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 _______June_______ 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)
JUNE 30, 2003
______________________________________________________________________________
consolidated statements of income
Three months Six months
Periods ended June 30 (unaudited) (millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 1,773.3 $ 1,748.0 $ 3,514.2 $ 3,446.0
---------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,053.5 1,127.0 2,123.6 2,235.7
Depreciation 322.0 300.1 640.6 591.2
Amortization of intangible assets 88.1 85.1 180.6 168.4
Restructuring and workforce reduction costs (Note 4) 3.3 3.1 9.8 15.6
---------------------------------------------------------------------------------------------------------------------------------
1,466.9 1,515.3 2,954.6 3,010.9
---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 306.4 232.7 559.6 435.1
Other expense 6.6 5.9 12.2 10.7
Financing costs (Note 5) 169.1 174.0 330.7 355.4
---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND NON-
CONTROLLING INTEREST 130.7 52.8 216.7 69.0
Income taxes (Note 6) 54.9 33.1 49.0 49.6
Non-controlling interest 1.0 1.3 1.7 1.8
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME 74.8 18.4 166.0 17.6
Preference and preferred share dividends 0.8 0.9 1.7 1.8
Interest on convertible debentures, net of income taxes 1.8 1.7 3.5 3.3
---------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE AND NON-VOTING SHARE INCOME $ 72.2 $ 15.8 $ 160.8 $ 12.5
---------------------------------------------------------------------------------------------------------------------------------
INCOME PER COMMON SHARE AND NON-VOTING SHARE ($) (NOTE 7)
- Basic 0.21 0.05 0.46 0.04
- Diluted 0.21 0.05 0.46 0.04
DIVIDENDS DECLARED PER COMMON SHARE AND
NON-VOTING SHARE($) 0.15 0.15 0.30 0.30
TOTAL WEIGHTED AVERAGE COMMON SHARES
AND NON-VOTING SHARES OUTSTANDING
(MILLIONS)
- Basic 348.6 306.6 347.7 305.3
- Diluted 350.8 306.6 350.8 305.5
consolidated statements of retained earnings
Six months
Periods ended June 30 (unaudited) (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 630.4 $ 1,654.8
Transitional impairment of intangible assets with indefinite lives - (595.2)
---------------------------------------------------------------------------------------------------------------------------------
Adjusted opening balance 630.4 1,059.6
Net income 166.0 17.6
---------------------------------------------------------------------------------------------------------------------------------
796.4 1,077.2
Less: Common Share and Non-Voting Share dividends paid in cash 83.5 68.1
Common Share and Non-Voting Share dividends reinvested in shares issued from Treasury 20.8 23.6
Preference and preferred share dividends 1.7 1.8
Interest on convertible debentures, net of income taxes 3.5 3.3
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD (Note 15) $ 686.9 $ 980.4
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements
consolidated balance sheets
---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ 16.6 $ -
Accounts receivable (Notes 9, 17(b)) 499.6 640.4
Income and other taxes receivable 351.1 134.0
Inventories 81.6 96.5
Current portion of future income taxes 167.4 138.8
Prepaid expenses and other (Note 17(b)) 231.7 163.5
---------------------------------------------------------------------------------------------------------------------------------
1,348.0 1,173.2
---------------------------------------------------------------------------------------------------------------------------------
Capital Assets, Net (Note 10)
Property, plant, equipment and other 7,820.0 8,025.9
Intangible assets subject to amortization 868.3 998.5
Intangible assets with indefinite lives 2,951.6 2,950.1
---------------------------------------------------------------------------------------------------------------------------------
11,639.9 11,974.5
---------------------------------------------------------------------------------------------------------------------------------
Other Assets
Deferred charges (Note 11) 591.6 729.1
Future income taxes 886.0 1,170.3
Investments 32.7 48.1
Goodwill (Note 12) 3,124.7 3,124.6
---------------------------------------------------------------------------------------------------------------------------------
4,635.0 5,072.1
---------------------------------------------------------------------------------------------------------------------------------
$17,622.9 $18,219.8
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ - $ 9.0
Accounts payable and accrued liabilities (Note 17(b)) 1,080.4 1,198.8
Restructuring and workforce reduction accounts payable and accrued liabilities (Note 4) 208.7 400.4
Dividends payable 52.7 52.2
Advance billings and customer deposits (Note 17(b)) 370.5 330.3
Current maturities of long-term debt (Note 13) 509.4 190.3
---------------------------------------------------------------------------------------------------------------------------------
2,221.7 2,181.0
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (Note 13) 6,833.6 8,197.4
---------------------------------------------------------------------------------------------------------------------------------
Future Income Taxes 988.3 992.3
---------------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities (Note 14) 1,024.4 405.3
---------------------------------------------------------------------------------------------------------------------------------
Non-Controlling Interest 8.6 11.2
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Note 15)
Convertible debentures 149.0 148.5
Preference and preferred shares 69.7 69.7
Common equity 6,327.6 6,214.4
---------------------------------------------------------------------------------------------------------------------------------
6,546.3 6,432.6
---------------------------------------------------------------------------------------------------------------------------------
$17,622.9 $18,219.8
=================================================================================================================================
Commitments and Contingent Liabilities (Note 16)
The accompanying notes are an integral part of these interim consolidated financial statements
consolidated statements of cash flows
Three months Six months
Periods ended June 30 (unaudited) (millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 74.8 $ 18.4 $ 166.0 $ 17.6
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 410.1 385.2 821.2 759.6
Future income taxes 60.4 8.7 255.3 19.3
Net pension expense (credits) 13.2 (2.2) 26.3 (9.7)
Employer contributions to employee benefit plans (18.0) (13.1) (36.0) (24.5)
Other, net 23.7 (3.6) 25.4 (3.5)
Restructuring and workforce reduction costs, net of
cash payments (Note 4) (44.3) (31.2) (191.7) (61.7)
Net change in non-cash working capital (Note 17(c)) (49.2) (85.4) (196.1) (126.6)
---------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 470.7 276.8 870.4 570.5
---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (Note 10(a)) (305.5) (548.6) (513.3) (954.5)
Proceeds from the sale of property (Note 10(c)) and
other assets 19.0 - 38.3 -
Other 0.5 (24.3) 6.4 (33.7)
---------------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by investing activities (286.0) (572.9) (468.6) (988.2)
---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 21.0 24.5 41.1 57.3
Dividends to shareholders (43.8) (26.3) (88.6) (53.1)
Long-term debt issued (Note 13) 291.9 392.0 309.4 584.0
Redemptions and repayment of long-term debt (Note 13) (440.1) (34.3) (640.2) (113.6)
Change in short-term obligations - (19.0) - (80.5)
Interest on convertible debentures (5.1) (5.1) (5.1) (5.1)
Amortization of debt issue costs and other 0.6 0.9 7.2 2.6
---------------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by financing activities (175.5) 332.7 (376.2) 391.6
---------------------------------------------------------------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in cash and temporary investments,
net 9.2 36.6 25.6 (26.1)
Cash and temporary investments, net, beginning of period 7.4 (45.6) (9.0) 17.1
---------------------------------------------------------------------------------------------------------------------------------
Cash and temporary investments, net, end of period $ 16.6 $ (9.0) $ 16.6 $ (9.0)
=================================================================================================================================
SUPPLEMENTAL DISCLOSURE
Interest paid $ 298.8 $ 302.0 $ 334.8 $ 344.3
=================================================================================================================================
Income taxes (inclusive of Investment Tax Credits
(Note 6)) paid $ 2.7 $ 6.6 $ 3.3 $ 19.8
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements
notes to interim consolidated financial statements
JUNE 30, 2003 (unaudited)
TELUS Corporation is one of Canada's largest telecommunications companies,
providing a full range of telecommunications products and services. The Company
is the largest incumbent telecommunications service provider in Western Canada
and provides data, Internet Protocol, voice and wireless services to Central
and Eastern Canada.
1. Interim Financial Statements
The notes presented in these interim consolidated financial statements include
only significant events and transactions and are not fully inclusive of all
matters normally disclosed in TELUS Corporation's annual audited financial
statements. As a result, these interim consolidated financial statements should
be read in conjunction with the TELUS Corporation consolidated financial
statements for the year ended December 31, 2002. These interim consolidated
financial statements follow the same accounting policies, other than as set out
in Note 2 to these interim consolidated financial statements, and methods of
their application as set out in the TELUS Corporation consolidated financial
statements for the year ended December 31, 2002.
The term "Company" is used to mean TELUS Corporation and, where the context of
the narrative permits or requires, its subsidiaries.
2. Accounting Policy Developments
(a) Disclosure of Guarantees
Commencing January 1, 2003, the new guidelines of the Canadian Institute of
Chartered Accountants ("CICA") for the disclosure of guarantees apply to the
Company (CICA Accounting Guideline AcG-14) (see Note 16(c)). The Guideline
elaborates on required disclosures by a guarantor in its financial statements
about obligations under certain types of guarantees that it has issued.
(b) Asset Retirement Obligations
Commencing with the Company's 2004 fiscal year, the new recommendations of the
CICA for accounting for asset retirement obligations (CICA Handbook Section
3110) apply to the Company. The new section focuses on the recognition and
measurement of liabilities for statutory, contractual or legal obligations,
normally when incurred, associated with the retirement of property, plant and
equipment when those obligations result from the acquisition, construction,
development or normal operation of the assets. The obligations are measured
initially at fair value (using present value methodology) and the resulting
costs capitalized into the carrying amount of the related asset. In subsequent
periods, the liability is adjusted for the accretion of discount and any
changes in the amount or timing of the underlying future cash flows. The
capitalized asset retirement cost is depreciated on the same basis as the
related asset; discount accretion is included in determining the results of
operations. The Company is currently evaluating the impact of this standard on
its financial statements.
(c) Hedging Relationships
Commencing with the Company's 2004 fiscal year, the new guidelines of the CICA
for accounting for hedging relationships apply to the Company (CICA Accounting
Guideline AcG-13). The Company's previously disclosed hedge accounting policy
is compliant with the new Guideline.
3. Financial Instruments
Price risk - currency: The Company is exposed to currency risks arising from
fluctuations in foreign exchange rates on its U.S. Dollar denominated long-term
debt. Currency hedging relationships have been established for the related
semi-annual interest payments and principal payments at maturity.
The Company's foreign exchange risk management includes the use of foreign
currency forward contracts to fix the exchange rates on short-term foreign
currency transactions and commitments. Hedge accounting is applied to these
foreign currency forward contracts on an exception basis only.
During the second quarter of 2003, the Company entered into foreign currency
forward contracts that have the effect of fixing the exchange rates on, as at
June 30, 2003, U.S.$75 million of fiscal 2003 purchase commitments; hedge
accounting has been applied to U.S.$50.5 million of these foreign currency
forward contracts relating to the Mobility segment.
Fair value: The fair values of the Company's long-term debt and convertible
debentures are estimated based on quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
maturity as well as the use of discounted future cash flows using current rates
for similar financial instruments subject to similar risks and maturities. The
fair values of the Company's derivative financial instruments used to manage
exposure to interest rate and currency risks are estimated similarly.
As at June 30, 2003 As at December 31, 2002
---------------------------------------------------------------------------------------------------------------------------------
(millions) Carrying Carrying
amount Fair value amount Fair value
---------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 7,343.0 $ 8,297.9 $ 8,387.7 $ 8,338.2
Convertible debentures $ 149.0 $ 152.6 $ 148.5 $ 137.6
Derivative financial instruments used to manage
exposure to interest rate and currency risks (a)
- Deferred hedging liability (Note 14) $ 581.5 $ 535.4 $ - $ -
- Deferred hedging asset (Note 11) $ - $ - $ 134.1 $ 315.7
---------------------------------------------------------------------------------------------------------------------------------
(a) Notional amount outstanding $4,920.1 (December 31, 2002 - $4,925.7).
4. Restructuring and Workforce Reduction Costs
In 2001, the Company initiated the phased Operational Efficiency Program aimed
at improving the Company's operating and capital productivity and
competitiveness. The first phase of the Operational Efficiency Program was to
complete merger-related restructuring activities in TELUS Mobility and the
reorganization for TELUS Communications. Approximately one-half of the 2001
charge was related to integration costs for TELUS Mobility including the
write-down of redundant capital assets, handset reconfiguration costs and
employee severance costs. The remaining charge was related to reorganization
costs in TELUS Communications, including employee severance costs and capital
asset impairment charges.
The second phase of the Operational Efficiency Program, which commenced at the
beginning of 2002, continued to focus on reducing staff, but also entailed a
comprehensive review of enterprise-wide processes to identify capital and
operational efficiency opportunities. Consequently, the Company initiated a
program offering an Early Retirement Incentive Plan and a Voluntary Departure
Incentive Plan to 11,000 of over 16,000 bargaining unit employees and announced
details on Operational Efficiency Program initiatives including: streamlining
of business processes; reducing the TELUS product portfolio and processes that
support them; optimizing the use of real estate, networks and other assets;
improving customer order management; reducing the scope of corporate support
functions; consolidating operational and administrative functions; and
consolidating customer contact centres.
The third phase of the Operational Efficiency Program, which commenced in the
third quarter of 2002, was focused on operationalizing the above noted
initiatives. Consolidation of administrative offices was largely completed by
December 31, 2002.
The following table presents the program costs to date and the changes in
program costs in the period as well as the corresponding liabilities and
changes in the corresponding liabilities for the period.
Program (a) Program (a)
inception to Six-month Program (a) items not yet
December 31, period ended inception to eligible for Total
(millions) 2002 June 30, 2003 June 30, 2003 recording program (a)
---------------------------------------------------------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------------------------------------
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 6.4 39.3 9.6 48.9
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction costs 768.3 9.8 778.1 $ 9.6 $ 787.7
---------------------------------------------------------------------------------------------------------------------------------
Less:
Payments (Note 17(c)) 332.0 192.9 524.9
Asset write-off related to
restructuring and other 30.5 8.6 39.1
Reclassified to other long-
term liabilities (pension
and other post-retirement
benefit liabilities) 5.4 - 5.4
---------------------------------------------------------------------------------------------------------------------------------
367.9 201.5 569.4
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce
reduction accounts payable
and accrued liabilities $ 400.4 $ (191.7) $ 208.7
================================================================================================================================
(a) Program includes phases 1, 2 and 3 of the Operational Efficiency Program.
The following table presents the status of various Operational Efficiency
Program initiatives. The expense and liability for the Early Retirement
Incentive Plan and Voluntary Departure Incentive Plan programs are recognized
when the employee accepts the Company's formalized offer. As a result,
Operational Efficiency Program costs may be, and have been, as appropriate and
required, recorded in advance of when the underlying event occurs.
Program (a)
inception to Six-month Program (a)
December 31, period ended inception to Total
(millions) 2002 June 30, 2003 June 30, 2003 Future program (a)
---------------------------------------------------------------------------------------------------------------------------------
Customer contact centre
consolidation 24 14 38 8 46
=================================================================================================================================
TELUS store closures 33 - 33 - 33
=================================================================================================================================
Net staff reductions
Phase 1 800 - 800 - 800
Phases 2 and 3 5,200 850 6,050 450 6,500
---------------------------------------------------------------------------------------------------------------------------------
6,000 850 6,850 450 7,300
=================================================================================================================================
(a) Program includes phases 1, 2 and 3 of the Operational Efficiency Program.
5. Financing Costs
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt $ 167.7 $ 180.3 $ 338.3 $ 359.5
Interest on short-term obligations and other 3.4 0.8 4.4 2.7
Foreign exchange loss (a) (1.2) (1.5) (0.8) (0.7)
---------------------------------------------------------------------------------------------------------------------------------
169.9 179.6 341.9 361.5
Capitalized interest during construction - (0.2) - (0.4)
Interest income (including interest on tax refunds) (0.8) (5.4) (11.2) (5.7)
---------------------------------------------------------------------------------------------------------------------------------
$ 169.1 $ 174.0 $ 330.7 $ 355.4
=================================================================================================================================
(a) For the three-month and six-month periods ended June 30, 2003, these amount include gain (losses)
of $0.3 (2002 - NIL) and $0.6 (2002 - $(0.3)),respectively,in respect of hedge ineffectiveness.
6. Income Taxes
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Current $ (5.5) $ 24.4 $ (206.3) $ 30.3
Future 60.4 8.7 255.3 19.3
---------------------------------------------------------------------------------------------------------------------------------
$ 54.9 $ 33.1 $ 49.0 $ 49.6
=================================================================================================================================
The Company's income tax expense differs from that calculated by applying statutory rates for the following reasons:
Three-month periods ended June 30 ($ in millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at statutory
income tax rates $ 48.5 37.1% 20.5 38.8%
Prior year rates applied to settlement of tax issues - 2.0
Other 1.4 4.0
---------------------------------------------------------------------------------------------------------------------------------
49.9 38.2% 26.5 50.2%
Large corporations tax 5.0 6.6
---------------------------------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated Statements of
Income $ 54.9 42.0% $ 33.1 62.7%
=================================================================================================================================
Six-month periods ended June 30 ($ in millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at statutory
income tax rates $ 80.3 37.0% $ 27.0 39.2%
Prior year rates applied to settlement of tax issues (47.0) 2.0
Other 4.9 7.4
---------------------------------------------------------------------------------------------------------------------------------
38.2 17.6% 36.4 52.8%
Large corporations tax 10.8 13.2
---------------------------------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated Statements of
Income $ 49.0 22.6% $ 49.6 71.9%
=================================================================================================================================
The Company conducts research and development activities, which are eligible to
earn Investment Tax Credits. During the three-month and six-month periods ended
June 30, 2003, the Company recorded Investment Tax Credits of NIL (2002 - $40.0
million) and $1.2 million (2002 - $40.0 million), respectively, of which NIL
(2002 - $40.0 million) and $1.0 million (2002 - $40.0 million), respectively,
were recorded as a reduction of "Operations expense" and the balance was
recorded as a reduction of capital expenditures.
7. Per Share Amounts
Basic net income per Common Share and Non-Voting Share is calculated by
dividing Common Share and Non-Voting Share income by the total weighted average
Common Shares and Non-Voting Shares outstanding during the period. Diluted
income per Common Share and Non-Voting Share is calculated to give effect to
share options and warrants and shares issuable on conversion of debentures. The
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.
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Net income $ 74.8 $ 18.4 $ 166.0 $ 17.6
Deduct:
Preference and preferred share dividends 0.8 0.9 1.7 1.8
Interest on convertible debentures 1.8 1.7 3.5 3.3
---------------------------------------------------------------------------------------------------------------------------------
Basic and diluted Common Share and Non-Voting
Share income $ 72.2 $ 15.8 $ 160.8 $ 12.5
=================================================================================================================================
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Basic total weighted average Common Shares and
Non-Voting Shares outstanding 348.6 306.6 347.7 305.3
Effect of dilutive securities
Exercise of share options and warrants 2.2 - 1.7 0.2
---------------------------------------------------------------------------------------------------------------------------------
Diluted total weighted average Common Shares and
Non-Voting Shares outstanding 350.8 306.6 349.4 305.5
=================================================================================================================================
8. Share-Based Compensation
The Company applies the intrinsic value based method of accounting for
share-based compensation awards granted to employees. Accordingly, no
compensation cost is recorded in the accounts for its share option plans. For
share options granted after 2001, disclosure of the impact on earnings and
earnings per share as if the fair value based method of accounting for the
share-based compensation had been applied is required. Such impact, using
weighted average fair values of $5.44 (2002 - $4.85) and $4.31 (2002 - $7.70)
for options granted in the three-month and six-month periods ended June 30,
2003, respectively, would approximate the following pro forma amounts:
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Compensation cost $ 4.9 $ 1.5 $ 9.0 $ 2.4
Net income
As reported $ 74.8 $ 18.4 $ 166.0 $ 17.6
Pro forma $ 69.9 $ 16.9 $ 157.0 $ 15.2
Net income per Common Share and Non-Voting Share
Basic and diluted
As reported $ 0.21 $ 0.05 $ 0.46 $ 0.04
Pro forma $ 0.19 $ 0.05 $ 0.44 $ 0.03
=================================================================================================================================
Due to the fact that only share options granted after 2001 are included, these
pro forma disclosures are not likely to be representative of the effects on
reported net income for future years.
The fair value of each option granted is estimated at the time of grant using
the Black-Scholes model with weighted average assumption for grants as follows:
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Risk free interest rate 4.7% 5.9% 5.0% 5.9%
Expected lives (years) 4.5 10.0 4.5 10.0
Expected volatility 40.0% 36.0% 40.0% 35.0%
Dividend yield 3.3% 4.0% 4.0% 3.6%
=================================================================================================================================
Forfeitures of options are accounted for in the period of forfeiture.
9. Accounts Receivable
On July 26, 2002, TELUS Communications Inc., a wholly-owned subsidiary of
TELUS, entered into an agreement (the "2002 Securitization") with an
arm's-length securitization trust under which TELUS Communications Inc. is able
to sell an interest in certain of its trade receivables up to a maximum of $650
million.
As at As at
June 30, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Total managed portfolio $ 1,001.7 $ 1,139.0
Securitized receivables (609.1) (595.4)
Retained interest in receivables sold 107.0 96.8
---------------------------------------------------------------------------------------------------------------------------------
Receivables held $ 499.6 $ 640.4
=================================================================================================================================
For the three-month and six-month periods ended June 30, 2003, the Company
recognized losses of $1.8 million and $3.0 million, respectively, on the sale
of receivables, arising from the 2002 Securitization.
Cash flows from the 2002 Securitization are as follows:
Periods ended June 30, 2003 (millions) Three months Six months
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, beginning of period $ 454.0 $ 475.0
Proceeds from new securitizations 31.0 34.0
Securitization reduction payments - (24.0)
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, end of period $ 485.0 $ 485.0
=================================================================================================================================
Proceeds from collections reinvested in revolving period securitizations $ 981.3 $ 1,999.7
=================================================================================================================================
Proceeds from collections pertaining to retained interest $ 209.9 $ 416.4
=================================================================================================================================
10. Capital Assets
(a) Capital Assets, Net
Accumulated
Depreciation and
Cost Amortization Net Book Value
As at As at
June 30, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Property, plant, equipment and other
Telecommunications assets $16,132.2 $10,122.4 $ 6,009.8 $ 6,252.9
Assets leased to customers 414.9 346.9 68.0 77.5
Buildings 1,507.6 704.4 803.2 836.0
Office equipment and furniture 855.8 598.9 256.9 280.8
Assets under capital lease 31.9 15.5 16.4 10.3
Other 345.2 230.0 115.2 144.0
Land 49.9 - 49.9 55.4
Plant under construction 476.6 - 476.6 341.6
Materials and supplies 24.0 - 24.0 27.4
---------------------------------------------------------------------------------------------------------------------------------
19,838.1 12,018.1 7,820.0 8,025.9
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscriber base 362.9 62.4 300.5 311.6
Software 967.1 485.1 482.0 600.3
Access to rights-of-way and other 115.6 29.8 85.8 86.6
---------------------------------------------------------------------------------------------------------------------------------
1,445.6 577.3 868.3 998.5
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences* 3,970.1 1,018.5 2,951.6 2,950.1
---------------------------------------------------------------------------------------------------------------------------------
$25,253.8 $13,613.9 $11,639.9 $11,974.5
=================================================================================================================================
* Accumulated amortization of spectrum licences is amortization recorded prior
to 2002 and the transitional impairment amount.
Included in capital expenditures for the three-month and six-month periods
ended June 30, 2003, were additions of intangible assets subject to
amortization of $24.3 million (2002 - $103.0 million) and $44.2 million (2002 -
$138.3 million), respectively.
(b) Intangible Assets Subject to Amortization
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at June 30, 2003, for each of
the next five fiscal years is as follows:
Years ended December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2003 (balance of year) $ 168.2
2004 245.3
2005 134.9
2006 42.6
2007 34.4
=================================================================================================================================
(c) Sale of Property
During the first quarter of 2003, the Company disposed of a non-strategic
property under the terms of a sale-leaseback transaction. The pre-tax gain of
$8.2 million, arising from net proceeds of $19.3 million, has been deferred and
will be amortized over the term of the lease.
During the second quarter of 2003, the Company disposed of non-strategic
properties and realized pre-tax gains totaling $7.3 million, arising from net
proceeds of $11.7 million.
11. Deferred Charges
As at As at
June 30, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Recognized transitional pension assets and pension plan
contributions in excess of charges to income $ 382.7 $ 367.9
Cost of issuing debt securities, less amortization 47.1 53.4
Deferred hedging asset - 134.1
Deferred customer activation and installation costs (a) 98.8 100.3
Other 63.0 73.4
---------------------------------------------------------------------------------------------------------------------------------
$ 591.6 $ 729.1
=================================================================================================================================
(a) Upfront customer activation fees, along with the corresponding direct costs
not in excess of revenues, are deferred and recognized over the average
expected term of the customer relationship.
12. Goodwill For the three-month and six-month periods ended June 30, 2003,
goodwill additions, arising from acquisitions, and in 2003, contingent
consideration paid in respect of a prior year's acquisition, were NIL (2002 -
$0.6 million) and $0.1 million (2002 - $2.9 million), respectively.
13. Long-Term Debt
(a) Details of Long-Term Debt
($ in millions)
As at As at
June 31, December 31,
Series Rate Maturity 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Notes
CA 7.5% June 2006 $ 1,570.8 $ 1,569.7
U.S. 7.5% June 2007 1,566.1 1,835.5
U.S. 8.0% June 2011 2,581.9 3,026.6
---------------------------------------------------------------------------------------------------------------------------------
5,718.8 6,431.8
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Credit Facilities May 2004 499.0 655.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Debentures
1 12.00% May 2010 50.0 50.0
2 11.90% November 2015 125.0 125.0
3 10.65% June 2021 175.0 175.0
5 9.65% April 2022 249.0 249.0
A 9.50% August 2004 189.5 189.5
B 8.80% September 2025 200.0 200.0
---------------------------------------------------------------------------------------------------------------------------------
988.5 988.5
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Medium Term Note Debentures
96-9 6.25% August 2004 20.0 20.0
99-1 7.25% June 2030 0.1 151.0
---------------------------------------------------------------------------------------------------------------------------------
20.1 171.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications (Quebec) Inc. First Mortgage Bonds
T 10.80% March 2003 - 30.0
U 11.50% July 2010 30.0 30.0
---------------------------------------------------------------------------------------------------------------------------------
30.0 60.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications (Quebec) Inc. Medium Term Notes
1 7.10% February 2007 70.0 70.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Senior Discount Notes 0.4 0.8
---------------------------------------------------------------------------------------------------------------------------------
Capital leases issued at varying rates of interest from
5.3% to 18.0% and maturing on various dates up to 2008 13.0 10.1
---------------------------------------------------------------------------------------------------------------------------------
Other 3.2 0.5
---------------------------------------------------------------------------------------------------------------------------------
Total debt 7,343.0 8,387.7
Less - current maturities 509.4 190.3
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 6,833.6 $ 8,197.4
=================================================================================================================================
(b) Long-Term Debt Maturities
Anticipated requirements to meet long-term debt repayments during each of the
five years ended December 31, are as follows:
(millions) Credit facilities Other Total
---------------------------------------------------------------------------------------------------------------------------------
2003 (balance of year) $ - $ 10.4 $ 10.4
2004 499.0 210.9 709.9
2005 - 1.2 1.2
2006 - 1,579.8 1,579.8
2007 - 1,869.9 1,869.9
=================================================================================================================================
14. Other Long-Term Liabilities
As at As at
June 30, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Deferred gain on sale-leaseback of buildings $ 114.2 $ 111.1
Pension and other post-retirement liabilities 154.0 149.7
Deferred hedging liability 581.5 -
Deferred customer activation and installation fees (a) 98.8 100.3
Other 75.9 44.2
---------------------------------------------------------------------------------------------------------------------------------
$ 1,024.4 $ 405.3
=================================================================================================================================
(a) Upfront customer activation fees, along with the corresponding direct costs
not in excess of revenues, are deferred and recognized over the average
expected term of the customer relationship.
15. Shareholders' Equity
(a) Details of Shareholders' Equity
As at As at
June 30, December 31,
($ in millions except per share amounts) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Convertible debentures $ 149.0 $ 148.5
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Preference Shares and Preferred Shares
Authorized Amount
Non-voting first preferred shares Unlimited
Redemption
Issued Premium (b)
Cumulative
$6.00 Preference 8,090 10.0% 0.8 0.8
$4.375 Preferred 53,000 4.0% 5.3 5.3
$4.50 Preferred 47,500 4.0% 4.8 4.8
$4.75 Preferred 71,250 5.0% 7.1 7.1
$4.75 Preferred (Series 1956) 71,250 4.0% 7.1 7.1
$5.15 Preferred 114,700 5.0% 11.5 11.5
$5.75 Preferred 96,400 4.0% 9.6 9.6
$6.00 Preferred 42,750 5.0% 4.3 4.3
$1.21 Preferred 768,400 4.0% 19.2 19.2
---------------------------------------------------------------------------------------------------------------------------------
69.7 69.7
---------------------------------------------------------------------------------------------------------------------------------
Preferred equity
Authorized Amount
First Preferred Shares 1,000,000,000
Second Preferred Shares 1,000,000,000
Common equity
Shares
Authorized Amount
Common Shares 1,000,000,000
Non-Voting Shares 1,000,000,000
Issued
Common Shares (c) 2,314.1 2,275.1
Non-Voting Shares (c) 3,262.6 3,243.2
Options and warrants (d), (e) 55.7 56.8
Accrual for shares issuable under channel stock incentive plan (f) and other 0.9 1.5
Retained earnings 686.9 630.4
Contributed surplus 7.4 7.4
---------------------------------------------------------------------------------------------------------------------------------
6,327.6 6,214.4
---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 6,546.3 $ 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
Periods ended June 30, 2003 Three months Six months
Number of Amount Number of Amount
shares (millions) shares (millions)
---------------------------------------------------------------------------------------------------------------------------------
Common Shares
Beginning of period 188,402,241 $ 2,294.8 187,271,994 $ 2,275.1
Exercise of share options (d) 11,691 0.2 11,691 0.2
Employees' purchase of shares 876,885 17.5 1,912,612 35.6
Dividends reinvested in shares 95,261 1.6 189,781 3.2
---------------------------------------------------------------------------------------------------------------------------------
End of period 189,386,078 $ 2,314.1 189,386,078 $ 2,314.1
=================================================================================================================================
Non-Voting Shares
Beginning of period 158,905,599 $ 3,251.1 158,407,931 $ 3,243.2
Exercise of share options (d) 24,480 1.4 28,851 1.6
Channel stock incentive plan (f) 11,375 0.3 21,475 0.4
Dividend Reinvestment and Share Purchase Plan (g)
Dividends reinvested in shares 658,695 9.5 1,126,784 16.9
Optional cash payments 14,314 0.3 29,422 0.5
---------------------------------------------------------------------------------------------------------------------------------
End of period 159,614,463 $ 3,262.6 159,614,463 $ 3,262.6
=================================================================================================================================
(d) Share Option Plans
The Company has a number of share option plans under which directors, officers
and other employees receive options to purchase Common Shares and/or Non-Voting
Shares at a price equal to the fair market value at the time of grant. Options
granted under the plans may be exercised over specific periods not to exceed 10
years from the time of grant. At June 30, 2003, 26.7 million (December 31, 2002
- 25.8 million) shares are reserved for issuance under the share option plans.
The following table presents a summary of the activity related to the Company's
share options plans for the periods ended June 30, 2003.
Periods ended June 30, 2003 Three months Six months
Number of Weighted average Number of Weighted average
shares option price shares option price
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 24,893,660 $ 25.12 24,689,860 $ 25.60
Granted 43,950 18.08 1,003,805 14.98
Exercised (36,171) 14.97 (40,542) 14.00
Forfeited (245,714) 28.65 (856,193) 29.42
Expired (including cancelled) (120,330) 16.15 (261,535) 18.64
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 24,535,395 25.13 24,535,395 25.13
=================================================================================================================================
(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 June 30,
2003, 0.8 million (December 31, 2002 - 0.8 million) warrants remained
outstanding.
(f) Channel Stock Incentive Plan
The Company initiated the Plan to increase sales of various products and
services by providing additional performance-based compensation in the form of
Non-Voting Shares. The Company has reserved 0.3 million (December 31, 2002 -
0.3 million) shares for issuance under the Plan. As at June 30, 2003, shares
earned, but not yet issued, are accrued as a component of Common Equity.
(g) Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase Plan under which
eligible shareholders may acquire Non-Voting Shares through the reinvestment of
dividends and additional optional cash payments. Excluding Non-Voting Shares
purchased by way of additional optional cash payments, at the Company's
discretion it may offer the Non-Voting Shares at up to a 5% discount from the
market price. Shares purchased through optional cash payments are subject to a
minimum investment of $100 per transaction and a maximum investment of $20,000
per calendar year. Under this Plan, the Company has the option of offering
shares from Treasury or having the trustee acquire shares in the market. Prior
to July 1, 2001, when the acquisition of shares from Treasury commenced, all
Non-Voting Shares were acquired on the market at normal trading prices.
16. Commitments and Contingent Liabilities
(a) Operational Efficiency Program Initiatives
As disclosed in Note 4, the Company estimates that an additional restructuring
amount of approximately $9.6 million may be recorded in 2003 in respect of the
Operational Efficiency Program for items that were not eligible to be recorded
prior to June 30, 2003.
(b) Labour Negotiations
In 2000, TELUS commenced collective bargaining with the Telecommunications
Workers Union for a new collective agreement replacing the legacy agreements
from BC TELECOM and Alberta-based TELUS. Following the Clearnet acquisition and
subsequent transactions, the Mobility business assumed responsibility for
separate negotiations for its unionized operations in British Columbia and
Alberta. This is the first round of collective bargaining since the merger of
BC TELECOM and TELUS Alberta and the Company's aim is to replace the multiple
legacy collective agreements with a single collective agreement for the new
bargaining unit.
During the fourth quarter of 2002, the Company's application to the Federal
Minister of Labour, as provided for under the Canada Labour Code, requesting
the appointment of a federal conciliator was granted. While the conciliation
process is underway, the Canada Labour Code prohibits a strike or lock out.
In January 2003, the Company and the Telecommunications Workers Union signed a
Maintenance of Activities agreement, as required by federal legislation. This
agreement ensures the continuation of services to 911 emergency, police, fire,
ambulance, hospitals and coast guard, with provisions to cover other potential
emergency services necessary to prevent immediate and serious danger to the
health or safety of the public, in the event of a work stoppage.
Also in January 2003, the Company and the Telecommunications Workers Union
agreed to an extension of the conciliation process to include a global review
of all outstanding issues and a subsequent 60-day conciliation period. In July
2003, the conciliators concluded their global review and released their action
plan, which was agreed to and accepted by the Company and the
Telecommunications Workers Union. The conciliators' action plan sets out that
the 60-day conciliation period will commence November 14, 2003, while, in the
interim, pensions and employee benefits discussions will continue. If the
outstanding issues are not resolved at the end of the 60-day period, the
parties may agree to extend this phase or, alternatively, following a 21-day
cooling off period, a legal work stoppage may occur no earlier than February
2004. If the outstanding issues are not resolved and a new collective agreement
is not achieved, there is the risk of a labour disruption. As a labour
disruption could occur in multiple forms, the operational and financial impacts
of a labour disruption on the Company are not practicably determinable
currently.
(c) Guarantees
Effective for reporting periods ending after December 31, 2002,
Canadian GAAP requires the disclosure of certain types of guarantees and their
maximum, undiscounted amounts. The maximum potential payments represent a
"worst-case scenario" and do not necessarily reflect results expected by the
Company. Guarantees requiring disclosure are those obligations that require
payments contingent on specified types of future events; in the normal course
of its operations, the Company enters into obligations which GAAP may consider
to be guarantees. As defined by Canadian GAAP, guarantees subject to these
disclosure guidelines do not include guarantees that relate to the future
performance of the Company.
Performance guarantees: Performance guarantees contingently require a guarantor
to make payments to a guaranteed party based on a third party's failure to
perform under an obligating agreement. TELUS provides sales price guarantees in
respect of employees' principal residences as part of its employee relocation
policies. In the event that the Company is required to honour such guarantees,
it purchases (for immediate resale) the property from the employee.
The Company has guaranteed a third party's financial obligation as a part of a
facility naming rights agreement. The guarantee runs through to December 31,
2014, on a declining-balance basis and is of limited recourse.
In 2003, the Company guaranteed a third party's performance in respect of two
customer contracts that have been assigned to the third party. The Company
would be required to make payments to the customers should the performance
requirements of the contract not be met. The guarantees are currently expected
to run through to mid-2004 and the Company has recourse to escrowed funds
sufficient to offset any payment it may be required to make under the
guarantee.
As at June 30, 2003, the Company has no liability recorded in respect of the
aforementioned performance guarantees.
Financial guarantees: In conjunction with its 2001 exit from the equipment
leasing business, the Company provided a guarantee to a third party with
respect to certain specified telecommunication asset and vehicle leases. If the
lessee were to default, the Company would be required to make a payment to the
extent that the realized value of the underlying asset is insufficient to pay
out the lease; in some instances, the Company could be required to pay out the
lease on a gross basis and realize the underlying value of the leased asset
itself. As at June 30, 2003, the Company has a liability of $1.8 million
recorded in respect of these lease guarantees.
The following table quantifies the maximum, undiscounted guarantee amounts, as
at June 30, 2003, without regard for the likelihood of having to make such
payment.
Performance Financial
(millions) guarantees (a) guarantees (a) Total
---------------------------------------------------------------------------------------------------------------------------------
2003 (balance of year) $ 6.9 $ 8.7 $ 15.6
2004 3.5 6.7 10.2
2005 2.0 4.9 6.9
2006 1.8 3.3 5.1
2007 1.6 1.6 3.2
=================================================================================================================================
(a) Annual amounts for performance guarantees and financial guarantees
include the maximum guarantee amounts during any year of the term of the
guarantee.
Indemnification obligations: In the normal course of operations, the
Company may provide indemnification in conjunction with certain transactions.
The term of these indemnification obligations range in duration and often are
not explicitly defined. Where appropriate, an indemnification obligation is
recorded as a liability. In many cases, there is no maximum limit on these
indemnification obligations and the overall maximum amount of the obligations
under such indemnification obligations cannot be reasonably estimated. Other
than obligations recorded as liabilities at the time of the transaction,
historically the Company has not made significant payments under these
indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the
Company agreed to bear a proportionate share of the purchaser's increased
directory publication costs if the increased costs were to arise from a change
in the applicable Canadian Radio-television and Telecommunications Commission
(the "CRTC") regulatory requirements. The Company's proportionate share would
be 80% through May 2006, declining to 40% in the next five-year period and then
to 15% in the final five years. As well, should the CRTC take any action which
would result in the purchaser being prevented from carrying on the directory
business as specified in the agreement, TELUS would indemnify the purchaser in
respect of any losses that the purchaser incurred.
The Company has no liability recorded, as at June 30, 2003, in respect of
indemnification obligations.
(d) Claims and Lawsuits
A number of claims and lawsuits seeking damages and other relief are pending
against the Company. It is impossible at this time for the Company to predict
with any certainty the outcome of such litigation. However, management is of
the opinion, based upon information presently available, that it is unlikely
that any liability, to the extent not provided for through insurance or
otherwise, would be material in relation to the Company's consolidated
financial position.
17. Additional Financial Information
(a) Income Statement
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Advertising expense $ 34.1 $ 45.3 $ 60.4 $ 75.3
=================================================================================================================================
(b) Balance Sheet
As at As at
June 30, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Accounts receivable
Customer accounts receivable $ 372.2 $ 524.7
Accrued receivables 195.1 153.9
Allowance for doubtful accounts (75.2) (71.8)
Other 7.5 33.6
---------------------------------------------------------------------------------------------------------------------------------
$ 499.6 $ 640.4
=================================================================================================================================
Prepaid expense and other
Prepaid expenses $ 154.1 $ 106.1
Deferred customer activation and installation costs 53.1 57.3
Other 24.5 0.1
---------------------------------------------------------------------------------------------------------------------------------
$ 231.7 $ 163.5
=================================================================================================================================
Accounts payable and accrued liabilities
Trade accounts payable $ 292.0 $ 337.1
Accrued liabilities 312.4 388.1
Payroll and other employee related liabilities 361.4 359.7
Interest payable 72.2 75.4
Other 42.4 38.5
---------------------------------------------------------------------------------------------------------------------------------
$ 1,080.4 $ 1,198.8
=================================================================================================================================
Advance billings and customer deposits
Advance billings $ 345.4 $ 304.3
Customer deposits 25.1 26.0
---------------------------------------------------------------------------------------------------------------------------------
$ 370.5 $ 330.3
=================================================================================================================================
(c) Statement of Cash Flows
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Disbursements made in conjunction with
Operational Efficiency Program
Workforce reduction
Voluntary (Early Retirement Incentive Plan,
Voluntary Departure Incentive Plan and other) $ 27.9 $ - $ 126.2 $ -
Involuntary and other 13.7 28.6 63.1 61.1
Lease termination charges 2.0 2.3 3.6 2.3
Other charges 4.0 3.4 8.6 13.9
---------------------------------------------------------------------------------------------------------------------------------
$ 47.6 $ 34.3 $ 201.5 $ 77.3
=================================================================================================================================
Net change in non-cash working capital
Accounts receivable $ 53.8 $ 72.5 $ 140.8 $ 42.3
Income and other taxes receivable (5.7) (25.9) (217.1) (58.7)
Inventories 4.7 7.5 14.9 17.5
Prepaid expenses and other (42.6) (12.5) (60.1) (51.6)
Accounts payable and accrued liabilities (90.8) (91.1) (114.8) (61.6)
Advance billings and customer deposits 31.4 (35.9) 40.2 (14.5)
---------------------------------------------------------------------------------------------------------------------------------
$ (49.2) $ (85.4) $ (196.1) $ (126.6)
=================================================================================================================================
18. Segmented Information
The Company's reportable segments, which are used to manage the business, are
Communications and Mobility. Communications includes: voice local, voice long
distance, data and other telecommunication services excluding wireless;
Mobility includes: cellular and paging services. Segmentation is based on
similarities in technology, the technical expertise required to deliver the
products and services, and the distribution channels used. Intersegment sales
are recorded at the exchange value, which is the amount agreed to by the
parties.
Three-month periods
ended June 30 Communications Mobility Eliminations Consolidated
(millions) 2003 2002 2003 2002 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
External revenue $ 1,209.2 $ 1,260.4 $ 564.1 $ 487.6 $ - $ - $ 1,773.3 $ 1,748.0
Inter-segment
revenue 23.4 26.1 3.9 4.2 (27.3) (30.3) - -
---------------------------------------------------------------------------------------------------------------------------------
Total operating
revenue 1,232.6 1,286.5 568.0 491.8 (27.3) (30.3) 1,773.3 1,748.0
Operations expenses 714.1 784.3 366.7 373.0 (27.3) (30.3) 1,053.5 1,127.0
---------------------------------------------------------------------------------------------------------------------------------
EBITDA (a) $ 518.5 $ 502.2 $ 201.3 $ 118.8 $ - $ - $ 719.8 $ 621.0
=================================================================================================================================
CAPEX (b) $ 227.4 $ 407.9 $ 78.1 $ 140.7 $ - $ - $ 305.5 $ 548.6
=================================================================================================================================
EBITDA less CAPEX $ 291.1 $ 94.3 $ 123.2 $ (21.9) $ - $ - $ 414.3 $ 72.4
=================================================================================================================================
Six-month periods
ended June 30 Communications Mobility Eliminations Consolidated
(millions) 2003 2002 2003 2002 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
External revenue $ 2,417.7 $ 2,511.3 $ 1,096.5 $ 934.7 $ - $ - $ 3,514.2 $ 3,446.0
Inter-segment
revenue 46.8 48.0 7.6 8.3 (54.4) (56.3) - -
---------------------------------------------------------------------------------------------------------------------------------
Total operating
revenue 2,464.5 2,559.3 1,104.1 943.0 (54.4) (56.3) 3,514.2 3,446.0
Operations expenses 1,453.8 1,590.4 724.2 701.6 (54.4) (56.3) 2,123.6 2,235.7
---------------------------------------------------------------------------------------------------------------------------------
EBITDA (a) $ 1,010.7 $ 968.9 $ 379.9 $ 241.4 $ - $ - $ 1,390.6 $ 1,210.3
=================================================================================================================================
CAPEX (b) $ 380.9 $ 717.0 $ 132.4 $ 237.5 $ - $ - $ 513.3 $ 954.5
=================================================================================================================================
EBITDA less CAPEX $ 629.8 $ 251.9 $ 247.5 $ 3.9 $ - $ - $ 877.3 $ 255.8
=================================================================================================================================
(a) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
is defined as operating revenues less operations expense and, as defined,
excludes restructuring and workforce reduction costs. The Company has issued
guidance on, and reports, EBITDA because it is a key measure used by management
to evaluate performance of its business segments and is utilized in measuring
compliance with debt covenants.
(b) Total capital expenditures ("CAPEX").
19. Related Party Transactions
In 2001, the Company entered into an agreement with Verizon Communications Inc.
("Verizon"), a significant shareholder, with respect to acquiring certain
rights to Verizon's software, technology, services and other benefits, thereby
replacing and amending a previous agreement between the Company and GTE
Corporation. The agreement is renewable annually at the Company's sole option
up to December 31, 2008, and it has been renewed for 2003. As of June 30, 2003,
$312.1 million of specified software licences and a trademark licence have been
acquired and recorded as capital and other assets. These assets are valued at
fair market value at the date of acquisition as determined by an arm's-length
party's appraisal. Assuming renewal through to 2008, the total commitment under
the new agreement is U.S.$377 million for the period 2001 to 2008 and the
commitment remaining after June 30, 2003, is U.S.$112 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, $42.7 million at June
30, 2003 (December 31, 2002 - $75.4 million).
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Verizon agreement
Ongoing services and benefits expensed $ 6.8 $ 11.8 $ 14.3 $ 25.3
Specified software licences and trademark licence
acquired and recorded as capital and other $ - $ 27.4 $ - $ 53.7
Sales to Verizon (Verizon customers' usage of TELUS'
telecommunication infrastructure and other) $ 9.0 $ 9.9 $ 21.1 $ 15.8
Purchases from Verizon (TELUS customers' usage of
Verizon's telecommunication infrastructure
and other) $ 12.2 $ 5.9 $ 20.9 $ 14.4
=================================================================================================================================
In common with, and on the same basis as, other shareholders of the Company,
Verizon is eligible to participate in the Company's Dividend Reinvestment and
Share Purchase Plan (see Note 15(g)). The following table presents a summary of
the Company's dividend transactions with Verizon, which are included elsewhere
in these financial statements in similarly captioned line item amounts.
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Declared dividends attributable to
Verizon's shareholdings
- to be paid in cash $ 11.0 $ 10.5 $ 21.5 $ 10.5
- to be reinvested in Treasury shares - 0.5 0.5 11.4
---------------------------------------------------------------------------------------------------------------------------------
11.0 11.0 22.0 21.9
--------------------------------------------------------------------------------------------------------------------------------
Cash payments 10.5 - 21.0 -
Reinvested in Treasury shares 0.5 10.9 1.0 21.6
---------------------------------------------------------------------------------------------------------------------------------
11.0 10.9 22.0 21.6
---------------------------------------------------------------------------------------------------------------------------------
Change in dividends payable to Verizon - 0.1 - 0.3
Dividends payable to Verizon, beginning of period 11.0 10.9 11.0 10.7
--------------------------------------------------------------------------------------------------------------------------------
Dividends payable to Verizon, end of period $ 11.0 $ 11.0 $ 11.0 $ 11.0
=================================================================================================================================
20. Differences Between Canadian and United States Generally Accepted
Accounting Principles
The consolidated financial statements have been prepared in accordance with
Canadian GAAP. The principles adopted in these financial statements conform in
all material respects to those generally accepted in the United States except
as summarized below. Significant differences between Canadian GAAP and U.S.
GAAP would have the following effect on reported net income of the Company:
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with Canadian GAAP $ 74.8 $ 18.4 $ 166.0 $ 17.6
Adjustments:
Decrease in depreciation expense (b) 9.0 9.0 17.9 17.9
Decrease in interest expense (c) 2.4 2.4 4.8 4.8
Amortization of intangible assets (d) (20.4) (20.4) (40.9) (40.9)
Change in future employee benefits (e) (4.3) (4.3) (8.5) (8.5)
Asset impairment - decrease in depreciation (f) 18.1 18.1 36.1 36.1
Interest on convertible debentures (g) (1.8) (1.7) (3.5) (3.3)
Accounting for derivatives (h) (0.8) 0.6 0.3 (0.5)
Taxes on the above adjustments (1.8) (1.6) (3.5) (4.2)
---------------------------------------------------------------------------------------------------------------------------------
Income before effect of change in accounting principles 75.2 20.5 168.7 19.0
Effect of change in accounting principles for
intangible assets and goodwill (j) - - - (1,701.6)
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with U.S. GAAP 75.2 20.5 168.7 (1,682.6)
Other comprehensive income (loss) (h) (n) (103.0) 73.1 (83.6) 24.1
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) in accordance
with U.S. GAAP $ (27.8) $ 93.6 $ 85.1 $(1,658.5)
=================================================================================================================================
Income (loss) per share under U.S. GAAP
(basic and diluted):
Before effect of change in accounting principles
for intangible assets and goodwill $ 0.21 $ 0.06 $ 0.48 $ 0.06
Effect of change in accounting principles
for intangible assets and goodwill (j) - - - (5.57)
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.21 $ 0.06 $ 0.48 $ (5.51)
=================================================================================================================================
The following is a restatement of major balance sheet categories to reflect the
application of U.S. GAAP:
As at As at
June 30, December 31,
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Current assets $ 1,348.0 $ 1,173.2
Capital assets
Property, plant, equipment and other 7,774.1 7,926.0
Intangible assets subject to amortization 2,730.5 2,901.6
Intangible assets with indefinite lives 2,951.6 2,950.1
Goodwill 3,543.3 3,543.2
Deferred income taxes 928.0 1,174.7
Other assets 682.8 979.9
---------------------------------------------------------------------------------------------------------------------------------
$19,958.3 $20,648.7
=================================================================================================================================
Current liabilities $ 2,221.7 $ 2,181.0
Long-term debt 6,996.8 8,364.9
Other long-term liabilities 1,122.7 499.7
Deferred income taxes 1,635.8 1,655.1
Non-controlling interest 8.6 11.2
Shareholders' equity 7,972.7 7,936.8
---------------------------------------------------------------------------------------------------------------------------------
$19,958.3 $20,648.7
=================================================================================================================================
The following is a reconciliation of shareholders' equity incorporating the
differences between Canadian and U.S. GAAP:
As at June 30 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under Canadian GAAP $ 6,546.3 $ 6,407.0
Adjustments:
Purchase versus Pooling Accounting (a) - (e), (k) 1,529.1 1,562.3
Asset impairment (f) (13.5) (57.7)
Reclassification of convertible debentures from equity to debt (g) (149.0) (147.9)
Accounting for derivatives (h) (1.1) (3.2)
Additional goodwill on Clearnet purchase (l) 123.5 123.5
Accumulated other comprehensive income (loss) (n) (62.6) 4.2
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under U.S. GAAP $ 7,972.7 $ 7,888.2
=================================================================================================================================
Composition of Shareholders' Equity under U.S. GAAP
Preference and preferred shares
TELUS Communications Inc. Preference Shares and Preferred Shares $ 69.7 $ 69.7
Common equity
Common Shares 4,247.6 4,174.7
Non-Voting Shares 4,551.8 4,192.7
Options and warrants 55.7 56.6
Accrual for shares issuable under channel stock incentive plan and other 0.9 0.3
Retained earnings (deficit) (897.8) (617.4)
Accumulated other comprehensive income (loss) (n) (62.6) 4.2
Contributed surplus 7.4 7.4
---------------------------------------------------------------------------------------------------------------------------------
7,903.0 7,818.5
---------------------------------------------------------------------------------------------------------------------------------
$ 7,972.7 $ 7,888.2
=================================================================================================================================
(a) Merger of BC TELECOM and TELUS
The business combination between BC TELECOM and TELUS Corporation (renamed
TELUS Holdings Inc. which was wound up June 1, 2001) was accounted for using
the pooling of interests method under Canadian GAAP. Under Canadian GAAP, the
application of the pooling of interests method of accounting for the merger of
BC TELECOM and TELUS Holdings Inc. resulted in a restatement of prior periods
as if the two companies had always been combined. Under U.S. GAAP, the merger
is accounted for using the purchase method. Use of the purchase method results
in TELUS (TELUS Holdings Inc.) being acquired by BC TELECOM for $4,662.4
million (including merger related costs of $51.9 million) effective January 31,
1999.
(b) Depreciation
Under the purchase method, TELUS' capital assets on acquisition have been
recorded at fair value rather than at their underlying cost (book values) to
TELUS. Therefore, depreciation of such assets based on fair values at the date
of acquisition under U.S. GAAP will be different than TELUS' depreciation based
on underlying cost (book values).
(c) Interest
Under the purchase method, TELUS' long-term debt on acquisition has been
recorded at its fair value rather than at its underlying cost (book value) to
TELUS. Therefore, interest expense calculated on the debt based on fair values
at the date of acquisition under U.S. GAAP will be different than TELUS'
interest expense based on underlying cost (book value).
(d) Intangible Assets
As TELUS' intangible assets on acquisition have been recorded at their fair
value, amortization of such assets, other than for those with indefinite lives,
needs to be included under U.S. GAAP; consistent with prior years, amortization
is calculated using the straight-line method.
The incremental amounts recorded as intangible assets arising from the TELUS
acquisition above are as follows:
Cost Accumulated Amortization Net Book Value
(millions) As at As at
June 30, December 31,
2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscribers - wireline $ 1,950.0 $ 199.8 $ 1,750.2 $ 1,769.4
Subscribers - wireless 250.0 138.0 112.0 133.7
---------------------------------------------------------------------------------------------------------------------------------
2,200.0 337.8 1,862.2 1,903.1
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences (a) 1,833.3 1,833.3 - -
---------------------------------------------------------------------------------------------------------------------------------
$ 4,033.3 $ 2,171.1 $ 1,862.2 $ 1,903.1
=================================================================================================================================
(a) Accumulated amortization of spectrum licences is amortization recorded
prior to 2002 and the transitional impairment amount.
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at June 30, 2003, for each of
the next five fiscal years is as follows:
Years ended December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2003 (balance of year) $ 209.1
2004 327.1
2005 216.7
2006 84.5
2007 72.8
=================================================================================================================================
(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) Income Taxes
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Current $ (5.5) $ 24.4 $ (206.3) $ 30.3
Deferred 61.1 9.2 256.7 21.4
---------------------------------------------------------------------------------------------------------------------------------
55.6 33.6 50.4 51.7
Investment Tax Credits - (40.0) (1.0) (40.0)
---------------------------------------------------------------------------------------------------------------------------------
$ 55.6 $ (6.4) $ 49.4 $ 11.7
=================================================================================================================================
The Company's income tax expense (recovery) differs from that calculated by
applying statutory rates for the following reasons:
Three-month periods ended June 30 ($ in millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 49.1 37.1% $ 5.3 38.8%
Prior year rates applied to settlement of tax issues - 2.0
Investment Tax Credits - (24.3)
Other 1.5 4.0
---------------------------------------------------------------------------------------------------------------------------------
50.6 38.1% (13.0) NM (a)
Large corporations tax 5.0 6.6
---------------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 55.6 41.9% $ (6.4) NM (a)
=================================================================================================================================
(a) "NM" - not meaningful.
Six-month periods ended June 30 ($ in millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 81.4 37.0% $ 12.9 39.2%
Prior year rates applied to settlement of tax issues (47.0) 2.0
Investment Tax Credits (0.6) (24.3)
Other 4.8 7.9
---------------------------------------------------------------------------------------------------------------------------------
38.6 17.6% (1.5) (4.4)%
Large corporations tax 10.8 13.2
---------------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 49.4 22.5% $ 11.7 35.8%
=================================================================================================================================
(j) Intangible Asset Transitional Impairment Amount and Goodwill
Commencing January 1, 2002, in Canada and the United States, new Generally
Accepted Accounting Principles for intangible assets with an indefinite life
and goodwill apply to the Company (SFAS 142, "Goodwill and Other Intangible
Assets"). As one part of the transitional implementation, intangible assets
with indefinite lives were tested for impairment as at January 1, 2002. Any
such transitional impairment amount arising is considered to arise from a
change in accounting policy and is charged to earnings, in the period the
change is effected, after determining net income from operations. As a result
of the differing accounting treatment afforded the merger of BC TELECOM and
TELUS (see (a) and (d)), the recorded value of intangible assets with
indefinite lives differs materially between Canadian and U.S. GAAP. The Company
has assessed its intangible assets with indefinite lives and determined it
necessary to record a transitional impairment amount of $595.2 million ($910.0
million before tax) for purposes of Canadian GAAP; a transitional impairment of
$1,701.6 million ($2,609.7 million before tax) was required under U.S. GAAP.
The transitional impairment amount, under both Canadian and U.S. GAAP, reduced
the carrying values of the intangible assets with indefinite lives to the same
amounts, thus eliminating the corresponding GAAP difference.
Similarly, goodwill was also to be tested for impairment as at January 1, 2002,
and any transitional impairment amount would also be considered to arise from a
change in accounting policy and is charged to earnings, in the period the
change is effected, after determining net income from operations. The Company
completed this test in the first quarter of 2002. By applying the prescribed
method of comparing the fair value of its reporting units to the carrying
amounts of its reporting units, the Company has assessed its goodwill and
determined that there was no goodwill transitional impairment amount.
Consistent with current industry-specific valuation methods, the Company used a
combination of the discounted cash flow model and the market comparable
approach for determining the fair value of its reporting units.
(k) Goodwill
Under the purchase method of accounting, TELUS' assets and liabilities at
acquisition have been recorded at their fair values with the excess purchase
price being allocated to goodwill in the amount of $403.1 million. Commencing
January 1, 2002, rather than being systematically amortized, the carrying value
of goodwill is periodically tested for impairment.
(l) Additional Goodwill on Clearnet purchase
Under U.S. GAAP, shares issued by the acquirer to affect an acquisition are
measured at the date the acquisition was announced; however, under Canadian
GAAP, at the time the transaction took place, shares issued to effect an
acquisition were measured at the transaction date. This results in the purchase
price under U.S. GAAP being $131.4 million higher than under Canadian GAAP. The
resulting difference is assigned to goodwill. Commencing January 1, 2002,
rather than being systematically amortized, the carrying value of goodwill is
periodically tested for impairment.
(m) Share-Based Compensation
Generally Accepted Accounting Principles require disclosure of the impact on
earnings and earnings per share as if the fair value based method of accounting
had been applied for share-based compensation. Under Canadian GAAP, this is
required in respect of awards made after 2001; under U.S. GAAP, this is
required in respect of awards made after 1994. The fair values of the Company's
options granted in 2003 and 2002, and the weighted average assumptions used in
estimating the fair values, are set out in Note 8. Such impact, using the fair
values set out in Note 8 would approximate the following pro forma amounts:
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Compensation cost $ 11.3 $ 17.3 $ 23.6 $ 36.7
Net income (loss)
As reported $ 75.2 $ 20.5 $ 168.7 $(1,682.6)
Pro forma $ 63.9 $ 3.2 $ 145.1 $(1,719.3)
Net income (loss) per Common Share and
Non-Voting Share
Basic and diluted
As reported $ 0.21 $ 0.06 $ 0.48 $ (5.51)
Pro forma $ 0.18 $ 0.01 $ 0.41 $ (5.64)
=================================================================================================================================
(n) Additional Disclosures Required Under U.S. GAAP - Comprehensive Income
SFAS 130, "Reporting Comprehensive Income", requires that a statement of
comprehensive income be displayed with the same prominence as other financial
statements. Comprehensive income, which incorporates net income, includes all
changes in equity during a period except those resulting from investments by
and distributions to owners. There is currently no requirement to disclose
comprehensive income under Canadian GAAP.
Periods ended June 30 Three months Six months
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Change in unrealized fair value of
derivative cash flow hedges (h) $ (162.0) $ 126.7 $ (137.8) $ 42.4
Minimum pension liability (1.2) - (2.1) -
---------------------------------------------------------------------------------------------------------------------------------
(163.2) 126.7 (139.9) 42.4
Income tax expense (recovery) (60.2) 53.6 (56.3) 18.3
---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (103.0) 73.1 (83.6) 24.1
Accumulated other comprehensive income (loss),
beginning of period 40.4 (68.9) 21.0 (19.9)
---------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss),
end of period $ (62.6) $ 4.2 $ (62.6) $ 4.2
=================================================================================================================================
(o) Asset Retirement Obligations
Commencing January 1, 2003, new Generally Accepted Accounting Principles for
asset retirement obligations apply to the Company (SFAS 143, "Accounting for
Asset Retirement Obligations"). The new standard focuses on the recognition and
measurement of liabilities for statutory, contractual or legal obligations,
normally when incurred, associated with the retirement of property, plant and
equipment when those obligations result from the acquisition, construction,
development or normal operation of the assets. The obligations are measured
initially at fair value (using present value methodology) and the resulting
costs capitalized into the carrying amount of the related asset. In subsequent
periods, the liability is adjusted for the accretion of discount and any
changes in the amount or timing of the underlying future cash flows. The
capitalized asset retirement cost is depreciated on the same basis as the
related asset; discount accretion is also included in determining the results
of operations.
All amounts arising from the application of this accounting policy are not
significant.
21. Prior Period Presentation
Certain of the comparative amounts have been reclassified to conform to the
presentation adopted in the current period.
==============================================================================
TELUS Management Discussion and Analysis
Second 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; development and introduction of new products and
services; supplier/vendor reliability and viability; realization of tax
savings; the impact of credit rating changes; availability and cost of capital
including renewal of credit facilities; financial condition and credit risk of
customers affecting collectibility of receivables; ability to maintain an
accounts receivable securitization program; legal and regulatory compliance of
employees and key stakeholders; adverse regulatory action; attraction and
retention of key personnel; collective labour agreement negotiations and
outcome of conciliation efforts; future costs of retirement and pension
obligations and returns on invested pension assets; technological advances;
the final outcome of pending or future litigation; the effect of
environmental, health and safety concerns; man-made and natural disasters; and
other risk factors discussed herein and listed from time to time in TELUS'
reports, comprehensive public disclosure documents, including the Annual
Information Form, and in other filings with securities commissions in Canada
and the U.S.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
==============================================================================
Management's Discussion and Analysis
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month and six-month
periods ended June 30, 2003 and 2002. This discussion contains forward-looking
information that is qualified by reference to, and should be read together
with, the Company's discussion regarding forward-looking statements (see
"Forward-Looking Statements" above). 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 20 to the interim consolidated
financial statements for a summary of the principal differences between
Canadian and U.S. GAAP as they relate to TELUS.
Management's discussion and analysis is comprised of the following:
1. Vision, Core Business and Strategy
2. Capability to Deliver Results
3. Results and Key Performance Indicators
4. Risks and Uncertainties
1. Vision, Core Business and Strategy
TELUS will continue to be guided by its six strategic imperatives
established in 2000. TELUS is focusing and moving forward on the following
priorities in 2003:
Continuing to deliver on our efficiency improvement objectives.
- Communications segment operating costs were significantly reduced,
fourteen customer contact centres were consolidated in the first six
months of 2003 and staff levels were reduced by approximately
850 since the beginning of the year; and
- The Company disposed of non-strategic properties and monetized
investments for total cash proceeds of $19.0 million and
$38.3 million, respectively, during the second quarter and six-month
period ended June 30, 2003.
Improving customer service.
Process and system changes that are having a positive impact, include:
- The Company is stabilizing customer care staff levels to address a
high number of voluntary departures and normal staff turnovers and
improve service delivery;
- The Company is working to improve its interactive voice response
systems (IVR) to better route inbound calls. Speech recognition
capabilities will help us deliver customer satisfaction with the first
contact. Routing will be faster, process steps will be reduced and our
answer speed will increase;
- Better communication, improved coaching, increased customer focus
through reducing layers of management and reducing front-line spans;
and
- Streamlining, simplifying and standardizing contracts and related
sales processes for business customers.
Enhancing our leadership position in the North American wireless
industry.
TELUS Mobility continued to build on its industry-leading performance
from the second half of 2002. Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) excluding Restructuring and workforce reduction
costs increased by 69.4% and 57.4% for the second quarter and first six months
of 2003, respectively, when compared with the same periods a year ago.
Mobility continues to lead the industry with average revenue per subscriber
unit per month (ARPU) of $56 and $55 for the second quarter and first six
months of 2003, respectively, while maintaining world-class churn rates of
1.3% and 1.4%, respectively.
Strengthen our financial position, based on improved operating
performance.
- The Company reduced net debt and continued to improve its financial
ratios in the first and second quarters of 2003. In particular, the
Net debt to EBITDA ratio reached 3.0:1 measured at June 30, 2003,
which represents accelerated achievement of TELUS' year-end target for
year-end 2003;
- To maintain flexibility, TELUS filed a $3 billion shelf prospectus in
mid-June 2003, which if desired, enables a quick and efficient means
to sell debt, equity and/or warrants should the Company want to issue
securities over the next two years. The new shelf prospectus replaced
a previous $10 billion shelf prospectus that was about to expire;
and
- During the second quarter of 2003, three of four debt-rating agencies
changed their outlook or trend to 'stable' from 'negative' for TELUS'
debt.
Achieving a settlement with our unionized employees.
In 2000, TELUS commenced collective bargaining with the
Telecommunications Workers Union (TWU) for a new collective agreement
replacing the legacy agreements from BC TELECOM and Alberta-based TELUS. Since
January 2003, the Company and the TWU continue to participate in a
conciliation process, which includes a global review of all outstanding issues
and a subsequent 60 day conciliation period. In July 2003, the conciliators
concluded their global review and released their action plan, which was agreed
to and accepted by the Company and the TWU. The conciliators' action plan sets
out that the 60-day conciliation period will commence November 14, 2003,
while, in the interim, pensions and employee benefits discussions will
continue. If the outstanding issues are not resolved at the end of the 60-day
period, the parties may agree to extend this phase or, alternatively,
following a 21 day cooling off period, a legal work stoppage may occur no
earlier than February 2004.
If the outstanding issues are not resolved and a new collective agreement
is not achieved, there is the risk of a labour disruption. While the financial
and operational impacts of a labour disruption are difficult to estimate, the
Company expects that in the short-term, profitability would be reduced, but
cash flow would increase due to reduced capital expenditures.
2. Capability to Deliver Results
Changes to the Competitive Environment
In June 2003, Sprint Canada and Microcell Solutions announced a joint
marketing alliance to bundle cellular phone services with regular landlines in
a strategy to simplify and provide an all-in-one telecommunications package.
Microcell will make its wireless product available to Sprint's 150,000
residential customers across Canada. This arrangement gives both partners
additional products to win market share from incumbent service providers.
Regulatory updates
Risk of increased rates for access to support structures of power
companies
Decision of the Supreme Court of Canada - May 16, 2003 (Barrie Public
Utilities v. Canadian Cable Television Association)
The Supreme Court of Canada upheld a Federal Court of Appeal decision
that determined the Canadian Radio-television and Telecommunications
Commission (CRTC) did not have jurisdiction over power poles of provincially
regulated power companies. The CRTC had ordered power companies to grant
access to their power poles to cable companies at fixed rates. The fixed rates
set by the CRTC were significantly lower than the expectations of the power
companies. TELUS will be affected by this decision, as it relies on power
poles to deliver services to its customers and has facilities on approximately
200,000 poles owned by power companies.
Telecom Public Notices PN 2000-124 and PN 2000-124-2 - Seeking public
input on access to multi-dwelling units, in-building wiring and riser
space
The CRTC announced principles that allow for access by all local
telephone companies to equipment and wire in buildings known as multi-dwelling
units. The decision reduces considerably the uncertainty TELUS had faced in
gaining access to such buildings, both where TELUS is an entrant in the market
and in its incumbent territory where onerous terms and conditions of access,
including fees, were being demanded by building owners. From a financial
perspective, the decision reduces TELUS' exposure to potential significantly
increased costs of building access.
Telecom Decision 2003-49 - CRTC directs incumbent telephone companies to
offer high-speed Internet services to competitors' residential telephone
customers
On July 21, 2003, the CRTC directed the incumbent telephone companies to
provide their retail high-speed Internet services to residential customers
receiving primary exchange service (local telephone service) from competitors
upon request. TELUS is currently assessing the impacts of this decision in
terms of operating and capital costs and as well, the timing of
implementation.
Public Notice 2003-04 - Measures with respect to incumbent telephone
company regulatory compliance.
On April 10, 2003, the CRTC announced in Public Notice 2003-04 more
rigorous measures to ensure regulatory compliance by incumbent telephone
companies; the CRTC will use inspectors to verify regulatory compliance. TELUS
encourages and supports regulatory compliance by all telecom industry players.
3. Results and Key Performance Indicators
Accounting Policy Developments
Guarantees
In the normal course of its operations, the Company enters into
obligations which GAAP may consider to be guarantees. Effective for reporting
periods ending after December 31, 2002, Canadian GAAP requires the disclosure
of these guarantees and their maximum, undiscounted amounts, even when the
likelihood of the Company having to make any payments under the guarantees is
slight. See Note 2a and Note 16c to the interim consolidated financial
statements.
Asset Retirement Obligations
Commencing with the Company's 2004 fiscal year, the new recommendations
of the Canadian Institute of Chartered Accountants (CICA) for accounting for
asset retirement obligations (CICA Handbook Section 3110) will apply. The new
section focuses on the recognition and measurement of liabilities for
statutory, contractual or legal obligations, normally when incurred,
associated with the retirement of property, plant and equipment when those
obligations result from the acquisition, construction, development or normal
operation of the assets. The Company is currently evaluating the impact of
this standard on its financial statements.
Hedging Relationships
Commencing with the Company's 2004 fiscal year, the new guidelines of the
CICA for accounting for hedging relationships apply to the Company (CICA
Accounting Guideline AcG-13). The Company's previously disclosed hedge
accounting policy is compliant with the new Guideline.
Financial Impact of Price Cap Decisions
On May 30, 2002 and July 31, 2002, the CRTC announced its decisions on
the Regulatory Framework for the Second Price Cap Period for the ILECs, 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 decrease in Communications segment Operating
revenues of $24.0 million and $47.0 million, respectively, for the second
quarter and six month period ended June 30, 2003, when compared with the same
periods in 2002. In addition, the Communications segment EBITDA decreased by
$25.2 million and $47.1 million, respectively, for the second quarter and six
month period ended June 30, 2003, when compared to the same period one year
earlier.
On March 18, 2003, the CRTC issued Telecom Decision CRTC 2003-11, which
finalized for the industry the assignment of tariffed services to the service
baskets established in Regulatory framework for the second price cap period.
Also on March 18, 2003, the CRTC released Telecom Decision CRTC 2003-18,
TELUS Communications Inc. - 2002 Annual price cap filing, in which it
approved, on a final basis, the majority of the applications filed in 2002 by
TELUS proposing rate changes pursuant to Decision 2002-34. The financial
impact of these two decisions is consistent with TELUS' financial assumptions
for 2002 and 2003.
Results of Operations
Highlights
Quarter ended June 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions except
per share amounts)
Operating revenues 1,773.3 1,748.0 25.3 1.4
EBITDA(1) 719.8 621.0 98.8 15.9
Restructuring and workforce
reduction costs 3.3 3.1 0.2 6.5
Income taxes 54.9 33.1 21.8 65.9
Net income 74.8 18.4 56.4 -
Common Share and
Non-Voting Share income 72.2 15.8 56.4 -
Earnings per share (EPS) $0.21 $0.05 $0.16 -
Capital expenditures
- general 305.5 548.6 (243.1) (44.3)
Free cash flow(2) 69.0 (261.8) 330.8 -
-------------------------------------------------------------------------
Six months ended June 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions except
per share amounts)
Operating revenues 3,514.2 3,446.0 68.2 2.0
EBITDA(1) 1,390.6 1,210.3 180.3 14.9
Restructuring and workforce
reduction costs 9.8 15.6 (5.8) (37.2)
Income taxes 49.0 49.6 (0.6) (1.2)
Net income 166.0 17.6 148.4 -
Common Share and
Non-Voting Share income 160.8 12.5 148.3 -
Earnings per share (EPS) $0.46 $0.04 $0.42 -
Capital expenditures
- general 513.3 954.5 (441.2) (46.2)
Free cash flow(2) 444.7 (160.8) 605.5 -
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) is defined as Operating revenues ($1,773 million and
$1,748 million, respectively, for the second quarter of 2003 and
2002) less Operations expense ($1,053 million and $1,127 million,
respectively, for the second quarter of 2003 and 2002). As defined,
EBITDA excludes Restructuring and workforce reduction costs of
$3.3 million and $3.1 million, respectively, for the second quarter
of 2003 and 2002.
The Company has issued guidance on and reports EBITDA because it is a
key measure used by management to evaluate performance of business
units and it is utilized in measuring compliance with debt covenants.
The Company also believes EBITDA is a measure commonly reported and
widely used by investors as an indicator of a company's operating
performance and ability to incur and service debt. The Company
believes EBITDA assists investors in comparing a company's
performance on a consistent basis without regard to depreciation and
amortization, which are non-cash in nature and can vary significantly
depending upon accounting methods or non-operating factors such as
historical cost; and without regard to Restructuring and workforce
reduction costs, which are transitional in nature. EBITDA is not a
calculation based on Canadian or U.S. Generally Accepted Accounting
Principles and should not be considered an alternative to Operating
income or Net income in measuring the Company's performance or used
as an exclusive measure of cash flow because it does not consider the
impact of working capital growth, capital expenditures, debt
principal reductions and other sources and uses of cash which are
disclosed in the Consolidated Statements of Cash Flows. Investors
should carefully consider the specific items included in TELUS'
computation of EBITDA. While EBITDA has been disclosed herein to
permit a more complete comparative analysis of the Company's
operating performance and debt servicing ability relative to other
companies, investors should be cautioned that EBITDA as reported by
TELUS may not be comparable in all instances to EBITDA as reported by
other companies.
(2) Free cash flow is defined as EBITDA less Capital expenditures, cash
interest, cash taxes and cash dividends. For the second quarter of
2003 and 2002, the calculation is:
($ in millions) 2003 2002
---- ----
EBITDA 720 621
Less: Capital expenditures 305 549
Less: Cash interest paid 299 302
Less: Cash income taxes 3 6
Less: Cash dividends 44 26
-- --
69 (262)
-- -----
This measure is used to provide an indication of underlying cash
flows in the business for the items identified. As defined, free cash
flow excludes Restructuring and workforce reduction costs, working
capital changes, and other sources and uses of cash, which are
disclosed in the consolidated statements of cash flows. Free cash
flow is not a calculation based on Canadian or U.S. Generally
Accepted Accounting Principles and should not be considered an
alternative to consolidated statements of cash flows. Free cash flow
is a measure that can be used to gauge TELUS' performance over time.
Investors should be cautioned that Free cash flow as reported by
TELUS may not be comparable in all instances to Free cash flow as
reported by other companies.
Significant changes included in the second quarter 2003 financial
results, when compared with the second quarter of 2002, were:
- Communications segment external revenues decreased by $51.2 million or
4.1%. Normalized for the $24.0 million negative price cap decision
impacts, revenues decreased by $27.2 million or 2.2%, primarily
because of lower voice equipment sales and lower long distance
revenues from reduced long distance minutes and prices;
- Communications segment EBITDA improved by $16.3 million or 3.2%, as
the decrease in revenues was more than offset by a $70.2 million
decrease in operations expense. The decrease in operations expense was
primarily a result of $104.0 million of savings resulting from the
Operational Efficiency Program, partially offset by an investment tax
credit of $40 million recognized in the second quarter of 2002;
- Mobility segment Network revenue improved by $73.0 million or 16.1%.
This was a result of a higher ARPU from increased usage and pricing
discipline, as well as strong subscriber growth. Mobility Network
revenue growth, combined with significant operating efficiencies and
economies of scale, flowed through to EBITDA at a rate of 113%;
- Mobility segment EBITDA increased $82.5 million or 69.4%. This was a
result of strong revenue growth, continued cost containment, and
economies of scale and efficiencies from the successful national
integration of TELUS Mobility's operations; Mobility segment EBITDA
represented 38.2% of Network revenue, resulting in a 12-point quarter
over quarter EBITDA margin expansion;
- Mobility net subscriber additions for the second quarter grew to
102,800 representing a 54.1% increase over the first quarter 2003 net
subscriber additions of 66,700. Moreover, the second quarter's net
additions were slightly higher than the same period last year
reversing the negative trend in the previous two quarters;
- Mobility blended postpaid and prepaid churn declined to 1.3% per
month, a substantial improvement from 2.0% for the same quarter last
year. This was attributed to TELUS Mobility's ongoing focus on
subscriber retention, improved network quality and coverage, enhanced
client service levels, specific grandfathered rate plans and a change
to certain rate plans which included 'free evening and weekend'
features;
- Interest expense on long-term and short-term debt decreased by
$10.0 million because of lower debt balances;
- Consolidated Free cash flow increased by $330.8 million to
$69.0 million - the first positive free cash flow during a quarter
with large semi-annual interest payments in the last three calendar
years. Second quarter free cash flow exceeded second quarter cash
payments of $47.6 million under Restructuring and workforce reduction
initiatives; and
- Net debt decreased by $156.6 million within the current quarter,
compared with an increase of $292.1 million within the second quarter
of 2002.
The discussion below for Operating revenues, Operations expense, EBITDA
and Capital expenditures is presented on a segmented basis. All other
discussion is presented for the consolidated interim financial results.
Operating revenues - Communications segment
Quarter ended June 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Voice local(1) 525.3 531.6 (6.3) (1.2)
Voice contribution 16.0 19.4 (3.4) (17.5)
Voice long distance(2) 239.2 254.5 (15.3) (6.0)
Data(3) 352.4 353.8 (1.4) (0.4)
Other(4) 76.3 101.1 (24.8) (24.5)
-------------------------------------------------------------------------
External operating revenue 1,209.2 1,260.4 (51.2) (4.1)
Intersegment revenue 23.4 26.1 (2.7) (10.3)
-------------------------------------------------------------------------
Total operating revenue 1,232.6 1,286.5 (53.9) (4.2)
-------------------------------------------------------------------------
Six months ended June 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Voice local(1) 1,048.2 1,056.5 (8.3) (0.8)
Voice contribution 31.9 37.9 (6.0) (15.8)
Voice long distance(2) 490.3 519.9 (29.6) (5.7)
Data(3) 695.2 694.5 0.7 0.1
Other(4) 152.1 202.5 (50.4) (24.9)
-------------------------------------------------------------------------
External operating revenue 2,417.7 2,511.3 (93.6) (3.7)
Intersegment revenue 46.8 48.0 (1.2) (2.5)
-------------------------------------------------------------------------
Total operating revenue 2,464.5 2,559.3 (94.8) (3.7)
-------------------------------------------------------------------------
(1) Voice local - incremental price cap reductions of $18.0 million for
the second quarter and $30.7 million for the six months ended
June 30, 2003.
(2) Voice long distance - incremental price cap reductions of
$0.6 million for the second quarter and $1.6 million for the six
months ended June 30, 2003.
(3) Data - incremental price cap reductions of $5.7 million for the
second quarter and $14.7 million for the six months ended June 30,
2003.
(4) Other - incremental price cap impact of $(0.3) million for the second
quarter and nil for the six months ended June 30, 2003.
Voice local revenue is generated from monthly access charges and enhanced
services. Local access revenue decreased by $10.8 million and $16.2 million,
respectively, for the second quarter and first six months of 2003, when
compared with the same period last year, due to price cap decision impacts and
fewer access lines than one year ago, partly offset by growth in non-ILEC
business. Increased local enhanced services revenue of $4.5 million and
$7.9 million, respectively, for the second quarter and first six months,
partly offset the decline in local access revenues. Excluding the negative
price cap impacts, voice local revenue increased by $11.7 million or 2.2% and
$22.4 million or 2.1%, respectively, for the second quarter and first six
months of 2003 as compared to 2002.
Network access lines decreased by 26,000 and 24,000 lines, respectively,
during the second quarter and first six months of 2003, compared with
decreases of 32,000 and 53,000, respectively, during the same periods in 2002.
Greater line losses during the second quarter, as compared to the first
quarter, reflect a consistent seasonal trend associated with university and
college students moving home for the summer. Lower line losses in 2003, as
compared with 2002, primarily reflect fewer second line losses associated with
migration of dial-up Internet services to high-speed Internet services,
consistent with lower high-speed Internet net additions. This was partly
offset by increased losses of consumer lines to competitors in 2003. Network
access lines decreased by 0.5% in the twelve-month period ended June 30, 2003,
an improvement from the 1.1% rate for the twelve months ended December 31,
2002. The trend of decreasing access lines primarily reflects losses of
consumer lines to competitors, reduction in consumer second lines associated
with migration of dial-up Internet services to high-speed Internet services
and technological substitution of consumer and business lines including
migration to other forms of wireline services as well as wireless services,
and economic factors. Net business line gains in Central and Eastern Canada
exceeded competitive losses in Western Canada. The combined ILEC business and
local consumer market share was estimated to be 96.4% at June 30, 2003 (97.2%
one year earlier).
Voice contribution revenue, which represents TELUS' share of contribution
pool funds for providing service in high cost rural service areas, decreased
for the quarter and six month period ended June 30, 2003, when compared with
the same periods 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 quarter and six-month
periods ended June 30, 2003, when compared with the same period last year,
primarily because of fewer consumer and business minutes and price
competition. Consumer revenues decreased by $3.9 million and $11.0 million,
respectively, for the quarter and six month periods ending June 30, 2003 when
compared with the same periods in 2002, as a result of competitive pressures
from 'dial-around' services and other competitors; partly offset by an
increase in the monthly long distance plan administration fee from $1.25 to
$2.95 in February of this year. Business revenues decreased by $5.3 million
and $14.0 million, respectively, as a result of fewer minutes. Wholesale
settlement revenues were unchanged in the second quarter, but increased by
$2.0 million for the first six months of 2003, 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 $4.3 million or 1.2% and $15.4 million or 2.2%,
respectively, for the second quarter and first six months of 2003 as compared
to 2002. Application development revenues decreased by approximately
$7 million in the second quarter of 2003, when compared with the first quarter
of 2003 and the prior year due to the disposal of certain assets. Internet
service revenues increased by $19.4 million and $47.4 million, respectively,
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. Net additions of high-speed Internet subscribers has been
slower than expected in 2003, a general industry trend. As a result of an
ongoing subscriber audit, dial-up and high-speed Internet subscriber net
additions for the second quarter of 2003 include negative adjustments of 6,400
and 1,600, respectively. For the six-month period ended June 30, 2003, dial-up
and high-speed Internet subscriber net additions include negative adjustments
of 13,000 and 4,700, respectively. Growth in Internet-related revenues was
partly offset by lower revenues for data equipment sales and other data
services such as analog and packet-switched services, broadcast and
videoconferencing, and managed information technology.
Other revenue decreased for the second quarter and first six months of
2003, when compared with the same periods in 2002, primarily because of lower
voice equipment rental and sales as a result of phone store consolidation, as
well as lower rent from support structures, lower installation and contract
services, and lower individual line service grants in respect of the
conversion of multi-party lines to single lines in high cost rural areas in
Alberta in the early 1990s.
Total external operating revenue included non-ILEC revenues of
$138.6 million for the second quarter of 2003 and $122.6 million for the
second quarter of 2002, an increase of $16.0 million or 13.1%. Non-ILEC
revenues for the six-month period ended June 30, 2003 were $279.3 million,
compared with $239.1 million for the same period last year - an increase of
$40.2 million or 16.8%. Growth in Non-ILEC application development revenues
was affected by the disposal of certain assets mentioned in data revenues
above.
Intersegment revenues represent services provided by the Communications
segment to the Mobility segment. These revenues are eliminated upon
consolidation together with the associated expense from the Mobility segment.
Key operating indicators - Communications segment
(000s for subscribers and
additions) 2003 2002 Change %
-------------------------------------------------------------------------
As at June 30
-------------
Network access lines,
end of period 4,887 4,914 (27) (0.5)
Total Internet subscribers(1),
end of period 820.6 757.7 62.9 8.3
Dial-up 351.8 431.6 (79.8) (18.5)
High-speed 468.8 326.1 142.7 43.8
Quarter ended June 30
---------------------
Total Internet subscriber
net additions(1) 6.4 50.3 (43.9) (87.3)
Dial-up (20.3) (8.7) (11.6) (133.3)
High-speed 26.7 59.0 (32.3) (54.7)
Six months ended June 30
------------------------
Total Internet subscriber
net additions(1) 18.9 87.7 (68.8) (78.4)
Dial-up (39.9) (23.5) (16.4) (69.8)
High-speed 58.8 111.2 (52.4) (47.1)
-------------------------------------------------------------------------
(1) As a result of an ongoing subscriber audit following a billing system
conversion in the third quarter of 2002, Internet subscriber counts
and net additions for the second quarter and six-month period ended
June 30, 2003 are net of reductions of approximately 6,400 and 13,000
dial-up subscribers, respectively, and approximately 1,600 and 4,700
high-speed Internet subscribers, respectively.
Operating revenues - Mobility segment
Quarter ended June 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Network revenue 526.4 453.4 73.0 16.1
Equipment revenue 37.7 34.2 3.5 10.2
-------------------------------------------------------------------------
External operating revenue 564.1 487.6 76.5 15.7
Intersegment revenue 3.9 4.2 (0.3) (7.1)
-------------------------------------------------------------------------
Total operating revenue 568.0 491.8 76.2 15.5
-------------------------------------------------------------------------
Six months ended June 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Network revenue 1,018.5 868.3 150.2 17.3
Equipment revenue 78.0 66.4 11.6 17.5
-------------------------------------------------------------------------
External operating revenue 1,096.5 934.7 161.8 17.3
Intersegment revenue 7.6 8.3 (0.7) (8.4)
-------------------------------------------------------------------------
Total operating revenue 1,104.1 943.0 161.1 17.1
-------------------------------------------------------------------------
Mobility segment Network revenue is generated from monthly billings for
access fees, incremental airtime charges, prepaid time consumed or expired,
wireless Internet services and fees for value-added services. Network revenue
increased for the quarter ended June 30, 2003 as compared to the same period
in 2002 as a result of increased average revenue per subscriber unit per month
(ARPU) and the continued expansion of TELUS Mobility's subscriber base by
14.2% to approximately 3.2 million subscribers from 2.8 million one year ago.
ARPU increased to $56 from $55 for 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 $1 increase in ARPU continued to build
upon the year over year increase experienced in the first quarter of 2003,
reversing the previously declining trend. Similarly, ARPU for the first six
months of 2003 was $55 as compared to $54 for the same period last year. The
improved ARPU was a result of increased usage and pricing discipline including
per-minute billing and the reduction of eligible hours included in certain
'free evening and weekend' rate plan features. Average minutes of use (MOU)
per subscriber per month were 342 for the current quarter and 329 for the
first six months of 2003 as compared to 299 and 280, respectively, for the
same periods in 2002. As of June 30, 2003, postpaid subscribers accounted for
82.6% of the total cumulative subscriber base as compared to 84.5% one year
earlier and stable relative to the first quarter of 2003. Net postpaid
subscriber additions for the current quarter of 81,100 represented 78.9% of
all net additions in the period as compared to 91,000 (88.7%) for the
corresponding period one year ago. For the first six months of 2003, net
postpaid additions represented 73.4% of all net additions as compared to 79.0%
in the same period one year earlier. Notably, total net subscriber additions
for the second quarter were slightly higher than last year reversing the
negative trend in the previous two quarters.
Blended postpaid and prepaid churn averaged 1.3% per month in the second
quarter of 2003, a significant improvement from 2.0% for the comparable period
one year earlier. The churn rate for the first six months of 2003 was 1.4% as
compared to 1.9% for the same period last year. Deactivations declined 24.5%
to 121,400 for the second quarter 2003 as compared to 160,700 for the same
period in 2002 despite a 14.2% increase in the subscriber base. Deactivations
for the first six months of 2003 were 260,400 as compared to 308,800 for the
same period last year. 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. Also, the
decline in churn can be attributed to improved network quality and coverage,
improved client service levels, client contracting as part of loyalty and
retention programs, and specific grandfathered rate plans related to per-
second billing and the change to certain 'free evening and weekend' rate plan
features.
Equipment sales, rental and service revenue in the three-month period
ended June 30, 2003, was $37.7 million as compared to $34.2 million for the
same period in 2002. Equipment revenue for the first six months of 2003 was
$78.0 million, an increase of $11.6 million or 17.5% over the same period in
2002. The increase occurred despite a decline in gross subscriber additions to
224,200 and 429,900, respectively, for the second quarter and first six months
of 2003 as compared to 263,300 and 501,900 for the same periods in 2002. The
increase in revenue was principally due to handset pricing discipline, product
mix, and increased retention and upgrade activity.
Intersegment revenues represent services provided by the Mobility segment
to the Communications segment. These revenues are eliminated upon
consolidation together with the associated expense from the Communications
segment.
Key operating indicators - Mobility segment
(000s for subscribers and
additions) 2003 2002 Change %
-------------------------------------------------------------------------
As at June 30
-------------
Subscribers - postpaid 2,615.0 2,341.6 273.4 11.7
Subscribers - prepaid 550.1 429.2 120.9 28.2
---------- ---------- ---------- ----------
Subscribers - total 3,165.1 2,770.8 394.3 14.2
Total POPs(1) covered
including roaming/resale
(millions)(2) 28.3 26.2 2.1 8.0
Quarter ended June 30
---------------------
Net subscriber additions
- postpaid 81.1 91.0 (9.9) (10.9)
Net subscriber additions
- prepaid 21.7 11.6 10.1 87.1
---------- ---------- ---------- ----------
Net subscriber additions
- total 102.8 102.6 0.2 0.2
Churn, per month (%)(3a) 1.3 2.0 (0.7) -
Acquisition COA (3b) per
gross subscriber add.
($)(3c) 428 420 8 1.9
ARPU ($)(3d) 56 55 1 1.8
EBITDA to network revenue (%) 38.2 26.2 12.0 -
Retention COA to network
revenue (%) 4.7 4.1 0.6 -
EBITDA excluding Acquisition
COA (3e) ($ millions) 297.3 228.7 68.6 30.0
Six months ended June 30
------------------------
Net subscriber additions
- postpaid 124.4 152.6 (28.2) (18.5)
Net subscriber additions
- prepaid 45.1 40.5 4.6 11.4
---------- ---------- ---------- ----------
Net subscriber additions
- total 169.5 193.1 (23.6) (12.2)
Churn, per month (%) 1.4 1.9 (0.5) -
Acquisition COA per gross
subscriber add. ($)(4) 427 412 15 3.6
ARPU ($) 55 54 1 1.9
EBITDA to network revenue (%) 37.3 27.8 9.5 -
Retention COA to network
revenue (%) 4.1 4.2 (0.1) -
EBITDA excluding Acquisition
COA ($ millions) 563.4 426.2 137.2 32.2
-------------------------------------------------------------------------
(1) POPs is an abbreviation for Population. A POP refers to one person
living in a population area, which in whole or substantial part is
included in the coverage areas.
(2) TELUS Mobility has not activated all digital-roaming areas. TELUS
Mobility PCS Digital Population Coverage was 21.5 million, and
28.0 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.
(3) The following are not measures under accounting principles generally
accepted in Canada. These measures are industry metrics and are
useful in assessing the operating performance of a wireless company.
The definitions of these measures are as follows:
a. Churn is calculated as the number of subscriber units
disconnected during the period divided by the average number of
units on the network, expressed as a rate per month.
b. Acquisition COA consists of the total of handset subsidies,
commissions, and advertising & promotion expenses related to the
initial customer acquisition during a given period.
c. Acquisition COA per gross subscriber add - Acquisition COA
divided by gross subscriber activations during the period.
d. ARPU is calculated as network service revenue divided by the
average number of units on the network during the period,
expressed as a rate per month.
e. EBITDA excluding Acquisition COA is a measure for operational
profitability normalized for the period costs of adding new
customers.
(4) For the six-month period ended June 30, 2002, Acquisition COA of $412
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 the
$21.0 million reduction is included, Acquisition COA for the
six-month period ended June 30, 2002 would be $370.
Operations expense - Communications segment
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended June 30 714.1 784.3 (70.2) (9.0)
Six months ended June 30 1,453.8 1,590.4 (136.6) (8.6)
-------------------------------------------------------------------------
Operations expense for the Communications segment decreased in the
quarter and six-month periods ended June 30, 2003, when compared with the same
periods last year, primarily because of the Operational Efficiency Program
savings and lower equipment costs of sales. An increased pension expense in
2003 and a $40 million investment tax credit received in the second quarter of
2002 partially offset these savings. The following are the principal changes
in Incumbent Local Exchange Carrier (ILEC) operations expense and Non
Incumbent Local Exchange Carrier (Non-ILEC) operations expense.
ILEC operations expense for the quarter and six-month periods ended
June 30, 2003 was $569.4 million and $1,153.9 million, respectively, compared
with $631.9 million and $1,285.0 million, respectively, in the same periods
last year. This represented a decrease of $62.5 million or 9.9% and
$131.1 million or 10.2%, respectively. The primary reasons for the reduction
in ILEC operations expense for the quarter and six-month periods ended
June 30, 2003 when compared with the same periods in 2002, were:
- Incremental Operational Efficiency Program savings from lower salaries
and benefits were $77.0 million and $152.0 million, respectively.
Staff decreases covered by the Operational Efficiency Program were
approximately 250 in the current quarter, and approximately 850 since
the beginning of the year;
- Incremental Operational Efficiency Program non salary-related savings
were $27.0 million and $47.0 million, respectively. The non
salary-related savings were from lower employee-related overhead
costs, use of fewer contractors, and lower advertising and promotions
expense;
- Equipment cost of sales was lower by $26.2 million and $40.7 million,
respectively, primarily because of lower sales of voice and data
equipment. This included approximately $7 million and $12 million,
respectively, of lower high-speed Internet cost of sales because of
reduced gross additions of high-speed Internet subscribers and
recognition of certain promotional discounts to customers recorded as
an offset against revenues;
- Payments to Verizon Communications Inc. ("Verizon") under the Software
and Related Technology and Service Agreements were lower by
$2.9 million and $6.9 million, respectively;
- An investment tax credit of $40 million was received in the second
quarter of 2002 for which there is only a $1.0 million comparable
credit in the first quarter of 2003. The investment tax credits were
recognized as a result of a settlement with tax authorities for
previous years' claims and were recorded as a reduction to operations
expense;
- Expenses increased by $12.0 million and $26.8 million, respectively,
as a result of lower labour capitalization representing lower capital
build activities consistent with lower salaries and benefits as a
result of Operational Efficiency Program savings;
- Pension expense for defined benefit and defined contribution plans
increased by $11.6 million and $27.8 million, respectively; and
- All other changes increased expenses by $9.1 million for the quarter
and $25.0 million for the six-month period.
Non-ILEC operations expense for the quarter and six-month periods ended
June 30, 2003 was $144.7 million and $299.9 million, respectively, compared
with $152.4 million and $305.4 million, respectively, in the same periods last
year. This represented decreases of $7.7 million or 5.0% and $5.5 million or
1.8%, respectively. Despite increasing revenues, expenses decreased as a
result of operating efficiencies and the greater use of on-net facilities.
Operations expense - Mobility segment
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended June 30 366.7 373.0 (6.3) (1.7)
Six months ended June 30 724.2 701.6 22.6 3.2
-------------------------------------------------------------------------
Mobility segment operations expense in the second quarter improved by
$6.3 million or 1.7% and increased slightly (after normalizing for the 2002
$21.0 million favourable PST ruling) by $1.6 million or 0.2% for the first six
months of 2003, when compared with the same periods in 2002. TELUS Mobility
has been able to achieve economies of scale as evidenced by growth in
subscribers of 14.2% and Network revenue of 16.1% in the second quarter while
maintaining a relatively fixed-cost back office structure.
Expenses related to equipment sales decreased $9.1 million (9.3%) to
$89.0 million in the second quarter as compared to $98.1 million for the same
period one year earlier. For the first six months of 2003, equipment expenses
increased by $7.4 million or 4.5% over the same period last year. However,
prior year expenses included a $21.0 million reduction resulting from a
clarification of provincial sales tax legislation related to handset
subsidies, which represented the reversal of a cumulative liability previously
recorded in marketing cost of acquisition (COA). Once normalized to exclude
the 2002 provincial sales tax credit, equipment expense for the first six
months of 2003 decreased $13.6 million or 7.3%. These decreases were
principally due to a decline in gross subscriber activations and improved
handset pricing including favourable exchange rates. Gross subscriber
activations were 224,200 and 429,900 for the current quarter and first six
months of 2003, respectively, as compared to 263,300 and 501,900 for the same
periods last year. The cost improvement due to the reduction in gross
subscriber additions was partially offset by increased retention activity in
the quarter. Handset costs are included in marketing cost of acquisition
(COA).
Network operating expenses consist of site-related expenses, transmission
costs, spectrum licence fees, contribution revenue taxes, and other direct
costs related to network operations. Network operating expenses remained
relatively flat at $90.8 million and $176.8 million for the second quarter and
first six months of 2003, respectively, compared to $89.8 million and
$176.7 million for the same periods last year. This was accomplished despite
increases attributed to transmission and site-related expenses to support the
increased sites, subscriber base, and improved network quality and coverage
which were offset by a reduction in Industry Canada spectrum licence fees of
$1.5 million for the second quarter and $6.5 million for the first six months.
TELUS Mobility has focused efforts on containing these costs through
negotiating improved leased transmission rates, roaming rates, and maintenance
rates with a number of telecommunications carriers and key vendors. PCS
digital population coverage increased 6.5 million (Bell - 5.1 million and
Aliant - 1.4 million) from 21.5 million before the roaming/resale agreements
to 28.0 million including roaming/resale areas turned on by the end of the
second quarter. Total digital population coverage (Mike and PCS) as of
June 30, 2003, was 25.4 million (28.0 million including all current digital
roaming service areas) as compared to 24.9 million one year ago.
Marketing expenses excluding handset subsidies were $65.2 million for the
second quarter and $121.1 million for the first six months of 2003 as compared
to $58.1 million and $107.5 million for the same periods in 2002. The
increases were primarily due to higher dealer compensation costs associated
with the expanded cumulative subscriber base and to increased re-contracting
activity. In addition, there were fewer dealer compensation claw-backs
attributed to improved churn year over year. Acquisition COA was $428 for the
second quarter as compared to $420 for the same period last year. Acquisition
COA for the first six months of 2003 was $427 as compared to $412 (excluding
any benefit from the $21.0 million PST clarification) for the same period in
2002. The small increases in acquisition COA were principally due to higher
marketing costs and lower than expected gross subscriber additions, offsetting
lower handset subsidies.
General and Administration (G&A) expenses consist of employee
compensation and benefits, facilities, client services, bad debt and various
other expenses. G&A expenses declined in the second quarter despite a
subscriber base growth of 14.2% and Network revenue growth of 16.1% in the
quarter. G&A expenses were $121.7 million and $253.5 million for the second
quarter and first six months of 2003, respectively, as compared to
$127.0 million and $252.0 million for the same periods in 2002. The decline of
$5.3 million in the second quarter was primarily due to lower bad debts. The
improvements in bad debts can be attributed to the completion of billing
system conversions in 2002. TELUS Mobility completed five major billing system
conversions by October 2002 after an 18-month period. TELUS Mobility decreased
full-time equivalent employees to 5,033 from 5,211 one year earlier. Payroll
expenses were unchanged for the second quarter while maintaining customer care
service levels and reducing the subscriber churn rate. Expenses remained
relatively flat for the first six months of 2003 as compared to the same
period in 2002.
Earnings(1) Before Interest, Taxes,Depreciation and Amortization
(EBITDA) by segment
Quarter ended June 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 518.5 502.2 16.3 3.2
Mobility segment 201.3 118.8 82.5 69.4
-------------------------------------------------------------------------
TELUS Consolidated 719.8 621.0 98.8 15.9
-------------------------------------------------------------------------
Six months ended June 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 1,010.7 968.9 41.8 4.3
Mobility segment 379.9 241.4 138.5 57.4
-------------------------------------------------------------------------
TELUS Consolidated 1,390.6 1,210.3 180.3 14.9
-------------------------------------------------------------------------
(1) Excluding Restructuring and workforce reduction costs.
EBITDA(1) margin(2) by segment (%)
Quarter ended June 30 2003 2002 Change
--------------------------------------------------------------
($ in millions)
Communications segment 42.1 39.0 3.1
Mobility segment(3) 35.4 24.2 11.2
--------------------------------------------------------------
TELUS Consolidated 40.6 35.5 5.1
--------------------------------------------------------------
Six months ended June 30 2003 2002 Change
--------------------------------------------------------------
($ in millions)
Communications segment 41.0 37.9 3.1
Mobility segment(3) 34.4 25.6 8.8
--------------------------------------------------------------
TELUS Consolidated 39.6 35.1 4.5
--------------------------------------------------------------
(1) Excluding Restructuring and workforce reduction costs.
(2) EBITDA divided by total revenue.
(3) EBITDA margin as a percentage of network revenue was 38.2% and 37.3%
for the second quarter and year to date 2003, respectively, as
compared to 26.2% and 27.8% (25.4% before PST clarification) for the
same periods last year.
Communications segment EBITDA excluding Restructuring and workforce
reduction costs improved for the second quarter and six-month periods ended
June 30, 2003, when compared with the same periods in 2002, primarily because
of:
- Operational Efficiency Program savings of $104 million and
$199 million, respectively;
- Non-ILEC EBITDA improved by $23.7 million and $45.7 million,
respectively; and
- Partly offset by negative price cap decision impacts, decreasing
long-distance and other revenues, increased pension costs, and the
investment tax credits received in 2002.
Normalized for price cap decision impacts, Communications segment EBITDA
increased by $41.5 million or 8.2% and $88.9 million or 9.2%, respectively,
for the second quarter and first six months of 2003 as compared to 2002.
TELUS Mobility continued to successfully execute its national strategy
focused on profitable revenue growth. The improvement in EBITDA margin was
attributed to:
- Strong ARPU and subscriber growth combined with a significant
reduction in the churn rate;
- Cost containment; and
- Economies of scale recognized through efficiencies resulting from the
successful integration of TELUS Mobility's operations.
For Mobility, this continues the favourable EBITDA trend experienced in
Q1 2003. EBITDA growth for the second quarter represented a flow-through rate
of 113% of Network revenue growth. Consequently, EBITDA for the first six
months of 2003 grew 57.4% to $379.9 million. When the $21.0 million favourable
PST clarification is excluded, EBITDA for the first six months of 2003
increased by 72.4%. EBITDA margin as a percentage of network revenue improved
to 38.2% for the second quarter and 37.3% for the first six months of 2003 as
compared to 26.2% and 27.8%, respectively, (25.4% before the PST
clarification) for the same periods one year earlier.
Depreciation and amortization
Quarter ended June 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Depreciation 322.0 300.1 21.9 7.3
Amortization of intangible
assets 88.1 85.1 3.0 3.5
-------------------------------------------------------------------------
Six months ended June 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Depreciation 640.6 591.2 49.4 8.4
Amortization of intangible
assets 180.6 168.4 12.2 7.2
-------------------------------------------------------------------------
Depreciation and amortization expenses increased by $24.9 million and
$61.6 million, respectively, in the quarter and six-month periods ended
June 30, 2003, when compared with the same periods in 2002, primarily because
of growth in shorter life capital assets, including billing system software,
data network, and administrative software.
Restructuring and workforce reduction costs
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended June 30 3.3 3.1 0.2 6.5
Six months ended June 30 9.8 15.6 (5.8) (37.2)
-------------------------------------------------------------------------
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 4 to the interim consolidated financial
statements.
Staff reductions since the beginning of 2002 were approximately 6,050.
Since the inception of the Operational Efficiency Program in 2001 through
June 30, 2003, the Company has reduced its staff count by approximately 6,850,
comprised of 4,900 bargaining unit positions and 1,950 management positions.
TELUS believes it will attain the 450 additional net employee reductions in
2003 required to meet the Operational Efficiency Program targeted reduction of
7,300 net positions.
EBITDA savings since inception of the Operational Efficiency Program have
increased to approximately $349 million by the end of the second quarter of
2003. The annual savings for 2003 are currently expected to be approximately
$450 million. Thereafter, annual recurring savings are currently estimated to
be approximately $550 million.
Other expense
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended June 30 6.6 5.9 0.7 11.9
Six months ended June 30 12.2 10.7 1.5 14.0
-------------------------------------------------------------------------
Other expense 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.
During the second quarter of 2003, the Company sold several properties and
recognized net gains of $7.3 million. The Company also recorded impairments in
portfolio investments and losses on asset sales totalling $7.5 million in the
second quarter of 2003, as compared with $2.7 million in the same period last
year. For the first six months of 2003, gains from the sale of properties were
$15.5 million. Accounts receivable securitization expense increased by
$3.7 million and $6.1 million for the second quarter and six-month period
ended June 30, 2003, when compared with the same periods in 2002 as a result
of expanding the securitization program. Proceeds from securitization averaged
$464 million for the first six-months of 2003, compared with $140 million in
the same period last year.
Financing costs
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended June 30 169.1 174.0 (4.9) (2.8)
Six months ended June 30 330.7 355.4 (24.7) (6.9)
-------------------------------------------------------------------------
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
$10.0 million and $19.5 million, respectively, in the second quarter and six
month periods ended June 30, 2003, when compared with the same periods in
2002. This was primarily a result of debt repurchases and retirements
partially offset by an increase in the effective interest rate. For the second
quarter of 2003, the average debt principal outstanding was $7,972 million
($8,888 million in the second quarter of 2002), while the effective interest
rate on the average debt outstanding was 8.2% (7.9% in 2002). During first six
months of 2003, the average debt principal outstanding was $8,129 million
($8,842 million during the first six months of 2002), while the effective
interest rate on the average debt outstanding was 8.2% (8.0% in 2002). TELUS
maintains a hedging program using cross-currency swaps, and as a result,
interest expense was generally unaffected by the recent appreciation of the
Canadian dollar against the U.S. dollar.
Interest income decreased by $4.6 million in the second quarter of 2003,
when compared with the second quarter of 2002. The decrease was primarily due
to recognition of interest income in the second quarter of 2002 associated
with investment tax credits. For the six-month period ended June 30, 2003,
interest income increased by $5.5 million, when compared with the same period
in 2002, primarily due to recognition of additional interest income in the
first quarter of 2003 for settlement of tax-related matters.
Income taxes
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended June 30 54.9 33.1 21.8 65.9
Six months ended June 30 49.0 49.6 (0.6) (1.2)
-------------------------------------------------------------------------
The increase in Income taxes for the quarter ended June 30, 2003, when
compared with the same period in 2002, was primarily related to higher income
before taxes. For the six-month period ended June 30, 2003, income taxes were
relatively unchanged as compared to 2002 because 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 June 30 1.0 1.3 (0.3) (23.1)
Six months ended June 30 1.7 1.8 (0.1) (5.6)
-------------------------------------------------------------------------
Non-controlling interest primarily represents a partner's interest in one
of TELUS' non-core businesses.
Preferred dividends
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended June 30 0.8 0.9 (0.1) -
Six months ended June 30 1.7 1.8 (0.1) -
-------------------------------------------------------------------------
There were no significant changes to quarterly dividends on preferred
shares.
Interest on convertible
debentures
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended June 30 1.8 1.7 0.1 5.9
Six months ended June 30 3.5 3.3 0.2 6.1
-------------------------------------------------------------------------
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 June 30 470.7 276.8 193.9 70.0
Six months ended June 30 870.4 570.5 299.9 52.6
-------------------------------------------------------------------------
Cash provided by operating activities increased for the quarter and six
month period ended June 30,2003, when compared with the same period last year
principally because of the following:
- Improvement in EBITDA of $98.8 million and $180.3 million,
respectively;
- A change in Future income taxes, net of changes Income taxes
receivable, of $71.9 million and $77.6 million, respectively,
primarily arising from the resolution of income tax matters;
- Decreased investment in Accounts Receivable of $53.8 million and
$140.8 million, respectively, for the second quarter and first six
months of 2003, compared with decreased investment in Accounts
Receivable of $72.5 million and $42.3 million, respectively, for the
same periods in 2002;
- Partly offset by an increase in payments under restructuring and
workforce reduction initiatives of $13.3 million and $124.2 million,
respectively. Payments in 2003 were $47.6 million for the second
quarter and $201.5 million for six-month period, respectively,
compared with $34.3 million and $77.3 million in the same periods in
2002.
Cash provided (used) by investing activities
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended June 30 (286.0) (572.9) 286.9 50.1
Six months ended June 30 (468.6) (988.2) 519.6 52.5
-------------------------------------------------------------------------
Net cash used by investing activities decreased for the second quarter
and six-month period ended June 30, 2003, when compared with the same periods
last year, primarily because of reduced capital spending. In addition, the
Company disposed of non-strategic properties and monetized an investment for
net proceeds of $19.0 million in the second quarter of 2003. In the first
quarter of 2003, the Company disposed of an administrative property under the
terms of a sale and leaseback transaction. An $8.2 million pre-tax gain on the
property sale, on total cash proceeds of $19.3 million, was deferred and is
amortized over the term of the lease.
Capital expenditures by segment
Quarter ended June 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 227.4 407.9 (180.5) (44.3)
Mobility segment 78.1 140.7 (62.6) (44.5)
-------------------------------------------------------------------------
Capital expenditures
- general 305.5 548.6 (243.1) (44.3)
-------------------------------------------------------------------------
-------------------------------------------------------------
Capital expenditure
intensity(1) (%) 17.2 31.4 (14.2)
-------------------------------------------------------------
Six months ended June 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 380.9 717.0 (336.1) (46.9)
Mobility segment 132.4 237.5 (105.1) (44.3)
-------------------------------------------------------------------------
Capital expenditures
- general 513.3 954.5 (441.2) (46.2)
-------------------------------------------------------------------------
-------------------------------------------------------------
Capital expenditure
intensity(1) (%) 14.6 27.7 (13.1)
-------------------------------------------------------------
(1) Capital Intensity is measured by dividing capital expenditures into
operating revenues, expressed as a percentage. This measure provides
a method of comparing the level of capital expenditures to other
companies within the same industry.
Capital spending decreased in the Communications segment in the second
quarter and first six months of 2003, when compared to the same periods in
2002. For the second quarter, Non-ILEC expenditures decreased by $48.5 million
to $35.0 million, and for the first six months Non-ILEC expenditures decreased
by $69.8 million to $53.6 million. Non-ILEC capital expenditures decreased
because the Company concentrated its deployment activity on meeting growth
demands through the use of assets in place. ILEC capital expenditures
decreased by $132.0 million to $192.4 million for the second quarter, and
decreased by $266.3 million to $327.3 million for the first six months, when
compared with the same periods in 2002. The primary changes in ILEC capital
expenditures were:
- High-speed Internet (ADSL) facilities and systems expenditures
decreased by $50.3 million and $98.4 million, respectively, to
$20.7 million and $41.2 million, respectively, for the second quarter
and six month period ended June 30, 2003, when compared to the same
periods in 2002. Lower spending on ADSL was due to a focus on higher
utilization of existing facilities, the completion of systems in 2002,
and slowing growth in the industry;
- There were no purchases from Verizon in 2003 for software licences and
trademark licences compared with $27.4 million and $53.7 million,
respectively, for the quarter and first six months of 2002;
- Network infrastructure spending decreased by $34.5 million and
$52.7 million, respectively, due to reduced demand for facilities; and
- Spending on internal systems and processes decreased due to completion
of initiatives in 2002, as planned, such as the national long distance
and card service platform and internal web enablement projects.
The Communications segment capital intensity ratios for the quarter and
six-month period ended June 30, 2003 were 18.4% and 15.5%, respectively, when
compared with 31.7% and 28.0%, respectively, for the same periods last year.
As a result of reduced capital expenditures and improved EBITDA, the
Communications segment contribution to Cash flow (EBITDA less capital
expenditures) for the quarter and six-months ended June 30, 2003 increased to
$291.1 million and $629.8 million, respectively, from $94.3 million and
$251.9 million, respectively, in the same periods last year.
Mobility segment capital expenditures were significantly reduced for the
second quarter and first six months of 2003 as compared to the same periods in
2002. TELUS Mobility continued the enhancement of digital wireless coverage
during the second quarter of 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;
- Reduced coverage expansion costs in 2003 due to operationalized
roaming/resale agreements in 2002 with Bell Mobility and Aliant
Telecom Wireless; and
- Timing of network capital expenditures in 2003, lower planned net
subscriber additions, improved infrastructure equipment costs, and a
stronger Canadian dollar.
Guidance has been reduced for Mobility capital spending; however,
Mobility plans to increase capital spending in the second half of 2003.
As at June 30, 2003, TELUS Mobility 1X digital population coverage
including roaming/resale areas was 24.3 million. Capital expenditure intensity
for TELUS Mobility was 13.8% and 12.0% for the second quarter and first six
months of 2003, respectively, as compared to 28.6% and 25.2% for the same
periods one year ago due to both lower capital spending and significant growth
in network revenues. As a result of continued EBITDA growth and reduced
capital expenditure intensity, Mobility substantially improved cash flow
(EBITDA less capital expenditures) to $123.2 million and $247.5 million for
the second quarter and year to date 2003, respectively, as compared with
negative $21.9 million and positive $3.9 million for the same periods in 2002.
Reduced capital expenditures and improved EBITDA in both segments, have
improved consolidated Cash flow (EBITDA less capital expenditures) to
$414.3 million and $877.3 million, respectively, for the quarter and six-month
periods ended June 30, 2003, when compared with the $72.4 million and
$255.8 million, respectively, in same periods in 2002. The Company expects
capital expenditures to increase during the second half of the year, while
maintaining a capital intensity ratio of 15 to 18%, which is less than the
annual target for 2003.
Cash provided (used) by financing activities
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended June 30 (175.5) 332.7 (508.2) (152.8)
Six months ended June 30 (376.2) 391.6 (767.8) (196.1)
-------------------------------------------------------------------------
Cash used by financing activities increased in the second quarter and
first six months of 2003, when compared with the same periods one year ago,
principally due to net debt redemptions in 2003 of $148.2 million and
$330.8 million respectively, compared with net debt issues in 2002 of
$338.7 million and $389.9 million, respectively. Net debt redemptions in the
first six months of 2003 included approximately $156.0 million of bank
facilities, $150.9 million of medium-term notes, $30 million of First Mortgage
Bonds. Proceeds received from Common and Non-voting shares issued from
Treasury under the employee share purchase plan and from share option plans
were $21.0 million and $41.1 million respectively for the second quarter and
first six months of 2003 (compared with proceeds of $24.5 million and $57.3
million, respectively, in the same periods in 2002 under the same plans and
from warrants). Cash dividends paid to shareholders increased by $17.5 million
and $35.5 million, respectively, for the second quarter and first six months
of 2003, when compared with the same periods in 2002. The increase in cash
dividends resulted from a lower enrolment in dividend reinvestment plans
(approximately 21% for the dividend paid in April 2003, compared with
approximately 47% one year earlier) and an increased number of shares
outstanding. The 15-cent dividend paid per Common share and Non-voting share
remained unchanged from one year ago.
Liquidity and capital resource measures
June 30, June 30, March 31,
Period ended 2003 2002 Change 2003
-------------------------------------------------------------------------
Components of debt and
coverage ratios
--------------------------
Net debt(1) ($ millions) 8,038.7 9,119.8 (1,081.1) 8,195.3
Total capitalization(2)
- book value ($ millions) 14,593.6 15,537.2 (943.6) 14,705.5
EBITDA (12-month
trailing, $ millions) 2,698.9 2,507.9 191.0 2,600.1
Net interest
cost(3) (12-month
trailing, $ millions) 662.1 718.0 (55.9) 667.0
Debt ratios
-----------
Fixed rate debt as a
proportion of total
indebtedness (%) 94.6 89.5 5.1 95.1
Average term to maturity
of debt (years) 6.4 6.8 (0.4) 6.5
Net debt(1) to total
capitalization(2) (%) 55.1 58.7 (3.6) 55.7
Net debt to EBITDA(4) 3.0 3.6 (0.6) 3.2
Coverage ratios
---------------
Earnings coverage(5) 0.8 2.2 (1.4) 0.7
EBITDA interest coverage(6) 4.1 3.5 0.6 3.9
Other measures
--------------
Free cash flow(7)
(3-month, $ millions) 69.0 (261.8) 330.8 375.7
Free cash flow(7)
(12-month trailing,
$ millions) 579.6 (692.2) 1,271.8 248.8
-------------------------------------------------------------------------
(1) Net debt is defined as Long-term debt plus current obligations and
cheques outstanding less Cash and temporary investments and cross-
currency foreign exchange hedge asset (plus cross-currency foreign
exchange hedge liability) related to U.S. dollar notes. The cross
currency foreign exchange hedge liability as at June 30, 2003 was
$588.2 million ($105.5 million as at June 30, 2002 and $204.6 million
as at March 31, 2003). Net Debt as calculated herein, includes a
notional amount related to accounts receivable securitization of
approximately $124.1 million at June 30, 2003 ($27.6 million at June
30, 2002, and $121.5 million at March 31, 2003), which is required to
be included in the numerator of the Leverage Ratio covenant
calculation in TELUS' credit facilities. Net debt is unaffected by
foreign exchange fluctuations because it includes (deducts) the net
deferred hedging liability (asset).
(2) Total capitalization is defined as Net debt plus Non-controlling
interest and Shareholders' Equity.
(3) Net Interest Cost is defined as Net financing cost before 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 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 June 30, 2003
decreased by $1,045 million to $7,343 million from $8,388 million as at
December 31, 2002. This reduction in the debt balance included a $715 million
decrease in the Canadian dollar value of U.S. dollar denominated Notes because
of an approximate 15% appreciation of the Canadian dollar between December 31,
2002 and June 30, 2003. TELUS' U.S. dollar debt is fully hedged, resulting in
a corresponding increase of $715 million being recorded in the net Deferred
hedging liability (the Deferred hedging asset of $126.8 million as at
December 31, 2002 has become a Deferred hedging liability of $588.2 million as
at June 30, 2003).
The proportion of debt with fixed interest rates increased as at June 30,
2003, when compared with June 30, 2002, because the amount of utilized bank
facilities at June 30, 2003 decreased by approximately $570 million from one
year ago and decreased by approximately $156 million since the end of 2002.
The primary reasons for a reduction in the net debt to total
capitalization ratio measured at June 30, 2003, when compared to a year ago,
were the repurchase of approximately $410 million of debt in the third and
fourth quarters of 2002, and net repayments in 2003. Total equity increased by
approximately $138 million as a reduction in retained earnings, caused
primarily by the Restructuring and workforce reduction charges net of tax, 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, improved Non-ILEC margins and strong Mobility cash generation
resulted in significant increased free cash flow allowing for additional debt
reduction in the second quarter and first six months of 2003. For the second
quarter and first six months of 2003, the free cash flow measure exceeded cash
payments of $47.6 million and $201.5 million, respectively, for Restructuring
and workforce reduction. Free cash flow decreased in the second quarter of
2003, when compared with the first quarter of 2003, due primarily to
$262.8 million higher paid interest in the second quarter which results from
semi-annual interest payments in June.
The net debt to EBITDA ratio measured at June 30, 2003 improved
significantly, when compared with June 30, 2002 and March 31, 2003, as a
result of debt reduction and an increase in twelve-month trailing EBITDA.
The EBITDA interest coverage ratio measured at June 30, 2003 improved,
when compared with June 30, 2002 and March 31, 2003, 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 June 2003 consisted of a
$1.5 billion (or U.S. dollar equivalent) revolving credit facility expiring on
May 30, 2004 ($499 million drawn along with $98.2 million in outstanding
undrawn letters of credit), an undrawn $600 million (or the U.S. dollar
equivalent) 364 day revolving credit facility extendible at TELUS' option for
any amount outstanding as at May 26, 2004 for one year on a non-revolving
basis, and approximately $74 million in other bank facilities (nil drawn and
approximately $23.2 million in committed and outstanding undrawn letters of
credit, at June 30, 2003).
At June 30, 2003, TELUS had unutilized available liquidity well in excess
of $1 billion. TELUS' credit facilities contain customary covenants including
a requirement that TELUS not permit its consolidated Leverage Ratio (Funded
Debt and Asset Securitization Amount to trailing 12-month EBITDA) to exceed
4.0:1 (approximately 3.0:1 as at June 30, 2003) and not permit its
consolidated Coverage Ratio (EBITDA to Interest Expense and Asset
Securitization Charges on a trailing 12-month basis) to be less than 2.5:1
(approximately 4.1:1 as at June 30, 2003) at the end of any financial quarter.
There are certain minor differences in the calculation of the Leverage Ratio
and Coverage Ratio under the credit agreement as compared with the calculation
of Net debt to EBITDA and EBITDA interest coverage. The calculations are not
expected to be materially different. Continued access to TELUS' credit
facilities is not contingent on the maintenance by TELUS of a specific credit
rating.
Shelf Prospectus
TELUS filed a $3 billion shelf prospectus in mid-June 2003, which if
desired, enables a quick and efficient means to sell debt, equity and/or
warrants should the Company want to issue securities over the next two years.
Any proceeds raised under the prospectus would be used to repay debt, fund
capital expenditures and for general corporate purposes. The new shelf
prospectus replaced a previous $10 billion shelf prospectus that was about to
expire.
Accounts Receivable Sale
TELUS Communications Inc., a wholly owned subsidiary of TELUS, is able to
sell an interest in certain of its receivables up to a maximum of $650 million
and is required to maintain at least a BBB(low) credit rating by Dominion Bond
Rating Service (DBRS), or the purchaser may require the sale program to be
wound down. The necessary credit rating was exceeded by one level at BBB as of
July 28, 2003. The proceeds of securitized receivables at June 30, 2003, were
$485 million. See Note 9 to the interim consolidated financial statements.
TELUS' credit facilities require that a portion of sold accounts
receivable be added to debt for purposes of calculating the Leverage Ratio
covenant under the credit agreement. This portion is calculated on a monthly
basis and is a function of the ongoing collection performance of the
receivables pool. At June 30, 2003, this amount, defined as the Asset
Securitization Amount, was $124.1 million.
Credit Ratings
The following rating actions occurred during the quarter ended June 30,
2003:
- On April 16, 2003, Moody's Investor Service changed the outlook for
TELUS Corporation's senior unsecured credit rating to 'stable' from
'negative';
- On May 1, 2003, DBRS discontinued its rating on commercial paper
programs of TELUS Corporation, TELUS Communications Inc. and TELUS
Communications (Quebec) Inc. as TELUS had no issues outstanding. On
June 17, 2003, DBRS revised the trend from 'negative' to 'stable' for
its ratings on TELUS Corporation, TELUS Communications Inc. and TELUS
Communications (Quebec) Inc.;
- On May 28, 2003, Fitch Ratings changed the outlook to 'stable' from
'negative' for its ratings on TELUS Corporation and TELUS
Communications Inc.; and
- On May 29, 2003, Standard & Poor's Rating Services (S&P) affirmed its
'BBB' long-term corporate credit rating for TELUS Corporation, TELUS
Communications Inc. and TELUS Communications (Quebec) Inc., each with
a 'negative' outlook. S&P withdrew its short-term corporate credit
rating on TELUS due to the discontinuance of commercial paper
programs. S&P also raised the issue rating on TELUS Communications
(Quebec) Inc.'s first mortgage bonds from BBB+ to A-.
TELUS has an objective to preserve access to capital markets at a
reasonable cost by maintaining investment grade credit ratings.
Credit rating summary
DBRS(1) S&P(2) Moody's(1) 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 withdrawn withdrawn --- ---
TELUS Communications Inc.
Debentures BBB BBB --- BBB
Medium-term Notes BBB BBB --- BBB
Commercial paper withdrawn withdrawn --- ---
Preferred shares Pfd-3 P-3(high) --- ---
TELUS Communications (Quebec) Inc.
First mortgage bonds BBB A- --- ---
Debentures BBB BBB --- ---
Medium-term Notes BBB BBB --- ---
Commercial paper withdrawn withdrawn --- ---
-------------------------------------------------------------------------
(1) Outlook or trend 'stable'
(2) Outlook 'negative'
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 generally applied to these foreign
currency forwards. During the second quarter of 2003, the Company entered into
foreign currency forward contracts that have the effect of fixing the exchange
rates on, as at June 30, 2003, U.S.$75 million of fiscal 2003 purchase
commitments; hedge accounting has been applied to U.S.$50.5 million of these
foreign currency forward contracts relating to the Mobility segment.
The Company is exposed to credit risk with respect to its short-term
deposits, accounts and leases receivable, interest rate swap agreements and
foreign exchange hedges. Credit risk associated with short-term deposits is
minimized substantially by ensuring that these financial assets are placed
with governments, well-capitalized financial institutions and other
creditworthy counterparties. An ongoing review is performed to evaluate
changes in the status of counterparties.
The carrying value of cash and temporary investments, bank indebtedness,
accounts receivable, leases receivable, accounts payable, restructuring and
workforce reduction accounts payable, dividends payable and short-term
obligations approximates their fair values due to the immediate or short-term
maturity of these financial instruments.
Commitments and Contingent Liabilities (Note 16 of the interim
consolidated financial statements)
The Company has a number of commitments and contingent liabilities. The
Company has $208.7 million in outstanding commitments for its Operational
Efficiency Program as at June 30, 2003, and approximately of $10.0 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 second 2003 first 2003 targets
quarter quarter
revised revised
guidance guidance
-------------------------------------------------------------------------
Consolidated
Revenues $7.1 to no change $7.2 to
$7.2 billion $7.3 billion
EBITDA(1) $2.75 to no change $2.7 to
$2.85 billion $2.8 billion
Earnings
(loss) per
share 80 to 90 cents 50 to 70 cents 35 to 55 cents
Capital
expenditures $1.2 to no change Approx. $1.5 billion
$1.3 billion
Free cash
flow $800 to $500 to $300 to
$1 billion $600 million(2) $600 million (2)
Net debt
to EBITDA 2.8 times or less no change 3.0 times
Communications
segment
Revenue
(external) $4.85 to no change $5.0 to
$4.9 billion $5.05 billion
Non-ILEC
revenue no change no change $575 million
EBITDA(1) $2.0 to no change $2.075 to
$2.075 billion $2.15 billion
Non-ILEC
EBITDA Approx. no change Approx.
$(30) million $(60) million
Capital
expenditures $850 to no change Approx.
$900 million $1.05 billion
High-speed
Internet
subscriber
net adds Approx. 125,000 no change 150,000 to 175,000
Mobility
segment
Revenue
(external) $2.25 to no change $2.2 to
$2.3 billion $2.25 billion
EBITDA(1) $750 to $675 to $625 to
$775 million $700 million $650 million
Capital
expenditures $350 to no change Approx. $450 million
$400 million
Wireless
subscriber
net additions 350,000 to Approx. 350,000 400,000 to 450,000
375,000
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization,
excluding Restructuring and workforce reduction costs.
(2) Original target of $300 to $600 million was revised in the 2002
Annual Report to $500 to $600 million as a result of a settlement
with tax authorities in late February 2003.
4. Risks and Uncertainties
A comprehensive discussion of the risks and uncertainties can be found in
Management's Discussion and Analysis in TELUS' Annual Information Form, TELUS'
2002 Annual Report, and filings on www.sedar.com and on Edgar at www.sec.gov.
Economic fluctuations
TELUS' and economists' forecasts for economic growth and inflation in
Canada have been revised to reflect recent political and economic events such
as the significant negative impact of Sudden Acute Respiratory Syndrome (SARS)
on the travel and tourism industries, the closure of the export markets for
Canadian cattle after the discovery of 'mad cow disease' in one animal and the
negative impact of the significant appreciation of the Canadian dollar on
Canadian exporters whose prices are based in U.S. dollars. TELUS has revised
its estimate for Canadian economic growth in 2003 down to approximately 2%.
The effect of the above events has been to increase uncertainty among
business and consumer customers, who continue to focus on price and defer
purchases. The appreciation of the Canadian dollar can be positive for
Canadian companies who may be importing technology or services in U.S. dollars
or making payments in U.S. dollars. Some companies with unhedged U.S. dollar
debt have benefited from the rise in the dollar in making interest payments.
The impact of the reduced economic growth on TELUS is negligible
generally for consumer purchases of telecommunications, but does have some
negative affect on business customer spending. TELUS has a fully hedged
position on its U.S. denominated $3.1 billion of debt and does not benefit
from the rising Canadian dollar. With annual U.S. dollar requirements of
approximately $480 million for capital expenditures and operational
requirements (primarily wireless handsets), the Company benefits if the
Canadian dollar strengthens against the U.S. dollar, and conversely, the
Company incurs a small cost if the Canadian dollar weakens against the U.S.
dollar.
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: July 29, 2003
TELUS Corporation
__ "James W. Peters"___
Name: James W. Peters
Title: Corporate Secretary