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 _____May_________ 2003
(Commission File No. 000-24876)
TELUS Corporation
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal registered offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
X
Form 20-F _____ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
X
Yes _____ No _____
This Form 6-K consists of the following:
TELUS Corporation First Quarter Financial Statements and
Management Discussion and Analysis.
______________________________________________________________________________
TELUS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2003
______________________________________________________________________________
consolidated statements of income
Three month periods ended March 31 (unaudited) (millions) 2003 2002
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OPERATING REVENUES $ 1,740.9 $ 1,698.0
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OPERATING EXPENSES
Operations 1,070.1 1,108.7
Depreciation 318.6 291.1
Amortization of intangible assets 92.5 83.3
Restructuring and workforce reduction costs (Note 3) 6.5 12.5
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1,487.7 1,495.6
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OPERATING INCOME 253.2 202.4
Other expense (income), net 5.6 4.8
Financing costs (Note 4) 161.6 181.4
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INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 86.0 16.2
Income taxes (recovery) (Note 5) (5.9) 16.5
Non-controlling interest 0.7 0.5
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NET INCOME (LOSS) 91.2 (0.8)
Preference and preferred share dividends 0.9 0.9
Interest on convertible debentures, net of income taxes 1.7 1.6
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COMMON SHARE AND NON-VOTING SHARE INCOME (LOSS) $ 88.6 $ (3.3)
=================================================================================================================================
INCOME (LOSS) PER COMMON SHARE AND NON-VOTING SHARE ($) (NOTE 6)
- Basic 0.26 (0.01)
- Diluted 0.26 (0.01)
DIVIDENDS DECLARED PER COMMON SHARE AND NON-VOTING SHARE ($) 0.15 0.15
TOTAL WEIGHTED AVERAGE COMMON SHARES AND NON-VOTING SHARES OUTSTANDING (MILLIONS)
- Basic 346.8 304.0
- Diluted 347.0 304.0
consolidated statements of retained earnings
Three month periods ended March 31 (unaudited) (millions) 2003 2002
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BALANCE AT BEGINNING OF YEAR $ 630.4 $ 1,654.8
Transitional impairment of intangible assets with indefinite lives - (595.2)
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Adjusted opening balance 630.4 1,059.6
Net income (loss) 91.2 (0.8)
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721.6 1,058.8
Less: Common Share and Non-Voting Share dividends paid in cash 42.7 25.4
Common Share and Non-Voting Share dividends reinvested in shares issued from Treasury 9.2 20.2
Preference and preferred share dividends 0.9 0.9
Interest on convertible debentures, net of income taxes 1.7 1.6
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BALANCE AT END OF PERIOD (Note 14) $ 667.1 $ 1,010.7
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements
consolidated balance sheets
As at As at
March 31, December 31,
(unaudited) (millions) 2003 2002
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ASSETS
Current Assets
Cash and temporary investments, net $ 7.4 $ -
Accounts receivable (Note 8) 553.4 640.4
Income and other taxes receivable 345.5 134.0
Inventories 86.3 96.5
Current portion of future income taxes 156.1 138.8
Prepaid expenses and other 189.1 163.5
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1,337.8 1,173.2
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Capital Assets, Net (Note 9)
Property, plant, equipment and other 7,869.2 8,025.9
Intangible assets subject to amortization 930.6 998.5
Intangible assets with indefinite lives 2,950.1 2,950.1
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11,749.9 11,974.5
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Other Assets
Deferred charges (Note 10) 589.3 729.1
Future income taxes 957.4 1,170.3
Investments 47.8 48.1
Goodwill (Note 11) 3,124.7 3,124.6
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4,719.2 5,072.1
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$17,806.9 $18,219.8
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ - $ 9.0
Accounts payable and accrued liabilities 1,170.8 1,198.8
Restructuring and workforce reduction accounts payable and accrued liabilities (Note 3) 253.0 400.4
Dividends payable 52.8 52.2
Advance billings and customer deposits 339.2 330.3
Current maturities of long-term debt (Note 12) 161.4 190.3
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1,977.2 2,181.0
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Long-Term Debt (Note 12) 7,715.2 8,197.4
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Future Income Taxes 990.6 992.3
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Other Long-Term Liabilities (Note 13) 613.7 405.3
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Non-Controlling Interest 11.4 11.2
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Shareholders' Equity (Note 14)
Convertible debentures 151.2 148.5
Preference and preferred shares 69.7 69.7
Common equity 6,277.9 6,214.4
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6,498.8 6,432.6
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$17,806.9 $18,219.8
=================================================================================================================================
Commitments and Contingent Liabilities (Note 15)
The accompanying notes are an integral part of these interim consolidated financial statements
consolidated statements of cash flows
Three month periods ended March 31 (unaudited) (millions) 2003 2002
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OPERATING ACTIVITIES
Income (loss) from operations $ 91.2 $ (0.8)
Items not affecting cash:
Depreciation and amortization 411.1 374.4
Future income taxes 36.9 10.6
Net pension expense (credits) 13.1 (7.5)
Other, net 1.7 0.1
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Operating cash flow before restructuring and workforce reduction costs 554.0 376.8
Restructuring and workforce reduction costs, net of cash payments (Note 3) (147.4) (30.5)
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Operating cash flow 406.6 346.3
Net change in non-cash working capital (Note 16) (6.9) (52.6)
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Cash provided by operating activities 399.7 293.7
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INVESTING ACTIVITIES
Capital expenditures (Note 9(a)) (207.8) (405.9)
Proceeds from the sale of property (Note 9(b)) 19.3 -
Other 5.9 (9.4)
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Cash provided (used) by investing activities (182.6) (415.3)
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FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 20.1 32.8
Dividends to shareholders (44.8) (26.8)
Long-term debt issued (Note 12) 17.5 192.0
Redemptions and repayment of long-term debt (Note 12) (200.1) (79.3)
Change in short-term obligations - (61.5)
Amortization of debt issue costs and other 6.6 1.7
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Cash provided (used) by financing activities (200.7) 58.9
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CASH POSITION
Increase (decrease) in cash and temporary investments, net 16.4 (62.7)
Cash and temporary investments, net, beginning of period (9.0) 17.1
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Cash and temporary investments, net, end of period $ 7.4 $ (45.6)
=================================================================================================================================
SUPPLEMENTAL DISCLOSURE
Interest paid $ 36.0 $ 42.3
=================================================================================================================================
Income taxes (inclusive of Investment Tax Credits (Note 5)) paid $ 0.6 $ 13.2
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements
notes to interim consodidated financial statements
MARCH 31, 2003 (unaudited)
TELUS Corporation is one of Canada's largest telecommunications companies,
providing a full range of telecommunications products and services. The Company
is the largest incumbent telecommunications service provider in Western Canada
and provides data, Internet Protocol, voice and wireless services to Central
and Eastern Canada.
1. Interim Financial Statements
The notes presented in these interim consolidated financial statements include
only significant events and transactions and are not fully inclusive of all
matters normally disclosed in TELUS Corporation's annual audited financial
statements. As a result, these interim consolidated financial statements should
be read in conjunction with the TELUS Corporation consolidated financial
statements for the year ended December 31, 2002. These interim consolidated
financial statements follow the same accounting policies, other than as set out
in Note 2 to these interim consolidated financial statements, and methods of
their application as set out in the TELUS Corporation consolidated financial
statements for the year ended December 31, 2002.
The term "Company" is used to mean TELUS Corporation and, where the context of
the narrative permits or requires, its subsidiaries.
2. Change in Accounting Policies
(a) Disclosure of Guarantees
Commencing January 1, 2003, the new guidelines of the Canadian Institute of
Chartered Accountants ("CICA") for the disclosure of guarantees apply to the
Company (CICA Accounting Guideline AcG-14) (see Note 15(c)). The Guideline
elaborates on required disclosures by a guarantor in its financial statements
about obligations under certain types of guarantees that it has issued.
(b) Asset Retirement Obligations
Commencing with the Company's 2004 fiscal year, the new recommendations of the
CICA for accounting for asset retirement obligations (CICA Handbook Section
3110) will apply. The new section focuses on the recognition and measurement of
liabilities for statutory, contractual or legal obligations, normally when
incurred, associated with the retirement of property, plant and equipment when
those obligations result from the acquisition, construction, development or
normal operation of the assets. The obligations are measured initially at fair
value (using present value methodology) and the resulting costs capitalized
into the carrying amount of the related asset. In subsequent periods, the
liability is adjusted for the accretion of discount and any changes in the
amount or timing of the underlying future cash flows. The capitalized asset
retirement cost is depreciated on the same basis as the related asset; discount
accretion is included in determining the results of operations. The Company is
currently evaluating the impact of this standard on its financial statements.
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. Approximately one-half of the 2001 charge was related to
integration costs for TELUS Mobility including the write-down of redundant
capital assets, handset reconfiguration costs and employee severance costs. The
remaining charge was related to reorganization costs in TELUS Communications,
including employee severance costs and capital asset impairment charges.
The second phase of the 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, the Company initiated a program offering an Early
Retirement Incentive Plan ("ERIP") and a Voluntary Departure Incentive Plan
("VDIP") to 11,000 of over 16,000 bargaining unit employees and 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.
The third phase of the OEP, which commenced in the third quarter of 2002, was
focused on operationalizing the above noted initiatives. Consolidation of
administrative offices was largely completed by December 31, 2002.
The following table discloses the program costs to date and the changes in
program costs in the period as well as the corresponding liabilities and
changes in the corresponding liabilities for the period.
Program (a) Program (a) Program (a)
inception to Three month inception to items not yet
December 31, period ended March 31, eligible for Total
(millions) 2002 March 31, 2003 2003 recording program (a)
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Workforce reduction costs
Voluntary (Early Retirement Incentive
Plan, Voluntary Departure Incentive
Plan and other) $ 498.5 $ - $ 498.5 $ - $ 498.5
Involuntary and other 220.8 - 220.8 - 220.8
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719.3 - 719.3 - 719.3
Lease termination charges 16.1 3.4 19.5 - 19.5
Asset write-off and other charges 32.9 3.1 36.0 12.9 48.9
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Restructuring and workforce reduction costs 768.3 6.5 774.8 $ 12.9 $ 787.7
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Less:
Payments 332.0 153.9 485.9
Asset write-off related to
restructuring and other 30.5 - 30.5
Reclassified to other long-term
liabilities (pension and other
post-retirement benefit liabilities) 5.4 - 5.4
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367.9 153.9 521.8
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Restructuring and workforce reduction
accounts payable and accrued liabilities $ 400.4 $ (147.4) $ 253.0
========================================================================================
(a) Program includes phases 1, 2 and 3 of the Operational Efficiency Program.
The following table presents the status of various OEP initiatives. The expense
and liability for the ERIP and VDIP programs are recognized when the employee
accepts the Company's formalized offer. As a result, OEP costs may be, and have
been, as appropriate and required, recorded in advance of when the underlying
event occurs.
Program (a) Program (a)
inception to Three month inception to
December 31, period ended March 31, Total
2002 March 31, 2003 2003 Future program (a)
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Customer contact centre consolidation 24 13 37 9 46
=================================================================================================================================
TELUS store closures 33 - 33 - 33
=================================================================================================================================
Net staff reductions
Phase 1 800 - 800 - 800
Phases 2 and 3 5,200 600 5,800 700 6,500
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6,000 600 6,600 700 7,300
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(a) Program includes phases 1, 2 and 3 of the Operational Efficiency Program.
4. Financing Costs
Three month periods ended March 31 (millions) 2003 2002
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Interest on long-term debt $ 170.6 $ 179.2
Interest on short-term obligations and other 1.0 1.9
Foreign exchange loss (a) 0.4 0.8
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172.0 181.9
Capitalized interest during construction - (0.2)
Interest income (including interest received on tax refunds) (10.4) (0.3)
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$ 161.6 $ 181.4
=================================================================================================================================
(a) These amounts include gains (losses) of $0.3 (2002 - $(0.3)) in respect of hedge ineffectiveness.
5. Income Taxes
Three month periods ended March 31 (millions) 2003 2002
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Current $ (200.8) $ 5.9
Future 194.9 10.6
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$ (5.9) $ 16.5
=================================================================================================================================
The Company's income tax expense (recovery) differs from that calculated by
applying statutory rates for the following reasons:
Three month periods ended March 31 (millions) 2003 2002
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Basic blended federal and provincial tax
at statutory income tax rates $ 31.8 37.0% $ 6.5 40.4%
Prior year rates applied to settlement of tax issues (47.0) -
Other 3.5 3.4
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(11.7) (13.6)% 9.9 61.1%
Large corporations tax 5.8 6.6
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Income tax expense (recovery) per Consolidated
Statements of Income $ (5.9) (6.9)% $ 16.5 NM (a)
=================================================================================================================================
(a) "NM" - not meaningful.
The Company conducts research and development activities, which are eligible to
earn Investment Tax Credits. During the three months ended March 31, 2003, the
Company recorded Investment Tax Credits of $1.2 million (2002 - NIL) of which
$1.0 million (2002 - NIL) was recorded as a reduction of "Operations expense"
and the balance was recorded as a reduction of capital expenditures.
6. Per Share Amounts
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.
The following tables present the reconciliations of the numerators and
denominators of the basic and diluted per share computations.
Three month periods ended March 31 (millions) 2003 2002
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Income (loss) $ 91.2 $ (0.8)
Deduct:
Preference and preferred share dividends 0.9 0.9
Interest on convertible debentures 1.7 1.6
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Basic and diluted Common Share and Non-Voting Share income (loss) $ 88.6 $ (3.3)
=================================================================================================================================
Three month periods ended March 31 (millions) 2003 2002
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Basic total weighted average Common Shares and Non-Voting Shares outstanding 346.8 304.0
Effect of dilutive securities
Exercise of share options and warrants (a) 0.2 -
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Diluted total weighted average Common Shares and Non-Voting Shares outstanding 347.0 304.0
=================================================================================================================================
(a) Share options, in the amount of 0.4 for the three months ended March
31, 2002, were excluded from the calculations, as they were anti-dilutive.
7. 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 a
weighted average fair value of $4.26 and $8.18 for options granted in 2003 and
2002, respectively, would approximate the following pro forma amounts:
Three month periods ended March 31 (millions except per share amounts) 2003 2002
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Compensation cost $ 4.1 $ 0.9
Net income (loss)
As reported $ 91.2 $ (0.8)
Pro forma $ 87.1 $ (1.7)
Net income (loss) per Common Share and Non-Voting Share
Basic and diluted
As reported $ 0.26 $ (0.01)
Pro forma $ 0.24 $ (0.01)
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Due to the fact that only share options granted after 2001 are included, these
pro forma disclosures are not likely to be representative of the effects on
reported net income (loss) for future years.
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:
Three month periods ended March 31 2003 2002
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Risk free interest rate 5.0% 5.9%
Expected lives (years) 4.5 10.0
Expected volatility 40.0% 35.0%
Dividend yield 4.0% 3.6%
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Forfeitures of options are accounted for in the period of forfeiture.
8. Accounts Receivable
On July 26, 2002, TELUS Communications Inc. ("TCI"), a wholly-owned subsidiary
of TELUS, entered into an agreement (the "2002 Securitization") 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 at As at
March 31, December 31,
(millions) 2003 2002
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Total managed portfolio $ 1,029.9 $ 1,139.0
Securitized receivables (575.5) (595.4)
Retained interest in receivables sold 99.0 96.8
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Receivables held $ 553.4 $ 640.4
=================================================================================================================================
For the three month period ended March 31, 2003, the Company recognized a loss
of $1.2 million on the sale of receivables, arising from the 2002
Securitization.
Cash flows from the 2002 Securitization are as follows:
Three month period ended March 31 (millions) 2003
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Cumulative proceeds from securitization, beginning of year $ 475.0
Proceeds from new securitizations 3.0
Securitization reduction payments (24.0)
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Cumulative proceeds from securitization, end of period $ 454.0
=================================================================================================================================
Proceeds from collections reinvested in revolving period securitizations $ 1,018.4
=================================================================================================================================
Proceeds from collections pertaining to retained interest $ 206.5
=================================================================================================================================
9. Capital Assets
(a) Capital Assets, Net
Accumulated
Depreciation and
Cost Amortization Net Book Value
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As at As at
March 31, December 31,
(millions) 2003 2002
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Property, plant, equipment and other
Telecommunications assets $16,017.6 $ 9,891.5 $ 6,126.1 $ 6,252.9
Assets leased to customers 416.6 344.2 72.4 77.5
Buildings 1,505.0 688.4 816.6 836.0
Office equipment and furniture 848.3 581.0 267.3 280.8
Assets under capital lease 30.0 22.0 8.0 10.3
Other 364.2 234.4 129.8 144.0
Land 51.5 - 51.5 55.4
Plant under construction 372.9 - 372.9 341.6
Materials and supplies 24.6 - 24.6 27.4
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19,630.7 11,761.5 7,869.2 8,025.9
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Intangible assets subject to amortization
Subscriber base 362.9 56.8 306.1 311.6
Software 993.0 456.6 536.4 600.3
Access to rights-of-way and other 115.7 27.6 88.1 86.6
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1,471.6 541.0 930.6 998.5
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Intangible assets with indefinite lives
Spectrum licences (a) 3,968.6 1,018.5 2,950.1 2,950.1
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$25,070.9 $13,321.0 $11,749.9 $11,974.5
=================================================================================================================================
(a) Accumulated amortization of spectrum licences is amortization recorded
prior to 2002 and the transitional impairment amount.
Included in capital expenditures for the three month period ended March 31,
2003, were additions of intangible assets subject to amortization of $19.9
million (2002 - $35.3 million).
(b) Sale of Property
During 2003, the Company disposed of a non-strategic property under the terms
of a sales-leaseback transaction. The pre-tax gain of $8.2 million, on total
cash proceeds of $19.3 million, has been deferred and will be amortized over
the term of the lease.
10. Deferred Charges
As at As at
March 31, December 31,
(millions) 2003 2002
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Recognized transitional pension assets and pension plan
contributions in excess of charges to income $ 375.3 $ 367.9
Cost of issuing debt securities, less amortization 49.8 53.4
Deferred hedging asset - 134.1
Deferred customer activation and installation costs (a) 97.8 100.3
Other 66.4 73.4
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$ 589.3 $ 729.1
=================================================================================================================================
(a) Upfront customer activation fees, along with the corresponding direct costs
not in excess of revenues, are deferred and recognized over the average
expected term of the customer relationship.
11. Goodwill
For the three months ended March 31, 2003, goodwill additions, arising from
contingent consideration paid in respect of a prior year's acquisition, were
$0.1 million (2002 - NIL).
12. Long-Term Debt
(a) Details of Long-Term Debt
($ in millions)
As at As at
March 31, December 31,
Series Rate Maturity 2003 2002
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TELUS Corporation Notes
CA 7.5% June 2006 $ 1,570.2 $ 1,569.7
U.S. 7.5% June 2007 1,710.6 1,835.5
U.S. 8.0% June 2011 2,820.6 3,026.6
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6,101.4 6,431.8
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TELUS Corporation Bank Facilities May 2004 504.0 655.0
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TELUS Communications Inc. Debentures
1 12.00% May 2010 50.0 50.0
2 11.90% November 2015 125.0 125.0
3 10.65% June 2021 175.0 175.0
5 9.65% April 2022 249.0 249.0
A 9.50% August 2004 189.5 189.5
B 8.80% September 2025 200.0 200.0
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988.5 988.5
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TELUS Communications Inc. Medium Term Note Debentures
96-9 6.25% August 2004 20.0 20.0
99-1 6.40% June 2003 151.0 151.0
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171.0 171.0
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TELUS Communications (Quebec) Inc. First Mortgage Bonds
T 10.80% March 2003 - 30.0
U 11.50% July 2010 30.0 30.0
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30.0 60.0
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TELUS Communications (Quebec) Inc. Medium Term Notes
1 7.10% February 2007 70.0 70.0
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TELUS Communications Inc. Senior Discount Notes 0.8 0.8
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Capital leases issued at varying rates of interest from 5.3% to 18.0%
and maturing on various dates up to 2006 7.6 10.1
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Other 3.3 0.5
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Total debt 7,876.6 8,387.7
Less - current maturities 161.4 190.3
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Long-Term Debt $ 7,715.2 $ 8,197.4
=================================================================================================================================
(b) Long-Term Debt Maturities
Anticipated requirements to meet long-term debt repayments during each of the
five years ended December 31, are as follows:
(millions)
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2003 (balance of year) $ 161.2
2004 714.2
2005 -
2006 1,578.0
2007 1,868.2
13. Other Long-Term Liabilities
As at As at
March 31, December 31,
(millions) 2003 2002
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Deferred gain on sale-leaseback of buildings $ 116.9 $ 111.1
Pension and other post-retirement liabilities 152.2 149.7
Deferred hedging liability 197.6 -
Deferred customer activation and installation fees (a) 97.8 100.3
Other 49.2 44.2
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$ 613.7 $ 405.3
=================================================================================================================================
(a) Upfront customer activation fees, along with the corresponding direct costs
not in excess of revenues, are deferred and recognized over the average
expected term of the customer relationship.
14. Common Equity
(a) Details of Shareholders' Equity
As at As at
March 31, December 31,
($ in millions except per share amounts) 2003 2002
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Convertible debentures $ 151.2 $ 148.5
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TELUS Communications Inc. Preference Shares and Preferred Shares
Authorized Amount
Non-voting first preferred shares Unlimited
Redemption
Issued Premium (b)
Cumulative
$6.00 Preference 8,090 10.0% 0.8 0.8
$4.375 Preferred 53,000 4.0% 5.3 5.3
$4.50 Preferred 47,500 4.0% 4.8 4.8
$4.75 Preferred 71,250 5.0% 7.1 7.1
$4.75 Preferred (Series 1956) 71,250 4.0% 7.1 7.1
$5.15 Preferred 114,700 5.0% 11.5 11.5
$5.75 Preferred 96,400 4.0% 9.6 9.6
$6.00 Preferred 42,750 5.0% 4.3 4.3
$1.21 Preferred 768,400 4.0% 19.2 19.2
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69.7 69.7
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Common equity
Shares
Authorized Amount
Common Shares 1,000,000,000
Non-Voting Shares 1,000,000,000
First Preferred Shares 1,000,000,000
Second Preferred Shares 1,000,000,000
Issued
Common Shares (c) 2,294.8 2,275.1
Non-Voting Shares (c) 3,251.1 3,243.2
Options and warrants (d), (e) 56.7 56.8
Accrual for shares issuable under channel stock incentive plan (f) and other 0.8 1.5
Retained earnings 667.1 630.4
Contributed surplus 7.4 7.4
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6,277.9 6,214.4
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Total Shareholders' Equity $ 6,498.8 $ 6,432.6
=================================================================================================================================
(b) TELUS Communications Inc. Preference and Preferred Shares
The Company has the right to redeem the Preference and Preferred shares upon
giving three months' previous notice.
(c) Changes in Common Shares and Non-Voting Shares
Three month period ended March 31 2003
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Number of Amount
shares (millions)
---------------------------------------------------------------------------------------------------------------------------------
Common Shares
Beginning of period 187,271,994 $ 2,275.1
Employees' purchase of shares 1,035,727 18.1
Dividends reinvested in shares 94,520 1.6
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End of period 188,402,241 $ 2,294.8
=================================================================================================================================
Three month period ended March 31 2003
---------------------------------------------------------------------------------------------------------------------------------
Number of Amount
shares (millions)
---------------------------------------------------------------------------------------------------------------------------------
Non-Voting Shares
Beginning of period 158,407,931 $ 3,243.2
Exercise of share options (d) 4,371 0.2
Channel stock incentive plan (f) 10,100 0.1
Dividend Reinvestment and Share Purchase Plan (g)
Dividends reinvested in shares 468,089 7.4
Optional cash payments 15,108 0.2
---------------------------------------------------------------------------------------------------------------------------------
End of period 158,905,599 $ 3,251.1
=================================================================================================================================
(d) Share Option Plans
The Company has a number of share option plans under which directors, officers
and other employees receive options to purchase Common Shares and/or Non-Voting
Shares at a price equal to the fair market value at the date of grant. Options
granted under the plans may be exercised over specific periods not to exceed 10
years from the date of grant. At March 31, 2003, 26,740,462 (December 31, 2002
- 25,824,684) shares are reserved for issuance under the share option plans.
The following is a summary of activity related to the Company's share options
plans for the three months ended March 31, 2003.
Three month period ended March 31 2003
---------------------------------------------------------------------------------------------------------------------------------
Weighted
Number of average option
shares price
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 24,689,860 $ 25.60
Granted 959,855 14.84
Exercised (4,371) 5.95
Forfeited (610,479) 29.73
Expired (141,205) 20.75
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 24,893,660 25.12
=================================================================================================================================
(e) Warrants
Under the terms of the arrangement to acquire Clearnet, effective January 18,
2001, TELUS Corporation exchanged the warrants held by former Clearnet warrant
holders. Each warrant entitles the holder to purchase a non-voting share at a
price of U.S.$10.00 per share until September 15, 2005. Proceeds arising from
the exercise of the warrants are credited to share capital. As at March 31,
2003, 779,434 (December 31, 2002 - 779,434) warrants remained outstanding.
(f) Channel Stock Incentive Plan
The Company initiated the Plan to increase sales of various products and
services by providing additional performance-based compensation in the form of
Non-Voting Shares. The Company has reserved 262,950 (December 31, 2002 -
273,050) shares for issuance under the Plan. As at March 31, 2003, shares
earned, but not yet issued, are accrued as a component of Common Equity.
(g) Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase Plan under which
eligible shareholders may acquire Non-Voting Shares through the reinvestment of
dividends and additional optional cash payments. Excluding Non-Voting Shares
purchased by way of additional optional cash payments, at the Company's
discretion it may offer the Non-Voting Shares at up to a 5% discount from the
market price. Shares purchased through optional cash payments are subject to a
minimum investment of $100 and a maximum investment of $20,000 per calendar
year. Under this Plan, the Company has the option of offering shares from
Treasury or having the trustee acquire shares in the market. Prior to July 1,
2001, when the acquisition of shares from Treasury commenced, all Non-Voting
Shares were acquired on the market at normal trading prices.
15. Commitments and Contingent Liabilities
(a) Operational Efficiency Program Initiatives
As disclosed in Note 3, the Company estimates that an additional restructuring
amount of approximately $12.9 million may be recorded in 2003 in respect of the
OEP for items that were not eligible to be recorded in 2002.
(b) Labour Negotiations
In 2000, TELUS commenced collective bargaining with the Telecommunications
Workers Union for a new collective agreement replacing the legacy agreements
from BC TEL and Alberta-based TELUS. Following the Clearnet acquisition and
subsequent transactions, the Mobility business assumed responsibility for
separate negotiations for its unionized operations in British Columbia and
Alberta. This is the first round of collective bargaining since the merger of
BC TELECOM and TELUS Alberta and the Company's aim is to replace the multiple
legacy collective agreements with a single collective agreement for the new
bargaining unit.
During the fourth quarter of 2002, the Company's application to the Federal
Minister of Labour, as provided for under the Canada Labour Code, requesting
the appointment of a federal conciliator was granted. While the conciliation
process is underway, the Canada Labour Code prohibits a strike or lock out.
In January 2003, the Company and the TWU signed a Maintenance of Activities
agreement, as required by federal legislation. This agreement ensures the
continuation of services to 911 emergency, police, fire, ambulance hospitals
and coast guard, with provisions to cover other potential emergency services
necessary to prevent immediate and serious danger to the health or safety of
the public, in the event of a work stoppage.
Also in January 2003, the Company and the TWU agreed to an extension of the
conciliation process to include a global review of all outstanding issues and a
subsequent 60 day conciliation period; conciliation dates are currently
scheduled through the third quarter of 2003. If the outstanding issues are not
resolved at the end of the 60 day period, the parties may agree to extend this
phase or, alternatively, following a 21 day cooling off period, a legal work
stoppage may occur.
Should a new collective agreement not be reached, there is the risk of a labour
disruption. As a labour disruption could occur in multiple forms, the
operational and financial impacts of a labour disruption on the Company are not
practicably determinable currently.
(c) Guarantees
Effective for reporting periods ending after December 31, 2002, Canadian GAAP
requires the disclosure of certain types of guarantees and their maximum,
undiscounted amounts. The maximum potential payments represent a "worst-case
scenario" and do not necessarily reflect results expected by the Company.
Guarantees requiring disclosure are those obligations that require payments
contingent on specified types of future events; in the normal course of its
operations, the Company enters into obligations which GAAP may consider to be
guarantees. As defined by Canadian GAAP, guarantees subject to these disclosure
guidelines do not include guarantees that relate to the future performance of
the Company.
Performance guarantees: Performance guarantees contingently require a
guarantor, to make payments to a guaranteed party based on a third party's
failure to perform under an obligating agreement. TELUS provides sales price
guarantees in respect of employees' principal residences as part of its
employee relocation policies. In the event that the Company is required to
honour such guarantees, it purchases (for immediate resale) the property from
the employee. As at March 31, 2003, the Company has no liability recorded in
respect of performance guarantees.
Financial guarantees: The Company has guaranteed a third party's financial
obligation as a part of a facility naming rights agreement. The guarantee runs
through to December 31, 2014, on a declining-balance basis and is of limited
recourse. The Company has no liability recorded, as at March 31, 2003, in
respect of this guarantee.
In conjunction with its 2001 exit from the equipment leasing business, the
Company provided a guarantee to a third party with respect to certain specified
telecommunication asset and vehicle leases. If the lessee were to default, the
Company would be required to make a payment to the extent that the realized
value of the underlying asset is insufficient to pay out the lease; in some
instances, the Company could be required to pay out the lease on a gross basis
and realize the underlying value of the leased asset itself. The Company has a
liability of $2.1 million recorded as at March 31, 2003, in respect of the
lease guarantees.
The following table quantifies the maximum, undiscounted guarantee amounts, as
at March 31, 2003, without regard for the likelihood of having to make such
payment.
Performance Financial
(millions) guarantees (a) guarantees (a) Total
---------------------------------------------------------------------------------------------------------------------------------
2003 $ 2.1 $ 12.1 $ 14.2
2004 - 9.7 9.7
2005 - 7.4 7.4
2006 - 5.0 5.0
2007 - 3.1 3.1
(a) Annual amounts for performance guarantees and financial guarantees
include the maximum guarantee amounts during any year of the term of the
guarantee.
Indemnification obligations: In the normal course of operations, the Company
may provide indemnifications in conjunction with certain transactions. The term
of these indemnification obligations range in duration and often are not
explicitly defined. Where appropriate, an indemnification obligation is
recorded as a liability. In many cases, there is no maximum limit on these
indemnification obligations and the overall maximum amount of the obligations
under such indemnification obligations cannot be reasonably estimated. Other
than obligations recorded as liabilities at the time of the transaction,
historically the Company has not made significant payments under these
indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the
Company agreed to bear a proportionate share of the purchaser's increased
directory publication costs if the increased costs were to arise from a change
in the applicable Canadian Radio-television and Telecommunications Commission
(the "CRTC") regulatory requirements. The Company's proportionate share is 80%
through May 2006, declining to 40% in the next five-year period and then to 15%
in the final five years. As well, should the CRTC take any action which would
result in the purchaser being prevented from carrying on the directory business
as specified in the agreement, TELUS would indemnify the purchaser in respect
of any losses that the purchaser incurred.
The Company has no liability recorded, as at March 31, 2003, in respect of
indemnifications.
(d) Claims and Lawsuits
A number of claims and lawsuits seeking damages and other relief are pending
against the Company. It is impossible at this time for the Company to predict
with any certainty the outcome of such litigation. However, management is of
the opinion, based upon information presently available, that it is unlikely
that any liability, to the extent not provided for through insurance or
otherwise, would be material in relation to the Company's consolidated
financial position.
16. Net Change in Non-Cash Working Capital
Three month periods ended March 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Accounts receivable $ 87.0 $ (30.2)
Income and other taxes receivable (53.6) (32.8)
Inventories 10.2 10.0
Prepaid expenses and other (17.5) (39.1)
Accounts payable and accrued liabilities (23.8) 29.5
Advance billings and customer deposits 8.8 21.4
Employer contributions to employee benefit plans (18.0) (11.4)
---------------------------------------------------------------------------------------------------------------------------------
$ (6.9) $ (52.6)
=================================================================================================================================
17. Segmented Information
The Company's reportable segments, which are used to manage the business, are
Communications and Mobility. Communications includes: voice local, voice long
distance, data and other telecommunication services excluding wireless;
Mobility includes: cellular and paging services. Segmentation is based on
similarities in technology, the technical expertise required to deliver the
products and services, and the distribution channels used. Intersegment sales
are recorded at the exchange value, which is the amount agreed to by the
parties.
Three month periods
ended March 31 Communications Mobility Eliminations Consolidated
(millions) 2003 2002 2003 2002 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
External revenue $ 1,208.5 $ 1,250.9 $ 532.4 $ 447.1 $ - $ - $ 1,740.9 $ 1,698.0
Inter-segment
revenue 23.4 21.9 3.7 4.1 (27.1) (26.0) - -
---------------------------------------------------------------------------------------------------------------------------------
Total operating
revenue 1,231.9 1,272.8 536.1 451.2 (27.1) (26.0) 1,740.9 1,698.0
Operations expenses 739.7 806.1 357.5 328.6 (27.1) (26.0) 1,070.1 1,108.7
---------------------------------------------------------------------------------------------------------------------------------
EBITDA (a) $ 492.2 $ 466.7 $ 178.6 $ 122.6 $ - $ - $ 670.8 $ 589.3
=================================================================================================================================
CAPEX (b) $ 153.5 $ 309.1 $ 54.3 $ 96.8 $ - $ - $ 207.8 $ 405.9
=================================================================================================================================
EBITDA less CAPEX $ 338.7 $ 157.6 $ 124.3 $ 25.8 $ - $ - $ 463.0 $ 183.4
=================================================================================================================================
(a) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
is defined as operating revenues less operations expense and, as defined,
excludes restructuring and workforce reduction costs. The Company has issued
guidance on, and reports, EBITDA because it is a key measure used by management
to evaluate performance of its business segments and is utilized in measuring
compliance with debt covenants.
(b) Total capital expenditures ("CAPEX").
18. Related Party Transactions
In 2001, the Company entered into an agreement with Verizon Communications Inc.
("Verizon"), a significant shareholder, with respect to acquiring certain
rights to Verizon's software, technology, services and other benefits, thereby
replacing and amending a previous agreement between the Company and GTE
Corporation. The agreement is renewable annually at the Company's sole option
up to December 31, 2008, and it has been renewed for 2003. As of March 31,
2003, $312.1 million of specified software licences and a trademark licence
have been acquired and recorded as capital and other assets. These assets are
valued at fair market value at the date of acquisition as determined by an
arm's-length party's appraisal. Assuming renewal through to 2008, the total
commitment under the new agreement is U.S.$377 million for the period 2001 to
2008 and the commitment remaining after March 31, 2003, is U.S.$117 million. In
addition, in the normal course of operations and on market terms and
conditions, ongoing services and other benefits have been received and
expensed; the Company owed Verizon, on a net basis and including dividends
payable, $43.0 million at March 31, 2003 (December 31, 2002 - $75.4 million).
Three month periods ended March 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Verizon agreement
Specified software licences and trademark licence
acquired and recorded as capital and other $ - $ 26.3
Ongoing services and benefits expensed $ 7.5 $ 13.5
Sales to Verizon (Verizon customers' usage of TELUS'
telecommunication infrastructure and other) $ 12.1 $ 5.9
Purchases from Verizon (TELUS customers' usage of Verizon's
telecommunication infrastructure and other) $ 8.7 $ 8.5
---------------------------------------------------------------------------------------------------------------------------------
In common with, and on the same basis as, other shareholders of the Company,
Verizon is eligible to participate in the Company's Dividend Reinvestment and
Share Purchase Plan (see Note 14(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.
Three month periods ended March 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Declared dividends attributable to Verizon's shareholdings
- to be paid in cash $ 10.5 $ -
- to be reinvested in Treasury shares 0.5 10.9
---------------------------------------------------------------------------------------------------------------------------------
11.0 10.9
---------------------------------------------------------------------------------------------------------------------------------
Cash payments 10.5 -
Reinvested in Treasury shares 0.5 10.7
---------------------------------------------------------------------------------------------------------------------------------
11.0 10.7
---------------------------------------------------------------------------------------------------------------------------------
Change in dividends payable to Verizon - 0.2
Dividends payable to Verizon, beginning of period 11.0 10.7
---------------------------------------------------------------------------------------------------------------------------------
Dividends payable to Verizon, end of period $ 11.0 $ 10.9
=================================================================================================================================
19. Differences Between Canadian and United States Generally Accepted
Accounting Principles
The consolidated financial statements have been prepared in accordance with
Canadian GAAP. The principles adopted in these financial statements conform in
all material respects to those generally accepted in the United States except
as summarized below. Significant differences between Canadian GAAP and U.S.
GAAP would have the following effect on reported net income of the Company:
Three month periods ended March 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with Canadian GAAP $ 91.2 $ (0.8)
Adjustments:
Decrease in depreciation expense (b) 8.9 8.9
Decrease in interest expense (c) 2.4 2.4
Amortization of intangible assets (d) (20.5) (20.5)
Change in future employee benefits (e) (4.2) (4.2)
Asset impairment - decrease in depreciation (f) 18.0 18.0
Interest on convertible debentures (g) (1.7) (1.6)
Accounting for derivatives (h) 1.1 (1.1)
Taxes on the above adjustments (1.7) (2.6)
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before effect of change in accounting principle 93.5 (1.5)
Effect of change in accounting principles for intangible assets and goodwill (i) - (1,701.6)
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with U.S. GAAP 93.5 (1,703.1)
Other comprehensive income (loss) (h) (m) 19.4 (49.0)
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) in accordance with U.S. GAAP $ 112.9 $(1,752.1)
=================================================================================================================================
Income (loss) per share under U.S. GAAP (basic and diluted):
Before effect of change in accounting principles for intangible assets and goodwill $ 0.27 $ (0.01)
Effect of change in accounting principles for intangible assets and goodwill (i) - (5.60)
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.27 $ (5.61)
=================================================================================================================================
The following is a restatement of major balance sheet categories to reflect the
application of U.S. GAAP:
As at As at
March 31, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Current assets $ 1,337.8 $ 1,173.2
Capital assets
Property, plant, equipment and other 7,796.2 7,926.0
Intangible assets subject to amortization 2,813.2 2,901.6
Intangible assets with indefinite lives 2,950.1 2,950.1
Goodwill 3,543.3 3,543.2
Deferred income taxes 948.6 1,174.7
Other assets 859.7 979.9
---------------------------------------------------------------------------------------------------------------------------------
$20,248.9 $20,648.7
=================================================================================================================================
Current liabilities $ 1,977.2 $ 2,181.0
Long-term debt 7,883.0 8,364.9
Other long-term liabilities 710.0 499.7
Deferred income taxes 1,645.7 1,655.1
Non-controlling interest 11.4 11.2
Shareholders' equity 8,021.6 7,936.8
---------------------------------------------------------------------------------------------------------------------------------
$20,248.9 $20,648.7
=================================================================================================================================
The following is a reconciliation of shareholders' equity incorporating the
differences between Canadian and U.S. GAAP:
As at March 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under Canadian GAAP $ 6,498.8 $ 6,394.1
Adjustments:
Purchase versus Pooling Accounting (a) - (e), (j) 1,537.5 1,570.4
Asset impairment (f) (24.9) (69.0)
Reclassification of convertible debentures from equity to debt (g) (151.2) (149.6)
Accounting for derivatives (h) (2.5) (3.8)
Additional goodwill on Clearnet purchase (k) 123.5 123.5
Other comprehensive income (loss) (m) 40.4 (68.9)
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under U.S. GAAP $ 8,021.6 $ 7,796.7
=================================================================================================================================
(a) Merger of BC TELECOM and TELUS
The business combination between BC TELECOM and TELUS Corporation (renamed
TELUS Holdings Inc. which was wound up June 1, 2001) was accounted for using
the pooling of interests method under Canadian GAAP. Under Canadian GAAP, the
application of the pooling of interests method of accounting for the merger of
BC TELECOM and TELUS Holdings Inc. resulted in a restatement of prior periods
as if the two companies had always been combined. Under U.S. GAAP, the merger
is accounted for using the purchase method. Use of the purchase method results
in TELUS (TELUS Holdings Inc.) being acquired by BC TELECOM for $4,662.4
million (including merger related costs of $51.9 million) effective January 31,
1999.
(b) 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.
(e) Future Employee Benefits
Under U.S. GAAP, TELUS' future employee benefit assets and obligations have
been recorded at their fair values on acquisition. Accounting for future
employee benefits under Canadian GAAP changed to become more consistent with
U.S. GAAP effective January 1, 2000. Canadian GAAP provides that the
transitional balances can be accounted for prospectively. Therefore, to conform
to U.S. GAAP, the amortization of the transitional amount needs to be removed
from the future employee benefit expense.
(f) Asset Impairment
In the first quarter of 1998, BC TELECOM, took an asset impairment charge. In
assessing if a capital asset is impaired, estimated future net cash flows are
not discounted in computing the net recoverable amount. Under Canadian GAAP, at
the time the assessment took place, the impairment amount recorded was the
excess of the carrying amount over the recoverable amount; under U.S. GAAP the
impairment amount recorded was the excess of the carrying amount over the
discounted estimated future net cash flows that were used to determine the net
recoverable amount. Under U.S. GAAP the net of tax charge taken in 1998 would
be $232.2 million higher and would not be considered an extraordinary item. The
annual depreciation expense would be approximately $72 million lower subsequent
to when the increased impairment charge was taken under U.S. GAAP.
(g) Convertible Debentures
Under Canadian GAAP, financial instruments such as the convertible debentures
are classified as debt or equity according to their substance rather than their
legal form. Accordingly, due to the substance of the transaction the
convertible debentures have been classified as equity and the corresponding
interest expense and the amortization of issue costs has been charged to the
retained earnings rather than to the Consolidated Statements of Income.
Pursuant to U.S. GAAP, the convertible debentures would be included in
long-term debt. The corresponding interest expense on the convertible
debentures and the amortization of issue costs are charged to the Consolidated
Statements of Income.
(h) Accounting for Derivatives
On January 1, 2001, the Company adopted the provisions of SFAS 133, "Accounting
For Derivative Instruments and Hedging Activities." This standard requires all
derivatives be recognized as either assets or liabilities and measured at fair
value. This is different from the Canadian GAAP treatment for financial
instruments. Under U.S. GAAP, derivatives, which are fair value hedges,
together with the financial instrument being hedged, will be marked to market
with adjustments reflected in income and derivatives, which are cash flow
hedges, will be marked to market with adjustments reflected in comprehensive
income.
(i) Intangible Asset Transitional Impairment Amount and Goodwill
Commencing January 1, 2002, in Canada and the United States, new Generally
Accepted Accounting Principles for intangible assets with an indefinite life
and goodwill apply to the Company (SFAS 142, "Goodwill and Other Intangible
Assets"). As one part of the transitional implementation, intangible assets
with indefinite lives were tested for impairment as at January 1, 2002. Any
such transitional impairment amount arising is considered to arise from a
change in accounting policy and is charged to earnings, in the period the
change is effected, after determining net income from operations. As a result
of the differing accounting treatment afforded the merger of BC TELECOM and
TELUS (see (a) and (d)), the recorded value of intangible assets with
indefinite lives differs materially between Canadian and U.S. GAAP. The Company
has assessed its intangible assets with indefinite lives and determined it
necessary to record a transitional impairment amount of $595.2 million ($910.0
million before tax) for purposes of Canadian GAAP; a transitional impairment of
$1,701.6 million ($2,609.7 million before tax) was required under U.S. GAAP.
The transitional impairment amount, under both Canadian and U.S. GAAP, reduced
the carrying values of the intangible assets with indefinite lives to the same
amounts, thus eliminating the corresponding GAAP difference.
Similarly, goodwill was also to be tested for impairment as at January 1, 2002,
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.
(j) 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.
(k) 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.
(l) Share-Based Compensation
Generally Accepted Accounting Principles require disclosure of the impact on
earnings and earnings per share as if the fair value based method of accounting
had been applied for share-based compensation. Under Canadian GAAP, this is
required in respect of awards made after 2001; under U.S. GAAP, this is
required in respect of awards made after 1994. The fair values of the Company's
options granted in 2003 and 2002, and the weighted average assumptions used in
estimating the fair values, are set out in Note 7. Such impact, using the fair
values set out in Note 7 would approximate the following pro forma amounts:
Three month periods ended March 31 (millions except per share amounts) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Compensation cost $ 12.3 $ 19.4
Net income (loss)
As reported $ 93.5 $(1,703.1)
Pro forma $ 81.2 $(1,722.5)
Net income (loss) per Common Share and Non-Voting Share
Basic and diluted
As reported $ 0.27 $ (5.61)
Pro forma $ 0.23 $ (5.67)
---------------------------------------------------------------------------------------------------------------------------------
(m) Additional Disclosures Required Under U.S. GAAP - Comprehensive Income
SFAS 130, "Reporting Comprehensive Income", requires that a statement of
comprehensive income be displayed with the same prominence as other financial
statements. Comprehensive income, which incorporates net income, includes all
changes in equity during a period except those resulting from investments by
and distributions to owners. There is currently no requirement to disclose
comprehensive income under Canadian GAAP.
Three month periods ended March 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Change in unrealized fair value of derivative cash flow hedges (h) $ 24.2 $ (84.3)
Minimum pension liability (0.9) -
---------------------------------------------------------------------------------------------------------------------------------
23.3 (84.3)
Income tax expense (recovery) 3.9 (35.3)
---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $ 19.4 $ (49.0)
=================================================================================================================================
(n) Asset Retirement Obligations
Commencing January 1, 2003, new Generally Accepted Accounting Principles for
asset retirement obligations apply to the Company (SFAS 143, "Accounting for
Asset Retirement Obligations"). The new standard focuses on the recognition and
measurement of liabilities for statutory, contractual or legal obligations,
normally when incurred, associated with the retirement of property, plant and
equipment when those obligations result from the acquisition, construction,
development or normal operation of the assets. The obligations are measured
initially at fair value (using present value methodology) and the resulting
costs capitalized into the carrying amount of the related asset. In subsequent
periods, the liability is adjusted for the accretion of discount and any
changes in the amount or timing of the underlying future cash flows. The
capitalized asset retirement cost is depreciated on the same basis as the
related asset; discount accretion is also included in determining the results
of operations.
All amounts arising from the application of this accounting policy are not
significant.
20. Prior Period Presentation
The December 31, 2002, and March 31, 2002, amounts have been reclassified,
where applicable, to conform to the 2003 presentation.
TELUS Management Discussion and Analysis
First Quarter 2003
==============================================================================
Forward-Looking Statements
This document and the management discussion and analysis contain
statements about expected future events and financial and operating results of
TELUS Corporation ("TELUS" or the "Company") that are forward-looking and
subject to risks and uncertainties. TELUS' actual results, performance or
achievement could differ materially from those expressed or implied by such
statements. Such statements are qualified in their entirety by the inherent
risks and uncertainties surrounding future expectations and may not reflect
the potential impact of any future acquisitions, mergers or divestitures.
Factors that could cause actual results to differ materially include but are
not limited to: general business and economic conditions in TELUS' service
territories across Canada and future demand for services; competition in
wireline and wireless services, including voice, data and Internet services
and within the Canadian telecommunications industry generally; re-emergence
from receivership of newly restructured competitors; levels of capital
expenditures; corporate restructurings; success of operational and capital
efficiency programs including maintenance of customer service levels; success
of integrating acquisitions; network upgrades, billing system conversions, and
reliance on legacy systems; implementation of new customer relationship
management software; realization of tax savings; the impact of credit rating
changes; availability and cost of capital including renewal of credit
facilities; financial condition and credit risk of customers affecting
collectibility of receivables; ability to maintain an accounts receivable
securitization program; adverse regulatory action; attraction and retention of
key personnel; collective labour agreement negotiations and outcome of
conciliation efforts; future costs of retirement and pension obligations and
returns on invested pension assets; technological advances; the final outcome
of pending or future litigation; the effect of environmental, health and
safety concerns and other risk factors discussed herein and listed from time
to time in TELUS' reports, comprehensive public disclosure documents,
including the Annual Information Form, and in other filings with securities
commissions in Canada and the U.S.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
==============================================================================
Management's Discussion and Analysis
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month periods ended
March 31, 2003 and 2002. This discussion contains forward-looking information
that is qualified by reference to, and should be read together with, the
Company's discussion regarding forward-looking statements (see "Forward-
Looking Statements" above). The following should also be read together with
the interim consolidated financial statements of TELUS. The interim
consolidated financial statements have been prepared in accordance with
Canadian Generally Accepted Accounting Principles (GAAP), which differ in
certain respects from U.S. GAAP. See Note 19 to the interim consolidated
financial statements for a summary of the principal differences between
Canadian and U.S. GAAP as they relate to TELUS.
Management's discussion and analysis is comprised of the following:
1. Vision, Core Business and Strategy
2. Capability to Deliver Results
3. Results and Key Performance Indicators
4. Risks and Uncertainties
1. Vision, Core Business and Strategy
TELUS will continue to be guided by its six strategic imperatives
established in 2000. TELUS is focusing and moving forward on the following
priorities in 2003:
Continuing to deliver on our efficiency improvement objectives.
- Communications segment operating costs were significantly reduced,
thirteen customer contact centres were consolidated and staff were
reduced by 600 in the first quarter of 2003, as discussed in detail in
"Results and Key Performance Indicators";
- The Company disposed of a non-core property for $19.3 million of cash
proceeds.
Improving customer service.
Process and system changes that are having a positive impact, include:
- TELUS-wide priority customer service measures;
- Root cause analysis and issue resolution reducing inbound call volumes;
- Errors being identified and eliminated at their source; and
- Available staff being aligned with peak service periods.
Enhancing our leadership position in the North American wireless
industry.
During the quarter, TELUS Mobility built on performance which was
industry leading in the second half of 2002 on a number of key indicators.
First quarter Earnings Before Interest Taxes Depreciation and Amortization
(EBITDA) excluding Restructuring and workforce reduction costs increased by
46% compared to the same quarter a year ago. Mobility's industry-leading
average revenue per subscriber unit per month (ARPU) increased by $2 in the
first quarter of 2003 compared to the first quarter a year ago. TELUS Mobility
also enjoys an industry-leading 83% proportion of higher value postpaid
subscribers in its mix of postpaid and pre-paid subscribers. In the area of
building value by retaining customers, in the first quarter of 2003 TELUS
Mobility's churn rate was further reduced to 1.53%, or by 35 basis points as
compared to 1.88% in the first quarter of 2002. For more details please see
"Key operating indicators - Mobility segment".
Strengthen our financial position, based on improved operating
performance.
- Moody's Investor Services changed its outlook for TELUS senior
unsecured debt to 'Stable' from 'Negative', prior to the release of
TELUS first quarter 2003 results; and
- TELUS reduced net debt and improved its financial ratios in the first
quarter of 2003.
Achieving a settlement with our unionized employees.
In 2000, TELUS commenced collective bargaining with the
Telecommunications Workers Union for a new collective agreement replacing the
legacy agreements from BC TEL and Alberta-based TELUS. Following the Clearnet
acquisition and subsequent transactions, the Mobility business assumed
responsibility for separate negotiations for its unionized operations in
British Columbia and Alberta. This is the first round of collective bargaining
since the merger of BC TELECOM and TELUS Alberta and the Company's aim is to
replace the multiple legacy collective agreements with a single collective
agreement for the new bargaining unit.
During the fourth quarter of 2002, the Company's application to the
Federal Minister of Labour, as provided for under the Canada Labour Code,
requesting the appointment of a federal conciliator was granted. While the
conciliation process is underway, the Canada Labour Code prohibits a strike or
lock out.
In January 2003, the Company and the TWU signed a Maintenance of
Activities agreement, as required by federal legislation. This agreement
ensures the continuation of services to 911 emergency, police, fire, ambulance
hospitals and coast guard, with provisions to cover other potential emergency
services necessary to prevent immediate and serious danger to the health or
safety of the public, in the event of a work stoppage.
Also in January 2003, the Company and the TWU agreed to an extension of
the conciliation process to include a global review of all outstanding issues
and a subsequent 60-day conciliation period; conciliation dates are currently
scheduled through the third quarter of 2003. If the outstanding issues are not
resolved at the end of the 60-day period, the parties may agree to extend this
phase or, alternatively, following a 21 day cooling off period, a legal work
stoppage may occur.
Should a new collective agreement not be reached, there is the risk of a
labour disruption. As a labour disruption could occur in multiple forms, the
operational and financial impacts of a labour disruption on the Company are
not practicably determinable currently.
2. Capability to Deliver Results
Changes to the Competitive Environment
The level of competitive rivalry is expected to remain intense in 2003 as
certain competitors restructured their operations. AT&T Canada completed its
restructuring process in April 2003, which eliminated all its debt, and
Microcell Telecommunications Inc. has received creditor and court approval for
the restructuring of its debt and capital in March 2003.
Regulatory updates
Price Cap Decision 2002-34
In 2002, AT&T Canada Inc. petitioned the federal Cabinet to increase
competitor discounts from those provided for in Decision 2002-34. On March 25,
2003 the federal Cabinet upheld Decision 2002-34 thereby denying the petition.
Telecom Public Notice 2003-4, April 10, 2003
The Canadian Radio-television and Telecommunications Commission (CRTC)
announced measures to address what it considers to be non-compliance issues by
Incumbent Local Exchange Carriers (ILECs). The Commission has decided to step
up proactive enforcement powers it is already granted under the
Telecommunications Act. The Company believes this decision has no immediate
material impact on TELUS.
3. Results and Key Performance Indicators
Financial Statement Presentation and Disclosure Changes
Guarantees
In the normal course of its operations, the Company enters into
obligations which GAAP may consider to be guarantees. Effective for reporting
periods ending after December 31, 2002, Canadian GAAP requires the disclosure
of these guarantees and their maximum, undiscounted amounts, even when the
likelihood of the Company having to make any payments under the guarantees is
slight. See Note 2(a) and Note 15(c) to the interim consolidated financial
statements.
Asset Retirement Obligations
Commencing with the Company's 2004 fiscal year, the new recommendations
of the CICA for accounting for asset retirement obligations (CICA Handbook
Section 3110) will apply. The new section focuses on the recognition and
measurement of liabilities for statutory, contractual or legal obligations,
normally when incurred, associated with the retirement of property, plant and
equipment when those obligations result from the acquisition, construction,
development or normal operation of the assets. The obligations are measured
initially at fair value (using present value methodology) and the resulting
costs capitalized into the carrying amount of the related asset. In subsequent
periods, the liability is adjusted for the accretion of discount and any
changes in the amount or timing of the underlying future cash flows. The
capitalized asset retirement cost is depreciated on the same basis as the
related asset; discount accretion is included in determining the results of
operations. The Company is currently evaluating the impact of this standard on
its financial statements.
Financial Impact of Price Cap Decisions
On May 30, 2002 and July 31, 2002, the CRTC announced its decisions on
the Regulatory Framework for the Second Price Cap Period for the ILECs, 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 Inc. and
beginning August 2002 for TELUS Communications (Quebec) Inc. The impact of
these decisions on TELUS was a $23.0 million decrease in Communications
segment Operating revenues and a $21.9 million decrease in Communications
segment EBITDA for the first quarter of 2003, when compared to the same period
one year earlier.
On March 18, 2003, the CRTC issued Telecom Decision CRTC 2003-11, which
finalized for the industry the assignment of tariffed services to the service
baskets established in Regulatory framework for the second price cap period.
Also on March 18, 2003, the CRTC released Telecom Decision CRTC 2003-18, TELUS
Communications Inc. - 2002 Annual price cap filing, in which it approved, on a
final basis, the majority of the applications filed in 2002 by TELUS proposing
rate changes pursuant to Decision 2002-34. The financial impact of these two
decisions is consistent with TELUS' financial assumptions for 2002 and 2003.
Results of Operations
Highlights
Quarter ended March 31 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions except per share amounts)
Operating revenues 1,740.9 1,698.0 42.9 2.5
EBITDA(1) 670.8 589.3 81.5 13.8
Restructuring and workforce
reduction costs 6.5 12.5 (6.0) (48.0)
Income taxes (recovery) (5.9) 16.5 (22.4) (135.8)
Net income (loss) 91.2 (0.8) 92.0 -
Common Share and 88.6 (3.3) 91.9 -
Non-Voting Share income (loss)
Earnings (loss) per share (EPS) 0.26 (0.01) 0.27 -
Capital expenditures - general 207.8 405.9 (198.1) (48.8)
Free cash flow (2) 375.7 101.0 274.7 272.0
-------------------------------------------------------------------------
(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 it is
utilized in measuring compliance with debt covenants. The Company also
believes EBITDA is a measure commonly reported and widely used by investors as
an indicator of a company's operating performance and ability to incur and
service debt. The Company believes EBITDA assists investors in comparing a
company's performance on a consistent basis without regard to depreciation and
amortization, which are non-cash in nature and can vary significantly
depending upon accounting methods or non-operating factors such as historical
cost; and without regard to Restructuring and workforce reduction costs, which
are transitional in nature. EBITDA is not a calculation based on Canadian or
U.S. Generally Accepted Accounting Principles and should not be considered an
alternative to Net income in measuring the Company's performance or used as an
exclusive measure of cash flow because it does not consider the impact of
working capital growth, capital expenditures, debt principal reductions and
other sources and uses of cash which are disclosed in the Consolidated
Statements of Cash Flows. Investors should carefully consider the specific
items included in TELUS' computation of EBITDA. While EBITDA has been
disclosed herein to permit a more complete comparative analysis of the
Company's operating performance and debt servicing ability relative to other
companies, investors should be cautioned that EBITDA as reported by TELUS may
not be comparable in all instances to EBITDA as reported by other companies.
(2) Free cash flow is defined as EBITDA excluding Restructuring and
workforce reduction costs less Capital expenditures, cash interest, cash taxes
and cash dividends. This measure is used to provide an indication of
underlying cash flows in the business for the items identified. As defined,
free cash flow excludes Restructuring and workforce reduction costs, working
capital changes and other sources and uses of cash, which are disclosed in the
consolidated statements of cash flows.
Significant changes included in the first quarter 2003 financial results,
when compared with the first quarter of 2002, were:
- Communications segment revenues decreased by $42.4 million. This
reduction included price cap decision impacts of $23.0 million, lower
voice equipment sales of $14.3 million, and lower long distance
revenues of $14.3 million from erosion of long distance minutes and
prices;
- Communications segment EBITDA improved by $25.5 million as the decrease
in revenues was more than offset by a $66.4 million decrease in
operations expense. The decrease in operations expense was primarily a
result of $95 million of incremental savings resulting from the
Operational Efficiency Program. Total staff for the Communications
segment were reduced by approximately 600 since December 31, 2002,
bringing cumulative staff reductions to approximately 5,800 since
December 31, 2001, and approximately 6,600 since the inception of the
Operational Efficiency Program. Savings in operations expense have
aggregated $245 million from the start of the Operational Efficiency
Program.
- Mobility segment Revenue improved by $85.3 million or 19.1%. This was a
result of strong average revenue per subscriber unit per month (ARPU)
and subscriber growth;
- Mobility segment EBITDA improved $56.0 million or 45.7%. This was a
result of strong revenue and subscriber growth, cost containment, and
to the economies of scale recognized through efficiencies resulting
from the successful national integration of TELUS Mobility's
operations;
- Consolidated Financing costs decreased by $19.8 million because of
lower debt balances and receipt of interest income for tax-related
matters;
- Income taxes included a recovery of $47.0 million in 2003 for
settlement of tax-related matters;
- Consolidated cash flow (EBITDA excluding Restructuring and workforce
reduction costs less Capital expenditures) increased by $279.6 million
to $463.0 million;
- Consolidated free cash flow (EBITDA excluding Restructuring and
workforce reduction costs less Capital expenditures, cash interest,
cash taxes and cash dividends) increased by $274.7 million to $375.7
million, and exceeded current quarter cash payments under Restructuring
and workforce reduction initiatives of $153.9 million; and
- Net debt was reduced by $195 million in the current quarter.
The discussion below for Operating revenues, Operations expense, EBITDA
and Capital expenditures is presented on a segmented basis. All other
discussion is presented for the consolidated interim financial results.
Operating revenues -Communications segment
Quarter ended March 31 2003 2002 Change %
------------------------------------------------------------------------
($ in millions)
Voice local (net of 2003 price cap of
$12.7 million) 522.9 524.9 (2.0) (0.4)
Voice contribution 15.9 18.5 (2.6) (14.1)
Voice long distance 251.1 265.4 (14.3) (5.4)
(net of 2003 price cap of $1.0 million)
Data (net of 2003 price cap of $9.0
million) 342.8 340.7 2.1 0.6
Other (net of 2003 price cap of $0.3
million) 75.8 101.4 (25.6) (25.2)
-------------------------------------------------------------------------
External operating revenue 1,208.5 1,250.9 (42.4) (3.4)
Intersegment revenue 23.4 21.9 1.5 6.8
-------------------------------------------------------------------------
Total operating revenue 1,231.9 1,272.8 (40.9) (3.2)
-------------------------------------------------------------------------
Voice local revenue is generated from monthly access charges and enhanced
services. Local access revenue decreased by $5.3 million in the first quarter
of 2003, when compared with the same period last year, due to price cap
decision impacts of $12.7 million and fewer access lines than one year ago,
partly offset by growth in non-ILEC business. Increased local enhanced
services revenue of $3.3 million partly offset the decline in local access
revenues. Excluding the negative price cap impacts, voice local revenue
increased by $10.7 million or 2.0% in 2003 as compared to 2002.
Network access lines decreased by approximately 26,000 consumer lines and
7,000 business lines in the twelve-month period ended March 31, 2003. During
the first quarter of 2003, business lines increased by 4,000, while consumer
lines decreased by 2,000. ILEC consumer lines continued to decrease due to
removal of second lines as a result of Internet services migrating from dial-
up to high-speed, technological substitution including migration to other
forms of wireline services as well as wireless services, and losses to
competitors. ILEC business line losses resulting from technological
substitution to more efficient Integrated Services Digital Network (ISDN)
services and from economic factors were 28,000 over twelve months and 3,000
during the current quarter. Partly offsetting this was a net line competitive
gain of 21,000 over twelve months and 7,000 during the current quarter as
growth in Central Canada non-ILEC business lines exceeded ILEC business line
losses. The combined ILEC business and local consumer market share was
estimated to be 96.7% at March 31, 2003 (97.4% one year earlier).
Voice contribution revenue decreased for the first quarter of 2003, when
compared with the same period one year ago because of a lower shortfall
calculated according to the methods prescribed by the CRTC for TELUS and other
industry competitors.
Voice long distance revenue decreased for the first quarter of 2003, when
compared with the same period last year, primarily because of fewer consumer
and business minutes. Consumer revenues decreased by $7.1 million as a result
of competitive pressures from 'dial-around' services and other competitors;
partly offset by increasing the monthly long distance plan administration fee
from $1.25 to $2.95 in February of this year. Business revenues decreased by
$8.6 million as a result of fewer minutes. Wholesale settlement revenues
increased by $2.0 million due to higher international traffic. Substitution to
alternative technologies such as e-mail, Internet and wireless, and lower
business long distance rates contributed to long distance revenue and minute
erosion.
Data revenues include Internet access, hosting and applications, LAN/WAN,
gateway service, internetworking and remote access, managed information
technology (IT) services and legacy data services such as private line,
switched data services, data local access, data settlements and data equipment
sales. Wireless data revenues are included in Mobility segment Network
revenues. Communications segment data revenue growth excluding the negative
price cap impacts was $11.1 million or 3.3% in 2003 as compared to 2002.
Internet service revenues increased by $28.5 million because of growth in the
high speed Internet subscriber base, net of lower revenues from dial-up
Internet services as a result of subscriber migration to high-speed services.
As a result of post-implementation review following billing system
conversions, dial-up and high-speed Internet subscriber net additions include
negative adjustments of 6,400 and 3,000, respectively, in the first quarter of
2003. Growth in Internet-related revenues was partly offset by $13.7 million
lower revenues for data equipment sales and other data services such as analog
and packet-switched services, broadcast and videoconferencing, and managed
information technology. Non-core data revenues from international managed
information technology services decreased by $3.7 million to $9.6 million.
Other revenue decreased for the first quarter of 2003 primarily because
of $14.3 million lower voice equipment sales. Other changes included lower
rents from support structures, lower installation and contract services, and
lower Individual Line Service grant.
Included in the total external operating revenue are non-ILEC revenues of
$140.7 million for the first quarter of 2003 and $116.5 million for the first
quarter of 2002, an increase of $24.2 million or 20.8%.
Intersegment revenues represent services provided by the Communications
segment to the Mobility segment. These revenues are eliminated upon
consolidation together with the associated expense from the Mobility segment.
Key operating indicators - Communications segment
Quarter ended March 31 2003 2002 Change %
-------------------------------------------------------------------------
(000s for subscribers and additions)
Network access lines, end of period 4,913 4,946 (33.0) (0.7)
Total Internet subscribers(1),
end of period 814.2 707.3 106.9 15.1
Dial-up 372.1 440.3 (68.2) (15.5)
High-speed 442.1 267.0 175.1 65.6
Total Internet subscriber net additions(1) 12.5 37.4 (24.9) (66.6)
Dial-up (19.6) (14.8) (4.8) (32.4)
High-speed 32.1 52.2 (20.1) (38.5)
-------------------------------------------------------------------------
(1) Internet net additions and subscriber counts for 2003 are net of
reductions of approximately 6,400 dial-up subscribers and approximately 3,000
high-speed Internet subscribers as a result of a post-implementation review
following billing system conversions.
Operating revenues - Mobility segment
Quarter ended March 31 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Network revenue 492.1 414.9 77.2 18.6
Equipment revenue 40.3 32.2 8.1 25.2
-------------------------------------------------------------------------
External operating revenue 532.4 447.1 85.3 19.1
Intersegment revenue 3.7 4.1 (0.4) (9.8)
-------------------------------------------------------------------------
Total operating revenue 536.1 451.2 84.9 18.8
-------------------------------------------------------------------------
Mobility segment 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 for the quarter
ended March 31, 2003 as compared to the same period in 2002 as a result of the
continued expansion of TELUS Mobility's subscriber base by 14.8% to
approximately 3.1 million subscribers from 2.7 million one year ago while
average revenue per subscriber unit per month (ARPU) increased to $54 from $52
in the same quarter last year.
TELUS Mobility continued its strategic focus on profitable revenue growth
and subscriber retention, which resulted in higher ARPU and a substantially
improved churn rate year over year. The $2 increase in the year over year ARPU
was the first such increase in some time reversing the declining trend.
Moreover, ARPU remained stable relative to the fourth quarter of 2002. This is
despite recent trends of greater in-bucket usage, postpaid / prepaid mix
changes, retention offers aimed at reducing postpaid churn, and overall
competitive market pressures. In-bucket usage refers to plans that offer
included minutes at a fixed fee for periods of time including "Evenings and
Weekends". The increased ARPU for the first quarter of 2003 was a result of
increased usage and pricing discipline. TELUS Mobility believes stable ARPU
and churn will continue during 2003. Average minutes of use (MOU) per
subscriber per month were 315 for the current quarter as compared to 250 for
the same period in 2002. As of March 31, 2003, postpaid subscribers accounted
for an industry leading 82.7% of the total cumulative subscriber base as
compared to 84.3% one year earlier and stable relative to the fourth quarter
of 2002. Net postpaid subscriber additions for the current quarter of 43,300
represented 64.9% of all net additions in the period as compared to 61,600
(68.1%) for the corresponding period one year ago. Total net subscriber
additions were 66,700 for the current quarter as compared to 90,500 for the
comparable period last year.
Blended postpaid and prepaid churn averaged 1.5% per month in the first
quarter of 2003, a significant improvement from 1.9% for the comparable period
one year earlier. Deactivations declined 6.1% to 139,000 for the first quarter
2003 as compared to 148,100 for the same period in 2002 despite a 14.8%
increase in the subscriber base. The improved churn and industry leading ARPU
are evidence of the continued focus and execution by TELUS Mobility on
subscriber retention and profitable revenue generating subscriber growth. The
decline in churn is attributed to improved network quality and coverage,
improved client service levels, client contracting as part of loyalty and
retention programs, and the grand fathered per-second rate plans.
Equipment sales, rental and service revenue in the three-month period
ended March 31, 2003, was $40.3 million as compared to $32.2 million for the
same period in 2002. The increase in equipment revenue occurred despite a
decline in gross subscriber additions for the current quarter of 205,700 as
compared to 238,600 for the same period in 2002. The increase was principally
due to handset pricing discipline and product mix.
Intersegment revenues represent services provided by the Mobility segment
to the Communications segment. These revenues are eliminated upon
consolidation together with the associated expense from the Communications
segment.
Key operating indicators -Mobility segment
Quarter ended March 31 2003 2002 Change %
-------------------------------------------------------------------------
(000s for subscribers and additions)
Net subscriber additions - postpaid 43.3 61.6 (18.3) (29.7)
Net subscriber additions - prepaid 23.4 28.9 (5.5) (19.0)
------------------------------------
Net subscriber additions - total 66.7 90.5 (23.8) (26.3)
Subscribers - postpaid 2,533.9 2,250.6 283.3 12.6
Subscribers - prepaid 528.3 417.6 110.7 26.5
------------------------------------
Subscribers - total 3,062.2 2,668.2 394.0 14.8
Churn, per month (%) 1.5 1.9 (0.4) -
Cost of Acquisition (COA) per gross
subscriber addition ($)(1) 507 480 27 5.6
Cost of Acquisition (COA) per gross
subscriber addition excl. retention
and migration ($)(1) 425 404 21 5.2
ARPU ($) 54 52 2 3.8
Total POPs (2) covered 25.9 25.1 0.8 3.2
Total POPs covered including 28.2 25.1 3.1 12.4
roaming/resale (millions) (3)
Digital POPs covered (millions) 25.4 24.8 0.6 2.4
Digital POPs covered including 27.9 24.8 3.1 12.5
roaming/resale (millions) (3)
EBITDA margin as a percentage of
network revenue (%) 36.3 29.5 6.8 -
EBITDA excluding COA ($ millions) 282.8 215.7 67.1 31.1
-------------------------------------------------------------------------
(1) For the three months ended March 31, 2002, Cost of Acquisition of
$480 and $404 before retention and migration costs excluded the $21.0 million
favourable clarification of tax legislation by the Ontario Provincial Sales
Tax authorities, representing a reversal of a cumulative COA liability. When
including the $21.0 million reduction, COA for the three months ended March
31, 2002 would be $392 and $315 excluding retention and migration.
(2) POPs is an abbreviation for Population. A POP refers to one person
living in a population area, which in whole or substantial part is included in
the coverage areas.
(3) TELUS Mobility has not activated all digital-roaming areas. TELUS
Mobility PCS Digital Population Coverage was 21.5 million, and 27.9 million
including the roaming/resale agreement with Bell Mobility and Aliant Telecom
Wireless. TELUS Mobility PCS and Mike Digital Population Coverage was 25.4
million.
Operations expense - Communications segment
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended March 31 739.7 806.1 (66.4) (8.2)
-------------------------------------------------------------------------
Operations expense for the Communications segment decreased in the first
quarter of 2003, when compared with the same period last year, primarily
because of the Operational Efficiency Program savings and lower equipment
costs of sales. An increased pension expense partially offset these cost
reductions.
ILEC operations expense was $584.5 million in the first quarter of 2003
compared with $652.3 million in the same period last year, a decrease of $67.8
million or 10.4%. The primary reasons for the reduction in ILEC operations
expense in the first quarter of 2003, when compared with the first quarter of
2002, were:
- Incremental Operational Efficiency Program savings of $75.0 million
from lower salaries and benefits. Total staff for the Communications
segment decreased by approximately 600 in the current quarter;
- Incremental Operational Efficiency Program non salary-related savings
of $20.0 million from lower advertising and promotions expense, lower
employee-related overhead costs, and use of fewer contractors;
- Lower equipment cost of sales of $14.4 million. This included $5.0
million lower high-speed Internet cost of sales because of reduced
gross additions of high-speed Internet subscribers and adoption of
EITF 01-9 in mid-2002 for recognizing certain discounts to customers
net against revenues;
- Lower payments to Verizon under the Software and Related Technology
Service Agreement of $4.0 million;
- Costs associated with non-core international data revenues decreased by
$3.0 million to $9.2 million;
- Increased expense of $14.8 million as a result of lower labour
capitalization associated with reduced capital spending;
- Increased pension expense of $16.3 million; and
- Inflationary and other increases of $17.5 million.
Non-ILEC operations expense was $155.2 million in first quarter of 2003
compared with $153.8 million in the same period last year, an increase of $1.4
million or 0.9%. The primary changes in Non-ILEC operations expense were:
- Facility and settlement costs increased by $9.7 million higher because
of higher international transit minute volumes;
- Bad debt expense increased by $6.0 million; and
- Other costs decreased by $14.3 million as a result of concerted focus
on managing operating expenses.
Operations expense - Mobility segment
($ in millions) 2003 2002 Change %
------------------------------------------------------------------------
Quarter ended March 31 357.5 328.6 28.9 8.8
------------------------------------------------------------------------
Expenses related to equipment sales increased $16.4 million (24.3%) to
$83.8 million in the first quarter as compared to $67.4 million for the same
period one year earlier. First quarter 2002 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).
Excluding this $21.0 million favourable clarification of provincial tax
legislation, the current quarter expense decrease was $4.6 million (5.2%)
principally due to a decline of 32,900 gross subscriber activations as
compared to the same period in the prior year as well as favourable exchange
rates. These handset costs are included in marketing cost of acquisition
(COA).
Network service expenses consist of site-related expenses, transmission
costs, spectrum licence fees, contribution revenue taxes, and other direct
costs related to network operations. Network operating expenses decreased $0.8
million or 0.9% to $86.1 million in the first quarter of 2003, as compared to
$86.9 million for the same period in 2002. Reduced Industry Canada spectrum
licence fees of $5.0 million more than offset increases attributed to
transmission and site-related expenses to support the increased sites,
subscriber base, and improved service levels. PCS digital population coverage
increased 6.4 million (Bell - 5.0 million and Aliant - 1.4 million) from 21.5
million before the roaming/resale agreements to 27.9 million including
roaming/resale areas turned on by the end of the first quarter. Total digital
population coverage (Mike and PCS) as of March 31, 2003, was 25.4 million
(27.9 million including all current digital roaming service areas) as compared
to 24.8 million one year ago.
Marketing expenses excluding handset subsidies were $55.8 million for the
first quarter 2003 as compared to $49.4 million for the same period in 2002.
The $6.4 million increase was primarily due to higher advertising and
promotion expenses and to a lesser extent, dealer compensation costs incurred
during the launch of several promotions during the first quarter of 2003. COA
excluding retention and migration was $425 for the current quarter as compared
to $404 (excluding any benefit from the $21.0 million PST clarification) for
the same period in 2002. The increase in COA excluding retention and migration
was due to higher marketing costs and lower than expected gross subscriber
additions, partially offset by a decrease in handset subsidies. COA including
retention and migration was $507 for Q1 2003 as compared to $480 for the
corresponding period in 2002. Retention and migration COA was $82 for the
first quarter 2003 and $76 for the same period last year.
General and Administration (G&A) expense consisted of employee
compensation and benefits, facilities, client services, bad debt and various
other expenses. G&A increased 5.5% to $131.8 million for the first quarter
2003 as compared to spending of $124.9 million for the same period in 2002.
The increase in payroll was principally related to inflation and a growth in
permanent staffing levels in the areas of client operations, company-owned
retail stores, expansion into new coverage territory, and channel distribution
expansion to support subscriber growth and improved service levels. TELUS
Mobility has realized significant economies of scale with the integration of
its operations and billing systems. Consequently, full-time equivalent
employees decreased by 1.3% to 5,021 from 5,088. In the first quarter of 2003,
bad debts decreased slightly over the same period last year.
Earnings(1) Before Interest, Taxes, Depreciation and Amortization (EBITDA) by segmen
Quarter ended March 31 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 492.2 466.7 25.5 5.5
Mobility segment 178.6 122.6 56.0 45.7
-------------------------------------------------------------------------
TELUS Consolidated 670.8 589.3 81.5 13.8
-------------------------------------------------------------------------
(1) Excluding Restructuring and workforce reduction costs.
EBITDA(1) margin(2) by segment (%)
Quarter ended March 31 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 40.0 36.7 3.3 --
Mobility segment 3 33.3 27.2 6.1 --
-------------------------------------------------------------------------
TELUS Consolidated 38.5 34.7 3.8 --
-------------------------------------------------------------------------
(1) Excluding Restructuring and workforce reduction costs.
(2) EBITDA divided by total revenue.
(3) EBITDA margin as a percentage of network revenue was 36.3% for Q1
2003 as compared to 29.5% (24.5% before PST clarification) for the
same period last year.
Communications segment EBITDA excluding Restructuring and workforce
reduction costs improved primarily because of Operational Efficiency Program
savings of $95 million, partially offset by $21.9 million negative price cap
decision impacts, $16.3 million higher pension expense, and lower long
distance and other revenues. Excluding price cap decision impacts, EBITDA
increased by $47.4 million or 10.2%.
TELUS Mobility continued to successfully execute its national strategy
focused on profitable revenue growth. The significant increase in Mobility
segment EBITDA was principally due to an 18.6% increase in network revenue,
resulting from a 14.8% increase in the cumulative subscriber base, improved
ARPU from $52 to $54, as well as realization of economies of scale.
Incremental network revenue flowed through to EBITDA excluding COA at a rate
of 86.9% in the first quarter 2003 as compared to 88.8% for the same period in
2002.
TELUS Mobility EBITDA improved by $77.0 million (75.8%) when the $21.0
million favourable PST clarification in the first quarter 2002 is excluded.
EBITDA margin as a percentage of network revenue improved to 36.3% for the
first quarter as compared to 29.5% (24.5% before the PST clarification) for
the same period one year earlier. The improvement in EBITDA margin was
attributed to strong ARPU and subscriber growth, cost containment, and to the
economies of scale recognized through efficiencies resulting from the
successful integration of TELUS Mobility's operations.
Depreciation and amortization
Quarter ended March 31 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Depreciation 318.6 291.1 27.5 9.4
Amortization of intangible assets 92.5 83.3 9.2 11.0
-------------------------------------------------------------------------
Depreciation and amortization expenses increased by $36.7 million in the
first quarter of 2003, when compared with the first quarter of 2002, primarily
because of growth in wireless, data network, and administrative software
capital assets.
Restructuring and workforce reduction costs
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended March 31 6.5 12.5 (6.0) (48.0)
-------------------------------------------------------------------------
Restructuring and workforce reduction costs were recorded for initiatives
under the Company's Operational Efficiency Program. In 2001, the Company
initiated the phased Operational Efficiency Program aimed at improving
operating and capital productivity and competitiveness. The second and third
phases commenced in 2002, with the third phase continuing into 2003. For
further detail, refer to Note 3 of interim consolidated financial statements.
Staff reductions since the beginning of 2002 were approximately 5,800.
Since the inception of the Operational Efficiency Program in 2001 through
March 31, 2003, the Company has reduced its staff count by approximately
6,600, comprised of 4,700 bargaining unit positions and 1,900 management
positions. TELUS currently expects approximately 700 additional net employee
reductions to occur in 2003 as a result of the Operational Efficiency Program.
EBITDA savings since inception of the Operational Efficiency Program have
increased to approximately $245 million by the first quarter of 2003. The
annual savings for 2003 are currently expected to be approximately $450
million. Thereafter, annual recurring savings are currently estimated to be
approximately $550 million.
Other expense (income)
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended March 31 5.6 4.8 0.8 16.7
-------------------------------------------------------------------------
Other expense (income) includes accounts receivable securitization
expense, charitable donations, income from or impairments in portfolio
investments, gains and losses on disposal of property, and 2002 Discontinued
operations. The first quarter 2003 accounts receivable securitization expense
increased by $2.4 million from expanding the volume of receivables under the
securitization program to an average of $467 million in the first quarter of
2003 from $143 million last year. This was partly offset by a timing
difference of lower charitable donations expense in the first quarter of 2003.
Financing costs
($ in millions) 2003 2002 Change %
------------------------------------------------------------------------
Quarter ended March 31 161.6 181.4 (19.8) (10.9)
------------------------------------------------------------------------
Financing costs include interest expense on long-term and short-term
debt, interest income, foreign exchange gains and losses, and amortization of
debt issue costs. Interest on long-term and short-term debt decreased by $9.1
million in the first quarter of 2003, when compared with the first quarter of
2002. This was primarily a result of debt repurchases in the third and fourth
quarters of 2002. The average debt principal outstanding during the first
quarter of 2003 was $8,283 million ($8,783 million in the first quarter of
2002). The effective interest rate on the average debt outstanding for the
first quarter of 2003 was 8.2% (8.1% in 2002). Financing costs in the first
quarter of 2003 were reduced by $9.8 million interest income from settlements
of tax-related matters.
Income taxes (recovery)
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended March 31 (5.9) 16.5 (22.4) (135.8)
-------------------------------------------------------------------------
TELUS recorded a $47.0 million income tax recovery in the first quarter
of 2003 for settlement of previous years' tax matters. This settlement was
partially offset by higher income taxes related to higher income before taxes.
Non-controlling interest
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended March 31 0.7 0.5 0.2 40.0
-------------------------------------------------------------------------
Non-controlling interest primarily represents a partner's interest in
TELUS International Inc.
Preferred dividends
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended March 31 0.9 0.9 - -
-------------------------------------------------------------------------
There were no changes to quarterly dividends on preferred shares.
Interest on convertible debentures
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended March 31 1.7 1.6 0.1 6.3
-------------------------------------------------------------------------
The interest on convertible debentures is presented net of related income
taxes. As these debentures are convertible into non-voting shares and are
classified as equity on the balance sheet, the related interest is recorded as
a charge to retained earnings rather than an interest expense.
Liquidity and capital resources
Cash provided by operating activities
($ in millions) 2003 2002 Change %
------------------------------------------------------------------------
Quarter ended March 31 399.7 293.7 106.0 36.0
------------------------------------------------------------------------
Cash provided by operating activities increased for the first quarter of
2003, when compared with the same period last year principally because of the
following:
- Changes in non-cash working capital included an improvement of
$116.8 million resulting from an $87.0 million reduction in accounts
receivable in the first quarter of 2003, compared to the same period
last year in which there was a $29.8 million increase in accounts
receivable
- An $81.5 million improvement in EBITDA;
- A $12.6 million decrease in income taxes paid;
- A $6.3 million decrease in interest paid, and
- Partly offset by a $110.9 million increase in payments under
restructuring and workforce reduction initiatives Payments in the first
quarter of 2003 were $153.9 million, compared with $43.0 million in the
first quarter of 2002 (see Note 3 to the interim consolidated financial
statements).
Cash provided (used) by investing activities
($ in millions) 2003 2002 Change %
------------------------------------------------------------------------
Quarter ended March 31 (182.6) (415.3) 232.7 56.0
------------------------------------------------------------------------
Net cash used by investing activities for the first quarter of 2003
decreased, when compared with the same period last year, because of reduced
capital spending and disposal of an administrative property under the terms of
a sale and leaseback transaction in 2003. An $8.2 million pre-tax gain on the
property sale, on total cash proceeds of $19.3 million, has been deferred and
amortized over the term of the lease.
Capital expenditures by segment
Quarter ended March 31 2003 2002 Change %
------------------------------------------------------------------------
($ in millions)
Communications segment 153.5 309.1 (155.6) (50.3)
Mobility segment 54.3 96.8 (42.5) (43.9)
------------------------------------------------------------------------
Capital expenditures - general 207.8 405.9 (198.1) (48.8)
------------------------------------------------------------------------
------------------------------------------------------------------------
Capital expenditure intensity (%)(1) 11.9 23.9 (12.0) -
------------------------------------------------------------------------
(1) Capital expenditures as a percentage of revenue
Capital spending decreased in the Communications segment in the first
quarter of 2003, when compared to the same period in 2002. Non-ILEC
expenditures decreased by $21.2 million to $18.6 million because of a focus on
optimizing existing facilities. The primary reasons for the decrease in ILEC
capital expenditures by $134.4 million to $134.9 million were:
- ADSL facilities and systems expenditures decreased by $48.2 million to
$20.0 million due to a focus on higher utilization of existing
facilities, the completion of systems in 2002, and slowing growth in
the industry;
- Payments for software licences and trademarks to Verizon in 2003
decreased to zero, compared with $26.2 million in 2002;
- Network infrastructure spending decreased by $18.2 million due to
reduced demand for facilities; and
- Spending on internal systems and processes decreased due to completion
of initiatives in 2002, such as the national long distance and card
service platform and internal web enablement projects.
The Communications segment capital intensity ratio decreased to 12.5% in
the first quarter of 2003 from 24.3% in first quarter of 2002. The
Communications segment contribution to cash flow (EBITDA less Capital
expenditures) increased to $338.7 million in the first quarter of 2003 from
$157.6 million in the same period last year.
Mobility segment capital expenditures were significantly reduced for the
first quarter 2003 as compared to the same period in 2002. TELUS Mobility
continued the enhancement of digital wireless coverage during the first
quarter 2003. Capital spending declined significantly year over year
principally because of:
- Implementation of the 1X digital network in 2002;
- Digital conversion of analogue networks in 2002; and
- Reduced coverage expansion costs in 2003 due to operationalized
roaming/resale agreements in 2002 with Bell Mobility and Aliant Telecom
Wireless.
As at March 31, 2003, TELUS Mobility 1X digital population coverage
including roaming/resale areas was 24.3 million. Capital expenditure intensity
for TELUS Mobility was 10.1% for the first quarter 2003 as compared to 21.5%
for the same period one year ago due to both lower capital spending and growth
in network revenues. As a result of continued EBITDA growth and reduced
capital expenditure intensity, Mobility significantly improved cash flow
(EBITDA less Capital expenditures) to $124.3 million for the current quarter
as compared with $25.8 million for the same period in 2002.
As a result of achieving reduced capital expenditures and achieving
improved EBITDA, consolidated cash flow (EBITDA less Capital expenditures) has
improved to $463.0 million in the first quarter of 2003, when compared with
the $183.4 million in same period in 2002. The Company expects capital
expenditures to increase during the remainder of the year such that the
capital intensity ratio for 2003 will be consistent with the consolidated 20%
or less annual target.
Cash provided (used) by financing activities
($ in millions) 2003 2002 Change %
------------------------------------------------------------------------
Quarter ended March 31 (200.7) 58.9 (259.6) -
------------------------------------------------------------------------
Cash used by financing activities increased in the first quarter of 2003,
when compared with the same period one year ago, principally due to
$182.6 million of net debt redemptions in 2003, compared with $51.2 million of
net debt issues in 2002. Debt redemptions in the first quarter of 2003
included approximately $151 million of bank facilities, $30 million of First
Mortgage Bonds and $1.6 million of capital leases. Proceeds of $20.1 million
were received from Common and Non-voting shares issued from Treasury under the
employee share purchase plan and from share option plans (compared with
$32.8 million of proceeds issued in the same period in 2002 under the same
plans and from warrants). Cash dividends paid to shareholders increased by
$18.0 million as a result of lower enrolment in dividend reinvestment plans
(approximately 17% for the dividend paid in January 2003, compared with
approximately 45% one year earlier) and an increased number of shares
outstanding. The 15-cent dividend paid per Common share and Non-voting share
remained unchanged from one year ago.
Liquidity and capital resource ratios
Mar. 31, Mar. 31, Dec. 31,
Period ended 2003 2002 Change 2002
------------------------------------------------------------------------
Net debt(1) ($ millions) 8,195.3 8,827.2 (631.9) 8,390.3
Total capitalization(2)
($ millions) 14,705.5 15,230.3 (524.8) 14,834.1
EBITDA (12-month
trailing, $ millions) 2,600.1 2,501.2 98.9 2,518.6
Net interest cost(3)
(12-month trailing,
$ millions) 667.0 687.6 (20.6) 686.8
Fixed rate debt as proportion
of total indebtedness (%) 95.1 93.3 (1.8) 93.4
Average term to maturity of
debt (years) 6.5 7.3 (0.8) 6.6
Net debt(1) to total
capitalization(2) (%) 55.7 58.0 (2.3) 56.6
Net debt to EBITDA(4) 3.2 3.5 (0.3) 3.3
Earnings coverage(5) 0.7 2.3 (1.6) 0.6
EBITDA interest coverage(6) 3.9 3.6 0.3 3.7
Free cash flow(7)
(3-month, $ millions) 375.7 101.0 274.7 (104.0)
Free cash flow(7)
(12-month trailing,
$ millions) 248.8 (727.2) 976.0 (25.9)
------------------------------------------------------------------------
(1) Long-term debt plus current obligations and cheques outstanding less
Cash and temporary investments and cross-currency foreign exchange hedge asset
(plus cross-currency foreign exchange hedge liability) related to U.S. dollar
notes. The cross currency foreign exchange hedge liability as at
March 31, 2003 was $204.6 million ($187.9 million hedge asset as at
March 31, 2002). Net Debt as calculated herein, includes a notional amount
related to accounts receivable securitization of approximately $121.5 million
at March 31, 2003 ($30 million at March 31, 2002), which is required to be
included in the numerator of the Leverage Ratio covenant calculation in TELUS'
credit facilities.
(2) Total capitalization is defined as Net debt plus Non-controlling
interest and Shareholders' Equity.
(3) Net Interest Cost is defined as Net financing cost before non-cash
accreted interest and gains on repurchase or redemption of debt, calculated on
a 12-month trailing basis. Accreted interest was recorded up to and including
the second quarter of 2001, affecting the calculation for the period ended
March 31, 2002. Gains on repurchase and redemption of debt were recorded in
the second and third quarters of 2001 and the third quarter and fourth
quarters of 2002, affecting each period reported above.
(4) Net debt to EBITDA is defined as Net debt as at the end of the period
divided by 12-month trailing EBITDA, where EBITDA excludes Restructuring and
workforce reduction costs. This measure is substantially the same as the
Leverage Ratio covenant in TELUS' credit facilities.
(5) Earnings coverage ratio is calculated on a 12-month trailing basis as
Net income before interest expense on total debt and income tax expense
divided by interest expense on total debt.
(6) EBITDA interest coverage is defined as EBITDA excluding Restructuring
and workforce reduction costs divided by Net interest cost. This measure is
substantially the same as the Coverage Ratio covenant in TELUS' credit
facilities.
(7) Free cash flow is defined as EBITDA excluding Restructuring and
workforce reduction costs less Capital expenditures, cash interest, cash taxes
and cash dividends. This measure is used to provide an indication of
underlying cash flows in the business for the items identified. As defined,
free cash flow excludes Restructuring and workforce reduction costs working
capital changes, and other sources and uses of cash, which are disclosed in
the consolidated statements of cash flows.
The short-term obligation and long-term debt balance as at March 31, 2003
decreased by $511 million to $7,877 million from $8,388 million as at
December 31, 2002. This reduction in the debt balance included a $332 million
decrease in the Canadian dollar value of U.S. dollar denominated Notes because
of an approximate five U.S. cent appreciation of the Canadian dollar between
December 31, 2002 and March 31, 2003. TELUS' U.S. dollar debt is fully hedged,
resulting in a corresponding increase of $332 million being recorded in the
Deferred hedging liability.
The proportion of debt with fixed interest rates increased as at
March 31, 2003, when compared with March 31, 2002 and December 31, 2002,
because the amount of utilized Bank facilities at March 31, 2003 decreased by
approximately $173 million from one year ago and decreased by approximately
$151 million since the end of 2002.
The primary reasons for a reduction in the net debt to total
capitalization ratio measured at March 31, 2003, when compared to a year ago,
were the repurchase of approximately $410 million of debt in the third and
fourth quarters of 2002. Total equity increased by approximately $104 million
as a reduction in retained earnings was more than offset by the $323 million
of net proceeds from a public equity issue in the third quarter of 2002 and
Common shares and Non-voting shares issued over the last twelve months. The
Company's Operational Efficiency Program and strong Mobility cash generation
resulted in significant increased free cash flow allowing for additional debt
reduction in the first quarter of 2003. For the first quarter of 2003, the
free cash flow measure exceeded cash payments of $153.9 million for
Restructuring and workforce reduction.
The net debt to EBITDA ratio measured at March 31, 2003 improved, when
compared with March 31, 2002 and December 31, 2002, as a result of debt
reduction and an increase in twelve-month trailing EBITDA.
The EBITDA interest coverage ratio measured at March 31, 2003 improved,
when compared with March 31, 2002 and December 31, 2002, as a result of higher
twelve-month trailing EBITDA and lower twelve-month trailing net interest
costs.
Credit Facilities
TELUS credit facilities at the end of March 2003 consisted of a
$1.5 billion (or U.S. dollar equivalent) revolving credit facility expiring on
May 30, 2004 ($504 million drawn along with $101 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 $74 million in other bank facilities (nil drawn and
approximately $19 million in committed and outstanding undrawn letters of
credit, at March 31, 2003). The Company expects to renew its 364 day
extendible revolving credit facility in the amount of $600 million on similar
terms, prior to the May 28, 2003 availability termination date of such credit
facility.
At March 31, 2003, TELUS had unutilized available liquidity well in
excess of $1 billion. TELUS' credit facilities contain customary covenants
including a requirement that TELUS not permit its consolidated Leverage Ratio
(Funded Debt and Asset Securitization Amount to trailing 12-month EBITDA) to
exceed 4.0:1 (approximately 3.2:1 as at March 31, 2003) and not permit its
consolidated Coverage Ratio (EBITDA to Interest Expense and Asset
Securitization Charges on a trailing 12-month basis) to be less than 2.5:1
(approximately 3.9:1 as at March 31, 2003) at the end of any financial
quarter. There are certain minor differences in the calculation of the
Leverage Ratio and Coverage Ratio under the credit agreement as compared with
the calculation of Net debt to EBITDA and EBITDA interest coverage. The
calculations are not expected to be materially different. Continued access to
TELUS' credit facilities is not contingent on the maintenance by TELUS of a
specific credit rating.
Accounts Receivable Sale
TELUS Communications Inc., a wholly owned subsidiary of TELUS, is able to
sell an interest in certain of its receivables up to a maximum of $650 million
and is required to maintain at least a BBB(low) credit rating by Dominion Bond
Rating Service, or the purchaser may require the sale program to be wound
down. The necessary credit rating was exceeded by one level at BBB as of
April 29, 2003. The value of securitized receivables at March 31, 2003, was
$454 million. See Note 8 to the interim consolidated financial statements.
TELUS' credit facilities require that a portion of sold accounts
receivable be added to debt for purposes of calculating the Leverage Ratio
covenant under the credit agreement. This portion is calculated on a monthly
basis and is a function of the ongoing collection performance of the
receivables pool. At March 31, 2003, this amount, defined as the Asset
Securitization Amount, was $121.5 million.
Credit Ratings
On April 16, 2003, Moody's Investor Service changed the outlook for
TELUS' senior unsecured credit rating to 'stable' from 'negative'. No other
new rating actions have 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.
Credit rating summary
S&P(1) DBRS(1) Moody's(2) Fitch(1)
------------------------------------------------------------------------
TELUS Corporation
Senior Bank Debt BBB BBB Ba1 BBB
Debentures and Notes BBB BBB Ba1 BBB
Medium-term Notes BBB BBB --- ---
Commercial Paper A-2 R-2(high) --- ---
TELUS Communications Inc.
Debentures BBB BBB --- BBB
Medium-term Notes BBB BBB --- BBB
Commercial Paper A-2 R-2(high) --- ---
Preferred Shares P-3(high) Pfd-3 --- ---
TELUS Communications
(Quebec) Inc.
First Mortgage Bonds BBB BBB --- ---
Debentures BBB BBB --- ---
Medium-term Notes BBB BBB --- ---
Commercial Paper A-2 R-2(high) --- ---
------------------------------------------------------------------------
(1) Outlook or Trend 'negative'
(2) Outlook 'stable'
Off-Balance Sheet Arrangements and Contractual Liabilities
Financial Instruments
TELUS uses various financial instruments, the fair values of which are
not reflected on the balance sheet, to reduce or eliminate exposure to
interest rate and currency risks. These instruments are accounted for on the
same basis as the underlying exposure being hedged.
The Company is exposed to interest rate risk arising from fluctuations in
interest rates on its temporary investments, short-term obligations and long-
term debt. The Company has entered into an interest rate swap that has the
effect of fixing the interest rate on $70 million of floating rate debt until
April 2004. Hedge accounting is not applied to this swap agreement.
The Company is exposed to currency risks arising from fluctuations in
foreign exchange rates on its U.S. Dollar denominated long-term debt. Currency
hedging relationships have been established for the related semi-annual
interest payments and principal payments at maturity. The Company's foreign
exchange risk management also includes the use of foreign currency forwards to
fix the exchange rates on short-term foreign currency transactions and
commitments. Hedge accounting is not applied to these foreign currency
forwards.
The Company is exposed to credit risk with respect to its short-term
deposits, accounts and leases receivable, interest rate swap agreements and
foreign exchange hedges. Credit risk associated with short-term deposits is
minimized substantially by ensuring that these financial assets are placed
with governments, well-capitalized financial institutions and other
creditworthy counter parties. An ongoing review is performed to evaluate
changes in the status of counter parties.
The carrying value of cash and temporary investments, bank indebtedness,
accounts receivable, leases receivable, accounts payable, restructuring and
workforce reduction accounts payable, dividends payable and short-term
obligations approximates their fair values due to the immediate or short-term
maturity of these financial instruments.
Commitments and Contingent Liabilities (Note 15 of the interim
consolidated financial statements)
The Company has a number of commitments and contingent liabilities. The
Company has $253.0 million in outstanding commitments for its Operational
Efficiency Program as at March 31, 2003, and approximately $13.0 million
additional Restructuring and workforce reduction expense may be recorded in
2003. The Company occupies leased premises in various centres and has land,
buildings and equipment under operating leases. The Company is currently
engaged in contract negotiations through the federal conciliation process. In
the normal course of the Company's operations, it enters into commercial
agreements that require, as a part of normal terms, guarantees by the Company.
Revised Guidance for 2003
2003 revised 2003 target Change
guidance
------------------------------------------------------------------------------
Consolidated
Revenues no change $7.2 to $7.3 billion -
EBITDA1 no change $2.7 to $2.8 billion 15 cents
Earnings (loss)
per share 50 to 70 cents 35 to 55 cents -
Capital
expenditures no change Approx. $1.5 billion see note 2
Free cash
flow(2) $500 to 600 million $300 to $600 million -
Net debt to
EBITDA no change 3.0 times -
Communications
segment
Revenue
(external) no change $5.0 to $5.05 billion -
Non-ILEC
revenue no change $575 million -
EBITDA(1) no change $2.075 to $2.15 billion -
Non-ILEC EBITDA no change Approx. $(60) million -
Capital
expenditures no change Approx. $1.05 billion -
High-speed
Internet
subscriber net
additions no change 150,000 to 175,000 -
Mobility segment
Revenue
(external) no change $2.2 to $2.25 billion -
EBITDA1 $675 to $700 million $625 to $650 million $50 million
Capital
expenditures no change Approx. $450 million -
Wireless
subscriber
net additions Approx. 350,000 400,000 to 450,000 (50,000) to
(100,000)
------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization,
excluding Restructuring and workforce reduction costs.
(2) EBITDA less Capital expenditures, cash interest, cash taxes and cash
dividends. Original target of $300 to $600 million was revised in the 2002
Annual Report to $500 to $600 million as a result of a settlement with tax
authorities in late February 2003.
4. Risks and Uncertainties
A comprehensive discussion of the risks and uncertainties can be found in
Management's Discussion and Analysis in TELUS' Annual Information Form, TELUS'
2002 Annual Report, and filings on sedar.com and on Edgar at sec.gov.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 1, 2003
TELUS Corporation
__ "James W. Peters"___
Name: James W. Peters
Title: Corporate Secretary