (c) - - 77,937 1.7
Exercise of pre-emptive rights - - 596,993 13.3
Employees' purchase of shares 1,460,788 14.5 3,620,047 51.8
Dividends reinvested in shares 133,346 1.4 254,917 3.9
--------------------------------------------------------------------------------------------------------------------------------
End of period 185,936,204 $ 2,257.1 185,936,204 $ 2,257.1
================================================================================================================================
Periods ended September 30, 2002 Three months Nine months
--------------------------------------------------------------------------------------------------------------------------------
Number of Amount Number of Amount
shares (millions) shares (millions)
--------------------------------------------------------------------------------------------------------------------------------
Non-Voting Shares
Beginning of period 122,970,715 $ 2,903.5 120,840,391 $ 2,861.4
Exercise of share options (c) - - 30,511 0.7
Exercise of warrants (c) - - 28,667 1.1
Channel stock incentive plan (d) 14,450 0.1 14,450 0.1
Other (e) (30,104) (0.9) (30,104) (0.9)
Public issuance of shares (f) 34,250,000 327.8 34,250,000 327.8
Dividend Reinvestment and Share Purchase Plan (g)
Dividends reinvested in shares 291,915 3.3 2,315,355 42.9
Optional cash payments 65,730 0.7 113,436 1.4
--------------------------------------------------------------------------------------------------------------------------------
End of period 157,562,706 $ 3,234.5 157,562,706 $ 3,234.5
================================================================================================================================
(c) Share Option Plans and Warrants
At September 30, 2002, 25,900,040 (December 31, 2001 - 26,571,268) shares are
reserved for issuance under the option plans. At September 30, 2002, 754,243
(December 31, 2001 - 782,910) warrants remained outstanding. The following is a
summary of activity related to the Company's share options plans for the year to
date period ended September 30, 2002.
Outstanding Outstanding
at beginning at end of
of year Granted Exercised Forfeited Expired period
--------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Number of shares 3,354,276 - - 136,726 - 3,217,550
Share Option and --------------------------------------------------------------------------------------------------------
Compensation Plan Weighted average
option price $35.32 - - 33.86 - 35.38
--------------------------------------------------------------------------------------------------------------------------------
TELUS Share Number of shares 1,794,977 - 4,534 15,242 - 1,775,201
Option Plan for --------------------------------------------------------------------------------------------------------
Former Clearnet Weighted average
Option Holders option price $14.37 - 5.30 30.46 - 14.19
--------------------------------------------------------------------------------------------------------------------------------
BC TELECOM Number of shares 823,265 - - 55,567 28,300 739,398
Stock Option Plan --------------------------------------------------------------------------------------------------------
Weighted average
option price $34.11 - - 39.50 36.83 33.60
--------------------------------------------------------------------------------------------------------------------------------
BC TELECOM Number of shares 211,592 - - - 2,800 208,792
Long-Term --------------------------------------------------------------------------------------------------------
Incentive Share Weighted average
Option Plan option price $22.91 - - - 22.13 22.92
--------------------------------------------------------------------------------------------------------------------------------
TELUS Holdings Inc. Number of shares 847,158 - 103,914 316,684 7,461 419,099
Stock Option Plan --------------------------------------------------------------------------------------------------------
Weighted average
option price $32.28 - 21.23 34.77 31.96 33.14
--------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Number of shares 6,908,300 1,406,420 - 292,093 4,666 8,017,961
Amended Share --------------------------------------------------------------------------------------------------------
Option and Weighted average
Compensation Plan option price $28.96 21.67 - 29.92 34.88 27.64
--------------------------------------------------------------------------------------------------------------------------------
TELUS Employee Number of shares 5,728,800 - - 426,900 - 5,301,900
Share Option Plan --------------------------------------------------------------------------------------------------------
Weighted average
option price $29.33 - - 28.61 - 29.38
--------------------------------------------------------------------------------------------------------------------------------
Total of all Plans Number of shares 19,668,368 1,406,420 108,448 1,243,212 43,227 19,679,901
================================================================================================================================
(d) 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 285,550 (December 31, 2001 -
300,000) shares for issuance under the Plan. As at September 30, 2002, shares
earned, but not yet issued, are accrued as a component of Common Equity.
(e) Other
During 2001, the Company issued Non-Voting Shares as partial consideration for
acquisitions made during the year. Some of these Non-Voting Shares, which were
held in an escrow account, represented contingent consideration that met the
requirements for recording as capital at the time of the acquisition. The excess
of the amount of contingent consideration over the amount actually earned has
been recorded as a reduction of Non-Voting Share capital.
(f) Public issuance of Non-Voting Shares
In the third quarter of 2002, the Company sold 34,250,000 Non-Voting Shares by
way of a public offering in Canada and the United States at a price of $9.85 per
share. Proceeds of $337.4 million were reduced by costs of issue of $14.5
million, less related future income taxes of $4.9 million.
(g) Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase Plan under which
eligible shareholders may acquire Non-Voting Shares through the reinvestment of
dividends and additional optional cash payments. Excluding Non-Voting Shares
purchased by way of additional optional cash payments, at the Company's
discretion it may offer the Non-Voting Shares at up to a 5% discount from the
market price. Shares purchased through optional cash payments are subject to a
minimum investment of $100 and a maximum investment of $20,000 per calendar
year. Under this Plan, the Company has the option of offering shares from
Treasury or having the trustee acquire shares in the stock market. Prior to July
1, 2001, when the acquisition of shares from Treasury commenced, all Non-Voting
Shares were acquired on the market at normal trading prices.
17. Commitments and Contingent Liabilities
(a) CRTC Decision 2002-34 Deferral Account
On May 30, 2002, and on July 31, 2002, the CRTC issued Decision 2002 - 34 and
2002 - 43, respectively, and introduced the concept of a deferral account (see
Note 2(c)). The Company records a liability ($14.1 million as of September 30,
2002) 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.
(b) Operational Efficiency Program Initiatives
As disclosed in Note 3, the Company has announced various initiatives, currently
estimated to be $560 million, not all of which have met the criteria for
recording as at September 30, 2002.
18. Net Change in Non-Cash Working Capital
(a) Continuing Operations:
Periods ended September 30 Three months Nine months
(millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Accounts receivable $ 263.3 $ (19.5) $ 305.6 $ (35.6)
Income and other taxes receivable 3.4 52.7 (55.3) 55.7
Inventories 8.6 17.7 26.1 53.4
Prepaid expenses and other 55.9 202.8 4.3 121.8
Accounts payable and accrued liabilities 55.4 84.1 (12.5) 99.7
Advance billings and customer deposits 18.2 (10.9) 3.7 35.4
Employer contributions to employee benefit plans (11.7) (14.6) (36.2) (42.7)
Other - 10.6 - -
--------------------------------------------------------------------------------------------------------------------------------
$ 393.1 $ 322.9 $ 235.7 $ 287.7
================================================================================================================================
(b) Discontinued Operations:
Periods ended September 30 Three months Nine months
(millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Operating cash flow $ (1.9) $ 68.9 $ (1.9) $ 106.9
Accounts receivable and prepaid expenses (4.3) (278.9) (4.1) (279.0)
Accounts payable and accrued liabilities 1.6 55.1 1.6 55.1
--------------------------------------------------------------------------------------------------------------------------------
$ (4.6) $ (154.9) $ (4.4) $ (117.0)
================================================================================================================================
19. Segmented Information
Three months ended
September 30 Communications Mobility (a) Eliminations Consolidated (a)
(millions) 2002 2001 2002 2001 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
External revenue $ 1,233.8 $ 1,341.9 $ 532.5 $ 481.3 $ - $ - $ 1,766.3 $ 1,823.2
Inter-segment revenue 24.5 25.7 4.9 4.3 (29.4) (30.0) - -
--------------------------------------------------------------------------------------------------------------------------------
Total operating revenue 1,258.3 1,367.6 537.4 485.6 (29.4) (30.0) 1,766.3 1,823.2
Operations expenses 760.0 786.3 372.6 367.6 (29.4) (30.0) 1,103.2 1,123.9
--------------------------------------------------------------------------------------------------------------------------------
EBITDA (b) $ 498.3 $ 581.3 $ 164.8 $ 118.0 $ - $ - $ 663.1 $ 699.3
================================================================================================================================
Capital expenditures $ 230.2 $ 403.3 $ 92.5 $ 183.8 $ - $ - $ 322.7 $ 587.1
Purchase of spectrum - - 4.5 - - - 4.5 -
--------------------------------------------------------------------------------------------------------------------------------
CAPEX (c) $ 230.2 $ 403.3 $ 97.0 $ 183.8 $ - $ - $ 327.2 $ 587.1
================================================================================================================================
EBITDA less CAPEX $ 268.1 $ 178.0 $ 67.8 $ (65.8) $ - $ - $ 335.9 $ 112.2
================================================================================================================================
Nine months ended
September 30 Communications Mobility (a) Eliminations Consolidated (a)
(millions) 2002 2001 2002 2001 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
External revenue $ 3,745.1 $ 3,880.0 $ 1,467.2 $ 1,332.5 $ - $ - $ 5,212.3 $ 5,212.5
Inter-segment revenue 72.5 63.6 13.2 13.0 (85.7) (76.6) - -
--------------------------------------------------------------------------------------------------------------------------------
Total operating revenue 3,817.6 3,943.6 1,480.4 1,345.5 (85.7) (76.6) 5,212.3 5,212.5
Operations expenses 2,350.4 2,313.0 1,074.2 1,044.8 (85.7) (76.6) 3,338.9 3,281.2
--------------------------------------------------------------------------------------------------------------------------------
EBITDA (b) $ 1,467.2 $ 1,630.6 $ 406.2 $ 300.7 $ - $ - $ 1,873.4 $ 1,931.3
================================================================================================================================
Capital expenditures $ 947.2 $ 1,219.0 $ 330.0 $ 438.8 $ - $ - $ 1,277.2 $ 1,657.8
Purchase of spectrum - - 4.5 355.9 - - 4.5 355.9
--------------------------------------------------------------------------------------------------------------------------------
CAPEX (c) $ 947.2 $ 1,219.0 $ 334.5 $ 794.7 $ - $ - $ 1,281.7 $ 2,013.7
================================================================================================================================
EBITDA less CAPEX $ 520.0 $ 411.6 $ 71.7 $ (494.0) $ - $ - $ 591.7 $ (82.4)
================================================================================================================================
(a) External revenue for Mobility has been reclassified for 2001
(see Note 2(b)).
(b) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is
defined as operating revenues less operations expense and, as defined, excludes
restructuring and workforce reduction costs. The Company has issued guidance on,
and reports, EBITDA because it is a key measure used by management to evaluate
performance of its business segments and is utilized in measuring compliance
with debt covenants.
(c) Total capital expenditures (CAPEX) are the sum of capital expenditures and
purchases of spectrum.
20. Related Party Transactions
In 2001, the Company entered into an agreement with Verizon Communications Inc.,
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 2003. As of September 30, 2002, $281.8 million
of specified software licences and a trade mark licence have been acquired and
recorded as capital and other assets. These assets are valued at fair market
value as determined by an arm's-length party's appraisal. In addition, in the
normal course of operations and on market terms and conditions, ongoing services
and other benefits have been received and expensed. Assuming renewal through to
2008, the total commitment under the new agreement is U.S.$377 million for the
period 2001 to 2008 and the commitment remaining after September 30, 2002 is
U.S.$147 million.
Periods ended September 30 Three months Nine months
(millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Verizon agreement
Specified software licenses and trademark license
acquired and recorded as capital and other $ 28.8 $ 66.9 $ 82.5 $ 149.8
Ongoing services and benefits expensed $ 10.1 $ 16.3 $ 35.4 $ 55.3
Sales to Verizon $ 18.1 $ 32.6 $ 32.5 $ 46.7
--------------------------------------------------------------------------------------------------------------------------------
In common with, and on the same basis as, other shareholders of the Company,
Verizon is eligible to participate in the Company's Dividend Reinvestment and
Share Purchase Plan (see Note 16(g)). The following table presents a
summarization of the Company's dividend transactions with Verizon, which are
included elsewhere in these financial statements in similarly captioned line
item amounts.
Periods ended September 30 Three months Nine months
(millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Declared dividends attributable to Verizon's
shareholdings
- to be paid in cash $ 10.5 $ - $ 21.0 $ 22.1
- to be reinvested in Treasury shares 0.5 24.5 11.9 46.6
--------------------------------------------------------------------------------------------------------------------------------
11.0 24.5 32.9 68.7
--------------------------------------------------------------------------------------------------------------------------------
Cash payments 10.5 - 10.5 44.2
Reinvested in Treasury shares 0.5 22.1 22.1 22.1
--------------------------------------------------------------------------------------------------------------------------------
11.0 22.1 32.6 66.3
--------------------------------------------------------------------------------------------------------------------------------
Change in dividends payable to Verizon - 2.4 0.3 2.4
Dividends payable to Verizon, beginning of period 11.0 22.1 10.7 22.1
--------------------------------------------------------------------------------------------------------------------------------
Dividends payable to Verizon, end of period $ 11.0 $ 24.5 $ 11.0 $ 24.5
================================================================================================================================
21. Differences Between Canadian and United States Generally Accepted Accounting
Principles
The consolidated financial statements have been prepared in accordance with
Generally Accepted Accounting Principles (GAAP) in Canada. 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 except per share amounts) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) from continuing operations
in accordance with Canadian GAAP $ (105.3) $ 24.0 $ (87.9) $ (95.2)
Adjustments:
Decrease in depreciation expense (b) 9.0 9.0 26.9 26.9
Decrease in interest expense (c) 2.4 9.2 7.2 27.5
Amortization of intangible assets (d) (20.5) (29.9) (61.4) (89.7)
Goodwill amortization (e) - (5.0) - (15.1)
Asset impairment - decrease in depreciation (f) 18.0 18.0 54.1 54.1
Change in future employee benefits (g) (4.2) (4.2) (12.7) (12.7)
Amortization of additional goodwill
- Clearnet purchase (h) - (1.7) - (5.0)
Interest on convertible debentures (i) (1.8) (1.4) (5.1) (4.7)
Accounting for derivatives (j) 1.2 (1.2) 0.7 (2.2)
Taxes on the above adjustments (1.3) 2.2 (5.5) (1.8)
Revaluation of deferred income tax assets
and liabilities (k) - 403.8 - 337.5
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) from continuing operations
in accordance with U.S. GAAP (l) (102.5) 422.8 (83.7) 219.6
Discontinued operations (2.1) 556.7 (1.9) 595.4
--------------------------------------------------------------------------------------------------------------------------------
Income (loss) before effect of change
in accounting principle (104.6) 979.5 (85.6) 815.0
Effect of change in accounting principles
for intangible assets and goodwill (m) - - (1,701.6) -
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with U.S. GAAP (104.6) 979.5 (1,787.2) 815.0
Other comprehensive income (loss) (j)(o) 140.3 84.8 164.4 12.1
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) in accordance
with U.S. GAAP $ 35.7 $ 1,064.3 $ (1,622.8) $ 827.1
================================================================================================================================
Income (loss) per share under U.S. GAAP
(basic and diluted):
Continuing operations $ (0.32) $ 1.42 $ (0.28) $ 0.75
Discontinued operations (0.01) 1.87 (0.01) 2.04
--------------------------------------------------------------------------------------------------------------------------------
Before effect of change in accounting principles
for intangible assets and goodwill (0.33) 3.29 (0.29) 2.79
Effect of change in accounting principles for
intangible assets and goodwill - - (5.51) -
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.33) $ 3.29 $ (5.80) $ 2.79
================================================================================================================================
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) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Current assets $ 1,148.4 $ 1,442.6
Capital assets
Property, plant, equipment and other 7,986.2 7,716.3
Intangible assets subject to amortization 2,866.0 2,966.9
Intangible assets with indefinite lives (m) 2,948.1 5,553.3
Goodwill 3,606.5 3,739.5
Deferred income taxes 1,067.0 1,072.1
Other assets 1,099.8 798.0
--------------------------------------------------------------------------------------------------------------------------------
$ 20,722.0 $ 23,288.7
================================================================================================================================
Current liabilities $ 2,085.2 $ 1,860.1
Long-term debt 8,297.0 8,829.7
Other long-term liabilities 433.8 432.6
Deferred income taxes 1,671.2 2,614.3
Non-controlling interest 10.5 8.0
Shareholders' equity 8,224.3 9,544.0
--------------------------------------------------------------------------------------------------------------------------------
$ 20,722.0 $ 23,288.7
================================================================================================================================
The following is a reconciliation of shareholders' equity incorporating the
differences between Canadian and U.S. GAAP:
As at September 30,
(millions) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under Canadian GAAP $ 6,599.8 $ 7,009.5
Adjustments:
Purchase versus Pooling Accounting (a) - (e), (g), (m) 1,554.7 2,692.7
Asset impairment (f) (46.6) (82.2)
Additional goodwill on Clearnet purchase (h) 123.5 125.1
Reclassification of convertible debentures from equity to debt (i) (149.6) (151.8)
Accounting for derivatives (j) (2.0) (1.1)
Other comprehensive income (loss) (o) 144.5 12.1
--------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under U.S. GAAP $ 8,224.3 $ 9,604.3
================================================================================================================================
(a) Merger of BC TELECOM and TELUS
The business combination between BC TELECOM and TELUS Corporation (renamed TELUS
Holdings Inc. which was wound up June 1, 2001) was accounted for using the
pooling of interests method under Canadian GAAP. Under Canadian GAAP, the
application of the pooling of interests method of accounting for the merger of
BC TELECOM and TELUS Holdings Inc. resulted in a restatement of prior periods as
if the two companies had always been combined. Under U.S. GAAP, the merger is
accounted for using the purchase method. Use of the purchase method results in
TELUS (TELUS Holdings Inc.) being acquired by BC TELECOM for $4,662.4 million
(including merger related costs of $51.9 million) effective January 31, 1999.
(b) Depreciation
Under the purchase method, TELUS' capital assets on acquisition have been
recorded at fair value rather than at their underlying cost (book values) to
TELUS. Therefore, depreciation of such assets based on fair values at the date
of acquisition under U.S. GAAP will be different than TELUS' depreciation based
on underlying cost (book values).
(c) Interest
Under the purchase method, TELUS' long-term debt on acquisition has been
recorded at its fair value rather than at its underlying cost (book value) to
TELUS. Therefore, interest expense calculated on the debt based on fair values
at the date of acquisition under U.S. GAAP will be different than TELUS'
interest expense based on underlying cost (book value).
(d) Intangible Assets
As TELUS' intangible assets on acquisition have been recorded at their fair
value, amortization of such assets, other than for those with indefinite lives,
needs to be included under U.S. GAAP; consistent with prior years, amortization
is calculated using the straight-line method. As required (see (m) and Note
2(a)), the Company reviewed the estimated useful lives associated with its
intangible assets that are subject to amortization. Generally Accepted
Accounting Principles require that changes in estimates, such as the useful
lives of assets, be applied prospectively. The Company's review resulted in the
following changes, effected in the first quarter of 2002, to the estimated
useful lives:
Estimated useful lives
Assigned Fair Value on Acquisition Current Former
--------------------------------------------------------------------------------------------------------------------------------
Subscribers - wireline $1,950.0 million 50 years 40 years
Spectrum licences $1,833.3 million Indefinite (m) 40 years
Subscribers - wireless $ 250.0 million 7 years 10 years
--------------------------------------------------------------------------------------------------------------------------------
(e) Goodwill
Under the purchase method of accounting, TELUS' assets and liabilities at
acquisition 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 will be periodically tested for impairment (see (m)).
(f) Asset Impairment
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, the impairment amount recorded is the excess of the carrying amount over
the recoverable amount; under U.S. GAAP the impairment amount recorded is the
excess of the carrying amount over the discounted estimated future net cash
flows that were used to determine the net recoverable amount. Under U.S. GAAP
the net of tax charge taken in 1998 would be $232.2 million higher and would
not be considered an extraordinary item. The annual depreciation expense would
be approximately $72 million lower subsequent to when the increased impairment
charge was taken under U.S. GAAP.
(g) 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.
(h) 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 will be
periodically tested for impairment (see Note 2(a)).
(i) Convertible Debentures
Under Canadian GAAP, financial instruments such as the convertible debentures
are classified as debt or equity according to their substance rather than their
legal form. Accordingly, due to the substance of the transaction the convertible
debentures have been classified as equity and the corresponding interest expense
and the amortization of issue costs has been charged to the retained earnings
rather than to the Consolidated Statements of Income. Pursuant to U.S. GAAP, the
convertible debentures would be included in long-term debt. The corresponding
interest expense on the convertible debentures and the amortization of issue
costs are charged to the Consolidated Statements of Income.
(j) Accounting for Derivatives
On January 1, 2001, the Company adopted the provisions of SFAS 133, "Accounting
For Derivative Instruments and Hedging Activities." This standard requires all
derivatives be recognized as either assets or liabilities and measured at fair
value. This is different from the Canadian GAAP treatment for financial
instruments. Under U.S. GAAP, derivatives, which are fair value hedges, together
with the financial instrument being hedged, will be marked to market with
adjustments reflected in income and derivatives, which are cash flow hedges,
will be marked to market with adjustments reflected in comprehensive income. As
a result of adopting the statement, the Company recorded an expense arising from
the cumulative effect of the change in accounting principle.
(k) Revaluation of Deferred Income Tax Assets and Liabilities
Canadian GAAP requires recognition of a change in tax laws or rates when the
change is "substantively enacted." Thus, recognition may precede actual
enactment by a period of several months. U.S. GAAP (SFAS 109) requires
recognition upon actual enactment, which is the date that the tax change in
signed into law.
(l) Gain on Redemption of Long-Term Debt
During the third quarter of 2002, the Company adopted SFAS 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections", in advance of mandatory adoption in the Company's 2003
fiscal year. Statement 145 results in the gain on redemption of long-term debt,
in the Company's instance, no longer being reported as an extraordinary item and
thus results in the elimination of the differing treatment between Canadian GAAP
and U.S. GAAP. The comparative amounts have been restated, as required, in the
adoption of this Statement.
(m) Intangible Asset Transitional Impairment Amount and Goodwill
Commencing January 1, 2002, in Canada and the United States, new Generally
Accepted Accounting Principles for intangible assets with an indefinite life and
goodwill apply to the Company (SFAS 142, "Goodwill and Other Intangible
Assets")(see Note 2(a)). As one part of the transitional implementation,
intangible assets with indefinite lives were tested for impairment as at January
1, 2002. Any such transitional impairment amount arising is considered to arise
from a change in accounting policy and is charged to earnings, in the period the
change is effected, after determining net income from operations. As a result of
the differing accounting treatment afforded the merger of BC TELECOM and TELUS
(see (a) and (d)), the recorded value of intangible assets with indefinite lives
differs materially between Canadian and U.S. GAAP. The Company has assessed its
intangible assets with indefinite lives and determined it necessary to record a
transitional impairment amount of $595.2 million ($910.0 million before tax) for
purposes of Canadian GAAP; a transitional impairment of $1,701.6 million
($2,609.7 million before tax) was required under U.S. GAAP. The transitional
impairment amount, under both Canadian and U.S. GAAP, reduced the carrying
values of the intangible assets with indefinite lives to the same amounts, thus
eliminating the corresponding GAAP difference.
Similarly, goodwill is also to be tested for impairment as at January 1, 2002,
by June 30, 2002, and any transitional impairment amount would also be
considered to arise from a change in accounting policy and is charged to
earnings, in the period the change is effected, after determining net income
from operations. The Company completed this test in the first quarter of 2002.
By applying the prescribed method of comparing the fair value of its reporting
units to the carrying amounts of its reporting units, the Company has assessed
its goodwill and determined that there was no goodwill transitional impairment
amount. Consistent with current industry-specific valuation methods, the Company
used a combination of the discounted cash flow model and the market comparable
approach for determining the fair value of its reporting units.
In accordance with the new requirements, net income (loss) for prior periods
presented is to be adjusted to exclude amortization expense (including any
related tax effects) recognized in those periods related to goodwill and
intangible assets with indefinite lives; the corresponding per share amounts are
also required to be adjusted.
Periods ended September 30 Three months Nine months
(millions except per share amounts) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with U.S. GAAP
As reported $ (104.6) $ 979.5 $ (85.6) $ 815.0
Add back: Goodwill amortization - 52.9 - 149.8
Amortization of intangible assets
with indefinite lives (a) - 19.0 - 56.6
--------------------------------------------------------------------------------------------------------------------------------
As adjusted $ (104.6) $ 1,051.4 $ (85.6) $ 1,021.4
================================================================================================================================
Basic and diluted income (loss) per share
under U.S. GAAP
As reported $ (0.33) $ 3.29 $ (5.80) $ 2.79
Add back: Goodwill amortization - 0.18 - 0.51
Amortization of intangible assets
with indefinite lives (a) - 0.06 - 0.20
--------------------------------------------------------------------------------------------------------------------------------
As adjusted $ (0.33) $ 3.53 $ (5.80) $ 3.50
================================================================================================================================
(a) Net of taxes of $15.1 and $44.9 for three-month and nine-month periods ended
September 30, 2001, respectively.
(n) Share-Based Compensation
Generally Accepted Accounting Principles require disclosure of the impact on
earnings and earnings per share as if the fair value based method of accounting
had been applied for share-based compensation. Under Canadian GAAP, this is
required in respect of awards made after 2001; under U.S. GAAP, this is required
in respect of awards made after 1994. The fair values of the Company's options
granted in 2002, and the weighted average assumptions used in estimating the
fair values, are set out in Note 8. The fair value of the Company's options
granted in the three-month and nine-month periods ended September 30, 2001 were
estimated using the Black-Scholes model with weighted average assumptions of 10
year expected terms, volatility of 24% and 23%, respectively, interest rates of
5.5% and 6.2%, respectively, and an expected dividend yield of 3.3%. Such
impact, using the weighted average fair values of $7.85 and $9.69 for options
granted in the three-month and nine-month periods ended September 30, 2001 would
approximate the following pro forma amounts:
Periods ended September 30 Three months Nine months
(millions except per share amounts) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Compensation cost (recovery) $ 17.1 $ (3.0) $ 53.8 $ 26.3
Net income (loss)
As reported $ (104.6) $ 979.5 $ (85.6) $ 815.0
Pro forma $ (121.7) $ 982.5 $ (139.4) $ 788.7
Net income (loss) per Common Share
and Non-Voting Share
Basic and diluted - net income (loss)
As reported $ (0.33) $ 3.29 $ (5.80) $ 2.79
Pro forma $ (0.39) $ 3.30 $ (5.96) $ 2.70
--------------------------------------------------------------------------------------------------------------------------------
(o) Additional Disclosures Required Under U.S. GAAP - Comprehensive Income
SFAS 130, "Reporting Comprehensive Income", requires that a statement of
comprehensive income be displayed with the same prominence as other financial
statements. Comprehensive income, which incorporates net income, includes all
changes in equity during a period except those resulting from investments by and
distributions to owners. There is no requirement to disclose comprehensive
income under Canadian GAAP.
22. Prior Period Presentation
The December 31, 2001, and September 30, 2001, amounts have been reclassified,
where applicable, to conform to the 2002 presentation.
TELUS Management Discussion and Analysis
Third Quarter 2002
Forward-Looking Statements
-------------------------------------------------------------------------------
This document and the management discussion and analysis contain statements
about expected future events and financial and operating results that are
forward-looking and subject to risks and uncertainties. TELUS' actual results,
performance or achievement could differ materially from those expressed or
implied by such statements. Such statements are qualified in their entirety by
the inherent risks and uncertainties surrounding future expectations and may
not reflect the potential impact of any future acquisitions, mergers or
divestitures. Factors that could cause actual results to differ materially
include but are not limited to: general business and economic conditions in
TELUS' service territories across Canada and future demand for services;
competition in wireline and wireless services, including voice, data and
Internet services and within the Canadian telecommunications industry
generally; levels of capital expenditures; corporate restructurings; success of
operational and capital efficiency programs including maintenance of client
service levels; success of integrating acquisitions; network upgrades, billing
system conversions, and reliance on legacy systems; capital and operating
expense savings; the impact of credit rating changes; availability and cost of
capital including renewal of credit facilities; financial condition and credit
risk of customers affecting collectibility of receivables; ability to maintain
an accounts receivable securitization program; adverse regulatory action;
attraction and retention of key personnel; collective labour agreement
negotiations; future costs of retirement and pension obligations; technological
advances; the final outcome of pending or future litigation; the effect of
health and safety concerns and other risk factors described and listed from
time to time in TELUS' reports, TELUS' comprehensive public disclosure
documents, including the Annual Information Form, and in other filings with
securities commissions in Canada and the U.S.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
-------------------------------------------------------------------------------
Management Discussion and Analysis
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation (TELUS or the Company) for the
three-month and nine-month periods ended September 30, 2002 and 2001. This
discussion contains forward-looking information that is qualified by reference
to, and should be read in conjunction with, the Company's discussion regarding
forward-looking statements (see "Forward-Looking Statements" above). The
following should also be read in conjunction with the accompanying unaudited
Consolidated Financial Statements of TELUS and notes thereto. The 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 21 to the Consolidated Financial Statements for a summary
of the principal differences between Canadian and U.S. GAAP as they relate to
TELUS.
Change in External Auditor
Effective with the second quarter of 2002, as a result of the partners and
staff of the Canadian operations of Arthur Andersen LLP joining Deloitte and
Touche LLP, Deloitte and Touche LLP has been appointed as the external auditor
of TELUS.
Accounting Policy Changes
The 2002 interim financial results reflect the adoption of two recent
accounting pronouncements.
Earlier this year, the Company adopted the provisions of Financial Accounting
Standards Board (FASB) EITF 01-9 regarding the accounting for consideration
given by a vendor to a customer. The application of this standard by TELUS
results in costs specific to the Mobility and Internet operations, which were
previously recorded as operations expenses, being reclassified to offset
revenues. Comparative revenues and operations expense for the three-month and
nine-month periods ending September 30, 2001 for Mobility operations have been
reduced by $26.6 million and $85.7 million respectively, restated on a
consistent basis with 2002 results - with no change to reported 2001 EBITDA or
other key operating metrics such as marketing Cost of Acquisition (COA). See
Note 2(b) to the Consolidated Financial Statements for more information.
In addition, effective January 1, 2002, the Company has adopted the changes in
accounting policy as required by CICA Handbook Section 3062 - Goodwill and
Other Intangible Assets. As a result, the Company no longer amortizes goodwill
or indefinite life intangible assets. In the three-month and nine-month periods
ended September 30, 2001, the pre-tax amortization expense associated with
these items was $68.7 million and $196.8 million respectively.
Under Section 3062, rather than being systematically amortized, the value of
intangible assets with indefinite lives and goodwill are periodically tested
for impairment. In the first quarter, the Company assessed its intangible
assets with indefinite lives, which are its wireless spectrum licences, and
determined it necessary to record a transitional impairment amount of $595.2
million ($910 million before tax) as a charge to retained earnings. The Company
also completed its test for transitional impairment for goodwill and determined
that there was no transitional goodwill impairment amount. See Note 2(a) to the
Consolidated Financial Statements for additional details.
Regulatory Changes
Contribution Decisions
Commencing January 1, 2002, operating revenues, EBITDA, and EPS were impacted
by changes to the contribution revenues received and contribution expenses paid
as a result of the following CRTC Decision 2000-745 on Changes to the
Contribution Regime, and Decision 2001-238 on Restructured Bands. The impact of
these decisions was a decrease in consolidated EBITDA of $40.0 million and
$162.1 million for the three-month and nine-month periods ended September 30,
2002, respectively, when compared to the same periods one year earlier.
In 2001, TELUS had filed for a 'review and vary' relating to the costing
assumptions prescribed to be used in calculating portable subsidy requirements,
relating to the CRTC Decisions 2000-745 and 2001-238. Under these decisions,
the costs the Company can recover through the contribution regime were reduced.
On October 25, 2002, the CRTC released Decision 2002-67, denying TELUS' review
and vary request. However, the CRTC noted that it will consider portfolio
expenses in upcoming proceedings. Other than the impacts described in the
paragraph above, no additional financial impacts are expected. This decision
does not affect previous financial guidance by TELUS.
Price Cap Decisions
On May 30, 2002 and July 31, 2002 the Canadian Radio-television and
Telecommunications Commission (CRTC) announced its decisions on the Regulatory
Framework for the Second Price Cap Period for the Incumbent Local Exchange
Carriers (ILECs), or CRTC Decision 2002-34 and CRTC Decision 2002-43, which
established the framework for regulation of ILECs, including TELUS. These
decisions cover a four-year period beginning June 2002 (for TELUS
Communications Quebec Inc. (TCQI), a four- year period beginning August 2002).
The impact of these decisions was a decrease in consolidated EBITDA of $23.8
million and $31.3 million for the three-month and nine-month periods ended
September 30, 2002, respectively, when compared to the same periods one year
earlier.
The positive aspects of the CRTC decision were that it confirms TELUS'
preferred regulatory model of facilities based competition, did not introduce
the significantly larger discounts of up to 70% for use of incumbent facilities
sought by competitors and allows TELUS to benefit as it becomes more efficient.
On the negative side, the CRTC has extended the regulation of local prices and
service levels, reduced the ability of companies to raise prices, introduced
more complexity and caused additional negative impact to TELUS' earnings.
TELUS anticipates that the financial impact of the CRTC decisions in 2002,
updated for the current year impacts on TCQ, is a negative EBITDA impact of
approximately $58 million in 2002 and an incremental annual negative EBITDA
impact of approximately $80 million for 2003. This is in part due to the CRTC
allowing a reduction of between 15 to 20 per cent on the fees paid by
Competitive Local Exchange Carriers (CLECs) for access to the TELUS network.
Subsequent to Decision 2002-34, AT&T Canada Inc. petitioned the Federal Cabinet
to increase competitor discounts from those provided for in the Decision - this
matter is still before Cabinet. In addition, CallNet Enterprises Inc. filed for
a 'review and vary' in respect of the follow-up process as set by the CRTC in
Decision 2002-34 to examine the services that are included and qualify for
Competitor Digital Network Access (CDNA) discounts. On August 9, 2002, the CRTC
issued Public Notice 2002-4 to determine the scope of CDNA services, which
among other issues, will address CallNet's application. The proceeding under
Public Notice 2002-4 will be concluded some time in 2003.
Status of Labour Negotiations
On October 16, 2002, the Telecommunications
Workers Union (TWU) informed TELUS of their decision to halt bargaining in
order to seek a strike vote from unionized TELUS Communications Inc. employees
in British Columbia and Alberta. Although bargaining dates had been confirmed
into 2003, the union advised TELUS that it was canceling all agreed to
bargaining sessions until November 18. Given this most recent delay and the
lack of progress at the bargaining table, TELUS informed the union that it
would be applying to the Minister of Labour, as provided under the Canada
Labour Code, to seek the appointment of a federal conciliator. Conciliation is
a mandatory requirement under the Code where the parties have been unable to
successfully conclude a new collective agreement. The conciliation process can
take a number of months and while the conciliation process is underway a strike
or lock out is not allowed
Results of Operations
Highlights
Three months ended September 30 2002 2001 Change %
---------------------------------------------------------------------------------------------------------------------------------
($ in millions except per share amounts)
Operating revenues 1,766.3 1,823.2 (56.9) (3.1)
EBITDA (1) normalized for regulatory impacts (2) 726.9 699.3 27.6 3.9
EBITDA (1) 663.1 699.3 (36.2) (5.2)
Restructuring and workforce reduction costs 313.3 - 313.3 -
Discontinued operations (2.1) 556.7 (558.8) (100.4)
Net income (loss) (107.4) 580.7 (688.1) (118.5)
Common Share and Non-Voting Share income (loss) (110.0) 578.5 (688.5) (119.0)
Earnings (loss) per share (EPS) (0.35) 1.94 (2.29) (118.0)
Capital expenditures - wireless spectrum 4.5 - 4.5 -
Capital expenditures - general 322.7 587.1 (264.4) (45.0)
---------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30 2002 2001 Change %
---------------------------------------------------------------------------------------------------------------------------------
($ in millions except per share amounts)
Operating revenues 5,212.3 5,212.5 (0.2) 0.0
EBITDA (1) normalized for regulatory impacts (2) 2,066.8 1,931.3 135.5 7.0
EBITDA (1) 1,873.4 1,931.3 (57.9) (3.0)
Restructuring and workforce reduction costs 328.9 198.4 130.5 65.8
Discontinued operations (1.9) 595.4 (597.3) (100.3)
Net income (loss) (89.8) 500.2 (590.0) (118.0)
Common Share and Non-Voting Share income (loss) (97.5) 492.9 (590.4) (119.8)
Earnings (Loss) per share (0.32) 1.69 (2.01) (118.9)
Capital expenditures - wireless spectrum 4.5 355.9 (351.4) (98.7)
Capital expenditures - general 1,277.2 1,657.8 (380.6) (23.0)
---------------------------------------------------------------------------------------------------------------------------------
1 Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is
defined as Operating revenues less Operations expense and, as defined, excludes
Restructuring and workforce reduction costs.
The Company has issued guidance on and reports EBITDA because it is a key
measure used by management to evaluate performance of business units and 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 can vary significantly depending upon accounting methods or
non-operating factors such as historical cost; and without regard to
Restructuring and workforce reduction costs, which are transitional in nature.
EBITDA is not a calculation based on Canadian or U.S. Generally Accepted
Accounting Principles and should not be considered an alternative to 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 Regulatory impacts from changes to the Contribution Regime, Restructured
Bands, and Price Cap decisions.
Consolidated operating revenue and EBITDA decreased for the third quarter ended
September 30, 2002, when compared with the same period one year ago, reflecting
negative impacts of recent regulatory decisions totalling $110.6 million and
$63.8 million, respectively (year-to-date - $318.2 million and $193.4 million,
respectively). After normalizing for these impacts, TELUS operating revenues
improved by 2.9% and 6.1% for the quarter and year-to-date periods,
respectively. Similarly, normalized EBITDA improved by 3.9% and 7.0% for the
quarter and year-to-date, respectively. The Company is focused on reducing the
rate of erosion from traditional revenue streams such as long-distance, while
maximizing gains in growth areas primarily in wireless and Internet. TELUS made
significant cost structure improvements in the current quarter resulting from
continued execution of the Operational Efficiency Program (OEP) to reduce net
targeted staff count positions by approximately 6,500, primarily through
voluntary retirement and departure programs. As at September 30, 2002, over
2,700 positions have been reduced in the wireline business since the beginning
of the year, and approximately 3,500 positions reduced since the first
phase of the OEP that began in July 2001. In addition, the OEP included the
the closure of 33 TELUS stores and three customer contact centres that have
been accomplished during the quarter. Other initiatives of the program include:
the consolidation of customer contact centres; streamlining of business
processes; reduction of TELUS product portfolio and processes to support
them; optimizing the use of real estate,networks and other assets; and
operational and administrative function consolidation. The program will
continue in the fourth quarter of 2002 and is expected to be completed during
2003 to meet the Company's planned financial objectives.
Net income and earnings per share decreased in the third quarter, when compared
with the same period last year, primarily due to the following: the regulatory
decision impacts of approximately $38.6 million after-tax (12 cents per share),
recognition of approximately $207 million (66 cents loss per share) in
after-tax restructuring and workforce reduction costs in the current quarter,
recognition in 2001 of an after-tax gain on discontinued operations of $551.8
million ($1.85 per share), partly offset by after-tax gain on debt redemption
and the required cessation of amortization of goodwill and intangible assets
with indefinite lives.
The discussion below is presented on a segmented basis for external revenues
and total operations expenses. See the segmented disclosure in the TELUS
Consolidated Financial Statements, Note 19.
Operating revenues - TELUS Communications
Three months ended September 30 2002 2001 Change %
---------------------------------------------------------------------------------------------------------------------------------
($ in millions)
Voice local (net of 2002 price cap of $13.7 million) 524.4 533.6 (9.2) (1.7)
Voice contribution 24.9 110.8 (85.9) (77.5)
Voice long distance (net of 2002 price cap of $1.3 million) 252.3 284.4 (32.1) (11.3)
Data (net of 2002 price cap of $9.5 million) 332.2 287.5 44.7 15.5
Other (net of 2002 price cap $0.4 million) 100.0 125.6 (25.6) (20.4)
---------------------------------------------------------------------------------------------------------------------------------
External operating revenue 1,233.8 1,341.9 (108.1) (8.1)
Intersegment revenue 24.5 25.7 (1.2) (4.7)
---------------------------------------------------------------------------------------------------------------------------------
Total operating revenue 1,258.3 1,367.6 (109.3) (8.0)
---------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30 2002 2001 Change %
---------------------------------------------------------------------------------------------------------------------------------
($ in millions)
Voice local (net of 2002 price cap of $18.6 million) 1,580.9 1,561.3 19.6 1.3
Voice contribution 62.8 348.3 (285.5) (82.0)
Voice long distance (net of 2002 price cap of $1.5 million) 772.2 828.5 (56.3) (6.8)
Data (net of 2002 price cap of $12.2 million) 1,026.7 831.9 194.8 23.4
Other (net of 2002 price cap $0.4 million) 302.5 310.0 (7.5) (2.4)
---------------------------------------------------------------------------------------------------------------------------------
External operating revenue 3,745.1 3,880.0 (134.9) (3.5)
Intersegment revenue 72.5 63.6 8.9 14.0
---------------------------------------------------------------------------------------------------------------------------------
Total operating revenue 3,817.6 3,943.6 (126.0) (3.2)
---------------------------------------------------------------------------------------------------------------------------------
Voice local revenue is generated from monthly access charges and enhanced
services. Voice local revenue decreased by $9.2 million (1.7%) and increased by
$19.6 million (1.3%) in the three-month and nine-month periods ended September
30, 2002, respectively, when compared with the same periods one year ago. The
decrease in local access revenue in the third quarter was a result of CRTC
price cap decision impacts of $13.7 million (year-to-date $18.6 million). In
addition, year-to-date access revenues from price increases implemented in 2001
were somewhat offset by the impact of approximately 52,000 fewer access lines
than one year ago. Growth in local enhanced services revenue was $7.8 million
for the quarter and $23.3 million year-to-date.
The most significant decrease in total network access lines occurred between
December 31, 2001 and September 30, 2002 with a reduction of 47,000 lines. Over
this period, Incumbent Local Exchange Carrier (ILEC) consumer lines in Western
Canada and Quebec decreased by 29,000 due to removal of second lines as a
result of the significant increase in high-speed Internet subscribers,
competitive losses, and technological substitution including migration to
wireless services. Consumer second lines represent less than 7% of total
consumer access lines as at September 30, 2002. In the nine-month period ended
September 30, 2002, total business lines decreased by 18,000 mainly due to
technological substitution to more efficient Integrated Services Digital
Network(ISDN) services and economic factors. Central Canada Non-Incumbent
Local Exchange Carrier (Non-ILEC)business line gains exceeded ILEC business
line losses to competitors by approximately 15,000. The combined ILEC business
and consumer market share was estimated to be 97% at September 30, 2002, down
slightly from 98% one year ago and December 31, 2001.
Voice contribution revenue decreased by $85.9 million (77.5%) and $285.5
million (82.0%) for the three-month and nine-month periods ended September 30,
2002, respectively, when compared with the same periods one year ago. The
change in contribution revenue resulted principally from CRTC Decisions
2000-745 on Changes to the Contribution Regime and 2001-238 on Restructured
Bands, which reduced the revenues that TELUS received to subsidize high cost
service areas in 2002. Under these decisions, there was also a decrease in
contribution expense (or revenue tax) impacting both the Communications and
Mobility segments in 2002 (see discussion under Operations expense).
Voice long distance revenue decreased by $32.1 million (11.3%) and $56.3
million (6.8%) for the three-month and nine-month periods ended September 30,
2002, respectively, when compared with the same periods one year ago; however,
third quarter long distance revenue was relatively flat when compared with the
previous quarter. Wholesale settlement revenues decreased by $16.8 million for
the quarter and $39.1 million year-to-date, when compared with the same periods
last year, due to lower inbound minutes from domestic carriers due to migration
of competitors' minutes to their own networks, lower inbound volumes from the
U.S., as well as lower rates on international traffic. Substitution to
alternative technologies such as e-mail, Internet and wireless, and lower
business long distance rates contributed to long distance revenue erosion. In
addition, in the third quarter of 2001, there was short-term increase of
approximately $5.0 million to consumer long-distance revenues due to capping of
minutes in unlimited plans in June 2001 that was not repeated in the third
quarter of 2002 due to changes to consumer calling patterns. These declines were
partially offset by implementation of a $1.25 monthly long distance plan
administration fee and a 2-cent per minute rate increase in consumer calling
plans effective February 2002.
Data revenues include Enhanced/IP data services (services such as Internet
access, hosting and applications, LAN/WAN, gateway service, internetworking,
and remote access) and other data services (private line, switched data
services, data local access, data customer premises equipment (CPE) sales, and
managed information technology (IT) services). Total Data revenue increased by
$44.7 million (15.5%) and $194.8 million (23.4%) for the three-month and
nine-month periods ended September 30, 2002, respectively, when compared with
the same periods one year ago, despite negative price cap decision impacts of
$9.5 million in the third quarter and $12.2 million since June 2002. Data
revenue growth excluding negative price cap impacts was 18.9% and 24.9% for the
quarter and year-to-date, respectively. Data revenue growth excluding negative
price cap impacts and non-recurring managed information technology revenues was
14.1% and 20.1% for the quarter and year-to-date, respectively. Organic data
revenue growth, which excludes revenues from 2001 acquisitions as well as the
impacts of price caps and non-recurring data revenues, was 11.8% and 12.3% for
the quarter and year-to-date respectively.
Enhanced data/IP revenue increased by $41.2 million for the quarter and $115.2
million year-to-date mainly due to the year-over-year growth in consumer
high-speed Internet customer base of 133.3%, and increased internetworking and
hosting revenues. High-speed Internet net additions of 40,800 in the current
quarter increased by 35.1% as compared to 30,200 in the same period last year.
Partly offsetting high-speed Internet growth was the loss of 15,400 dial-up
subscribers this quarter as compared to an increase in dial-up subscribers of
8,300 in the same period last year.
Other data revenues increased by $3.5 million and $79.6 million for the
three-month and nine-month periods ended September 30, 2002, respectively. This
was due to growth in IT managed services (including non-recurring revenue of
$13.7 million for the quarter and $39.4 million year-to-date), and increased
volumes for digital private line and packet switched services. Negatively
impacting other data revenues were lower data settlements revenue from
competitors, and lower data CPE revenues attributed to reduced business
spending.
Other revenue decreased by $25.6 million (20.4%) and $7.5 million (2.4%) for
the three-month and nine-month periods ended September 30, 2002, respectively
when compared with the same periods in 2001. The decrease was due to lower
voice CPE sales volumes as a result of reduced demand and increased focus on
higher margin product portfolios, as well as a greater emphasis on data CPE
sales as opposed to voice CPE sales. The year-to-date decrease in revenues was
reduced by the inclusion of five additional months of revenue from Williams
Communications, which TELUS purchased on June 1, 2001.
Included in the total revenues discussed above, Non-ILEC revenues were $135.9
million and $375.0 million for the three-month and nine-month periods ended
September 30, 2002, respectively - increases of $31.3 million and $172.7
million, respectively, from the same periods last year. Minor adjustments have
been made to prior period Non-ILEC revenues and operations expense to reflect
current customer account classification.
Intersegment revenues represent services provided by the Communications segment
to the Mobility segment and are eliminated upon consolidation along with the
associated expense from TELUS Mobility.
Key operating indicators - TELUS Communications
Three months ended September 30 2002 2001 Change %
---------------------------------------------------------------------------------------------------------------------------------
(000s for subscribers and additions)
Network access lines, end of period 4,921 4,973 (52) (1.0)
Total Internet subscribers, end of period 783.0 605.9 177.1 29.2
Dial-up 416.2 448.7 (32.5) (7.2)
High-speed 366.8 157.2 209.6 133.3
Total Internet subscriber net additions 25.4 38.5 (13.1) (34.0)
Dial-up (15.4) 8.3 (23.7) (285.5)
High-speed 40.8 30.2 10.6 35.1
---------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30 2002 2001 Change %
---------------------------------------------------------------------------------------------------------------------------------
(000s for subscribers and additions)
Total Internet subscriber net additions 113.1 109.0 4.1 3.8
Dial-up (38.9) 35.4 (74.3) (209.9)
High-speed 152.0 73.6 78.4 106.5
---------------------------------------------------------------------------------------------------------------------------------
Operating revenues - TELUS Mobility
Three months ended September 30 2002 2001 Change %
---------------------------------------------------------------------------------------------------------------------------------
($ in millions)
Network revenue 493.9 439.3 54.6 12.4
Equipment revenue 38.6 42.0 (3.4) (8.1)
---------------------------------------------------------------------------------------------------------------------------------
External operating revenue 532.5 481.3 51.2 10.6
Intersegment revenue 4.9 4.3 0.6 14.0
----------------------------------------------------------------------------------------------------------------------------------
Total operating revenue 537.4 485.6 51.8 10.7
---------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30 2002 2001 Change %
---------------------------------------------------------------------------------------------------------------------------------
(in millions)
Network revenue 1,362.2 1,221.5 140.7 11.5
Equipment revenue 105.0 111.0 (6.0) (5.4)
---------------------------------------------------------------------------------------------------------------------------------
External operating revenue 1,467.2 1,332.5 134.7 10.1
Intersegment revenue 13.2 13.0 0.2 1.5
---------------------------------------------------------------------------------------------------------------------------------
Total operating revenue 1,480.4 1,345.5 134.9 10.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Mobility Network revenue is generated from monthly billings for access
fees, incremental airtime charges, prepaid time consumed or expired and fees
for value-added services. Network revenue increased substantially (12.4% and
11.5%) for the three-month and nine-month periods ended September 30, 2002,
respectively, as compared to the same periods last year. The Network revenue
growth is a result of the continued expansion of TELUS Mobility's subscriber
base by 18.5% to 2.9 million subscribers from 2.4 million one year ago while
maintaining a high average revenue per subscriber unit per month (ARPU).
TELUS Mobility continues to pursue a strategy focused on profitable revenue
growth and subscriber retention, resulting in industry leading ARPU and a
substantially improved churn year-over-year. ARPU was $58 and $55 for the third
quarter and year-to-date 2002, respectively. ARPU was $60 and $58 in the
comparable periods one year ago. ARPU for the third quarter 2002 increased $3
(5.5%) over the previous quarter. Average minutes of use (MOU) per subscriber
per month were 297 and 286 for the current quarter and year-to-date,
respectively, as compared to 272 and 268 for the same periods of the prior
year. Despite the increased subscriber usage, ARPU declined year-over-year,
which is primarily attributable to greater in-bucket usage, to the postpaid /
prepaid subscriber mix consistent with trends in the wireless market and to
retention offers. In-bucket usage refers to plans that offer free minutes (at a
fixed fee) for periods of time including Free Evening and Weekend plans and
after school calling. As of September 30, 2002, postpaid subscribers accounted
for an industry leading 84.1% of the total cumulative subscriber base as
compared to 86.6% one-year earlier. Net subscriber additions increased to
93,700 and 286,800 for the current quarter and year-to-date, respectively from
78,200 and 257,100 for the comparable periods one year ago representing a 19.8%
and 11.6% increase, respectively. This increase was achieved while decreasing
the cost of acquisition excluding retention costs by $58 per unit (12.9%) and
$40 per unit (9.0%) for the third quarter and year-to-date 2002, respectively.
Net postpaid subscriber additions for the current quarter of 67,300 represented
71.8% of all net additions in the period or a 20,600 (44.1%) increase over the
46,700 postpaid additions (59.7%) for the corresponding period one year ago.
Similarly, year-to-date net postpaid additions of 219,900 represented 76.7% of
all net additions as compared to 126,000 or 49.0% in the same period one-year
earlier.
Blended postpaid and prepaid churn averaged 1.7% per month in the third quarter
of 2002, a significant improvement from 2.2% for the comparable period one year
earlier and 2.0% from the second quarter of 2002. Year-to-date 2002 churn was
1.8% representing a significant improvement from 2.0% for the same period last
year. Deactivations declined to 142,900 (7.6%) for the third quarter 2002 as
compared to 154,700 for the same period last year despite an 18.5% increase in
the subscriber base. The improved churn and industry leading ARPU are evidence
of the continued focus and execution of TELUS Mobility on subscriber retention
and profitable revenue generating subscriber growth. The decrease in churn is
attributed to improved network quality and coverage, improved client service
levels and client contracting as part of loyalty and retention programs.
Equipment sales, rental and service revenue in the three-month and nine-month
periods ended September 30, 2002, was $38.6 million and $105.0 million,
respectively, as compared to $42.0 million and $111.0 million for the same
periods one year earlier. The reduction in equipment revenue occurred despite
an increase in gross subscriber additions for the three-month and nine-month
periods, which were 236,600 and 738,500, respectively, as compared to 232,900
and 674,800 for the same periods one year ago. This is due to lower handset
pricing primarily associated with competitive offers and retention efforts, as
they relate to incenting customers to sign multiple-year contracts and to renew
contracts during the year.
Intersegment revenues represent services provided by the Mobility segment to
the Communications segment and are eliminated upon consolidation along with the
associated expense in TELUS Communications.
Key operating indicators - TELUS Mobility
Three months ended September 30 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
(000s for subscribers and additions)
Net subscriber additions - postpaid 67.3 46.7 20.6 44.1
Net subscriber additions - prepaid 26.4 31.5 (5.1) (16.2)
--------------------------------------------------------------------------------------------------------------------------------
Net subscriber additions - total 93.7 78.2 15.5 19.8
Subscribers, end of period 2,864.5 2,417.3 447.2 18.5
Churn, per month (%) 1.7 2.2 (0.5) (22.7)
Cost of Acquisition (COA) per gross subscriber addition ($) 467 482 (15) (3.1)
Cost of Acquisition (COA) per gross subscriber addition excl.
retention and migration ($) 391 449 (58) (12.9)
ARPU ($) 58 60 (2) (3.3)
Total POPs covered (millions) 25.3 24.3 1.0 4.1
Digital POPs covered (millions) 25.0 23.9 1.1 4.6
Digital POPs covered incl. roaming/resale (1) 26.6 - - -
EBITDA ($ millions) 164.8 118.0 46.8 39.7
EBITDA excluding COA ($ millions) 274.7 228.9 45.8 20.0
--------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
(000s for subscribers and additions)
Net subscriber additions - postpaid 219.9 126.0 93.9 74.5
Net subscriber additions - prepaid 66.9 131.1 (64.2) (49.0)
--------------------------------------------------------------------------------------------------------------------------------
Net subscriber additions - total 286.8 257.1 29.7 11.6
Churn, per month (%) 1.8 2.0 (0.2) (10.0)
Cost of Acquisition (COA) per gross subscriber addition ($)(2) 479 499 (20) (4.0)
Cost of Acquisition (COA) per gross subscriber addition excl.
retention and migration ($)(2) 405 445 (40) (9.0)
ARPU ($) 55 58 (3) (5.2)
EBITDA ($ millions) 406.2 300.7 105.5 35.1
EBITDA excluding COA ($ millions) 737.5 623.3 114.2 18.3
--------------------------------------------------------------------------------------------------------------------------------
(1) TELUS Mobility has not turned on all digital roaming areas. Once fully activated, total digital pops coverage is estimated to
be more than 27 million.
(2) For the year-to-date ended September 30, 2002, Cost of Acquisition of $479and $405 before retention and migration costs
excluded the $21.0 millionfavourable clarification of tax legislation by the Ontario Provincial Sales Taxauthorities,
representing a reversal of a cumulative COA liability. When including the $21.0 million reduction, COA for the year-to-date
ended September30, 2002 would be $451 and $377 excluding retention and migration.
Operations expense - TELUS Communications
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 760.0 786.3 (26.3) (3.3)
Nine months ended September 30 2,350.4 2,313.0 37.4 1.6
--------------------------------------------------------------------------------------------------------------------------------
TELUS Communications operations expenses decreased by $26.3 million (3.3%) for
the three-month period ended September 30, 2002, and increased by $37.4 million
(1.6%) for the nine-month period ended September 30, 2002, when compared with
the same periods last year. Operations expense for the quarter decreased due to
the reduction in contribution expense and OEP cost reductions including lower
salaries and benefits from approximately 1,700 net staff reductions since
June 30, 2002 partly offset by increased expenses due to Non-ILEC expansion.
Operations expense for the nine-month period in 2002 includes a $40.0 million
favourable impact from a settlement with Canada Customs and Revenue Agency
(CCRA) for investment tax credits. The investment tax credits were recorded as
a reduction of operations expense as this is where the qualifying
expenses were recorded originally. Excluding the investment tax credits,
operations expense increased by $77.4 million for the nine-month period ended
September 30, 2002. These increases were mainly due to Non-ILEC expansion
and 2001 acquisitions that were partly offset by reduced contribution
expenses and OEP cost reductions.
Non-ILEC expenses increased by $16.7 million and $153.7 million,
respectively, for the three-month and nine-month periods ended September 30,
2002. The increase in the current quarter was primarily due to increased
facility costs associated with network expansion and increased cost of sales
associated with revenue growth. For the nine-month period, the increase was
mainly due to additional costs from companies acquired from June to October
2001, as well as increased facility costs and cost of sales associated with
revenue growth.
ILEC operations expense decreased by $43.0 million and $116.3 million,
respectively, for the three-month and nine-month periods ended September 30,
2002, when compared with the same periods last year. The most significant
change was a decrease in contribution expense of $29.8 million and $95.5
million for the quarter and nine-month periods, respectively, resulting from the
reduction in contribution rates from 4.5% of eligible revenues to an interim
rate of 1.4% of eligible revenues, as determined in CRTC Decision 2001-238.
Combined wholesale settlement, facilities and clearinghouse expenses decreased
by $3.6 million for the quarter and $5.6 million year-to-date, while
payments under the Software and Related Technology and Services Agreement with
Verizon decreased by $5.2 million and $18.9 million, respectively, for the
quarter and year-to-date. CPE cost of sales decreased by $15.3 million for the
quarter and $17.4 million year-to-date due to lower CPE sales. For the
nine-month period, expenses also decreased due to receipt of a $40.0 million
investment tax credit in June 2002. Other net productivity improvements
exceeded all other inflationary increases by $14.6 million for the quarter
and $24.2 million year-to-date, primarily as a result of the OEP.
The above decreases in ILEC operations expense were partially offset by
expenses related to non-recurring data managed service revenues ($10.9 million
for the quarter and $34.0 million year-to-date), and higher pension costs ($9.6
million for the quarter and $22.4 million year-to-date). Bad debt expense
increased by $1.4 million in the quarter, and was up $7.0 million for the
nine-month period. Expenses increased by $5.2 million in the quarter and
decreased by $5.8 million year-to-date due to changes in capitalized labour
when compared with the same periods last year. The current quarter capitalized
labour decreased along with the reduced overall capital expenditure program. In
addition, for the nine-month period, cost of sales for consumer Internet
increased by $12.3 million due to the growth in high speed Internet customers,
while building lease payments increased by $7.4 million due to the sale and
leaseback of administrative buildings early in 2001. In addition, a one-time
$8.0 million property tax recovery was recorded in the first quarter of 2001,
for which there is no equivalent recovery in the current year.
In regard to the pension expense, management's projection at this time is that
the 2003 expense could increase by approximately $80.0 million over that
recorded for the full year 2002. The pension expense change in 2003 would not
result in a correponding change in the required defined pension plan funding
in 2003. The projected increase in the 2003 pension expense is non-cash in
nature and is related to amortization of actuarial losses and a lower return on
assets for defined benefits pension plan.
Operations expense - TELUS Mobility
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 372.6 367.6 5.0 1.4
Nine months ended September 30 1,074.2 1,044.8 29.4 2.8
--------------------------------------------------------------------------------------------------------------------------------
TELUS Mobility operations expenses increased by $5.0 million (1.4%) and $29.4
million (2.8%) for the three-month period and nine-month periods ended
September 30, 2002, respectively, when compared to the same periods one year
ago. Year-to-date expenses included a $21.0 million reduction resulting from a
clarification of provincial sales tax legislation related to handset subsidies,
which represented the reversal of a cumulative liability previously recorded in
marketing cost of acquisition (COA). Normalized for this reduction in expenses,
year-to-date operating expenses increased by $50.4 million (4.8%). The increase
was principally due to general and administrative costs (G&A) for client care
to support higher subscriber levels and to a lesser extent, COA attributable to
higher postpaid gross activations. The increase in G&A expenses is variable
with increased subscribers. However, significant productivity improvement is
evident when G&A growth is compared with network revenue growth of 12.4% and
11.5% for the current quarter and year-to-date, respectively, and with
subscriber growth of 18.5% year-over-year.
Expenses related to equipment sales decreased $7.6 million (8.2%) in the third
quarter and decreased $19.1 million (7.1%) year-to-date 2002 as compared to the
respective periods one-year earlier. The current quarter decrease occurred
despite an increase of 3,700 gross subscriber activations as compared to the
same period in the prior year. Favourable exchange rates and improved vendor
pricing year-over-year are the primary reasons for the improvement. The
majority of the year-to-date decrease was related to the $21.0 million
favourable clarification of provincial tax legislation. Once normalized, year-
to-date equipment costs increased by $1.9 million (0.7%). These costs are
included in COA.
Network operating expenses improved $7.7 million (7.3%) to $97.9 million in the
third quarter of 2002, as compared to $105.6 million for the same period one
year ago. Year-to-date expenses improved $13.3 million (4.6%) to $274.6 million
as compared to $287.9 million for the corresponding period last year. Network
service expenses consist of site-related expenses, transmission costs, spectrum
licence fees, contribution revenue taxes, and other direct costs related to
network operations. These costs improved as a result of reduced contribution
charges period over period. Contribution charges in the current quarter and
year-to-date were $5.4 million and $14.7 million respectively as compared to
$21.6 million and $42.8 million for the same periods one-year earlier. When
normalized for reduced contribution revenue taxes in 2002, the increase in
network operating expenses were $8.5 million (10.1%) and $14.8 million (6.0%)
in the current quarter and year-to-date, respectively, as compared to the same
periods of last year. The increases were attributed to transmission and
site-related expenses including roaming costs in support of the increased
subscriber base and the growth in the number of cell sites in service from the
continued enhancement of TELUS Mobility's digital networks. PCS digital
population coverage increased from 20.8 million before the roaming/resale
agreements to 26.6 million including roaming/resale areas turned on at the end
of the third quarter. PCS digital population coverage increased 5.8 million
(including 1.1 million turned on in Aliant territory during the third quarter)
from 20.8 million before the roaming/resale agreements to 26.6 million
including roaming/resale areas turned on at the end of the third quarter. Total
digital population coverage (Mike(tm) and PCS) as of September 30, 2002, was
25.0 million (26.6 million including all current digital roaming service areas)
as compared to 23.9 million one year ago.
Marketing expenses excluding handset subsidies were $56.7 million and $164.2
million for the third quarter and year-to-date 2002, respectively, as compared
to $53.9 million and $147.9 million for the same periods in 2001. The increases
were primarily due to dealer compensation as a result of higher postpaid gross
subscriber additions. COA was $467 and $479 for the current quarter and year-to
-date (and excluding any benefit from the $21.0 million PST ruling) respectively
as compared to $482 and $499 for the same periods last year. The improvement in
COA is from lower handset subsidies and advertising efficiencies on a per gross
addition basis net of an increased investment in retention programs. Excluding
retention and migration costs, COA was $391 and $449 for the third quarter of
2002 and 2001, respectively, and $405 and $445 for year-to-date 2002 and 2001,
respectively. Increased retention spending is consistent with TELUS Mobility's
focus on reducing churn by offering incentives to the existing subscriber base.
G&A expenses increased 15.2% to $132.5 million and 13.4% to $384.5 million for
the third quarter and year-to-date 2002, respectively, compared to spending of
$115.0 million and $339.0 million for the same periods last year. G&A expenses
consisted of employee compensation and benefits, facilities, client services,
bad debt and various other expenses. The increases were principally related to
an increase in staffing levels in the areas of client care, Company-owned
retail stores and expansion into new coverage territory, to support subscriber
growth and improve service levels. Employee costs increased due to an increase
in headcount to 5,397 total headcount from 4,985 at September 30, 2001. Client
service expenses increased principally due to increases in bad debts and
subscriber related expenses, such as billing and postage charges. Bad debts
increased $10.3 million and $16.9 million for the three and nine-month periods
ended September 30, 2002 as compared the same period one year earlier. TELUS
Mobility has successfully completed all of its major billing system conversions
(five in the past 15 months) with the completion of the Mike subscriber
conversion in early October 2002. The billing systems integration over the last
fifteen-month period contributed to an increase in bad debts. All bad debts,
including nominal data clean-up costs, have been included in G&A expenses.
TELUS Mobility expects bad debt related expenses to decline to more historical
levels in the last quarter of this year and in 2003.
Earnings (1) Before Interest, Taxes, Depreciation and Amortization (EBITDA)
by segment
Three months ended September 30 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
($ in millions)
TELUS Communications 498.3 581.3 (83.0) (14.3)
TELUS Mobility 164.8 118.0 46.8 39.7
--------------------------------------------------------------------------------------------------------------------------------
TELUS Consolidated 663.1 699.3 (36.2) (5.2)
Nine months ended September 30 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
($ in millions)
TELUS Communications 1,467.2 1,630.6 (163.4) (10.0)
TELUS Mobility 406.2 300.7 105.5 35.1
--------------------------------------------------------------------------------------------------------------------------------
TELUS Consolidated 1,873.4 1,931.3 (57.9) (3.0)
--------------------------------------------------------------------------------------------------------------------------------
(1) Excluding Restructuring and workforce reduction costs.
EBITDA margin (2) by segment (%)
Three months ended September 30 2002 2001 Change
--------------------------------------------------------------------------------------------------------------------------------
TELUS Communications 39.6 42.5 (2.9) -
TELUS Mobility 30.7 24.3 6.4 -
TELUS Consolidated 37.5 38.4 (0.9) -
--------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30 2002 2001 Change
--------------------------------------------------------------------------------------------------------------------------------
TELUS Communications 38.4 41.3 (2.9) -
TELUS Mobility 27.4 22.3 5.1 -
TELUS Consolidated 35.9 37.1 (1.2) -
--------------------------------------------------------------------------------------------------------------------------------
(2) EBITDA divided by total revenue.
TELUS Communications EBITDA decreased $83.0 million and $163.4 million for the
three-month and nine-month periods ended September 30, 2002 primarily due to
the negative impacts of the changes in contribution rates and the recent price
cap decision. Normalized for these negative regulatory impacts, TELUS
Communications EBITDA would have declined marginally by $3.0 million and
increased by $58.1 million for the three-month and nine-month periods ended,
respectively. The normalized decrease in the quarter was due to the positive
impacts of the Operational Efficiency Program being more than offset by
decreases in revenue, primarily in voice long distance. The normalized year-to
-date improvement is attributable to the $40 million investment tax credits,
operational efficiency savings, and increased data revenue offset by decreases
in other areas such as long distance. Non-ILEC negative EBITDA of $23.3 million
and $89.6 million for the three-month and nine-month periods ended September
30, 2002, respectively, showed modest improvement from the negative $37.9
million and $108.6 million reported for the same periods last year due to
higher margin revenue growth, cost efficiencies, and improved economies of
scale.
TELUS Mobility continued to successfully execute its national strategy focused
on profitable revenue growth. TELUS Mobility EBITDA for the third quarter
improved by $46.8 million (39.7%) as compared to the same period one-year
earlier principally due to a 12.4% increase in network revenue and from an
18.5% increase in the cumulative subscriber base. When compared to 2001, the
year-to-date 2002 EBITDA growth is significant considering the large increase
in COA spending associated with the increase in subscriber loading. Incremental
network revenue flowed through to EBITDA excluding COA at a rate of 83.9% in
the third quarter of 2002 as compared to 57.2% in the same period in 2001. The
year-to-date 2002 EBITDA increased by $105.5 million (35.1%) when compared to
the corresponding period in 2001. Before the $21.0 million favourable PST
clarification, year-to-date 2002 EBITDA improved by $84.5 million (28.1%) to
$385.2 million from $300.7 million in the same period in 2001. Year-to-date
EBITDA margin as a percentage of network revenue (before the PST clarification)
improved to 28.3% in 2002 as compared to 24.6% one-year earlier. Year-to-date
EBITDA margin excluding COA as a percentage of network revenue (before the PST
clarification) improved to 54.1% in 2002 as compared to 51.0% one-year earlier.
The improvements in both EBITDA and EBITDA-COA are not only attributable to
strong subscriber and revenue growth but to the economies of scale recognized
through improved efficiencies resulting from the successful integration of
mobility operations and investments in information systems and technology.
Depreciation and amortization
Three months ended September 30 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
($ in millions)
Depreciation 307.3 282.9 24.4 8.6
Amortization of intangible assets 93.5 92.6 0.9 1.0
--------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
($ in millions)
Depreciation 898.5 850.2 48.3 5.7
Amortization of intangible assets 261.9 249.6 12.3 4.9
--------------------------------------------------------------------------------------------------------------------------------
Depreciation increased by $24.4 million and $48.3 million, respectively, for
the three-month and nine-month periods ended September 30, 2002, when compared
to the same periods one year earlier. For the current quarter, an increase in
depreciation expense of $22.6 million due to growth in wireless and data
network capital assets and a $9.1 million increase related to the acquisition
of PSINet were partially offset by $7.3 million lower depreciation on network
assets due to service life increases implemented in late 2001 as a result of
TELUS' ongoing depreciation studies. Similarly, for the nine-month period, an
increase in depreciation expense of $44.6 million due to growth in wireless and
data network capital assets and a $25.5 million increase related to the
acquisition of PSINet was partially offset by $21.8 million lower depreciation
on network assets due to service life increases.
Amortization increased by $0.9 million and $12.3 million, respectively, for the
three-month and nine-month periods ended September 30, 2002, when compared to
the same periods last year. Amortization in respect of administrative software
assets and subscribers increased by $23.4 million and $79.4 million for the
three-month and nine-month periods ended September 30, 2002. In the comparative
2001 periods, the Company recorded amortization of $22.5 million and $67.1
million respectively for intangible assets with indefinite lives. Commencing
January 1, 2002, the Company no longer amortizes intangible assets with
indefinite lives as a result of the required adoption of CICA policy discussed
in Note 2(a) to the Consolidated Financial Statements.
Restructuring and workforce reduction costs
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 313.3 - 313.3 -
Nine months ended September 30 328.9 198.4 130.5 65.8
--------------------------------------------------------------------------------------------------------------------------------
In 2001, the Company initiated a phased Operational Efficiency Program (OEP)
aimed at improving the Company's operating and capital productivity and
competitiveness. The first phase of the OEP was to complete merger-related
restructuring activities in TELUS Mobility and the reorganization for TELUS
Communications. In the first quarter of 2001, a restructuring charge of $198.4
million was recorded. Approximately one-half of the 2001 charge was related to
integration costs for TELUS Mobility including the write-down of redundant
capital assets, handset reconfiguration costs and employee severance costs. The
remaining charge was related to reorganization costs in TELUS Communications,
including employee severance costs and capital asset impairment charges. In the
first quarter of 2002 the Company recorded a $12.5 million expense in respect
of restructuring and workforce reduction costs incurred in excess of the 2001
provision. By December 31, 2001, excluding the impacts of staff increases
associated with acquisitions, there were approximately 800 net staff reductions
as a result of the OEP.
The second phase of the OEP which commenced at the beginning of 2002, continued
to focus on reducing staff, but also entailed a comprehensive review of
enterprise-wide processes to identify capital and operational efficiency
opportunities. Consequently, on June 7, 2002, the Company initiated a program
offering an Early Retirement Incentive Plan (ERIP) and Voluntary Departure
Incentive Plan (VDIP) to 11,000 of over 16,000 bargaining unit employees and
on July 11, 2002, the Company announced details on OEP initiatives including:
streamlining of business processes; reducing the TELUS product portfolio and
processes that support them; optimizing the use of real estate, networks and
other assets; improving customer order management; reducing the scope of
corporate support functions; consolidating operational and administrative
functions; and consolidating customer contact centres, currently from 66 offices
in 20 communities to 19 offices in six communities. Three of the 47 customer
contact centres targeted for consolidation have been consolidated by September
30, 2002. All 33 of the TELUS stores targeted for closure have been closed by
September 30, 2002. Consolidation of administrative offices is expected to be
largely completed by December 31, 2002, with other changes implemented
throughout 2003.
The third phase of the OEP commenced in the third quarter of 2002 and was
focused on operationalizing the above noted initiatives. In total for the
second and third phases of the OEP, TELUS is expecting a further net reduction
of approximately 6,500 positions involving approximately 5,200 bargaining
unit and 1,300 management positions in 2002 and 2003. These reductions are
somewhat higher than the 6,000 net positions originally announced due to higher
than anticipated enrollment to the ERIP and VDIP program and higher management
departures. In the third quarter, TELUS reduced its staff count by
approximately 1,700 positions and 2,700 on a year-to-date basis. Since the
inception of the OEP in 2001, the Company has reduced its staff count by
approximately 3,500, comprised of 2,200 bargaining unit positions and 1,300
management positions. See Note 3 to the Consolidated Financial Statements.
The expense and liability for the ERIP and VDIP programs are recognized when
the employee accepts the Company's formalized offer. The Company recorded
incentive package costs of $3.1 million in the second quarter of 2002 for
employees who departed during the second quarter of 2002. During the third
quarter of 2002, the Company recorded $313.3 million of restructuring and
workforce reduction costs, representing approximately 3,500 management and
bargaining unit ERIP and VDIP employee acceptances and planned involuntary
terminations (of which approximately 1,700 had left the Company as of September
30, 2002), qualifying lease termination and other costs. Additional
restructuring and workforce reduction costs are expected to be incurred
subsequent to September 30, 2002, but did not qualify for accrual at the
current balance sheet date. The total cost (inclusive of the items already
recorded) of all the phase two initiatives, including management, ERIP, VDIP
and other operational efficiency pursuits, is currently estimated to be $560
million.
The anticipated EBITDA impact for 2002 is approximately $55 million in expense
savings, of which approximately $15 million was realized in the third quarter.
The currently expected annual savings for 2003 are expected to be approximately
$350 million. Thereafter, annual recurring savings are
currently estimated to be approximately $540 million.
Other income (expense)
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 (5.6) 0.6 (6.2) -
Nine months ended September 30 (16.5) 19.6 (36.1) -
--------------------------------------------------------------------------------------------------------------------------------
Other income (expense) includes gains and losses on disposal of property,
charitable donations, and accounts receivable securitization expense. For the
three-month and nine-month periods ending September 30, 2002, accounts
receivable securitization expense increased by $2.3 million and $0.2 million,
respectively, when compared with the same periods in 2001. This increase
resulted from expansion of the program at the end of July 2002 - see Note 2(e)
and Note 9 to the Consolidated Financial Statements for further discussion.
Other expenses for the three-month and nine-month periods ended September 30,
2002 also increased due to losses in portfolio investments recorded in 2002,
while other income for the nine-month period ended September 30, 2001 included
a $24.5 million gain from the sale of a fibre asset.
Financing costs
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 98.6 175.2 (76.6) (43.7)
Nine months ended September 30 454.0 444.1 9.9 2.2
--------------------------------------------------------------------------------------------------------------------------------
Financing costs for the three-month period and nine-month periods ended
September 30, 2002, respectively, includes an $82.4 million pre-tax gain on
debt redemption. The gain arose from the repurchase of approximately $402
million principal amount of notes and debentures of TELUS Corporation and TELUS
Communications Inc. for a cash outlay of approximately $310 million including
commissions and net of cross currency swap unwind proceeds. Please refer to the
discussion under Cash Provided by Financing Activities in the following pages
for further details. Gains on redemption of debt of $7.0 million and $65.9
million, respectively, were also recorded in the comparable periods in 2001.
Excluding the gains on debt repurchase and redemption described above,
financing costs for the three-month period ended September 30, 2002 decreased
by $1.2 million when compared to the same period one year ago. See Note 4 to
the Consolidated Financial Statements. The average debt outstanding during the
three-month period ended September 30, 2002 was $9,019 million compared to
$8,999 million in 2001. The effective interest rate on the average debt
outstanding was 7.8% for the three-month period ended September 30, 2002 (2001
- 7.9%), while the average term to maturity has decreased to 6.6 years as at
September 30, 2002 (2001 - 7.6 years).
Excluding gains on debt repurchase and redemption, financing costs for the
nine-month period ended September 30, 2002 increased by $26.4 million when
compared to the same period one year ago. Interest on long-term and short-term
debt increased by $14.7 million to $543.1 million for the nine-month period
ended September 30, 2002 from $528.4 million in the comparative period in 2001,
while interest income decreased by $8.8 million. The average debt outstanding
during the nine-month period in 2002 was $8,957 million compared to $8,990
million in same period in 2001. Due to recent financing activities, the
short-term obligation and long-term debt balance as at September 30, 2002 was
$8,344 million compared with $8,474 million one year earlier and $8,881 million
at December 31, 2001. The effective interest rate on the average debt
outstanding was 7.9% for the nine-month period in 2002 (2001 - 7.7%).
Refinancing charge from debt restructuring
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 - - - -
Nine months ended September 30 - 96.5 (96.5) (100.0)
--------------------------------------------------------------------------------------------------------------------------------
As a result of negotiating new senior credit facilities in 2001, a non-cash
refinancing charge of $96.5 million was recorded in 2001 to expense fees
related to interim bridge financing for the acquisition of Clearnet, which were
paid and deferred in 2000.
Income taxes
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 (50.5) 79.0 (129.5) (163.9)
Nine months ended September 30 (0.9) 74.0 (74.9) (101.2)
--------------------------------------------------------------------------------------------------------------------------------
The recovery of income taxes for the three-month and nine-months periods ended
September 30, 2002, when compared with the same periods one year ago, was
primarily due to the losses before taxes partly offset by an increase in Large
Corporations Tax (LCT). The increase in LCT was a result of corporate
reorganizations in 2001 that allowed TELUS to offset taxable income in one
subsidiary with losses available in other subsidiaries. Accordingly, there was
no surtax credit available to reduce LCT. The 1% effective tax rate for the
nine-months ended September 30, 2002 is disproportionately low as the income
tax recovery is reduced by LCT, and is impacted by the timing of deductibility
of the restructuring and workforce reduction costs in future years with lower
enacted tax rates. The 66% effective tax rate for the nine-months ended
September 30, 2001 was disproportionately high because of adjustments to future
income tax assets and liabilities resulting from prospective changes in income
tax rates, as well as LCT. See Note 5 to the Consolidated Financial Statements.
Non-controlling interest
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 0.6 - 0.6 -
Nine months ended September 30 2.4 3.6 (1.2) (33.3)
--------------------------------------------------------------------------------------------------------------------------------
Non-controlling interest for the three-month and nine-month periods ended
September 30, 2002 primarily represents a partner's interest in TELUS
International Inc. The decrease in non-controlling interest for the nine-month
period ended September 30, 2002, when compared to the same period last year,
was mainly due to TELUS' purchase of the remaining 30% of TELUS Quebec from
Verizon on June 30, 2001.
Goodwill amortization
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 - 46.2 (46.2) (100.0)
Nine months ended September 30 - 129.7 (129.7) (100.0)
--------------------------------------------------------------------------------------------------------------------------------
Commencing January 1, 2002, the Company no longer amortizes goodwill. This is
the result of the required adoption of new accounting rules in CICA Handbook
Section 3062 as discussed in Note 2(a) to the Consolidated Financial
Statements.
Discontinued operations
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 (2.1) 556.7 (558.8) (100.4)
Nine months ended September 30 (1.9) 595.4 (597.3) (100.3)
--------------------------------------------------------------------------------------------------------------------------------
By the end of August, 2002, TELUS completed the sale of its remaining directory
operations in the U.S. Discontinued operations for the three-month and
nine-month periods ended September 30, 2001, represented combined income from
directory advertising and equipment leasing businesses prior to their effective
divestiture dates and the respective gains recognized upon divestiture. The
sale of TELUS Advertising Service's British Columbia, Alberta and Ontario
directory business and TELUS Quebec's directory business to Verizon's Dominion
Information Services closed on July 31, 2001. TELUS exited the equipment
leasing business on September 30, 2001. See Note 6 to the Consolidated
Financial Statements.
Preferred dividends
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 0.8 0.8 - -
Nine months ended September 30 2.6 2.6 - -
------------------------------------------------------------------------------------------------------------------------------
There were no changes to the quarterly preferred dividend.
Interest on convertible debentures
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 1.8 1.4 0.4 28.6
Nine months ended September 30 5.1 4.7 0.4 8.5
--------------------------------------------------------------------------------------------------------------------------------
The interest on convertible debentures is presented net of related income
taxes. As these debentures are convertible into non-voting shares and are
classified as equity on the balance sheet, the related interest is recorded as
a charge to retained earnings rather than an interest expense.
Common share and non-voting share income (loss)
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 (110.0) 578.5 (688.5) (119.0)
Nine months ended September 30 (97.5) 492.9 (590.4) (119.8)
--------------------------------------------------------------------------------------------------------------------------------
The Common share and non-voting share income was reduced by $688.5 million in
the three-month period ending September 30, 2002, when compared to the same
period one year ago. The most significant changes were the third quarter 2001
income from discontinued operations of $556.7 million and the third quarter
2002 restructuring and workforce reduction cost of $313.3 million before taxes.
Liquidity and capital resources
Cash provided by operating activities
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 804.3 558.3 246.0 44.1
Nine months ended September 30 1,373.2 1,222.7 150.5 12.3
--------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities increased by $246.0 million (44.1%) in
the three-month period ended September 30, 2002, when compared with the same
period last year due mainly to changes in non-cash working capital and lower
cash income taxes. The improvement in the non-cash working capital resulted
primarily from an increase in sold accounts receivable in 2002 and the negative
impacts on 2001 working capital due to the sale of directory operations. Cash
income taxes decreased as a result of corporate reorganizations in 2001 that
allowed TELUS to shelter taxable income with losses carried forward.
Cash provided by operating activities increased by $150.5 million (12.3%) for
the nine-month period ended September 30, 2002, when compared with the same
period last year, due mainly to an increase in sold accounts receivable, lower
cash income taxes, and the negative impacts on 2001 working capital due to the
sale of directory operations, partly offset by higher workforce restructuring
payments and higher interest paid.
Cash provided by (used by) investing activities
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 (322.1) 120.6 (442.7) (367.1)
Nine months ended September 30 (1,310.3) (1,257.5) (52.8) (4.2)
--------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities increased by $442.7 million and $52.8
million in the three-month period and nine-month periods ended September 30,
2002, respectively, when compared to the same period one year earlier. The
increase in net cash used for investing activities was mainly due to receipts
in 2001 of $810 million from the sale of the directory advertising business,
and for the nine-month period, the receipt of $228.4 million proceeds from the
sale of administrative buildings, partly offset in the quarter and year-to-date
periods by lower capital expenditures and spectrum purchases in 2002 (described
in more detail below), and lower other investing activities in 2002.
Capital expenditures by segment
Three months ended September 30 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
($ in millions)
TELUS Communications 230.2 403.3 (173.1) (42.9)
TELUS Mobility 92.5 183.8 (91.3) (49.7)
--------------------------------------------------------------------------------------------------------------------------------
Capital expenditures - general 322.7 587.1 (264.4) (45.0)
TELUS Mobility - wireless spectrum 4.5 - 4.5 -
--------------------------------------------------------------------------------------------------------------------------------
Total capital expenditures 327.2 587.1 (259.9) (44.3)
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Capital expenditure intensity (1) 18.5% 32.2% (13.7%)
--------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
($ in millions)
TELUS Communications 947.2 1,219.0 (271.8) (22.3)
TELUS Mobility 330.0 438.8 (108.8) (24.8)
--------------------------------------------------------------------------------------------------------------------------------
Capital expenditures - general 1,277.2 1,657.8 (380.6) (23.0)
TELUS Mobility - wireless spectrum 4.5 355.9 (351.4) (98.7)
--------------------------------------------------------------------------------------------------------------------------------
Total capital expenditures 1,281.7 2,013.7 (732.0) (36.4)
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Capital expenditure intensity (1) 24.6% 38.6% (14.0%)
--------------------------------------------------------------------------------------------------------------------------------
(1) Capital expenditures as a percentage of revenue
TELUS Communications' capital expenditures decreased by $173.0 million (42.9%)
for the three-month period ended September 30, 2002, when compared with the
same period last year due to reduced spending in both Non-ILEC and ILEC
initiatives. Expenditures for Non-ILEC expansion decreased by $33.6 million to
$50.3 million mainly due to lower co-location activity and accelerated
expansion in Quebec last year. Expenditures for ILEC sustainment decreased by
$139.5 million to $179.9 million mainly due to $66.8 million of lower payments
for software licences and brand-marks from Verizon, $17.8 million lower
spending on the national long distance and card service platform completed
early in 2002, $13.3 million lower e-hosting expenditures due to the opening of
the Calgary data centre in 2001, $13.3 million lower spending on web
enablement, and $28.3 million lower spending on network infrastructure and
other initiatives. Expenditures for ADSL initiatives were relatively unchanged
from the same period last year at $41.3 million. For the Communications
Segment, the ratio of capital expenditures to revenues was 18.3% for the
current quarter compared with 29.5% in the same period last year, as a result
of reduced capital expenditures. The ratio for ILEC operations was 16.0% for
the current quarter as compared to 25.3% in the same period last year.
TELUS Communications' capital expenditures decreased by $271.8 million (22.3%)
for the nine-month period ended September 30, 2002, when compared with the same
period last year. Expenditures for Non-ILEC expansion decreased by $78.3
million to $173.6 million mainly due to the completion of the national optical
carrier network and IP backbone in 2001. Expenditures for ILEC sustainment
decreased by $193.5 million to $773.6 million, mainly due to $94.3 million
lower payments for software licences and brand-marks from Verizon, $41.9
million lower expenditures for the national long distance and card service
platform, $62.5 million lower expenditures on network infrastructure and $28.3
million lower e-hosting expenditures. Expenditures for ADSL initiatives
increased by $46.0 million to $205.5 million, while spending on all other
initiatives decreased by $12.5 million. For the Communications Segment, the
ratio of capital expenditures to revenues decreased to 24.8% year-to-date 2002
compared to 30.9% in the same period last year. The ratio for ILEC operations
was 22.5% for the current quarter as compared to 25.8% in the same period last
year.
In addition to capital expenditures detailed above, a fibre asset was purchased
in June 2001 from a third party for non-monetary consideration of $76.0
million. As this was a non-cash purchase, the amount is not reflected in
Capital expenditures on the Consolidated Statements of Cash Flows.
TELUS Mobility capital expenditures were favourable as compared to the same
period last year, decreasing by $86.8 million and $460.2 million for the
three-month and nine-month periods ended September 30, 2002, respectively, when
compared with the same periods in 2001. TELUS Mobility continued the
enhancement of digital cellular coverage, digitization of the analogue network,
and implementation of the 1X CDMA data network. Excluding the spectrum
purchase, capital spending has declined significantly year-over-year
principally because of the implementation of the 1X digital network in 2001,
digital conversion of analogue networks in 2001, and reduced coverage expansion
costs in 2002 due to the recently operationalized roaming/resale agreements. As
a result of continued EBITDA growth and reduced capital expenditure intensity
and spectrum purchases, Mobility has improved cash flow (EBITDA less capital
expenditures) to a positive $67.8 million and $71.8 million, respectively, for
the current quarter and year-to-date, compared with negative $65.8 million and
negative $494.0 million, respectively, for the same periods last year. For
TELUS Mobility, capital expenditure intensity decreased to 18.0% and 22.6%,
respectively, for the current three-month and nine-month periods, compared with
37.9% and 59.1%, respectively, for the same periods last year.
The Company has significantly reduced its consolidated capital expenditure
intensity to 18.5% and 24.6%, respectively, for the current quarter and year-
to-date periods, from 32.2% and 38.6%, respectively, in the same periods last
year. Reduced capital expenditure intensity in the current quarter is
consistent with TELUS' objective to reduce annual consolidated capital
expenditures to 20% of revenue, or less, in 2003 and thereafter. The annual
percentage for 2002 is expected to be similar to the current year-to-date
figure, based on 2002 current annual targets (see 2002 Financial Targets).
Cash provided by (used in) financing activities
($ in millions) 2002 2001 Change %
--------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30 (478.5) (767.2) 288.7 37.6
Nine months ended September 30 (85.3) 16.8 (102.1) (607.7)
--------------------------------------------------------------------------------------------------------------------------------
Cash used by financing activities decreased by $288.7 million in the
three-month period ended September 30, 2002 when compared with the same period
one year ago, principally due to Common and Non-Voting shares issued in the
current quarter. Shares issued in the quarter included the September 2002
public issuance of 34.25 million Non-voting shares concurrently in Canada and
the U.S. at a share price of $9.85 (Canadian dollars) for aggregate gross
proceeds of $337.4 million, as well as $16.4 million proceeds of Common and
Non-Voting shares issued from Treasury under employee share purchase plans and
the channel stock incentive plan (compared with $23.9 million issued in the
same period last year). The net proceeds of $322.9 million from the public
share issuance were used to repurchase and repay debt, including bank debt
incurred to repurchase notes of TELUS Corporation and notes and debentures of
TELUS Communications Inc. and for general corporate purposes. The Company
repurchased approximately $402 million principal amount of such notes for a
cash outlay of approximately $310 million including commissions and net of
cross currency swap unwind proceeds. The repurchased notes had maturities in
the following years and for the approximate amounts shown: 2003 ($49 million),
2004 ($3 million), 2006 ($22 million), 2007 ($210 million) and 2011 ($118
million). The debt was repurchased at an average discount of 21%, while equity
dilution was 10% from the September 2002 public share issuance. In addition,
dividends paid to shareholders decreased by $19.4 million mainly due to the 57%
reduction in the quarterly dividend rate from 35 cents to 15 cents announced in
October 2001 effective for the January 1, 2002, payment. The reduction in
dividend payments was partly offset by lower enrollment in the dividend
reinvestment plan (approximately 10% at the end of September 2002, compared
with approximately 44% one year earlier).
Cash used by financing activities increased by $102.1 million in the nine-month
period ended September 30, 2002 when compared with the same period one year
ago, mainly due to debt repayments in 2002 funded by the recent public
Non-voting share issue, $167.1 million lower dividend payments, and improved
operating cash flow net of investing activities, compared with net debt
issuances in 2001. Proceeds from Common shares and Non-Voting shares issued
from Treasury for employee share purchase plans, additional shares purchased by
Verizon pursuant to anti-dilutive rights, the channel stock incentive plan, and
exercised options and warrants were $73.9 million year-to-date, compared with
$66.9 million in the comparable period last year. The $33.9 million change in
amortization of debt issue costs and other primarily reflected debt issue costs
that were incurred and deferred in second quarter of 2001.
Liquidity and capital resource ratios
Twelve months ended Sept. 30, Sept. 30, Change June 30,
2002 2001 2002
--------------------------------------------------------------------------------------------------------------------------------
Net debt1 to total capitalization (%) 55.8 54.2 1.6 58.7
Net debt to EBITDA (2) 3.4 3.3 0.1 3.6
Earnings coverage (3) 0.8 2.3 (1.5) 2.2
EBITDA interest coverage (4) 3.4 4.8 (1.4) 3.5
--------------------------------------------------------------------------------------------------------------------------------
(1) Current obligations and cheques outstanding plus Long-term debt less Cash
and temporary investments and cross-currency foreign exchange hedge asset (plus
cross-currency foreign exchange hedge liability) related to U.S.
dollar-denominated notes. The cross currency foreign exchange hedge asset as at
September 30, 2002 was $123.7 million ($128.5 million as at September 30,
2001). The impairment charge to retained earnings for intangible assets
increased the September 30, 2002 measure from 53.6% to 55.8%. Net Debt as
calculated herein, includes a notional amount related to accounts receivable
securitization of approximately $106 million at September 30, 2002 and $30
million at September 30, 2001, which is required to be included in the
numerator of the Leverage Ratio covenant calculation in TELUS' credit
facilities.
(2) Net debt as at September 30, 2002 divided by 12-month trailing
EBITDA.
(3) 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.
(4) EBITDA divided by Net financing
cost before non-cash accreted interest and gains on redemption of debt,
calculated on a 12-month trailing basis. Accreted interest was recorded until
the second quarter of 2001.
During the third quarter of 2002, total debt, after adjusting for the foreign
exchange hedge, decreased by approximately $870 million primarily as a result of
debt repurchases of $402 million principal amount and a reduction of $474
million in the drawn amount under the Company's credit facilities. The change in
Funded Debt and Asset Securitization Amount as calculated for covenant
calculation purposes under TELUS' credit facilities decreased by approximately
as a result of the decrease in total debt being partially offset by an increase
$792 million of approximately $78 million in the notional amount related to
Accounts Receivable Securitization.
TELUS has established an objective for its Net Debt to EBITDA ratio to be 3.0
or less by the end of 2003. The Company believes this objective is attainable
based on efficiency improvement resulting from the Operational Efficiency
Program, declining capital expenditures, continued organic growth in TELUS'
business segments, improved working capital, lower cash taxes driven by
application of losses carried forward, as well as employee and dividend
re-investment share issuances, amongst other factors. Refer to Credit Ratings
below for more detail.
The Net debt to total capitalization ratio as at September 30, 2002, increased,
when compared to one-year ago, mainly due to the non-cash reduction in equity
associated with the impairment charge for intangible assets recorded earlier
this year, net of the proceeds from an equity issue in the third quarter of
2002, and an increase in the notional amount related to sold accounts
receivables added to the debt balance for debt covenant purposes. TELUS has a
long-term objective of reducing its ratio of Net debt to total capitalization
to 50% (55.8% as at September 30, 2002). The Net Debt to EBITDA ratio for the
twelve-month period ended September 30, 2002 increased when compared with the
ratio for the twelve-month period ended September 30, 2001, mainly due to the
increase in the notional amount related to sold accounts receivable, and a $6
million decrease in the 12-month trailing EBITDA of $2,472 million ($2,478
million one-year earlier). The EBITDA interest coverage ratio for the 12 months
ended September 30, 2002, decreased as compared to the same period one year
earlier, mainly due to 2002 financing costs fully reflecting 2001 investing
activities, and an additional 20 days impact of the acquisition of Clearnet.
The Net Debt to total capitalization and Net Debt to EBITDA ratios improved
from June 30, 2002, due mainly to the repurchase of debt in the current quarter
that was indirectly funded through a public issue of equity.
Credit Facilities
TELUS credit facilities at the end of September 2002, consisted of a $1.5
billion (or U.S. dollar equivalent) revolving credit facility expiring on May
30, 2004 ($595 million drawn along with $47 million in outstanding undrawn
letters of credit), an undrawn $800 million (or the U.S. dollar equivalent)
364-day revolving credit facility extendible at TELUS' option for any amount
outstanding as at May 28, 2003 for one year on a non-revolving basis, and
approximately $89 million in other bank facilities (approximately $4 million
drawn and approximately $5 million in outstanding undrawn letters of credit, at
September 30, 2002). During the third quarter of 2002, the amount drawn on
TELUS' $1.5 billion revolving credit facility decreased by $474 million.
The decrease in credit facility borrowings during the third quarter was
primarily a result of receipt of proceeds from accounts receivable sales as well
as internally generated cash flow from operations. During the fourth quarter of
2002, the amount drawn is expected to increase primarily due to cash payments
related to the Company's OEP and the payment of semi-annual interest coupons
on the Company's public notes.
At September 30, 2002, TELUS had unutilized available liquidity well in excess
of $1.0 billion. TELUS' credit facilities contain customary covenants including
a requirement that TELUS not permit its consolidated Leverage Ratio (Funded
Debt and Asset Securitization Amount to trailing 12 month EBITDA) to exceed
4.0:1 (approximately 3.4:1 as at September 30, 2002) and to not permit its
consolidated Coverage Ratio (EBITDA to Interest Expense and Asset
Securitization Charges on a trailing 12 month basis) to be less than 2.5:1
(approximately 3.4:1 as at September 30, 2002) at the end of any financial
quarter. Continued access to TELUS' credit facilities is not contingent on the
maintenance by TELUS of a specific credit rating.
Accounts Receivable Sale
On July 26, 2002, TELUS Communications Inc. (TCI), a wholly owned subsidiary of
TELUS, signed an agreement with an arm's-length securitization trust under
which TCI is able to sell an interest in certain of its receivables up to a
maximum of $650 million. TCI is required to maintain at least a BBB(low) credit
rating by Dominion Bond Rating Service, or the purchaser may require the sale
program to be wound down.
During the third quarter of 2002, TCI terminated a prior securitization trust
agreement dated November 20, 1997. Collection and final remittances in respect
of the accounts receivable subject to the prior securitization transaction were
completed by September 27, 2002.
On September 30, 2002, the new securitization agreement was amended in order to
make available for purchase by the securitization trust, an interest in some of
TCI's other trade receivables of a certain class that were of the type
previously sold to the prior securitization trust. As at September 30, 2002,
TCI had received aggregate cash proceeds of $430 million under its new accounts
receivable securitization program. See Note 9 to the Consolidated Financial
Statements.
TELUS' credit facilities require that a portion of sold accounts receivable be
added to debt for purposes of calculating the Leverage Ratio covenant under the
credit agreement. The amount of sold accounts receivable, which is added to
debt for purposes of this ratio, is calculated on a monthly basis and is a
function of the ongoing collection performance of the receivables pool. At
September 30, 2002, this amount, defined as the Asset Securitization Amount,
was approximately $106 million.
Floating Rate/Fixed Rate Debt Balance
As at September 30, 2002, the Company's fixed rate debt comprised 94.1% of its
total indebtedness compared with 98.1% at as September 30, 2001.
Credit Ratings
As of November 1, 2002, no new rating actions on TELUS debt had been
announced since July 2002. TELUS has an objective to preserve access to capital
markets at a reasonable cost by maintaining investment grade credit ratings.
On July 8, 2002, Dominion Bond Rating Service (DBRS) confirmed its ratings at
R-2(high) for TELUS Corporation, TELUS Communications (Quebec) Inc. and TELUS
Communications Inc. commercial paper, but changed the trend for all to
Negative. DBRS also downgraded the ratings for all other debt instruments and
changed the trend to Negative. On July 11, 2002, Standard and Poors (S&P)
lowered its ratings of TELUS' long-term credit and senior unsecured debt to BBB
from BBB+ and lowered its Canadian scale commercial paper rating to A-2 from
A-1(low). At the same time, S&P lowered its ratings for TELUS wholly owned
subsidiaries TELUS Communications (Quebec) Inc. and TELUS Communications Inc.
The outlook for all ratings was changed to Negative. On July 23, 2002, Fitch
Ratings initiated ratings of TELUS' and TELUS Communications Inc. long-term
credit and senior unsecured debt at BBB with negative outlook. On July 25,
2002, Moody's lowered its ratings of TELUS' long-term credit and senior
unsecured debt to Ba1 (non-investment grade) from Baa2. The outlook for the
Moody's rating is negative.
The credit rating agency downgrades are expected to increase TELUS' financing
costs under TELUS' credit facilities by approximately $3.5 million per annum.
As at September 30, 2002, TELUS had approximately $218 million of short-term
obligations including long-term debt of $214 million maturing before September
30, 2003. The Company plans to improve its credit ratings over time by
increasing its cash flow and reducing debt through increased operating cash
flow driven in significant part by the announced Operational Efficiency
Program, continued EBITDA growth in TELUS Mobility, lower expected EBITDA
losses in Non-ILEC operations, declining capital expenditures, improved working
capital, lower cash income taxes due to application of significant tax losses
carried forward, discounted debt repurchases, as well as equity issuances
including employee and dividend share issuances, amongst other factors. The
Company's mid-term objective is to have BBB to A- ratings for its long-term
credit and senior unsecured debt.
Credit rating summary
S&P DBRS Moody's Fitch
--------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation
Senior Bank Debt BBB (1) BBB (1) Ba1 (1) BBB (1)
Debentures and Notes BBB (1) BBB (1) Ba1 (1) BBB (1)
Medium-term Notes BBB (1) BBB (1) --- ---
Commercial Paper A-2 (1) R-2(high) (1) --- ---
TELUS Communications Inc.
Debentures BBB (1) BBB (1) --- BBB (1)
Medium-term Notes BBB (1) BBB (1) --- BBB (1)
Commercial Paper A-2 (1) R-2(high) (1) --- ---
Preferred Shares P-3(high)(1) Pfd-3 (1) --- ---
TELUS Communications (Quebec) Inc.
First Mortgage Bonds BBB+(1) BBB (1) --- ---
Debentures BBB (1) BBB (1) --- ---
Medium-term Notes BBB (1) BBB (1) --- ---
Commercial Paper A-2 (1) R-2(high) (1) --- ---
--------------------------------------------------------------------------------------------------------------------------------
(1) Outlook or Trend Negative
2002 Financial Targets
Concurrent with the announcement of second quarter 2002 financial results,
management revised its 2002 guidance to reflect recent regulatory decisions,
the expected impacts of the Operational Efficiency Program, a reduction in
discretionary capital program expenditures, the impact of the retroactive
recovery associated with the favorable clarification of tax legislation by the
Ontario Provincial Sales Tax authorities, and the receipt of investment tax
credits.
Management has further updated the annual guidance for 2002 to reflect: (1)
third quarter results and the current outlook for fourth quarter results
including increased estimated OEP savings; (2) the impact of workforce
restructuring costs expected to be recorded in 2002; (3) the after tax gain on
debt repurchases; and (4) the impacts of the third quarter public equity issue.
2002 Current Targets Second Quarter 2002
Guidance
------------------------ ----------------------
--------------------------------------------------------------------------------------------------------------------------------
Consolidated
Revenues No change Approx. $7.0 billion
EBITDA (1) No change $2.475 to $2.525 billion
Earnings (loss) per share Approximately (80) cents (90) to (95) cents
Earnings per share
excluding restructuring Approximately 35 cents 15 to 20 cents
Capital expenditures Less than $1.8 billion Approx. $1.8 billion
--------------------------------------------------------------------------------------------------------------------------------
Communications Segment
Revenue No change Approx. $5.0 billion
Central Canadian wireline revenue - total No change Approx. $800 million
Non-ILEC revenue (included in Central
Canadian wireline revenue) No change Approx. $525 million
EBITDA No change Approx. $2.0 billion
Non-ILEC EBITDA No change $(125) million
Capital expenditures No change Approx. $1.3 billion
High-speed Internet net additions No change 200,000 or more
--------------------------------------------------------------------------------------------------------------------------------
Mobility Segment
Revenue No change Approx. $2.0 billion
EBITDA No change Approx. $490 million
Capital expenditures No change Approx. $500 million
Wireless subscriber net additions No change 425,000 to 450,000
--------------------------------------------------------------------------------------------------------------------------------
(1) Excluding Restructuring and workforce reduction costs.
As previously indicated, updates to guidance for 2003 will be provided at the
currently scheduled "2003 Targets" conference call on December 16, 2002.
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.
Date
TELUS Corporation
"James W. Peters"
_____________________________
Name: James W. Peters
Title: Corporate Secretary