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 _____August _________ 2004
(Commission File No. 000-24876)
TELUS Corporation
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal registered offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
X
Form 20-F _____ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
X
Yes _____ No _____
This Form 6-K consists of the following:
TELUS Corporation Second Quarter
Management's Discussion and Analysis
and Consolidated Financial Statements
______________________________________________________________________________
Forward-looking statements
=========================================================================
This document and the management's discussion and analysis contain
statements about expected future events and financial and operating
results of TELUS Corporation (TELUS or the Company) that are
forward-looking. By their nature, forward-looking statements require the
Company to make assumptions and are subject to inherent risks and
uncertainties. There is significant risk that predictions and other
forward-looking statements will not prove to be accurate. Readers are
cautioned not to place undue reliance on forward-looking statements as a
number of factors could cause actual future results, conditions, actions
or events to differ materially from the targets, expectations, estimates
or intentions expressed in the forward-looking statements.
Factors that could cause actual results to differ materially include but
are not limited to: competition; economic fluctuations; financing and
debt requirements; tax matters; dividends; human resources (including the
outcome of outstanding labour relations issues); technology (including
reliance on systems and information technology); regulatory developments;
process risks; health and safety; strategic partners; litigation;
business continuity events and other risk factors discussed herein and
listed from time to time in TELUS' reports, comprehensive public
disclosure documents, including the Annual Information Form, and in other
filings with securities commissions in Canada (filed on SEDAR at
www.sedar.com) and the United States (filed on EDGAR at www.sec.gov).
Risk factors associated with the potential completion of the Microcell
Telecommunications Inc. (Microcell) bid include: approvals under the
Competition Act (Canada) and by Industry Canada, realization of tax,
capital and operating synergies, including reduced network expenses and
subscriber churn rates, success in migrating subscribers and integrating
certain systems and processes, and achieving long-term leverage targets.
See the Risks and uncertainties section in TELUS' 2003 annual
Management's discussions and analysis for further information.
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 - August 3, 2004
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, 2004 and 2003, and should be read together with TELUS'
interim consolidated financial statements. This discussion contains forward-
looking information that is qualified by reference to, and should be read
together with, the Company's discussion regarding forward-looking statements
above. TELUS' interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP"),
which differ in certain respects from U.S. GAAP. See Note 20 to the interim
consolidated financial statements for a summary of the principal differences
between Canadian and U.S. GAAP as they relate to TELUS. The interim
consolidated financial statements and Management's discussion and analysis
have been reviewed by TELUS' Audit Committee and approved by TELUS' Board of
Directors. All amounts are in Canadian dollars unless otherwise specified.
Forward looking information in this document does not include changes
that may arise upon the purchase of Microcell should it proceed, unless
otherwise indicated.
The following discussion is comprised of significant updates since
Management's discussion and analysis in TELUS' 2003 Annual Report and 2004
first quarter report:
1. Core business, vision and strategy
2. Key performance drivers
3. Capability to deliver results
4. Results
5. Risks and uncertainties
1. Core business, vision and strategy
Strategic imperatives
TELUS continues to be guided by its six strategic imperatives established
four years ago that serve as a guideline for the Company's actions. Some
recent examples of TELUS' activities in support of these imperatives
follow:
Building national capabilities across data, IP and wireless;
Partnering, acquiring and divesting to accelerate the implementation of
TELUS' strategy;
Focusing relentlessly on the growth markets of data, IP and wireless
On May 13, 2004, TELUS announced its intention to acquire all of the
publicly traded shares and warrants of Microcell, the Montreal-based
operator of the Fido(R)(1) wireless network, through all-cash offers with
an aggregate value of approximately $1.1 billion. The offer price for
each of the shares is $29, the offer price for each Warrant 2005 is $9.67
and the offer price for each Warrant 2008 is $8.89. Funding for the
offers will come from TELUS' available cash on hand and draw downs on its
committed credit facilities. The offers were commenced by TELUS on
May 17, 2004.
Management expects that the acquisition, if successful, would expand
TELUS' national capabilities in the growing Canadian wireless industry,
enhance TELUS Mobility's established strength as a leading national
wireless carrier, particularly in Quebec and Ontario, and accelerate
TELUS' growth in the wireless market. If completed, the transaction is
also expected to provide TELUS with financial benefits, including tax,
capital and operating synergies. On May 28, 2004, and confirmed on
June 29, 2004, Microcell's board of directors recommended that its
security holders not tender into the TELUS offers. On several occasions
since the commencement of the offers, Microcell has publicly reported
that it and its advisors were engaged in discussions with other
interested parties regarding possible strategic and financial
alternatives that may lead to competing bids or other transactions.
On June 4, 2004, the Competition Bureau advised TELUS that it has
characterized the transactions contemplated by TELUS' offers as
"very complex". Very complex merger transactions necessitate substantial
assessments and a greater volume of work by the Competition Bureau than
what is required in typical transactions. TELUS continues to co-operate
with the Competition Bureau to facilitate its review of the contemplated
transactions.
On June 22, 2004, TELUS and Microcell entered into a confidentiality
agreement in which Microcell agreed to disclose certain non-public
information relating to Microcell and its subsidiaries and affiliates to
TELUS and its representatives. Following the execution of the
confidentiality agreement, TELUS and certain of its representatives were
granted access by Microcell to an electronic data room. Since that time,
the Company has conducted due diligence on Microcell and its business and
operations using the materials contained in the data room and certain
other information provided in response to requests made by TELUS. In
addition, members of Microcell's management team and its financial
advisors for the offers made a presentation on June 29, 2004 to members
of TELUS' management team. The June 22, 2004 expiry date of the offers
was extended to July 22, 2004 and has been further extended to
August 20, 2004.
On July 21, 2004, Microcell publicly announced that it had signed a
number of additional confidentiality agreements with other interested
parties. As of August 3, 2004, 78 days have elapsed since TELUS made its
original offers. As of such date, the TELUS offers remain the only
outstanding public bid for the publicly traded shares and warrants of
Microcell. This summary is qualified in its entirety by reference to the
Offers to Purchase and amendments thereto filed on SEDAR, and by
reference to the Schedule TO and amendments thereto and accompanying
exhibits that TELUS has filed with the United States Securities and
Exchange Commission relating to its offers for the publicly traded shares
and warrants of Microcell.
Providing integrated solutions that differentiate TELUS from its
competitors
TELUS continues the transformation of its networks from circuit-based
switching to packet-based routing. Over a year ago, TELUS began migrating
voice traffic onto its Internet Protocol (IP) network or Next Generation
Network (NGN), and became one of the first companies in the world to
deliver carrier-grade Voice over IP calls. As of May 2004, all voice
traffic placed in B.C. and Alberta destined for Province of Quebec area
codes is carried over TELUS' NGN. The migration of calls is an important
step in the transformation of TELUS' network into a single ubiquitous IP
network design that carries high quality voice, data, and video
applications - one that will eventually eliminate the need for separate
networks to carry these same applications.
As a result of research and development activities TELUS has undertaken,
the next phase of the IP-One(TM) product family was launched on
June 14, 2004, and is currently provided to businesses in 24 cities in
Ontario and Quebec. IP-One uses TELUS' NGN to route calls and data, while
providing business customers with a full suite of advanced applications
and services. It gives customers the opportunity to reduce operational
expenses by eliminating costs associated with installing, managing and
supporting three separate connections. IP-One also provides the
efficiency and accessibility of integrated messaging that allows
standards-based e-mail programs to retrieve voice-mail.
In the first half of 2004, TELUS introduced new consumer Internet-based
services. A wireless home networking solution was introduced for
residential customers in B.C. and Alberta for an additional $8 per month
plus the cost of a home networking kit. The service includes enhanced
Internet access with speeds up to 2.5 megabits per second and capability
to connect multiple computers through a wireless network. Higher speed
dial-up services were also introduced in B.C. and Alberta for an
additional $2.95 per month and are soon expected to be introduced in
Quebec. In addition, TELUS expanded the selection of legal music services
by offering 75 continuous, high-quality and commercial free music
channels to suit a variety of tastes for a regular monthly cost of $4.99.
Other new services are currently being readied for launch.
(1) Fido is a registered trademark of Microcell.
2. Key performance drivers
TELUS is focused on addressing six 2004 corporate priorities to help
drive operational performance. Certain recent examples of developments or
progress on these priorities follow:
Reaching a collective agreement
TELUS Communications Inc. ("TCI") and the Telecommunications Workers
Union ("TWU") have not made progress in reaching an agreement as a result
of a number of outstanding appeals to the Canada Industrial Relations
Board ("CIRB") and the Federal Court of Appeal.
In February 2004, TCI filed applications with both the CIRB and the
Federal Court of Appeal seeking a review of the CIRB's earlier decisions,
which imposed a communications ban and required TCI to offer binding
arbitration to the TWU. On April 8, 2004, the CIRB rendered the full
reasons (Decision 271) regarding the complaints that led to its earlier
decisions. TCI sought reconsideration and a judicial review of the
April 8, 2004 CIRB decision that imposed a further communications ban on
TCI, prohibiting communications with bargaining unit employees on matters
of employment and collective interest until such time as the conditions
of the Canada Labour Code with respect to gaining the right to strike or
lockout have been satisfied. This matter is still before the CIRB and the
Federal Court of Appeal.
On May 21, 2004, in Letter Decision 1088, the CIRB declared that
TELE-MOBILE COMPANY, which operates a national wireless business under
the TELUS Mobility trade name, and TCI are a single employer for labour
relations purposes. The CIRB also determined that TELUS Mobility's
non-unionized team members, predominantly located in Ontario and Quebec,
performing work similar to their unionized Mobility segment counterparts
in Alberta and British Columbia, should be included in the bargaining
unit represented by the TWU without a representational vote. On
June 23, 2004, both TCI and TELUS Mobility filed an application to the
Federal Court of Appeal for a stay and a judicial review of CIRB Letter
Decision 1088. On June 24, 2004, the CIRB issued in Decision 278 the full
reasons of two of three panel members supporting Letter Decision 1088.
The reasons supporting one dissenting panel member's opinion were issued
in late July 2004. On July 7, 2004, TCI and TELUS Mobility filed
applications with the Federal Court of Appeal for judicial review of
Decision 278. Those applications have been consolidated with the stay and
judicial review applications filed in June 2004. The application for a
stay was heard on July 19, 2004. The stay was subsequently denied, while
clarifying that the communications ban does not apply to
TELUS Mobility. The Federal Court of Appeal held that TELUS Mobility is
free to lawfully communicate with its eastern employees affected by the
CIRB's Decisions 1088 and 271 and is not subject to the April 8th
communications ban imposed by the CIRB. The other aspects of the stay
application were denied on the basis that although the employers provided
examples of irreparable harm there was no evidence of imminent
irreparable harm. The Federal Court of Appeal has confirmed, however,
that TCI and TELUS Mobility may bring another application for a stay
should the circumstances change such that irreparable harm is imminent.
The judicial review application is scheduled to be heard in early
October 2004.
Growing brand value through superior customer service
TELUS has overcome the short-term wireline customer service challenges
experienced in late summer 2003 and has been consistently surpassing
historical service levels on various indicators in the first half of
2004. These indicators include not only our internal ones, but also
certain ones reported to the Canadian Radio-television and
Telecommunications Commission ("CRTC"). Management remains focused on
continuing to maintain high levels of service through the balance of the
year.
TELUS Mobility continues to deliver superior customer service by focusing
on such areas as customer care and high network quality. The success of
this approach is evidenced by our world-class low subscriber churn rate
of 1.3% per month.
Enhancing TELUS Mobility's leadership position in wireless
TELUS Mobility continued to build on its solid performance from the first
quarter of 2004. Network revenue grew by 18.8% for the second quarter and
19.6% for the first six months of 2004 when compared to the same periods
last year. When coupled with a very low churn rate of 1.3% and operating
efficiencies, EBITDA increased by a notable 42.2% and 40.6% for the
second quarter and first six months. In addition, cash flow (EBITDA less
capital expenditures) grew significantly by 68.7% to $207.8 million for
the second quarter and 63.8% to $405.3 million for the first six months
of 2004 as a result of strong Network revenue growth. It is expected that
the annual target of 375,000 to 425,000 subscriber net additions will be
achieved, while the 2004 annual revenue and EBITDA guidance has been
increased by $25 million and $50 million, respectively, this quarter.
Guidance for annual EBITDA was previously increased in the first quarter
of 2004 by $25 million over the original target, for a cumulative EBITDA
increase of $75 million over the original 2004 annual target. If
achieved, the midpoint of the revised annual revenue and EBITDA guidance
anticipates growth of 14.4% and 31.8%, respectively. The acquisition of
Microcell, if successful, would accelerate TELUS Mobility's strategy of
national growth principally in Quebec and Ontario.
Driving towards leadership in high-speed Internet
For the first six months of 2004, TELUS' high-speed subscriber net
additions of 62,700 exceeded the net additions recorded for the same
period in 2003 by 6.6% and represents half of the annual 2004 target of
125,000. The Company estimates that it has obtained the majority of the
market's high-speed Internet net additions in its incumbent territories
in 2004, increasing its overall market share. For the second quarter of
2004, high-speed subscriber net additions decreased to 19,100 from the
26,700 in the same period in 2003, as a result of increased
deactivations, notably including those following the expiry of
promotional discount periods related to recently discontinued service
plans. The Company expects that the annual target of 125,000 high-speed
Internet net additions will be achieved.
3. Capability to deliver results
Operational capabilities - TELUS Communications
The wireline marketplace is evolving rapidly, requiring TELUS to be more
innovative, efficient and competitive. To retain and attract customers,
TELUS must be able to quickly deliver innovative services and pricing
packages. At the same time, the rapid pace of technological change makes
it necessary to have tariff decisions made as quickly as possible, as
many of TELUS' competitors are not subject to the same price and win-back
regulation.
TELUS is participating in the CRTC's process for determining the
regulatory framework for voice communication services using Internet
protocol, also known as "VOIP". The Company has tabled its views that it
should be able to offer VOIP, with the same regulations applied to all
VOIP service providers, including cable-TV companies and foreign-based
competitors. For further discussion, see Risks and uncertainties,
Regulation - wireline operations.
A number of initiatives to improve internal systems and processes are
underway. One project that is currently in the design stage has a mandate
to simplify processes and technology for residential customers. The
project will focus on streamlining processes and improving
interoperability of systems, from the sales request and order entry
through to service assurance, billing, and credit and collections. A
parallel project seeks to establish uniform national fulfillment
processes for data and enhanced services including order management.
Eventually, numerous legacy systems will be decommissioned.
Operational capabilities - TELUS Mobility
With the wireless marketplace exhibiting strong growth, TELUS Mobility
has managed best-in-class results in many respects. Focus on customer
care, value-added solutions and superior network quality provides the
customer with an exceptional service experience. With the focus on
profitable wireless growth, TELUS Mobility is generating significant
EBITDA margins ahead of its peer group. TELUS Mobility's performance in
the marketplace and its ability to efficiently provide value to its
customers, have positioned TELUS well. TELUS Mobility has previously
demonstrated its ability to successfully execute on significant wireless
merger integration to realize synergies and generate rapidly increasing
cash flows, which should allow it to attain benefits from a successful
bid for Microcell.
Liquidity and capital resources
At the end of June 2004, after making semi-annual interest payments,
TELUS had a $357.7 million cash balance and access to unutilized credit
facilities totaling nearly $1.6 billion. In addition, TELUS has obtained
a fully underwritten commitment for a $500 million (or U.S. Dollar
equivalent) unsecured bank credit facility, which upon documentation,
would be available until the earlier of October 31, 2005, and 364 days
after the completion date of the Company's offers to purchase Microcell,
should in fact this event occur. Free cash flow of $672.8 million for the
first half of 2004 benefited from the receipt of approximately
$180 million of tax refunds and $19 million interest income, which are
not expected to recur in the second half of 2004. Based on June
year-to-date results and expectations for the second half of 2004, TELUS
has increased its annual guidance for free cash flow to a range of
$1.15 to $1.25 billion. The Company believes it has sufficient internally
generated cash flow from operations and access to credit facilities to
fund capital expenditures, make payments under restructuring programs,
make planned 2004 debt repayments, pay dividends, and complete the
$1.1 billion offer to purchase Microcell.
4. Results
Critical accounting estimates
-----------------------------
The Company's critical accounting estimates are discussed in the
Company's 2003 annual Management's discussion and analysis. The
preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Accounting policy developments
------------------------------
Share-based compensation (Note 2(a) of the interim consolidated financial
statements)
Commencing with the Company's 2004 fiscal year, the amended
recommendations of the CICA for accounting for share-based compensation
(such amendments arising in 2003) (CICA Handbook Section 3870) apply to
the Company. The Company has selected the modified-prospective transition
method (also referred to as the retroactive application without
restatement method), implemented effective January 1, 2004. To reflect
the fair value of options granted subsequent to 2001, and vesting prior
to 2004, certain components of common equity in the December 31, 2003,
Consolidated Balance Sheet balances have been restated.
Equity settled obligations (Note 2(b) of the interim consolidated
financial statements)
Commencing with the Company's 2004 fiscal year, the Company early adopted
the amended recommendations of the CICA for the presentation and
disclosures of financial instruments (CICA Handbook Section 3860)
specifically concerning the classification of obligations that an issuer
can settle with its own equity instruments (such amendments arising in
2003). The amendments result in the Company's convertible debentures
being classified as a liability on the consolidated balance sheets
(previously classified as a component of equity) and the associated
interest expense correspondingly being classified with financing costs on
the consolidated statements of income (previously recorded net of income
taxes as an adjustment to retained earnings). The conversion option
embedded in the convertible debentures continues to be presented as a
component of shareholders' equity. As required, these amended
recommendations have been applied retroactively. As a result of the
reclassification of convertible debentures, minor changes were effected
in historical Net debt to EBITDA ratios, and historical Net debt to total
capitalization ratios. The reclassification of the associated interest
expense also resulted in minor changes in historical EBITDA interest
coverage ratios.
Materiality for disclosure
--------------------------
Management determines whether or not information is "material" based on
whether it believes a reasonable investor's decision to buy, sell or hold
securities in the Company would likely be influenced or changed if the
information were omitted or misstated.
Quarterly results summary
-------------------------
($ in millions, except
per share amounts) 2004 Q2 2004 Q1 2003 Q4 2003 Q3 2003 Q2 2003 Q1
-------------------------------------------------------------------------
Segmented revenue
(external)
TELUS
Communications
segment 1,189.0 1,171.1 1,182.4 1,186.3 1,209.2 1,208.5
TELUS Mobility
segment 676.6 632.7 643.2 619.9 564.1 532.4
------- ------- ------- ------- ------- -------
Operating revenues
(consolidated) 1,865.6 1,803.8 1,825.6 1,806.2 1,773.3 1,740.9
Restructuring and
workforce
reduction costs 0.7 15.9 16.2 2.3 3.3 6.5
Net income
(loss)(1) 172.3 101.3 47.8 114.1 73.0 89.5
Per weighted
average Common
Share and Non-
Voting Share
outstanding
- basic 0.48 0.28 0.13 0.32 0.21 0.26
- diluted 0.48 0.28 0.13 0.32 0.21 0.26
Dividends declared per
Common Share
and Non-Voting
Share outstanding 0.15 0.15 0.15 0.15 0.15 0.15
-------------------------------------------------------------------------
($ in millions, except
per share amounts) 2002 Q4 2002 Q3
--------------------------------------
Segmented revenue
(external)
TELUS
Communications
segment 1,244.2 1,233.8
TELUS Mobility
segment 550.2 532.5
------- -------
Operating revenues
(consolidated) 1,794.4 1,766.3
Restructuring and
workforce
reduction costs 241.0 313.3
Net income
(loss)(1) (140.9) (109.2)
Per weighted
average Common
Share and Non-
Voting Share
outstanding
- basic (0.41) (0.35)
- diluted (0.41) (0.35)
Dividends declared
per Common Share
and Non-Voting
Share outstanding 0.15 0.15
--------------------------------------
(1) With the reclassification of convertible debentures noted above, Net
income has been restated for the presented quarters in 2003 and
2002. The restatement reflects the classification of interest on
convertible debentures with Financing costs, the classification of
related income tax credits with Income taxes, and removal of the
line "Interest on convertible debentures net of income taxes" from
the Income statement. The approximate quarterly amounts of the
presentation change were $2.8 million increased Financing costs,
$1.0 million lower Income taxes, and $1.8 million lower Net income.
Common share income and earnings per share were unaffected by this
presentation change.
The trend in Operating revenues continued to reflect growing
TELUS Mobility segment revenues attributed to subscriber growth and
improved average revenue per subscriber unit ("ARPU"). This positive
trend was partly offset by decreasing TELUS Communications Segment voice
local, long distance, and equipment sales revenues and soft data revenue
growth, consistent with the Canadian wireline industry. The trend of
decreasing Communications segment revenues includes the impacts of
regulatory price cap decisions.
Significant restructuring charges were recorded in 2002 primarily as a
result of the Communications segment Operational Efficiency Program,
which contributed to improved operating profitability in 2003 and 2004.
Restructuring charges in 2003 and 2004 were also for Communications
segment restructuring activities. Net income and earnings per share
reflect improved wireline and wireless operating profitability, as well
as decreasing financing costs.
For five of the periods shown above, Net income and earnings per share
included significant favourable impacts for the settlement of tax matters
(including investment tax credits and related interest) and tax losses
carried back to prior years, as shown in the table below:
($ in millions, except 2004 2004 2003 2003 2003 2003 2002 2002
per share amounts) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
--------------------------------------------------------------------------
Approximate Net income
impact 45 13 - 19 - 53 18 -
Approximate per share
impact 0.13 0.04 - 0.05 - 0.15 0.05 -
--------------------------------------------------------------------------
Related party transactions
In 2001, the Company entered into an agreement with
Verizon Communications Inc. ("Verizon"), a significant shareholder, with
respect to acquiring certain rights to Verizon's software, technology,
services and other benefits, thereby replacing and amending a previous
agreement between the Company and GTE Corporation. The agreement is
renewable annually at the Company's sole option up to December 31, 2008,
and it has been renewed for 2004. As of June 30, 2004, in aggregate,
$312.1 million of specified software licences and a trademark licence
have been acquired and recorded as capital and other assets. These assets
are valued at fair market value at the date of acquisition as determined
by an arm's-length party's appraisal. Assuming renewal through to 2008,
the total commitment under the agreement is U.S.$377 million for the
period 2001 to 2008 and the commitment remaining after June 30, 2004, is
U.S.$92 million.
Results of operations
---------------------
Consolidated highlights
Quarters Six-month periods
($ in millions except ended June 30 ended June 30
per share amounts) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Operating revenues 1,865.6 1,773.3 5.2% 3,669.4 3,514.2 4.4%
EBITDA(1) 784.8 716.5 9.5% 1,506.1 1,380.8 9.1%
Net income 172.3 73.0 136.0% 273.6 162.5 68.4%
Earnings per share,
basic and diluted 0.48 0.21 128.6% 0.76 0.46 65.2%
Cash dividends
declared per share 0.15 0.15 - 0.30 0.30 -
Cash provided by
operating activities 489.0 469.6 4.1% 1,077.1 874.3 23.2%
Capital expenditures 346.1 305.5 13.3% 655.8 513.3 27.8%
Free cash flow(2) 229.5 65.5 NM 672.8 333.1 102.0%
-------------------------------------------------------------------------
NM - not meaningful
Non-GAAP measures used by management to evaluate performance of business
units and segments
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) is calculated as:
2004 Q2 2003 Q2 2004 YTD 2003 YTD
------- ------- -------- --------
Operating revenues 1,865.6 1,773.3 3,669.4 3,514.2
Less Operations expense 1,080.1 1,053.5 2,146.7 2,123.6
Less Restructuring and
workforce reduction costs 0.7 3.3 16.6 9.8
--- --- ---- ---
EBITDA 784.8 716.5 1,506.1 1,380.8
The Company has issued guidance on and reports EBITDA because it is a
key measure used by management to evaluate performance of business
units and it is utilized in measuring compliance with debt covenants.
The Company also believes EBITDA is a measure commonly reported and
widely used by investors as an indicator of a company's operating
performance and ability to incur and service debt. The Company
believes EBITDA assists investors in comparing a company's
performance on a consistent basis without regard to depreciation and
amortization, which are non-cash in nature and can vary significantly
depending upon accounting methods or non-operating factors such as
historical cost. EBITDA is not a calculation based on Canadian or
U.S. GAAP and should not be considered an alternative to Operating
income or Net income in measuring the Company's performance or used
as an exclusive measure of cash flow because it does not consider the
impact of working capital growth, capital expenditures, debt
principal reductions and other sources and uses of cash, which are
disclosed in the consolidated statements of cash flows. Investors
should carefully consider the specific items included in TELUS'
computation of EBITDA. While EBITDA has been disclosed herein to
permit a more complete comparative analysis of the Company's
operating performance and debt servicing ability relative to other
companies, investors should be cautioned that EBITDA as reported by
TELUS may not be comparable in all instances to EBITDA as reported by
other companies.
(2) Free cash flow excludes certain working capital changes, and other
sources and uses of cash, which are disclosed in the consolidated
statements of cash flows. Free cash flow is not a calculation based
on Canadian or U.S. GAAP and should not be considered an alternative
to consolidated statements of cash flows. Free cash flow is a measure
that can be used to gauge TELUS' performance over time. Investors
should be cautioned that Free cash flow as reported by TELUS may not
be comparable in all instances to Free cash flow as reported by other
companies. While the closest GAAP measure is Cash provided by
operating activities, Free cash flow is relevant because it provides
an indication of how much cash is available before changes in working
capital (such as trade payables, and trade receivables, which can be
significantly distorted by securitization changes that do not reflect
operating results) and after funding capital expenditures. The
following shows the calculation of Free cash Flow and reconciles
EBITDA and Free cash flow with Cash provided by operating activities:
2004 Q2 2003 Q2 2004 YTD 2003 YTD
------- ------- -------- --------
EBITDA 784.8 716.5 1,506.1 1,380.8
Restructuring and workforce
reduction costs, net of cash
payments (9.0) (44.3) (61.5) (191.7)
Share-based compensation 5.6 - 10.6 -
Cash interest paid (293.8) (298.8) (316.6) (334.8)
Cash interest received 7.0 0.3 21.2 1.3
Income taxes received (paid) 81.0 (2.7) 185.6 (3.3)
Capital expenditures (capex) (346.1) (305.5) (655.8) (513.3)
Investment tax credits received
(included in reported or prior
EBITDA or capex, and in Income
taxes received (paid)) - - (16.8) (5.9)
- - ------ -----
Free cash flow 229.5 65.5 672.8 333.1
Add back capital expenditures 346.1 305.5 655.8 513.3
Net employee defined benefit
plans expense (credit) 4.9 13.2 9.8 26.3
Employer contributions to
employee defined benefit plans (57.9) (18.0) (86.5) (36.0)
Other net operating activities 11.5 28.0 17.6 34.9
Non-cash working capital
changes except changes in
taxes and interest (45.1) 75.4 (192.4) 2.7
------ ---- ------- ---
Cash provided by operating
activities 489.0 469.6 1,077.1 874.3
---------------------------------------------------------------------
Consolidated Operating revenue and EBITDA increased significantly in the
second quarter of 2004, when compared with the same period in 2003,
primarily as a result of 18.8% growth in TELUS Mobility Network revenues,
with only an 8.0% increase in TELUS Mobility operations expenses. TELUS'
Communications segment experienced a 1.7% decrease in Operating revenue,
while reducing operations expenses by 0.3%.
Consolidated Financing costs decreased by $15.1 million in the second
quarter of 2004, when compared with the same period in 2003, as a result
of lower interest on long-term and short-term debt, and increased
interest income from the settlement of tax matters. Income before taxes
and non-controlling interest increased by $90.5 million to $218.3 million
in the second quarter of 2004 as compared with the second quarter of
2003, as a result of improved operating profitability and lower net
financing and other costs. Decreased Income taxes, despite higher income,
resulted from a favourable income tax adjustment of $34.2 million
recorded in the second quarter of 2004 for tax losses carried back to
prior years and the settlement of tax matters relating to prior years,
which had higher tax rates.
Basic and diluted earnings per share increased by 27 cents in the second
quarter of 2004, as compared with the same period last year as a result
of higher Net income, partly offset by a larger number of shares
outstanding. The impact of tax settlements and related interest
contributed approximately 13 cents per share.
Cash provided by operating activities increased in the second quarter of
2004, when compared with the second quarter of 2003, principally due to
the recovery of income taxes associated with settlement of tax matters
(including interest income), improved operating profitability, lower
payments under restructuring programs, and lower interest expense, partly
offset by an increase in contributions to defined benefit plans and other
working capital changes. Increased free cash flow was net of higher
capital expenditures. Communications segment capital expenditures
increased by 17.7% due to investment in internal systems and processes,
new service development and infrastructure to improve customer service
and support new customers.
Communications segment
- Operating revenues decreased by $20.2 million or 1.7% in the second
quarter of 2004, when compared with the same period in 2003, while
EBITDA decreased by $16.6 million or 3.2% as lower revenues were only
partly offset by lower operations expenses and restructuring charges.
- Total Internet subscribers increased by 10,700 in the second quarter
of 2004, compared with 6,400 in second quarter of 2003, primarily as a
result of lower net deactivations of dial-up Internet subscribers.
- Network access lines decreased by 21,000 during the second quarter of
2004 as a result of competition and technological substitution.
- Cash flow (EBITDA less capital expenditures) decreased by
$56.9 million to $230.9 million in the second quarter of 2004, when
compared with the same period in 2003, primarily because of an
increase in capital spending and lower revenues.
Mobility segment
- Operating revenues grew by $112.5 million or 19.9% to $676.6 million
in the second quarter of 2004, when compared with the same period in
2003, while EBITDA increased by $84.9 million or 42.2% to
$286.2 million.
- ARPU (average revenue per subscriber unit) increased by $3 to $59,
representing a sixth consecutive quarter of year over year increases,
while blended monthly churn remained at a low 1.3%. Notably, postpaid
churn was 1.0% in the quarter.
- Subscriber net additions were 113,700 or 10.6% higher than the second
quarter of 2003. Notably, higher revenue-generating postpaid
subscriber net additions increased by 27.7%, representing a fourth
successive quarter of positive growth. Postpaid subscribers
represented 91.1% of total subscriber net additions in the second
quarter of 2004.
- Cost of acquisition per gross subscriber addition ("COA") improved to
$381 from $428, a notable achievement when coupled with significant
subscriber growth.
- Cash flow (EBITDA less capital expenditures) increased by
$84.6 million or 68.7% to a TELUS Mobility quarterly record of
$207.8 million.
The following discussion for Operating revenues, Operations expense,
Restructuring and workforce reduction costs, EBITDA and Capital
expenditures is presented on a segmented basis. All other discussion is
presented for the consolidated financial results.
Operating revenues - Quarters Six-month periods
Communications segment ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Voice local 543.8 541.3 0.5 % 1,072.7 1,080.1 (0.7)%
Voice long distance 228.5 239.2 (4.5)% 458.1 490.3 (6.6)%
Data 345.7 352.4 (1.9)% 685.5 695.2 (1.4)%
Other 71.0 76.3 (6.9)% 143.8 152.1 (5.5)%
-------------------------------------------------------------------------
External operating
revenue 1,189.0 1,209.2 (1.7)% 2,360.1 2,417.7 (2.4)%
Intersegment revenue 22.1 23.4 (5.6)% 47.1 46.8 0.6 %
-------------------------------------------------------------------------
Total operating
revenue 1,211.1 1,232.6 (1.7)% 2,407.2 2,464.5 (2.3)%
-------------------------------------------------------------------------
Key operating indicators - Communications segment
At June 30
(000s) 2004 2003 Change
--------------------------
Network access
lines(1) 4,827 4,887 (1.2)%
High-speed Internet
subscribers 624.3 468.8 33.2%
Dial-up Internet
subscribers 300.7 351.8 (14.5)%
-------- ------- --------
Total Internet
subscribers(2) 925.0 820.6 12.7%
--------------------------
Quarters Six-month periods
ended June 30 ended June 30
(000s) 2004 2003 Change 2004 2003 Change
-----------------------------------------------------
Change in network
access lines (21) (26) 19.2% (39) (24) (62.5)%
High-speed Internet
net additions 19.1 26.7 (28.5)% 62.7 58.8 6.6%
Dial-up Internet net
reductions (8.4) (20.3) 58.6% (19.1) (39.9) 52.1%
-------- ------ ------- ------ ------ -------
Total Internet
subscriber net
additions 10.7 6.4 67.2% 43.6 18.9 130.7%
-------------------------------------------------------------------------
(1) Network access lines are measured at the end of the reporting period
based on information in billing and other systems.
(2) Internet subscribers are measured at the end of the reporting period
based on Internet access counts from billing and other systems.
The Communications segment continued to experience an industry-wide trend
of declining traditional revenues and softness in data revenue growth.
- Voice local revenue increased slightly in the second quarter of 2004
and decreased in first six months of 2004, when compared with the same
periods in 2003. Included in the results for the second quarter of
2004 was a positive adjustment of $10.2 million resulting from CRTC
Decision 2004-42, released in June 2004, in which TELUS was allowed to
recover costs to support local number portability and local
competition capital investments for the period June 2002 to May 2004.
Excluding this adjustment, the decrease was primarily as a result of
fewer access lines, partly offset by a modest increase in
interconnection revenue, and implementation of approved rate increases
for business single and multi-line services effective June 1, 2004.
Enhanced service revenues decreased in the second quarter and first
six months of 2004, when compared with the same periods in 2003, but
showed some growth over the first quarter of 2004.
Consumer network access lines decreased by 22,000 and 33,000,
respectively, during the second quarter and first six months of 2004,
as compared with decreases of 24,000 and 26,000, respectively, for the
same periods in 2003. Consumer line losses resulted from competitive
activity and technological substitution, including substitution to
wireless. Business network access lines increased by 1,000 and
decreased by 6,000, respectively, during the second quarter and first
six months of 2004, as compared with a decrease of 2,000 during the
second quarter of 2003 and an increase of 2,000 during the first six
months of 2003. For the second quarter of 2004, growth in
non-incumbent local exchange carrier ("Non-ILEC") business access
lines exceeded incumbent local exchange carrier ("ILEC") business line
losses to competition and migration to more efficient ISDN services.
For the first six months of 2004, business lines decreased primarily
as a result of ILEC Centrex line losses to competition and migration
to ISDN data services. It is expected that the trend of declining
network access lines will continue.
- Voice long distance revenue continued to decrease, but at a slower
rate in the second quarter of 2004, compared with the first quarter of
2004. The decrease was primarily a result of fewer consumer minutes,
price competition, and technological substitution. This was partly
offset by a $1 increase this quarter in certain monthly long distance
plan administrative charges, effective June 2004, as well as increased
business long distance minute volumes. Wholesale settlement revenues
were relatively unchanged as higher volumes were nearly offset by
lower prices. Price competition and substitution to alternative
technologies are expected to continue.
- Communications segment data revenue for the second quarter and first
six-months of 2003 included approximately $2.8 million and
$13.6 million, respectively, of application development revenues from
assets that were divested during 2003. As a result of these
divestitures, 2003 revenues totaling $17.8 million will not recur in
the full year 2004. Data revenues normalized for the disposal of
assets decreased by $3.9 million or 1.1% in the second quarter of 2004
and increased by $4.0 million or 0.6% in the first six months of 2004,
when compared with the same periods in 2003.
Internet and enhanced data service revenues increased by $11.9 million
and $16.5 million, respectively, for the second quarter and first six
months of 2004, when compared with the same periods in 2003, primarily
as a result of the 155,500 increase in the high-speed Internet
subscriber base over the last 12 months, partly offset by lower
introductory pricing for new subscribers and the 51,100 reduction in
dial-up subscribers over the last 12 months. The decrease in dial-up
subscribers is attributed mainly to conversions to high-speed
Internet. Managed workplace revenues increased by $8.9 million and
$21.2 million, respectively, due to higher functional outsourcing
services. Partly offsetting growth in Internet, enhanced data and
managed workplace revenues were lower basic data services and
equipment sales.
- Other revenue decreased in the second quarter and first six months of
2004, when compared with the same periods in 2003, primarily as a
result of lower voice equipment sales and the conclusion in the first
quarter of 2004 of recognition of deferred individual line service
grant revenues. The annual impact of the conclusion of individual line
service grants will be lower revenues of $6.7 million in 2004, when
compared with 2003. Individual line service grants were provided in
respect of the conversion of multi-party lines to single lines in high
cost rural areas in Alberta in the early 1990s.
- Intersegment revenues represent services provided by the
Communications segment to the Mobility segment. These revenues are
eliminated upon consolidation together with the associated expense in
TELUS Mobility.
Total external operating revenue discussed above included Non-ILEC
revenues of $130.6 million and $259.0 million, respectively, for the
second quarter and first six months of 2004, as compared with
$138.6 million and $$279.3 million for the same periods in 2003. This
represents decreases of $8.0 million or 5.8% and $20.3 million or 7.3%,
respectively. Growth in Non-ILEC application development revenues was
affected by the disposal of certain assets in 2003 as discussed in data
revenues above. Normalized for asset disposals, Non-ILEC revenues for the
second quarter and first six-months of 2004 decreased by approximately
$5.2 million or 3.8% and $6.7 million or 2.5%, respectively, as reduced
revenues from lower margin equipment sales were partly offset by increased
wholesale traffic and a shift towards higher quality recurring revenue
sources associated with large complex contracts.
Operating revenues - Quarters Six-month periods
Mobility segment ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Network revenue 625.5 526.4 18.8% 1,217.9 1,018.5 19.6%
Equipment revenue 51.1 37.7 35.5% 91.4 78.0 17.2%
-------------------------------------------------------------------------
External operating
revenue 676.6 564.1 19.9% 1,309.3 1,096.5 19.4%
Intersegment revenue 5.6 3.9 43.6% 10.2 7.6 34.2%
-------------------------------------------------------------------------
Total operating
revenue 682.2 568.0 20.1% 1,319.5 1,104.1 19.5%
-------------------------------------------------------------------------
Key operating indicators - Mobility segment
-------------------------------------------------------------------------
(000s) At June 30
2004 2003 Change
--------------------------
Subscribers
- postpaid 2,980.1 2,615.0 14.0%
Subscribers
- prepaid 633.7 550.1 15.2%
-------- -------- --------
Subscribers
- total(1) 3,613.8 3,165.1 14.2%
Digital POPs(2)
covered including
roaming/resale
(millions)(3) 29.7 28.0 6.1%
--------------------------
Quarters Six-month periods
ended June 30 ended June 30
(000s) 2004 2003 Change 2004 2003 Change
-----------------------------------------------------
Subscriber net
additions - postpaid 103.6 81.1 27.7% 168.3 124.4 35.3%
Subscriber net
additions - prepaid 10.1 21.7 (53.5)% 21.5 45.1 (52.3)%
------ ------ -------- ------ ------ --------
Subscriber net
additions - total 113.7 102.8 10.6% 189.8 169.5 12.0%
Churn, per month
(%)(4a) 1.32 1.30 - 1.40 1.41 -
COA(4b) per gross
subscriber addition
($)(4c) 381 428 (11.0)% 382 427 (10.5)%
ARPU ($)(4d) 59 56 5.4% 58 55 5.5%
Average minutes of
use per subscriber
per month ("MOU") 390 342 14.0% 376 329 14.3%
EBITDA to network
revenue (%) 45.8 38.2 7.6 pts 43.8 37.3 6.5 pts
Retention spend to
network revenue
(4e)(%) 4.9 4.7 0.2 pts 4.9 4.1 0.8 pts
EBITDA excluding
Acquisition COA
($ millions)(4f) 383.2 297.3 28.9% 719.3 563.4 27.7%
-------------------------------------------------------------------------
pts - percentage points
(1) Subscribers are measured at the end of the reporting period based on
information from billing and other systems.
(2) POPs is an acronym for population. A POP refers to one person living
in a population area, which in whole or substantial part is included
in the coverage areas.
(3) TELUS Mobility has not activated all digital-roaming areas. As at
June 30, 2004, TELUS Mobility PCS digital population coverage was
22.4 million and 29.7 million including the roaming/resale
agreements principally with Bell Mobility and Aliant Telecom
Wireless.
(4) The following are not measures under accounting principles generally
accepted in Canada and the U.S. These measures are industry metrics
and are useful in assessing the operating performance of a wireless
company. The definitions of these measures are as follows:
(a) Churn is calculated as the number of subscriber units
disconnected during the period divided by the average number of
units on the network, expressed as a rate per month. Prepaid
subscribers are deactivated when the subscriber has no usage
for 90 days following expiry of the prepaid card.
(b) Cost of acquisition (COA) consists of the total of handset
subsidies, commissions, and advertising and promotion expenses
related to the initial customer acquisition during a given
period. As defined, COA excludes costs to retain existing
subscribers (Retention spend).
(c) COA per gross subscriber addition is Cost of acquisition
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) Retention Spend to network revenue represents direct costs
associated with Marketing and promotional efforts aimed at the
retention of the existing subscriber base, divided by
Network revenue.
(f) EBITDA excluding Acquisition COA is a measure for operational
profitability normalized for the period costs of adding new
customers.
-------------------------------------------------------------------------
- TELUS Mobility Network revenue is generated from monthly billings for
access fees, incremental airtime charges, prepaid time consumed or
expired, wireless Internet services and fees for value-added services.
Network revenue increased 18.8% for the quarter ended June 30, 2004
and 19.6% for the first six months of 2004 as compared with the same
periods in 2003. This growth was a result of the continued expansion
of the subscriber base by 14.2% to approximately 3.6 million
subscribers combined with increased ARPU. As a result of an overall
14.0% increase in average minutes of use ("MOU") per subscriber per
month, an increase in roaming revenue and increased acceptance of data
and Internet based products, including picture messaging, ARPU
increased to a Canadian industry-leading $59 in the second quarter of
2004 as compared with $56 in 2003, representing a sixth successive
quarter of year over year increases. Similarly, ARPU for the first six
months of 2004 was $58 as compared to $55 for the same period last
year.
Average minutes of use per subscriber per month were 390 in the second
quarter and 376 for the first six months of 2004 as compared with
342 and 329 for the same periods last year. At June 30, 2004, postpaid
subscribers were maintained at 82.5% of the total cumulative
subscriber base as compared with one-year earlier, contributing to the
significant ARPU premium TELUS Mobility enjoys over its competitors.
Postpaid subscriber net additions of 103,600 for the second quarter of
2004 represented 91.1% of all net additions as compared with 81,100
(78.9%) for the corresponding period in 2003; a significant increase
of 27.7%. Similarly, postpaid subscriber net additions of 168,300 for
the first six months of 2004 represented 88.7% of total net additions
as compared with 73.4% for the same period in 2003. This was the
fourth consecutive quarter of year over year positive net postpaid
subscriber growth. Moreover, total subscriber net additions for the
second quarter of 2004 improved by 10.6% over the same quarter in
2003. This overall positive trend was initiated during Q4 2003 with
TELUS' exclusive camera phones and picture messaging service and has
continued with the recent launch of two new BlackBerry(R)(2)
handhelds.
-----------------
(2) BlackBerry is a registered trademark of Research in Motion Limited
Blended postpaid and prepaid churn was relatively flat at 1.32% in the
second quarter of 2004 as compared with the second quarter of 2003.
Churn for the first six months of 2004 was also relatively flat at
1.40% with that for the same period in 2003. Deactivations were
140,800 and 295,000 for the second quarter and first six months of
2004, respectively, as compared with 121,400 and 260,400 for the same
periods last year. These were notable accomplishments in a market
characterized by vigorous competition. These churn and deactivation
results reflect a high level of client satisfaction, which can be
attributed to improved network quality and coverage, excellent client
service levels, client contracts for one to three years as part of
loyalty and retention programs and specific grandfathered rate plans.
- Equipment sales, rental and service revenue increased by 35.5% for the
second quarter and 17.2% for the first six months of 2004 as compared
to the corresponding periods in 2003. Handset revenue increased mainly
due to subscriber growth brought about by a stronger wireless market,
increased promotional, retention and contracting activity, and to a
lesser extent, a shift in product mix to higher price handsets. Gross
subscriber additions grew to 254,500 for the second quarter and
484,800 for the first six months of 2004 as compared to 224,200 and
429,900 for the same periods in 2003. Handset revenues associated with
gross subscriber activations are included in acquisition COA.
- Intersegment revenues represent services provided by the Mobility
segment to the Communications segment and are eliminated upon
consolidation along with the associated expense in
TELUS Communications.
Operations expense - Quarters Six-month periods
Communications segment ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Salaries, benefits
and other employee-
related costs(1) 414.8 415.8 (0.2)% 807.9 818.5 (1.3)%
Other operations
expenses(1) 297.0 298.3 (0.4)% 610.6 635.3 (3.9)%
-------------------------------------------------------------------------
Total operations
expense 711.8 714.1 (0.3)% 1,418.5 1,453.8 (2.4)%
-------------------------------------------------------------------------
(1) Minor corrections to classification between the two expense
categories have been made in each of the reported periods.
Communications segment Operations expense decreased slightly in second
quarter and first six months of 2004, when compared with the same periods
in 2003. Increased expenses including costs associated with a new
partnership and in-sourcing call centre services were more than offset by
Operational Efficiency Program savings and lower Intercarrier facilities,
transit and termination costs. Incremental savings in salaries, benefits
and employee-related overhead costs under the Operational Efficiency
Program (duration from 2001 to 2003) were $15 million and $38 million,
respectively, in the second quarter and the first six months of 2004.
Other Operational Efficiency Program savings of $12 million for the
second quarter and first six months of 2004 included reduced real estate
costs and software licence fees. There were 19,036 full-time equivalent
employees at the end of June 2004 (including 533 staff added for
in-sourcing call centre services in Montreal and a partnership with
Calgary Health Region), as compared to 18,923 full-time equivalent
employees one year earlier. When adjusted for staff at new in-sourcing
and partnership services, full-time equivalent employees decreased by
2.2% from one year earlier.
- Salaries, benefits and employee-related expenses decreased in the
second quarter and first six months of 2004, when compared with the
same periods in 2003, primarily due to Operational Efficiency Program
savings. In addition, pension expense for defined benefit and defined
contribution plans decreased by $6.9 million and $13.2 million,
respectively for the second quarter and first six months, primarily as
a result of increased investment returns in 2003. TELUS'
Communications segment annual pension expense is expected to decrease
by approximately $25.0 million for 2004, when compared with 2003.
These reductions were partly offset by other increases. Additional
costs for the new partnership with the Calgary Health Region and
establishment of the new Montreal call centre were $6.5 million and
$12.8 million, respectively, in the second quarter and first six
months of 2004. These increased costs were partly offset by savings on
outsourcing of approximately $2.0 million and $3.8 million,
respectively, which are included in Other operations expense. Staff
increased by 157 for these two functions since the beginning of 2004.
Non-cash share-based compensation expense recognized commencing
January 1, 2004, as discussed in Accounting policy developments, was
$4.7 million in the second quarter of 2004 and $9.9 million during the
first six months of 2004 ($nil in 2003). Overtime, training and travel
increased by $5.8 million in the second quarter and $16.6 million for
the first six months of 2004, when compared with the same periods in
2003, and was related to activities to maintain high customer service
levels, improve internal processes, emergency operations training, and
an increased focus on leadership training and team development.
Overtime, training and travel decreased by $4.8 million when compared
with the fourth quarter of 2003, when extra effort was expended to
improve customer service and clear backlogs created in the third
quarter of 2003 by a number of natural disasters, staffing and system
conversion issues. All other costs collectively increased in line with
inflation rates.
- Other operations expenses inclusive of $12 million Operational
Efficiency Program savings decreased in the second quarter and first
six months of 2004, when compared with the same periods in 2003,
principally due to: (i) reduced facilities, transit and termination
costs, which decreased by $10.0 million and $27.4 million,
respectively, as a result of lower outbound traffic volumes and lower
rates for U.S. and international traffic termination, as well as
migration of off-net costs to on-net facilities; (ii) lower product
and services cost of sales of $6.4 million and $8.0 million,
respectively, associated with lower equipment sales revenue; and (iii)
lower bad debt expense that decreased by $1.8 million and
$7.0 million, respectively, as a result of stringent enforcement of
credit policy, more effective collection practices and reduced loss
experience. Partially offsetting these lower costs were increased
network support and maintenance costs with third parties of
$5.8 million and $12.4 million, respectively and increased contract
and consulting expenses of $3.2 million and $7.3 million,
respectively, incurred for improvement of internal systems and
processes. Capitalized labour has not significantly changed, while all
other costs collectively increased in line with inflation rates.
Included in the total segment expenses discussed above are Non-ILEC
operations expenses of $144.4 million and $281.9 million, respectively,
for the second quarter and first six months of 2004, as compared with
$144.7 million and $299.9 million, respectively, for the same periods in
2003. This represented decreases of $0.3 million or 0.2% and
$18.0 million or 6.0%, respectively, as a result of asset disposals in
2003. Normalized for asset disposals, Non-ILEC operations expenses
increased by $1.9 million or 1.3% in the second quarter of 2004, and
decreased by $9.6 million or 3.3% in the first six months of 2004, when
compared with the same periods in 2003. Normalized operations expenses
increased in the second quarter of 2004, when compared with the same
period in 2003, due to start-up process costs in support of implementing
major customer contracts, before realizing the full impact of revenues.
Normalized operations expense decreased for the first six months of 2004,
when compared with the same period in 2003, due to lower wholesale
transit and termination costs associated with lower long distance
revenues and the shift away from shorter term revenue streams such as
equipment sales.
Operations expense - Quarters Six-month periods
Mobility segment ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
------------------------------------------------------------------------
Equipment sales
expenses 99.2 89.0 11.5% 188.4 172.8 9.0%
Network operating
expenses 94.4 90.8 4.0% 196.9 176.8 11.4%
Marketing expenses 73.4 65.2 12.6% 134.8 121.1 11.3%
General and
administration
expenses 129.0 121.7 6.0% 265.4 253.5 4.7%
------------------------------------------------------------------------
Total operations
expense 396.0 366.7 8.0% 785.5 724.2 8.5%
------------------------------------------------------------------------
TELUS Mobility operations expense increased in the second quarter and
first six months of 2004, when compared with the same periods last year.
TELUS Mobility has been able to achieve significant economies of scale as
evidenced by the 14.2% growth in subscribers compared to second quarter
Network revenue growth of 18.8%, with only an 8.0% increase in total
operations expense.
- Expenses related to equipment sales increased in the second quarter
and first six months of 2004 when compared with the same periods in
2003, principally due to an increase in gross subscriber activations
and higher retention activity. The increase related in part to
continued marketing promotions including camera phones. Handset costs
associated with gross subscriber activations are included in
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. Transmission and
site-related expenses increased to support the greater number of cell
sites, a larger subscriber base, and improved network quality and
coverage. In addition, Industry Canada spectrum licence fees were
higher in 2004 principally due to a $1.5 million and $6.5 million
credit received in second quarter and first six months of 2003,
respectively as part of a retroactive filing with Industry Canada for
years prior to 2003. Network costs, once normalized for this event,
increased by 2.3% and 7.4% over the same periods last year. Further,
Network roaming costs increased $1.8 million in the second quarter and
$9.5 million for the first six months of 2004 as compared to the same
periods in 2003 largely due to successful marketing efforts in
non-urban roaming/resale areas. TELUS Mobility believes this variable
cost increase is reflective of the overall positive industry trend of
subscriber growth and increased subscriber usage evidenced in the
continued strength of Network revenue growth. Management has focused
efforts on containing network costs through negotiating improved
leased transmission rates, roaming rates and maintenance rates with a
number of telecommunications carriers and key vendors. TELUS Mobility
also continued to build out microwave facilities aimed at reducing
future leased line transmission costs. The digital population coverage
grew by 1.7 million to 29.7 million since June 30, 2003, as a result
of continued activation of digital roaming regions and network
expansion.
- Marketing expenses increased primarily due to higher advertising
expenses and dealer compensation costs associated with the expanded
subscriber base and increased re-contracting activity. Despite the
higher marketing expenses and significant subscriber growth, COA per
gross subscriber addition improved considerably in the second quarter
to $381 and first six months to $382 as compared with $428 and $427
for the same periods last year. Combined with the higher ARPU and
steady churn, COA per gross subscriber addition over the lifetime
revenue of the subscriber continued to improve significantly in the
second quarter and first six months of 2004 as compared with 2003.
- General and administration expenses consist of employee compensation
and benefits, facilities, client services, bad debt and various other
expenses. General and administration expenses increased by only 6.0%
in the second quarter and 4.7% for the first six months of 2004. TELUS
Mobility increased full-time equivalent employees (FTEs) by 9.0% to
5,485 from 5,033 one year earlier to support the significant growth in
the subscriber base and continued expansion of the client care team
and company-owned retail stores, partly offset by a lower bad debt
expense due to reduced loss experience.
Restructuring and
workforce reduction Quarters Six-month periods
costs by segment ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications segment 0.7 3.3 (78.8)% 16.6 9.8 69.4%
Mobility segment - - - - - -
-------------------------------------------------------------------------
TELUS consolidated 0.7 3.3 (78.8)% 16.6 9.8 69.4%
-------------------------------------------------------------------------
Restructuring costs recorded in 2004 were for a departmental
reorganization primarily in the Communications segment information
technology resources area that is consolidating from 15 locations to two
primary locations. This reorganization, which has an estimated
implementation cost in 2004 of $30 million and is planned for completion
in 2004, is expected to enable greater efficiencies of scale and
effectiveness. No future costs are expected to be recorded under the 2001
to 2003 Operational Efficiency Program, but variances from estimates
currently recorded may impact amounts ultimately recorded. Cumulative
annual cost structure reductions in the Communications segment since
inception of the Operational Efficiency Program have increased to
approximately $504 million by June 30, 2004.
Quarters Six-month periods
EBITDA by segment ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications
segment 498.6 515.2 (3.2)% 972.1 1,000.9 (2.9)%
Mobility segment 286.2 201.3 42.2% 534.0 379.9 40.6%
-------------------------------------------------------------------------
TELUS consolidated 784.8 716.5 9.5% 1,506.1 1,380.8 9.1%
-------------------------------------------------------------------------
Quarters Six-month periods
EBITDA margin(1) ended June 30 ended June 30
by segment (%) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications
segment 41.2 41.8 (0.6)pts 40.4 40.6 (0.2)pts
Mobility segment 42.0 35.4 6.6 pts 40.5 34.4 6.1 pts
TELUS consolidated 42.1 40.4 1.7 pts 41.0 39.3 1.7 pts
-------------------------------------------------------------------------
(1) EBITDA divided by total revenue.
Communications segment EBITDA decreased for the second quarter and first
six months of 2004 as compared with the same periods in 2003 primarily
due to lower revenues, partly offset by lower operations expenses.
Significant growth in TELUS Mobility EBITDA and EBITDA margin was
attributed to profitable subscriber growth, a world-class churn rate, and
successful cost containment efforts. The EBITDA margin, when calculated
as a percentage of Network revenue, improved to 45.8% for the second
quarter and 43.8% for the first six months of 2004 as compared with 38.2%
and 37.3% for the same periods in 2003, representing positive increases
of 7.6 and 6.5 percentage points, respectively.
Depreciation and Quarters Six-month periods
amortization ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Depreciation 320.7 322.0 (0.4)% 642.4 640.6 0.3%
Amortization of
intangible assets 86.9 88.1 (1.4)% 175.6 180.6 (2.8)%
-------------------------------------------------------------------------
407.6 410.1 (0.6)% 818.0 821.2 (0.4)%
-------------------------------------------------------------------------
Depreciation and amortization expenses were not significantly changed in
the second quarter and first six months of 2004. Increased depreciation
and amortization for growth in data network and wireless capital assets
was largely matched by lower amortization resulting from certain software
applications becoming fully amortized and from write-offs of software
assets throughout 2003.
Quarters Six-month periods
Other expense ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
2.0 6.6 (69.7)% 3.2 12.2 (73.8)%
-------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense, income
(loss) or impairments in portfolio investments, gains and losses on
disposal of property, and charitable donations. Accounts receivable
securitization expense decreased by $3.9 million to $0.7 million in the
second quarter of 2004 and decreased by $6.3 million to $1.7 million for
the first six months of 2004, when compared with the same periods in
2003. The decrease resulted from a reduction in the amount of securitized
receivables prior to the second quarter of 2004. See Liquidity and
capital resources - Accounts receivable sale. Losses from portfolio
investments decreased by $9.0 million to $0.3 million in the second
quarter of 2004 and decreased by $9.3 million to $1.1 million for the
first six months of 2004, when compared with the same periods in 2003.
Net gains for the disposal of non-core property, including the sale of
land and several buildings, were $2.2 million and $4.3 million,
respectively, in the second quarter and first six months of 2004, as
compared with net gains of $7.6 million in the second quarter and first
six months of 2003. Charitable donations expenses increased to
$3.2 million and $4.6 million, respectively, for the second quarter and
first six months of 2004, as compared to $0.5 million and $1.5 million,
respectively, for the same periods in 2003, as a result of earlier
contributions in 2004.
Quarters Six-month periods
Financing costs ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
156.9 172.0 (8.8)% 301.9 336.3 (10.2)%
-------------------------------------------------------------------------
Financing costs consist of interest expense on long-term and short-term
debt (including interest on convertible debentures and amortization of
debt issue costs), interest income, and foreign exchange gains and
losses. See Note 5 of the interim consolidated financial statements.
Interest on long-term and short-term debt was $167.5 million and
$332.9 million, respectively, for the second quarter and first six months
of 2004 -- decreases of $6.5 million and $15.4 million when compared with
the same periods in 2003. The decrease was primarily a result of repaying
bank facilities, medium-term notes and first mortgage bonds during 2003.
TELUS maintains a hedging program using cross currency swaps, and as a
result, long-term financing costs were generally unaffected by
fluctuations in the value of the Canadian dollar against the U.S. dollar.
Debt, including Long-term debt, Current maturities and the deferred
hedging liability, but excluding cash-on-hand, was $7,581 million at
June 30, 2004, when compared with $7,577 million at December 31, 2003 and
$8,071 million at June 30, 2003. The average debt outstanding in the
first six months of 2004 was $7,573 million, as compared with
$8,217 million in the same period in 2003.
Interest income, which has the effect of reducing Financing costs, was
$10.5 million and $30.3 million, respectively, for the second quarter and
first six months of 2004 - increases of $9.7 million and $19.1 million,
respectively, when compared with the same periods in 2003. Interest
income in both years was recognized primarily as a result of tax refunds
from the settlement of various tax matters dating back to prior years.
Quarters Six-month periods
Income taxes ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
44.9 53.8 (16.5)% 107.5 46.9 129.2%
-------------------------------------------------------------------------
Effective tax rates(%) 20.6 42.1 - 28.1 22.2 -
-------------------------------------------------------------------------
Although income before taxes increased by $90.5 million in the second
quarter of 2004, when compared with the second quarter of 2003, Income
taxes decreased as a result of a $34.2 million tax recovery associated
with tax losses carried back to prior years and the settlement of tax
matters relating to prior years, which had higher tax rates. Similar tax
recoveries were recorded in the first quarter of 2004 and the first six
months of 2003, which significantly reduced the effective tax rates for
those periods. See Note 6 of the interim consolidated financial
statements. The increase in Income taxes for the first six months of
2004, when compared with 2003, was primarily related to the $171.9
million increase in income before taxes, partly offset by lower tax
recoveries in 2004.
Non-controlling Quarters Six-month periods
interest ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
1.1 1.0 10.0% 1.9 1.7 11.8%
-------------------------------------------------------------------------
Non-controlling interest primarily represents partners' interests in
several small subsidiaries.
Preference and Quarters Six-month periods
preferred dividends ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
0.8 0.8 - 1.7 1.7 -
-------------------------------------------------------------------------
No further Preference and preferred dividends will be paid as a result of
the redemption of all of the publicly held TELUS Communications Inc.
Preference and preferred shares by August 3, 2004.
Liquidity and capital resources
-------------------------------
Cash provided by Quarters Six-month periods
operating activities ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
489.0 469.9 4.1% 1,077.1 874.3 23.2%
-------------------------------------------------------------------------
Cash provided by operating activities increased in the second quarter and
first six months of 2004, when compared with the periods in 2003,
principally due to the recovery of income taxes associated with
settlement of tax matters (including interest income), improved operating
profitability, lower payments under restructuring programs, and lower
interest expense, partly offset by an increase in contributions to
defined benefit plans and other working capital changes.
- Cash recovery of income taxes associated with settlement of prior
years' tax matters was $86.0 million ($81.0 million net of tax
installments) in the second quarter of 2004, compared with net tax
installments of $2.7 million in the second quarter of 2003. For the
first six months of 2004, tax recoveries were $197.1 million
($185.6 million net of tax installments), compared with net tax
installments of $3.3 million in the first six months of 2003.
- EBITDA increased by $68.3 million and $125.3 million, respectively, in
the second quarter and first six months of 2004, when compared with
the same periods in 2003, reduced by offsetting investments in related
working capital. Included in EBITDA were non-cash share-based
compensation expenses of $5.9 million and $10.6 million, respectively,
for the second quarter and first six months of 2004.
- Payments under restructuring and workforce reduction initiatives
decreased by $37.9 million and $123.4 million, respectively, in the
second quarter and first six months of 2004, compared with the same
periods in 2003. The decrease is primarily a result of the completion
of the Operational Efficiency Program, which began in 2001 and was
substantially completed by the end of 2003.
- Interest received increased by $6.7 million and $19.9 million
respectively for the second quarter and first six months of 2004, when
compared with the same periods in 2003, primarily from the settlement
of tax matters.
- Interest paid decreased by $5.0 million and $18.2 million respectively
for the second quarter and first six months of 2004, when compared
with the same periods in 2003. The decrease in interest paid resulted
from lower debt balances.
- Employer contributions to employee defined benefit plans increased by
$39.9 million and $50.5 million, respectively, to reflect updated
actuarial valuations and the net acceleration of discretionary
funding. Contributions to defined benefit plans is expected to be
$136.6 million for the full year of 2004, compared with $46.9 million
for the full year of 2003.
- Non-cash working capital included changes in proceeds from securitized
accounts receivable. The Company neither reduced nor increased
proceeds from securitized accounts receivables in the second quarter
of 2004, whereas in the second quarter of 2003, proceeds from
securitized accounts receivable increased by $31.0 million. For the
first six months of 2004, the Company made payments of $150 million to
reduce securitized accounts receivables, compared with a net increase
in securitized accounts receivable of $10.0 million in the same period
in 2003.
Cash used by Quarters Six-month periods
investing activities ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
341.6 286.0 19.4% 640.2 468.6 36.6%
-------------------------------------------------------------------------
Cash used by investing activities increased in the second quarter and
first six months of 2004, when compared with the same periods in 2003,
primarily as a result of increased capital expenditures. The Company
received proceeds of $4.3 million and $16.4 million, respectively, in the
second quarter and first six months of 2004 from the sale of
non-strategic assets, including several properties. Similarly in second
quarter of 2003, the Company disposed of non-strategic properties and
monetized an investment for total proceeds of $19.0 million. In the first
quarter of 2003, the Company received proceeds of $19.3 million from the
sale of an administrative property under the terms of a sale and
leaseback transaction, on which an $8.2 million pre-tax gain was deferred
and is being amortized over the term of the lease.
Capital expenditures
by segment
($ in millions, except Quarters Six-month periods
capital expenditure ended June 30 ended June 30
intensity) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications
segment 267.7 227.4 17.7% 527.1 380.9 38.4%
Mobility segment 78.4 78.1 0.4% 128.7 132.4 (2.8)%
-------------------------------------------------------------------------
TELUS consolidated 346.1 305.5 13.3% 655.8 513.3 27.8%
-------------------------------------------------------------------------
Capital expenditure
intensity(1) (%) 18.6 17.2 1.4 pts 17.9 14.6 3.3 pts
-------------------------------------------------------------------------
(1) Capital intensity is measured by dividing capital expenditures into
operating revenues, expressed as a percentage. This measure provides
a method of comparing the level of capital expenditures to other
companies within the same industry.
- Communications segment Non-ILEC capital expenditures increased by
$9.1 million to $44.1 million in the second quarter of 2004 and
increased by $32.8 million to $86.4 million in the first six months
of 2004, when compared with the same periods in 2003. The increase in
Non-ILEC expenditures was primarily to support the Company's IP
strategy and delivery of services to new customers, which included
several large contracts over the last year.
ILEC capital expenditures increased by $31.2 million to
$223.6 million in the second quarter of 2004 and increased by
$113.5 million to $440.8 million in the first six months of 2004,
when compared with the same periods in 2003. The increase was due to
significant investments in network infrastructure to improve customer
service and network reliability, as well as investments in internal
systems and processes, delivery of services to new customers, and the
development of new services. In addition, 2003 capital spending for
the same periods was constrained by the impact of the Operational
Efficiency Program, which temporarily delayed certain projects.
High-speed Internet (ADSL) network facilities and systems
expenditures increased by $15.3 million to $35.9 million in the
second quarter of 2004 and increased by $31.4 million to
$72.5 million in the first six months of 2004 to support subscriber
growth.
The Communications segment capital expenditure intensity ratios were
approximately 22% in the second quarter and first six months of 2004,
compared with 18.4% and 15.5%, respectively, in the same periods in
2003. Cash flow (EBITDA less capital expenditures) decreased by
$56.9 million to $230.9 million in the second quarter of 2004, when
compared with the same period in 2003. For the first six months of
2004, cash flow decreased by $175.0 million to $445.0 million, when
compared with the same period in 2003, because of the increase in
capital spending, lower revenues, and to a lesser extent, an
increased restructuring charge of $6.8 million. Communication segment
capital expenditures for 2004 are now expected to be approximately
$950 million.
- Mobility segment capital expenditures remained steady in the second
quarter and decreased by 2.8% for the first six months of 2004 when
compared with same periods in 2003. TELUS Mobility continued the
enhancement of digital wireless coverage and continued building
microwave facilities in the second quarter of 2004 aimed at reducing
future leased line transmission costs. Capital spending declined
slightly over last year principally as a result of lower
infrastructure equipment costs, a stronger Canadian dollar, and the
timing of network capital expenditures.
Capital expenditure intensity for TELUS Mobility decreased to 11.5%
in the second quarter of 2004 from 13.8% in the second quarter of
2003, due primarily to significant growth in Network revenues.
Similarly, the capital expenditure intensity was 9.8% for the first
six months of 2004 as compared to 12.0% last year. Although capital
expenditures were generally lower in the first six months of 2004,
Mobility still expects to achieve capital expenditure intensity of
approximately 13% for the full year, consistent with its original
2004 capital expenditure target of approximately $350 million. As a
result of continued strong growth in EBITDA and reduced capital
expenditure intensity, Mobility generated a record cash flow of
$207.8 million or 30.5% of total revenue in the second quarter and
$405.3 million (30.7% of total revenue) for the first six months of
2004 as compared with $123.2 million (21.7% of total revenue) and
$247.5 million (22.4% of total revenue), respectively for the same
periods last year.
Consolidated cash flow (EBITDA less capital expenditures) increased by
$27.7 million to $438.7 million in the second quarter of 2004, when
compared with the same period in 2003, as improved Mobility segment cash
flow more than offset decreased Communications segment cash flow. For the
first six months of 2004, consolidated cash flow decreased by
$17.2 million to $850.3 million due to Communications segment lower
revenues and increased capital expenditures, partly offset by increased
Mobility segment cash flow. Consolidated capital expenditures for 2004
are expected to be approximately $1.3 billion and funded from internally
generated cash flows.
Cash used by Quarters Six-month periods
financing activities ended June 30 ended June 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
63.2 174.4 (63.8)% 85.4 380.1 (77.5)%
-------------------------------------------------------------------------
Cash used by financing activities decreased in the second quarter and
six-month periods ended June 30, 2004, when compared with the same period
in 2003, as a result of the following:
- Common Shares and Non-Voting Shares issued - Proceeds received from
shares issued from Treasury under the employee share purchase plan and
from share-based compensation plans were $16.8 million for the second
quarter of 2004, compared with proceeds of $21.0 million for the
second quarter of 2003 under the same plans. Proceeds received from
shares issued from Treasury under the employee share purchase plan,
from share-based compensation plans and from warrants were
$43.8 million for the first six months of 2004, compared with proceeds
of $41.1 million for the same period in 2003 under the employee share
purchase plan and share-based compensation plans.
- Dividends to shareholders - Cash dividends paid to shareholders for
the second quarter of 2004 increased by $4.5 million to $48.3 million,
when compared with same period in 2003. The increase in cash dividends
arose from a larger number of shares outstanding and a lower enrolment
in dividend reinvestment plans. The 15-cent quarterly dividend paid
per Common Share and Non-Voting Share was unchanged. The approximate
enrolment in dividend reinvestment plans was 13% for the dividend paid
in April 2004 as compared with 21% in April 2003 and 24% in January
2004. Subsequent to June 30, 2004, the enrolment rate for the dividend
paid on July 2, 2004 increased to approximately 19%. Cash dividends
paid to shareholders for the first six months of 2004 increased by
$2.0 million to $90.6 million, when compared with same period in 2003,
primarily due to the larger number of shares outstanding.
- Payments of $35.8 million were made in the second quarter of 2004 for
TELUS Communications Inc. $6.00 Cumulative Preference Shares,
$4.50 Cumulative Redeemable Preferred Shares, $5.75 Cumulative
Redeemable Preferred Shares and $1.21 Cumulative Redeemable Preferred
Shares. After June 30, 2004, the Company redeemed the remaining TELUS
Communications Inc. Preferred shares for a total of $37.0 million, as
follows: on July 15, 2004, TCI $4.75 Cumulative Redeemable Preferred
Shares, TCI $4.75 Cumulative Redeemable Preferred Shares (Series 1956)
and TCI $5.15 Cumulative Redeemable Preferred Shares; and, by August
3, 2004, TCI $6.00 Cumulative Redeemable Preferred Shares and TCI
$4.375 Cumulative Redeemable Preferred Shares.
- Net debt redeemed or issued (Long-term debt issued net of Redemptions
and repayment of long-term debt and Change in short-term obligations) -
Net debt issues were $7.7 million and $0.8 million, respectively, for
the second quarter and first six months of 2004, compared with net
debt redemptions of $148.2 million and $330.8 million, respectively,
for the same periods in 2003. In the first quarter of 2004, the full
outstanding balance of $34.0 million of bank facilities was repaid.
Debt redemptions expected for the remainder of 2004 include:
$189.5 million of TELUS Communications Inc. Series A debentures due
August 24, 2004, $20 million of TELUS Communications Inc. Medium Term
Notes due August 25, 2004 and capital leases.
Outstanding share data
The following is a summary of the outstanding shares for each class of
equity at June 30, 2004 and at July 26, 2004. In addition, for July 26,
2004, the total number of outstanding and issuable shares is presented,
assuming full conversion of convertible debentures, options and warrants.
Class of equity security
Common Non-Voting Total
Shares Shares Shares
outstanding outstanding outstanding
At June 30, 2004
Common equity - Common Shares
outstanding 192,253,334 - 192,253,334
Common equity - Non-Voting
Shares outstanding - 162,423,223 162,423,223
----------- ----------- -----------
192,253,334 162,423,223 354,676,557(1)
----------- ----------- -----------
At July 26, 2004
Common equity - Common Shares
outstanding 192,527,713 - 192,527,713
Common equity - Non-Voting
Shares outstanding - 162,865,395 162,865,395
----------- ----------- -----------
192,527,713 162,865,395 355,393,108
----------- ----------- -----------
Outstanding and issuable
shares(2) at July 26, 2004
Common Shares and Non-Voting
Shares outstanding 192,527,713 162,865,395 355,393,108
TELUS Corporation convertible
debentures - 3,765,819 3,765,819
Options(3) 3,285,114 22,937,011 26,222,125
Warrants - 677,412 677,412
Channel stock incentive plan - 199,125 199,125
----------- ----------- -----------
195,812,827 190,444,762 386,257,589
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share for the
second quarter of 2004, the number of shares outstanding at June 30,
2004 was 360,083,047.
(2) Assuming full conversion and ignoring exercise prices.
(3) Not reduced by any options that may be forfeited or cancelled during
the period July 1, 2004 to July 26, 2004.
Liquidity and capital resource measures
---------------------------------------
June 30, June 30, March 31,
Period ended 2004 2003 Change 2004
-------------------------------------------------------------------------
Components of debt and coverage
ratios
-------------------------------
Net debt(1) ($ millions) 7,223.2 8,054.8 (831.6) 7,297.8
Total capitalization(2) -
book value ($ millions) 13,920.2 14,469.5 (549.3) 13,847.7
EBITDA (excluding restructuring)(3)
(12-month trailing) ($ millions) 2,976.2 2,698.9 277.3 2,910.5
Net interest cost(4)
(12-month trailing) ($ millions) 602.2 673.3 (71.1) 617.3
Debt ratios
-----------
Fixed rate debt as a proportion of
total indebtedness (%) 93.4 94.6 (1.2) 95.4
Average term to maturity of debt
(years) 5.7 6.4 (0.7) 6.0
Net debt to total capitalization (%) 51.9 55.7 (3.8) 52.7
Net debt to EBITDA(5) 2.4 3.0 (0.6) 2.5
Coverage ratios
---------------
Earnings coverage(6) 2.0 0.8 1.2 1.9
EBITDA interest coverage(7) 4.9 4.0 0.9 4.7
Other measures
--------------
Free cash flow(8)
(three-month $ millions) 229.5 65.5 164.0 443.3
Free cash flow
(12-month trailing, $ millions) 1,184.6 378.9 805.7 1,020.6
-------------------------------------------------------------------------
(1) Net debt is defined as Long-term debt plus current maturities of
long-term debt and cheques outstanding less Cash and temporary
investments plus cross currency foreign exchange hedge liability
(less cross currency foreign exchange hedge asset) related to
U.S. dollar notes. The cross currency foreign exchange hedge
liability was $630.6 million at June 30, 2004 (compared with
deferred hedge liabilities of $588.2 million at June 30, 2003 and
$700.0 million at March 31, 2004). Net debt is unaffected by foreign
exchange fluctuations because it includes (deducts) the net deferred
hedging liability (asset). Under TELUS' new credit facilities, a
notional amount related to accounts receivable securitization is no
longer added to the numerator of the Leverage Ratio covenant
calculation. Consistent with the new credit facility calculation,
Net debt for current and prior periods excludes notional accounts
receivable securitization amounts.
(2) Total capitalization is defined as net debt plus Non-controlling
interest and Shareholders' equity.
(3) EBITDA (excluding Restructuring and workforce reduction costs of
$35.1 million, $564.1 million and $37.7 million, respectively, for
the 12-month periods ended June 30, 2004, June 30, 2003, and March
31, 2004). EBITDA (excluding restructuring) is used for the
calculation of Net debt to EBITDA and EBITDA interest coverage,
consistent with the calculation of the Leverage Ratio and the
Coverage Ratio in credit facility covenants.
(4) Net interest cost is defined as Net financing cost before gains on
redemption and repayment of debt, calculated on a 12-month trailing
basis. Gains on redemption and repayment of debt were recorded in
the third and fourth quarters of 2002.
(5) Net debt to EBITDA is defined as net debt as at the end of the
period divided by 12-month trailing EBITDA (excluding
restructuring). This measure is substantially the same as the
Leverage Ratio covenant in TELUS' credit facilities.
(6) Earnings coverage ratio is calculated on a 12-month trailing basis
as Net income before interest expense on total debt and income tax
expense divided by interest expense on total debt.
(7) EBITDA interest coverage is defined as EBITDA (excluding
restructuring) divided by Net interest cost. This measure is
substantially the same as the Coverage Ratio covenant in TELUS' new
credit facilities.
(8) See Note 2 of the Financial highlights table.
-------------------------------------------------------------------------
The balance of Long-term debt and Current maturities of long-term debt
was $6,950.3 million as at June 30, 2004, an increase of $119.4 million
from December 31, 2003. This increase in the debt balance included a
$115.2 million appreciation in the Canadian dollar value of U.S. dollar
denominated Notes as a result of an approximate 3% depreciation of the
Canadian dollar during the first half of 2004. TELUS' U.S. dollar debt is
fully hedged, resulting in a corresponding decrease of $115.2 million
being recorded in the Deferred hedging liability.
While the amount of utilized bank facilities decreased to $nil from
$499 million one year earlier, TELUS converted $500 million of debt from
a fixed rate to a floating rate basis during the first six months of
2004, reducing the proportion of fixed rate debt. The net debt to total
capitalization ratio measured at June 30, 2004 decreased, when compared
with one year earlier, as a result of debt repayments and increased
retained earnings since the second quarter of 2003. The net debt to
EBITDA ratio measured at June 30, 2004 improved significantly, when
compared with one year earlier, as a result of debt reduction and an
increase in 12-month trailing EBITDA (excluding restructuring). The
earnings coverage ratio improved significantly because of the improvement
in income before interest and taxes in 2004. The EBITDA interest coverage
ratio improved as a result of higher EBITDA (excluding restructuring) and
lower net interest costs, including significant interest income.
Free cash flow measures for the three-month and 12-month periods ended
June 30, 2004, increased when compared with one year earlier primarily
because of cash tax recoveries, improved EBITDA, lower payments under
restructuring programs and lower interest payments, partly offset by
increased capital expenditures.
Credit facilities
TELUS' credit facilities at June 30, 2004 consisted of:
- an $800 million (or U.S. Dollar equivalent) revolving credit facility
with a four-year term expiring May 7, 2008 ($nil drawn along with
$102.6 million in outstanding undrawn letters of credit);
- a 364-day facility with $800 million (or U.S. Dollar equivalent) in
available credit on a revolving basis and which is extendible at the
Company's option on a non-revolving basis for one year for any amounts
outstanding on the May 6, 2005 anniversary date ($nil drawn);
- approximately $74 million in other bank facilities ($nil drawn and
approximately $6.4 million in committed and outstanding undrawn
letters of credit).
Additionally, at June 30, 2004, the Company has accepted a fully
underwritten commitment for a $500 million (or U.S. Dollar equivalent)
unsecured bank credit facility for general corporate purposes. This
364-day credit facility, upon documentation, would be available until the
earlier of October 31, 2005, and 364 days after the completion date of
the Company's offers to purchase Microcell, should in fact this event
occur.
At June 30, 2004, TELUS had unutilized available liquidity well in excess
of $1 billion. TELUS' new credit facilities contain customary covenants
including a requirement that TELUS not permit its consolidated Leverage
Ratio (Funded Debt to trailing 12-month EBITDA) to exceed
4.0:1 (approximately 2.4 as at June 30, 2004) and not permit its
consolidated Coverage Ratio (EBITDA to Interest Expense on a trailing
12-month basis) to be less than 2.0:1 (approximately 4.9 as at June 30,
2004) at the end of any financial quarter. There are certain minor
differences in the calculation of the Leverage Ratio and Coverage Ratio
under the credit agreement as compared with the calculation of net debt
to EBITDA and EBITDA interest coverage. The calculations are not expected
to be materially different. The covenants are not impacted by revaluation
of capital assets, intangible assets and goodwill for accounting
purposes, and continued access to TELUS' credit facilities is not
contingent on the maintenance by TELUS of a specific credit rating.
Accounts receivable sale
TELUS Communications Inc., a wholly-owned subsidiary of TELUS, is able to
sell an interest in certain of its receivables up to a maximum of
$650 million and is required to maintain at least a BBB(low) credit
rating by Dominion Bond Rating Service (DBRS), or the purchaser may
require the sale program to be wound down. The necessary credit rating
was exceeded by two levels at BBB(high) as of August 3, 2004. The
proceeds of securitized receivables were $150 million at June 30, 2004,
as compared with $485 million one year earlier and $300 million at
December 31, 2003. Average proceeds from securitization were $212 million
for the first six months of 2004, compared with $464 million in the same
period in 2003. The Company is required to retain a minimum of
$150 million proceeds under this program to keep it active.
Credit ratings
With the May 13, 2004 announcement of TELUS' bid for Microcell, the four
credit rating agencies covering TELUS issued press releases confirming or
placing under review TELUS' investment grade credit ratings. No rating
changes have occurred since March 2, 2004.
- Moody's Investors Services affirmed its 'Baa3' rating for TELUS
Corporation with a stable outlook.
- Fitch Ratings affirmed its 'BBB' ratings with a stable outlook for
senior unsecured debt of TELUS Corporation and TELUS Communications
Inc.
- Dominion Bond Rating Service placed TELUS Corporation and TELUS
Communications Inc. "Under Review with Developing Implications",
indicating that the final rating determination will be made once the
final terms of the Microcell transaction are confirmed.
- Standard & Poor's placed its ratings for TELUS Corporation and TELUS
Communications Inc. on CreditWatch with negative implications. S&P
stated that the CreditWatch reflected uncertainty with respect to the
final terms and conditions of a potential transaction, but that it did
not foresee a situation where the ratings would be lowered by more
than one notch.
Off-balance sheet arrangements and contractual liabilities
----------------------------------------------------------
Financial instruments (Note 3 of the interim consolidated financial
statements)
During the first half of 2004, the Company entered into two series of
hedging relationships to which hedge accounting has been applied: one
series of hedging relationships results in fixing the Company's
compensation cost arising from a specific grant of restricted stock
units, and the other series of hedging relationships results in the
notional conversion of $500 million of the 2006 (Canadian Dollar) Notes
from a fixed interest rate of 7.5% to a floating interest rate based upon
the three-month Bankers' Acceptance Canadian Dollar Offered Rate plus a
spread.
As at June 30, 2004, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rates on
U.S. $35 million of fiscal 2004 purchase commitments; hedge accounting
has been applied to these foreign currency forward contracts, all of
which relate to the Mobility segment.
Fair value: The fair value of the Company's long-term debt, including the
convertible debentures, is estimated based on quoted market prices for
the same or similar issues or on the current rates offered to the Company
for debt of the same maturity as well as the use of discounted future
cash flows using current rates for similar financial instruments subject
to similar risks and maturities. The fair values of the Company's
derivative financial instruments used to manage exposure to interest rate
and currency risks are estimated similarly. The fair value of the
Company's debt at June 30, 2004 was estimated at $8,704 million
($8,699 million at December 31, 2003).
Commitments and contingent liabilities (Note 15 of the interim
consolidated financial statements)
The Company has a number of commitments and contingent liabilities. The
Company has $79.5 million in outstanding commitments for its
restructuring programs as at June 30, 2004. In accordance with CRTC Price
Cap Decisions 2002-34 and 2002-43, the Company defers a portion of
revenues in a deferral account, which at June 30, 2004, was $100 million.
The mechanism for disposing of balance of this deferral account, other
than as already approved by the CRTC, is currently the subject of a CRTC
proceeding, as discussed further in Risks and uncertainties - Regulation.
The Company announced its intention to make unsolicited offers to
purchase for cash all of the publicly traded shares and warrants of
Microcell. The total equity value of the transaction is approximately
$1.1 billion. The Company has bid for, or is negotiating for, certain
sponsorships, including in relation to the 2010 Winter Olympic Games,
that encompass material commitments.
On May 21, 2004, the Canadian Industrial Relations Board declared
TELE-MOBILE COMPANY and TELUS Communications Inc. a single employer for
labour relations purposes. The Canadian Industrial Relations Board also
determined that TELUS Mobility's non-unionized team members,
predominantly located in Ontario and Quebec, performing work similar to
their unionized TELUS Mobility counterparts in Alberta and British
Columbia, should be included in the bargaining unit represented by the
Telecommunications Workers Union. On June 23, 2004, both TELE-MOBILE
COMPANY and TELUS Communications Inc. filed applications with the Federal
Court of Appeal for a stay and a judicial review of the Canadian
Industrial Relations Board Letter Decision 1088. The motion by TCI and
TELUS Mobility for a stay was heard on July 19, 2004, and a stay was
subsequently denied, while clarifying that the communications ban does
not apply to TELUS Mobility. Should the ultimate operational and
financial impacts of the outcome of the Federal Court of Appeal process
differ from management's assessments and assumptions, a material
adjustment to the Company's financial position and the results of its
operations could result.
Canadian GAAP requires the disclosure of certain types of guarantees and
their maximum, undiscounted amounts. The maximum potential payments
represent a "worst-case scenario" and do not necessarily reflect results
expected by the Company. Guarantees requiring disclosure are those
obligations that require payments contingent on specified types of future
events; in the normal course of its operations, the Company enters into
obligations which GAAP may consider to be guarantees. As defined by
Canadian GAAP, guarantees subject to these disclosure guidelines do not
include guarantees that relate to the future performance of the Company.
As at June 30, 2004, the Company has no liability recorded in respect of
performance guarantees, and has recorded a liability of $1.5 million
(December 31, 2003 - $1.5 million) in respect of financial guarantees.
The following table quantifies the maximum undiscounted guarantee amounts
as at June 30, 2004, without regard for the likelihood of having to make
such payment.
Performance Financial
($ millions) guarantees(1) guarantees(1) Total
-------------------------------------------------------------------------
2004 (balance of year) 6.7 3.5 10.2
2005 3.8 3.3 7.1
2006 3.3 2.4 5.7
2007 2.6 1.2 3.8
2008 1.9 0.4 2.3
(1) Annual amounts for performance guarantees and financial guarantees
include the maximum guarantee amounts during any year of the term of
the guarantee.
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. As at June 30, 2004, the Company
has no liability recorded in respect of indemnification obligations.
A number of claims and lawsuits seeking damages and other relief are
pending against the Company. For further discussion, see Risks and
uncertainties - Claims and lawsuits.
Revised Guidance for 2004
-------------------------
Management has revised annual guidance for 2004. The revised guidance
excludes any potential impacts of the acquisition of Microcell.
- Consolidated EBITDA increased by $25 million to reflect improved
expectations for TELUS Mobility. Guidance for Communications segment
EBITDA remains at $1.925 to $1.975 billion; however, Non-ILEC EBITDA
was reduced by $10 million to reflect lower expectations for revenues
due to continued market softness and start-up costs associated with
implementation of major new contracts.
- Earnings per share increased by 20 cents to reflect revised
expectation for consolidated EBITDA and additional income tax
settlements.
- Communications segment capital expenditures, and consolidated capital
expenditures, increased by approximately $75 million due to additional
investments planned for improvements to internal systems and
processes, delivery services to new customers, and development of new
services.
- Free cash flow increased by $20 million for the items quantified in
Note 2 below, while the expectation for Net debt to EBITDA has
improved by 0.2 points as a results of higher EBITDA and higher cash
balances contributing to a lower net debt.
------------------------------------------------
2004 2004 First 2004
revised quarter Original
Revised guidance summary guidance guidance targets
-------------------------------------------------------------------------
Consolidated $7.45 to $7.55
Revenues No change No change billion
-------------------------------------------------------------------------
EBITDA(1) $2.975 to $3.075 $2.95 to $3.05
billion No change billion
-------------------------------------------------------------------------
Earnings per share
- basic $1.30 to $1.50 $1.10 to $1.30 $1.05 to $1.25
-------------------------------------------------------------------------
Capital expenditures Approx. $1.3 Approx. $1.225
billion No change billion
-------------------------------------------------------------------------
Free cash flow(2) $1.15 to $1.25 $1.13 to $1.23
billion No change billion
-------------------------------------------------------------------------
Net debt to EBITDA(3) 2.3 times or 2.5 times or
less No change less
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Communications segment
Revenue (external) No change $4.7 to $4.8 $4.8 to $4.85
billion billion
-------------------------------------------------------------------------
Non-ILEC revenue $525 to $550 $550 to $575 Approx. $610
million million million
-------------------------------------------------------------------------
EBITDA No change $1.925 to $1.975 to
$1.975 billion $2.025 billion
-------------------------------------------------------------------------
Non-ILEC EBITDA $(30) to $(40) $(20) to $(30) Approx. $5
million million million
-------------------------------------------------------------------------
Capital expenditures Approx. $950 Approx. $875
million No change million
-------------------------------------------------------------------------
High-speed Internet net
additions No change No change Approx.
125,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mobility segment
Revenue (external) $2.675 to $2.725 $2.65 to $2.7
billion No change billion
-------------------------------------------------------------------------
EBITDA $1.05 to $1.1 $1.0 to $1.05 $975 million to
billion billion $1.025 billion
-------------------------------------------------------------------------
Capital expenditures No change No change Approx. $350
million
-------------------------------------------------------------------------
Wireless subscriber
net additions No change No change 375,000 to
425,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization as
calculated below. The 2004 target also reflects adoption of CICA
Handbook Section 3870 for share-based compensation and other share-
based payments. The reconciling items below are Management's best
estimates at this time and are not intended to provide guidance for
each individual reconciling item.
($ millions) 2004 revised range 2004 target range
-------------------- --------------------
Operating revenues 7,450 to 7,550 7,450 to 7,550
Less Operations expense 4,445 4,445 4,470 4,470
Less Restructuring and
workforce reduction costs 30 30 30 30
------- ------- ------- -------
EBITDA 2,975 to 3,075 2,950 to 3,050
(2) Defined as EBITDA, adding Restructuring and workforce reduction
costs, cash interest received and excess of share compensation
expense over share compensation payments, subtracting cash interest
paid, cash taxes, capital expenditures, and cash restructuring
payments. The definition of free cash flow was amended for 2004 to
reflect a change in how the Company measures operating performance,
as restructuring payments are anticipated to occur for the
foreseeable future, and the level of dividend payments is set after
consideration of cash flows before dividends are paid out. The
reconciling items below are Management's best estimates at this time
and are not intended to provide guidance for each individual
reconciling item.
($ millions) 2004 revised range 2004 target range
-------------------- --------------------
EBITDA 2,975 to 3,075 2,950 to 3,050
Restructuring and workforce
reduction costs, net of
cash payments (95) (95) (85) (85)
Excess of share
compensation expense
over payments 30 30 35 35
Cash interest paid net of
cash interest received (615) (615) (650) (650)
Income taxes received
(paid) excluding
investment tax credits
received 155 155 105 105
Capital expenditures
(capex) (1,300) (1,300) (1,225) (1,225)
------- ------- ------- -------
Free cash flow 1,150 to 1,250 1,130 to 1,230
(3) Net Debt to EBITDA, where EBITDA excludes Restructuring and workforce
reduction costs. This measure is substantially the same as the
Leverage Ratio covenant in TELUS' credit facilities.
-------------------------------------------------------------------------
5. Risks and uncertainties
The following are updates to the risks and uncertainties described in
TELUS' 2003 Annual Report and 2004 first quarter Management's discussion
and analysis, including filings on SEDAR (www.sedar.com) and filings on
EDGAR (www.sec.gov).
Competition
Increased competition may adversely affect market shares, volumes and
pricing
In June 2004, Manitoba Telecom Services Inc. completed the purchase an
existing national competitor Allstream, affecting the competitive
landscape in Canada, particularly for business local, long distance,
data, and other services. Allstream will potentially be a better-funded
and financially stronger competitor as part of Manitoba Telecom.
Shaw Cable clarified that it was planning to launch VOIP services in
early 2005, delayed from the fall of 2004, and signed agreements with
Bell Canada for wholesale network services in B.C. and Alberta. This
gives Shaw the potential to offer local and long distance services in
Western Canada in addition to entertainment and Internet services already
provided.
Other competitors have already begun to offer VOIP services or have
announced plans to offer VOIP services. Increased competition for TELUS'
local and long distance services is expected and the degree to which
TELUS can expand its own VOIP services will depend on the outcome of the
proceedings under Telecom Public Notice CRTC 2004 2 Regulatory framework
for voice communication services using Internet protocol discussed below.
TELUS continues to test and evaluate broadband entertainment services for
potential introduction in the future.
As a result of CRTC Decisions 2004-34 and 2003-49, TELUS must now provide
high speed Internet to businesses and residences whose service is
provided by local loops leased from TELUS in its ILEC territories by
competitors. Implementing this decision allows TELUS to retain existing
Internet accounts and relationships with customers when they choose to
move their local service, and permits TELUS to extend Internet offers and
promotions to customers that have already moved their local service;
however, losses of local service customers in ILEC areas may be
accelerated.
Human resources
Appeal of CIRB Letter Decision 1004 and Decision 271
TCI has filed an application with the CIRB for reconsideration of its
Letter Decision 1004 and Decision 271 as well as a judicial review
application with the Federal Court of Appeal. The judicial review
application has been stayed until the CIRB renders its reconsideration
decision. Those decisions imposed a communications ban on TCI concerning
communications on matters of employment and collective interest to its
unionized employees and ordered TCI to offer binding arbitration to the
TWU. If TCI is successful in its reconsideration applications before the
CIRB in overturning the binding arbitration order, TCI could resume
collective bargaining with the TWU.
No decision with respect to this application has been rendered. There can
be no assurances that compensation expense will be as planned, or that
reduced productivity or work stoppage disruptions will not occur as a
result of or following this pending application.
CIRB Letter Decision 1088 and Decision 278
On May 21, 2004, in Letter Decision 1088, the CIRB declared that
TELE-MOBILE COMPANY, which operates a national wireless business under
the TELUS Mobility trade name, and TCI were a single employer for labour
relations purposes and that TELUS Mobility's non-unionized team members,
predominantly located in Ontario and Quebec, who perform similar work as
their unionized Mobility segment counterparts, should be included in the
bargaining unit represented by the TWU. An application by TCI and TELUS
Mobility for a stay was heard on July 19, 2004 and a stay was
subsequently denied, while clarifying that the communications ban does
not apply to TELUS Mobility. The judicial review application is scheduled
to be heard by the Federal Court of Appeal in early October 2004. If
TELUS Mobility and TCI are successful in their appeal to quash the CIRB's
decisions, the matter would be referred back to the CIRB for a new
hearing. Accordingly, the operational and financial impacts of the
ultimate outcome of the appeal process cannot be determined at this time.
Regulation - wireline operations
Review and disposition of deferral accounts for the second price cap
period - Telecom Public Notice CRTC 2004-1
On March 24, 2004, the CRTC initiated a public proceeding, inviting
proposals for disposing of the amounts accumulated in the incumbent local
exchange carriers' (ILECs') deferral accounts during the first two years
of the second price cap period (June 2002 through May 2004, except for
TELUS Communications (Quebec) Inc., which is August 2002 through July
2004). The CRTC has already determined that ILECs can recover from their
deferral accounts certain mandated reductions in competitor services
rates, service improvement plan costs, competitive digital network access
discounts, and certain ongoing costs to support local number portability
and local competition capital investments. The scope of the proceeding
will address the remaining balance of the deferral accounts. Proceedings
under this Public Notice are expected to continue through to the autumn
2004 and the Company anticipates that the CRTC will make its
determination on this proceeding prior to the end of 2004. TELUS is
participating in these proceedings.
Regulatory framework for voice communication services using Internet
protocol - Telecom Public Notice CRTC 2004-2
In April 2004, the CRTC initiated a public proceeding and expressed its
preliminary views regarding regulatory requirements for the provision of
voice communication services using Internet protocol, also known as VOIP.
Comments on the CRTC's preliminary views and related matters were filed
by June 18, 2004, followed by an interrogatory process and a public
consultation on September 21-22, 2004. This proceeding is expected to
conclude on October 13, 2004 with the filing of reply comments. TELUS is
participating in this process to present its view that the public policy
environment must allow TELUS to take advantage of the full potential of
VOIP.
The CRTC's preliminary views appeared to divide VOIP service providers
into two groups: ILECs who would be regulated in a manner similar to
existing local service regulation; and others, including cable-TV
companies, who would not be subject to price regulation. Non-regulated
companies, including foreign competitors, would be able to use TELUS' IP
network, while TELUS would be constrained from utilizing its own IP
network to the fullest.
Under the proposed rules, TELUS would face price regulation for VOIP in
its ILEC territories in British Columbia, Alberta and Eastern Quebec, but
not in the rest of Canada. TELUS already provides VOIP services in its
Non-ILEC business market in Quebec and Ontario and expects to launch
business VOIP services in its ILEC territories, subject to regulatory
approval.
Interconnection ruling - CRTC Decision 2004-46
In July 2004, the CRTC modified aspects of the regulatory framework for
the interconnection of local exchange carriers and introduces incremental
changes to the local network interconnection regime established by the
Commission in 1997. Three key respects of the changes are:
- Competitive local exchange carriers ("CLECs") can now interconnect
with an ILEC at a single point of interconnection in a given local
interconnection region. The so-called local interconnection region
will be based on geographic boundaries such as a county or
municipality. Prior to this ruling, CLECs were required to establish a
point of interconnection in each exchange in which they offered local
service.
- CLECs can now terminate long distance traffic to the ILEC at the point
of interconnection, via the same trunks used to exchange local
traffic. Prior to this ruling, only local traffic that both originated
and terminated within a given local exchange could be exchanged by a
CLEC, with the ILEC, and terminating toll traffic had to be routed
over separate trunks.
- Bill-and-keep compensation arrangements (with "mutual compensation"
rates applicable, in instances of traffic imbalance) continue to apply
to traffic exchanged between a CLEC and an ILEC at the point of
interconnection. However, as a result of this ruling, terminating toll
traffic can now be exchanged on a bill-and-keep basis between a CLEC
and the ILEC, at the point of interconnection, in a given local
interconnection region, with imbalance payments where applicable.
The decision allows TELUS to file revised cost studies for new
interconnection rates. The in-region financial impact of changes to the
interconnection regime will ultimately depend on the traffic volumes
under the new arrangements and the interconnection rates ultimately
approved by the Commission. A benefit of the decision is that it will
facilitate network deployment out-of-region for TELUS by allowing more
efficient interconnection arrangements.
Claims and lawsuits
General
A number of claims and lawsuits seeking damages and other relief are
pending against the Company. It is impossible at this time for the
Company to predict with any certainty the outcome of such litigation.
However, management is of the opinion, based upon legal assessment and
information presently available, that it is unlikely that any liability,
to the extent not provided for through insurance or otherwise, would be
material in relation to the Company's consolidated financial position,
excepting the items following.
Pay equity
On December 16, 1994, the Telecommunications Workers Union filed a
complaint against BC TEL, a predecessor of TELUS Communications Inc.,
with the Canadian Human Rights Commission, alleging that wage differences
between unionized male and female employees in British Columbia were
contrary to the equal pay for work of equal value provisions in the
Canadian Human Rights Act. In December 1998, the Canadian Human Rights
Commission advised that it would commence an investigation of the
Telecommunications Workers Union complaint. In February 2003, the
Canadian Human Rights Commission offered to mediate a settlement of the
complaint, but the Company declined the offer. In 2004, the Canadian
Human Rights Commission appointed a conciliator to attempt to bring about
a settlement of the complaint. If the conciliator is unable to settle the
complaint, the Canadian Human Rights Commission may refer the matter to
the Canadian Human Rights Tribunal for a formal hearing. The timing of
the resolution of this matter is not practicably determinable, but
resolution is not imminently expected. Should the ultimate resolution of
the pay equity complaint differ from management's assessment and
assumptions, a material adjustment to the Company's financial position
and the results of its operations could result.
TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan:
TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan: In
January 2002, the Company became aware of two statements of claim filed
in the Alberta Court of Queen's Bench on December 31, 2001, and January
2, 2002, by plaintiffs alleging to be either members or business agents
of the Telecommunications Workers Union. In one action, the three
plaintiffs alleged to be suing on behalf of all current or future
beneficiaries of the TELUS Corporation Pension Plan and in the other
action, the two plaintiffs allege to be suing on behalf of all current or
future beneficiaries of the TELUS Edmonton Pension Plan. The statement of
claim in the TELUS Corporation Pension Plan related action named the
Company, certain of its affiliates and certain present and former
trustees of the TELUS Corporation Pension Plan as defendants, and claims
damages in the sum of $445 million. The statement of claim in the TELUS
Edmonton Pension Plan related action named the Company, certain of its
affiliates and certain individuals who are alleged to be trustees of the
TELUS Edmonton Pension Plan and claims damages in the sum of
$15.5 million. On February 19, 2002, the Company filed statements of
defence to both actions and also filed notices of motion for certain
relief, including an order striking out the actions as representative or
class actions. On May 17, 2002, the statements of claim were amended by
the plaintiffs and include allegations, inter alia, that benefits
provided under the TELUS Corporation Pension Plan and the TELUS Edmonton
Pension Plan are less advantageous than the benefits provided under the
respective former pension plans, contrary to applicable legislation, that
insufficient contributions were made to the plans and contribution
holidays were taken and that the defendants wrongfully used the diverted
funds, and that administration fees and expenses were improperly
deducted. The Company filed statements of defence to the amended
statements of claim on June 3, 2002. An application for an order striking
out the actions as representative or class actions was dismissed on
December 17, 2003. The Company believes that it has good defences to the
actions. Should the ultimate resolution of these actions differ from
management's assessment and assumptions, a material adjustment to the
Company's financial position and the results of its operations could
result.
Microcell acquisition-related risks factors
Approvals under the Competition Act (Canada) and by Industry Canada
TELUS' offers to purchase Microcell are subject to the satisfaction of a
number of conditions, including required approvals from the Competition
Bureau and Industry Canada. Competition Bureau has characterized TELUS'
offers for Microcell as "very complex", which necessitates substantial
assessments and a greater volume of work by the Competition Bureau. There
can be no assurance that the Commissioner of Competition will issue a "no
action" letter, or that Industry Canada will grant relief from spectrum
cap limitations.
Realization of tax, capital and operating synergies
There can be no assurance that the bid will be completed and that future
savings in taxes, capital expenditures and operations expected by
management in connection with the outstanding Microcell acquisition bid
will materialize as planned. Certain Microcell systems and processes
would require integration with existing operations, and these integration
activities could distract the organization and negatively impact customer
service levels. There can be no assurance that the Company will be
successful in migrating subscribers and that subscriber churn rates will
be as expected.
Achievement of long-term leverage targets
The Company believes it has sufficient internally generated cash flow
from operations and access to external resources to fund capital
expenditures, make payments under restructuring programs, make planned
2004 debt repayments, pay dividends, and complete the purchase of
Microcell. TELUS has already achieved its 2004 leverage target of
2.5 times or less for Net Debt to EBITDA. The all-cash nature of TELUS'
bid for Microcell, combined with Microcell's net debt position that would
be assumed if the acquisition bid were successful, would temporarily
reverse the trend of decreasing leverage. There can be no assurance that
future financial market conditions will be favourable, that TELUS will be
able to de-leverage as fast as desired, that debt ratings will remain at
current levels, or that TELUS will be successful in executing its
financing plans at rates, terms and conditions that are reasonable.
_____________________________________________________________________________
TELUS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
______________________________________________________________________________
Consolidated statements of income
Three months Six months
Periods ended June 30 (unaudited) (millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
OPERATING REVENUES $ 1,865.6 $ 1,773.3 $ 3,669.4 $ 3,514.2
---------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,080.1 1,053.5 2,146.7 2,123.6
Restructuring and workforce reduction costs (Note 4) 0.7 3.3 16.6 9.8
Depreciation 320.7 322.0 642.4 640.6
Amortization of intangible assets 86.9 88.1 175.6 180.6
---------------------------------------------------------------------------------------------------------------------------------
1,488.4 1,466.9 2,981.3 2,954.6
---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 377.2 306.4 688.1 559.6
Other expense, net 2.0 6.6 3.2 12.2
Financing costs (Note 5) 156.9 172.0 301.9 336.3
---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 218.3 127.8 383.0 211.1
Income taxes (Note 6) 44.9 53.8 107.5 46.9
Non-controlling interest 1.1 1.0 1.9 1.7
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME 172.3 73.0 273.6 162.5
Preference and preferred share dividends 0.8 0.8 1.7 1.7
---------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE AND NON-VOTING SHARE INCOME $ 171.5 $ 72.2 $ 271.9 $ 160.8
=================================================================================================================================
INCOME PER COMMON SHARE AND NON-VOTING
SHARE ($) (Note 7)
- Basic 0.48 0.21 0.76 0.46
- Diluted 0.48 0.21 0.76 0.46
DIVIDENDS DECLARED PER COMMON SHARE AND
NON-VOTING SHARE ($) 0.15 0.15 0.30 0.30
TOTAL WEIGHTED AVERAGE COMMON SHARES AND
NON-VOTING SHARES OUTSTANDING (millions)
- Basic 354.3 348.6 353.7 347.7
- Diluted 360.1 350.8 356.0 349.4
The accompanying notes are an integral part of these interim consolidated
financial statements
Consolidated statements of retained earnings
Six months
Periods ended June 30 (unaudited) (millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 741.7 $ 630.4
Transitional amount for share-based compensation arising from share options (Note 2(a)) (25.1) -
---------------------------------------------------------------------------------------------------------------------------------
Adjusted opening balance 716.6 630.4
Net income 273.6 162.5
---------------------------------------------------------------------------------------------------------------------------------
990.2 792.9
Less: Common Share and Non-Voting Share dividends paid, or payable, in cash 93.1 83.5
Common Share and Non-Voting Share dividends reinvested, or to be reinvested,
in shares issued from Treasury 13.3 20.8
Preference and preferred share dividends 1.7 1.7
Redemption premium on preference and preferred shares in excess of amount chargeable
to contributed surplus (Note 14(c)) 2.3 -
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD (Note 14) $ 879.8 $ 686.9
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements
Consolidated balance sheets
As at As at
June 30, December 31,
(unaudited) (millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
ASSETS
Current Assets
Cash and temporary investments, net $ 357.7 $ 6.2
Accounts receivable (Notes 9, 16(b)) 800.2 723.8
Income and other taxes receivable 94.9 187.4
Inventories 96.7 123.5
Prepaid expenses and other (Note 16(b)) 262.0 172.4
Current portion of future income taxes 324.7 304.0
---------------------------------------------------------------------------------------------------------------------------------
1,936.2 1,517.3
---------------------------------------------------------------------------------------------------------------------------------
Capital Assets, Net (Note 10)
Property, plant, equipment and other 7,674.8 7,764.3
Intangible assets subject to amortization 762.9 844.7
Intangible assets with indefinite lives 2,954.6 2,954.6
---------------------------------------------------------------------------------------------------------------------------------
11,392.3 11,563.6
---------------------------------------------------------------------------------------------------------------------------------
Other Assets
Deferred charges (Note 11) 689.5 610.7
Future income taxes 411.7 626.0
Investments 41.9 41.9
Goodwill 3,117.7 3,118.0
---------------------------------------------------------------------------------------------------------------------------------
4,260.8 4,396.6
---------------------------------------------------------------------------------------------------------------------------------
$17,589.3 $17,477.5
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities (Note 16(b)) $ 1,224.2 $ 1,294.5
Restructuring and workforce reduction accounts payable and accrued liabilities (Note 4) 79.5 141.0
Dividends payable 54.0 53.5
Preference and preferred shares and accrual for redemption thereof (Note 14(c)) 37.0 -
Advance billings and customer deposits (Note 16(b)) 467.8 445.0
Current maturities of long-term debt (Note 12) 213.8 221.1
---------------------------------------------------------------------------------------------------------------------------------
2,076.3 2,155.1
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (Note 12) 6,736.5 6,609.8
---------------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities (Note 13) 1,076.3 1,173.7
---------------------------------------------------------------------------------------------------------------------------------
Future Income Taxes 1,003.2 1,007.0
---------------------------------------------------------------------------------------------------------------------------------
Non-Controlling Interest 10.5 10.7
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Note 14)
Convertible debentures conversion option 8.8 8.8
Preference and preferred shares (Note 14(c)) - 69.7
Common equity 6,677.7 6,442.7
---------------------------------------------------------------------------------------------------------------------------------
6,686.5 6,521.2
---------------------------------------------------------------------------------------------------------------------------------
$17,589.3 $17,477.5
=================================================================================================================================
Commitments and Contingent Liabilities (Note 15)
The accompanying notes are an integral part of these interim consolidated
financial statements
Consolidated statements of cash flows
Three months Six months
Periods ended June 30 (unaudited) (millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
OPERATING ACTIVITIES
Net income $ 172.3 $ 73.0 $ 273.6 $ 162.5
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 407.6 410.1 818.0 821.2
Future income taxes 98.7 59.3 190.5 253.2
Share-based compensation 5.9 - 10.6 -
Net employee defined benefit plans expense 4.9 13.2 9.8 26.3
Employer contributions to employee defined
benefit plans (57.9) (18.0) (86.5) (36.0)
Restructuring and workforce reduction costs,
net of cash payments (Note 4) (9.0) (44.3) (61.5) (191.7)
Other, net 11.5 28.0 17.6 34.9
Net change in non-cash working capital
(Note 16(c)) (145.0) (51.7) (95.0) (196.1)
---------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 489.0 469.6 1,077.1 874.3
---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (Note 10) (346.1) (305.5) (655.8) (513.3)
Proceeds from the sale of property and other assets 4.3 19.0 16.4 38.3
Other 0.2 0.5 (0.8) 6.4
---------------------------------------------------------------------------------------------------------------------------------
Cash used by investing activities (341.6) (286.0) (640.2) (468.6)
---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 16.8 21.0 43.8 41.1
Dividends to shareholders (48.3) (43.8) (90.6) (88.6)
Payment for redemption of preference and preferred
shares (Note 14(c)) (35.8) - (35.8) -
Long-term debt issued (Note 12) 10.5 291.9 37.8 309.4
Redemptions and repayment of long-term debt (Note 12) (2.8) (440.1) (37.0) (640.2)
Other (3.6) (3.4) (3.6) (1.8)
---------------------------------------------------------------------------------------------------------------------------------
Cash used by financing activities (63.2) (174.4) (85.4) (380.1)
---------------------------------------------------------------------------------------------------------------------------------
CASH POSITION
Increase in cash and temporary investments, net 84.2 9.2 351.5 25.6
Cash and temporary investments, net, beginning
of period 273.5 7.4 6.2 (9.0)
---------------------------------------------------------------------------------------------------------------------------------
Cash and temporary investments, net, end of period $ 357.7 $ 16.6 $ 357.7 $ 16.6
=================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Interest paid $ 293.8 $ 298.8 $ 316.6 $ 334.8
=================================================================================================================================
Interest received $ 7.0 $ 0.3 $ 21.2 $ 1.3
=================================================================================================================================
Income taxes (inclusive of Investment Tax Credits
(Note 6)) received (paid) $ 81.0 $ (2.7) $ 185.6 $ (3.3)
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements
Notes to interim consolidated financial statements
JUNE 30, 2004 (unaudited)
TELUS Corporation is one of Canada's largest telecommunications companies,
providing a full range of telecommunications products and services. The Company
is the largest incumbent telecommunications service provider in Western Canada
and provides data, Internet Protocol, voice and wireless services to Central
and Eastern Canada.
1. Interim Financial Statements
The notes presented in these interim consolidated financial statements include
only significant events and transactions and are not fully inclusive of all
matters normally disclosed in TELUS Corporation's annual audited financial
statements. As a result, these interim consolidated financial statements should
be read in conjunction with the TELUS Corporation audited consolidated
financial statements for the year ended December 31, 2003. These interim
consolidated financial statements follow the same accounting policies, other
than as set out in Note 2 to these interim consolidated financial statements,
and methods of their application as set out in the TELUS Corporation
consolidated financial statements for the year ended December 31, 2003,
including that certain of the comparative amounts have been reclassified to
conform with the presentation adopted currently.
The term "Company" is used to mean TELUS Corporation and, where the context of
the narrative permits or requires, its subsidiaries.
2. Accounting Policy Developments
(a) Share-Based Compensation
Commencing with the Company's 2004 fiscal year, the amended recommendations of
the Canadian Institute of Chartered Accountants ("CICA") for accounting for
share-based compensation (such amendments arising in 2003) (CICA Handbook
Section 3870) apply to the Company. The amendments result in the Company no
longer being able to use the intrinsic method of accounting for share options
granted to employees for purposes of Canadian Generally Accepted Accounting
Principles. The Company has selected the retroactive application without
restatement method (also referred to as the modified-prospective transition
method). The retroactive application without restatement method results in no
share option expense being recognized in the Consolidated Statements of Income
in fiscal years prior to 2004 (see Note 8(a)). The share option expense that is
recognized in fiscal years subsequent to 2003 will be in respect of share
options granted after 2001 and vesting in fiscal periods subsequent to 2003.
To reflect the fair value of options granted subsequent to 2001, and vesting
prior to 2004, certain components of common equity in the December 31, 2003,
Consolidated Balance Sheet balances would have been restated as follows (had
restatement occurred):
Cumulative transition
December 31, adjustment for share-
2003, as based compensation
previously arising from share January 1,
(millions) reported options 2004
---------------------------------------------------------------------------------------------------------------------------------
Common equity
Common shares $ 2,349.1 $ - $ 2,349.1
Non-voting shares 3,296.6 0.4 3,297.0
Options and warrants 51.5 - 51.5
Accrual for shares issuable under channel
stock incentive plan 0.6 - 0.6
Cumulative foreign currency translation adjustment (2.7) - (2.7)
Retained earnings 741.7 (25.1) 716.6
Contributed surplus 5.9 24.7 30.6
---------------------------------------------------------------------------------------------------------------------------------
$ 6,442.7 $ - $ 6,442.7
=================================================================================================================================
(b) Equity Settled Obligations
Commencing with the Company's 2004 fiscal year, the Company early adopted the
amended recommendations of the CICA for the presentation and disclosures of
financial instruments (CICA Handbook Section 3860) specifically concerning the
classification of obligations that an issuer can settle with its own equity
instruments (such amendments arising in 2003). The amendments result in the
Company's convertible debentures being classified as a liability on the
Consolidated Balance Sheets and the associated interest expense correspondingly
being classified with financing costs on the Consolidated Statements of Income.
The conversion option embedded in the convertible debentures continues to be
presented as a component of shareholders' equity. As required, these amended
recommendations have been applied retroactively.
To reflect the reclassification of the convertible debentures as a liability,
certain items of the Consolidated Income Statement for the three-month and
six-month periods ended June 30, 2003, have been restated as follows:
Periods ended June 30, 2003 Three months Six months
------------------------------------------------------------------------------- --------------------------------------------
Adjustment to Adjustment to
As reflect convertible As As reflect convertible As
previously debentures as a currently previously debentures as a reported
(millions except per share amounts) reported liability reported reported liability currently
---------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 1,773.3 $ - $ 1,773.3 $ 3,514.2 $ - $ 3,514.2
Operating expenses 1,466.9 - 1,466.9 2,954.6 - 2,954.6
---------------------------------------------------------------------------------------------------------------------------------
Operating income 306.4 - 306.4 559.6 - 559.6
Other expense, net 6.6 - 6.6 12.2 - 12.2
Financing costs 169.1 2.9 172.0 330.7 5.6 336.3
---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and non-
controlling interest 130.7 (2.9) 127.8 216.7 (5.6) 211.1
Income taxes (recovery) 54.9 (1.1) 53.8 49.0 (2.1) 46.9
Non-controlling interest 1.0 - 1.0 1.7 - 1.7
Net income 74.8 (1.8) 73.0 166.0 (3.5) 162.5
Preference and preferred share
dividends 0.8 - 0.8 1.7 - 1.7
Interest on convertible debentures,
net of income taxes 1.8 (1.8) - 3.5 (3.5) -
---------------------------------------------------------------------------------------------------------------------------------
Common Share and Non-Voting Share
income $ 72.2 $ - $ 72.2 $ 160.8 $ - $ 160.8
=================================================================================================================================
Income per Common Share and
Non-Voting Share
- Basic $ 0.21 $ - $ 0.21 $ 0.46 $ - $ 0.46
- Diluted $ 0.21 $ - $ 0.21 $ 0.46 $ - $ 0.46
To reflect the reclassification of the convertible debentures as a liability,
certain line items of the December 31, 2003, Consolidated Balance Sheet
balances have been restated as follows:
December 31, Adjustment to December 31,
2003, as reflect convertible 2003, as
previously debentures as a currently
(millions) reported liability reported
---------------------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 1,294.1 $ 0.4 $ 1,294.5
Long-Term Debt $ 6,469.4 $ 140.4 $ 6,609.8
Shareholders' Equity
Convertible debentures conversion option $ - $ 8.8 $ 8.8
Convertible debentures $ 149.6 $ (149.6) $ -
---------------------------------------------------------------------------------------------------------------------------------
3. Financial Instruments
During the first half of 2004, the Company entered into two series of hedging
relationships to which hedge accounting has been applied: one series of hedging
relationships results in fixing the Company's compensation cost arising from a
specific grant of restricted stock units (see Note 8(b)) and the other series
of hedging relationships results in the notional conversion of $500 million of
the 2006 (Canadian Dollar) Notes from a fixed interest rate of 7.5% to a
floating interest rate based upon the three-month Bankers' Acceptance Canadian
Dollar Offered Rate plus a spread.
As at June 30, 2004, the Company had entered into foreign currency forward
contracts that have the effect of fixing the exchange rates on U.S.$35 million
of fiscal 2004 purchase commitments; hedge accounting has been applied to these
foreign currency forward contracts, all of which relate to the Mobility
segment.
Fair value: The fair value of the Company's long-term debt, including the
convertible debentures, is estimated based on quoted market prices for the same
or similar issues or on the current rates offered to the Company for debt of
the same maturity as well as the use of discounted future cash flows using
current rates for similar financial instruments subject to similar risks and
maturities. The fair values of the Company's derivative financial instruments
used to manage exposure to interest rate and currency risks are estimated
similarly.
As at June 30, 2004 As at December 31, 2003
---------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(millions) amount value amount value
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
Long-term debt(1) (Note 12) $ 6,959.1 $ 7,934.7 $ 6,839.7 $ 7,840.2
Derivative financial instruments(2) used to manage
interest rate and currency risks associated with
U.S. dollar denominated debt (Note 13) 625.3 763.6 739.6 858.6
Derivative financial instruments(2) used to manage
interest rate risk associated with Canadian dollar
denominated debt - 6.0 - -
---------------------------------------------------------------------------------------------------------------------------------
$ 7,584.4 $ 8,704.3 $ 7,579.3 $ 8,698.8
=================================================================================================================================
Derivative financial instruments(2) used to manage
currency risks arising from U.S. dollar denominated
purchases $ - $ (0.5) $ - $ 0.1
=================================================================================================================================
Derivative financial instruments(2) used to manage
changes in compensation costs arising from
restricted stock units (Note 8(b)) $ 0.3 $ 2.8 $ - $ -
=================================================================================================================================
(1) Carrying amount of long-term debt, for purposes of this table, includes the
carrying amount of the convertible debenture conversion option.
(2) Notional amount of all derivative financial instruments outstanding is
$5,362.9 (December 31, 2003 - $4,822.9).
4. Restructuring and Workforce Reduction Costs
(a) Overview
Three-month periods ended June 30
(millions) 2004 2003
------------------------------------------------------------------------------------------------------- ----------------------
Operational Operational
2004 Efficiency Program Efficiency Program
Initiatives(b) (2001- 2003)(c) Total (2001- 2003) (c)
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction costs
Workforce reduction
Voluntary $ - $ - $ - $ -
Involuntary 0.2 - 0.2 -
Lease termination - - - -
Other 0.3 0.2 0.5 3.3
---------------------------------------------------------------------------------------------------------------------------------
0.5 0.2 0.7 3.3
---------------------------------------------------------------------------------------------------------------------------------
Disbursements
Workforce reduction
Voluntary (Early Retirement Incentive Plan,
Voluntary Departure Incentive Plan and other) - 0.1 0.1 27.9
Involuntary and other 3.7 4.6 8.3 13.7
Lease termination - 1.1 1.1 2.0
Other - 0.2 0.2 4.0
---------------------------------------------------------------------------------------------------------------------------------
3.7 6.0 9.7 47.6
---------------------------------------------------------------------------------------------------------------------------------
Expenses greater than (less than) disbursements (3.2) (5.8) (9.0) (44.3)
Restructuring and workforce reduction accounts
payable and accrued liabilities, beginning of period 14.4 74.1 88.5 253.0
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction accounts
payable and accrued liabilities, end of period $ 11.2 $ 68.3 $ 79.5 $ 208.7
=================================================================================================================================
Six-month periods ended June 30
(millions) 2004 2003
--------------------------------------------------------------------------------------------------------- -------------------
Operational Operational
2004 Efficiency Program Efficiency Program
Initiatives(b) (2001- 2003)(c) Total (2001- 2003) (c)
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction costs
Workforce reduction
Voluntary $ - $ - $ - $ -
Involuntary 15.9 - 15.9 -
Lease termination - - - 3.4
Other 0.3 0.4 0.7 6.4
---------------------------------------------------------------------------------------------------------------------------------
16.2 0.4 16.6 9.8
---------------------------------------------------------------------------------------------------------------------------------
Disbursements
Workforce reduction
Voluntary (Early Retirement Incentive Plan,
Voluntary Departure Incentive Plan and other) - 46.6 46.6 126.2
Involuntary and other 5.0 23.3 28.3 63.1
Lease termination - 2.2 2.2 3.6
Other - 1.0 1.0 8.6
---------------------------------------------------------------------------------------------------------------------------------
5.0 73.1 78.1 201.5
---------------------------------------------------------------------------------------------------------------------------------
Expenses greater than (less than) disbursements 11.2 (72.7) (61.5) (191.7)
Restructuring and workforce reduction accounts payable
and accrued liabilities, beginning of period - 141.0 141.0 400.4
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction accounts
payable and accrued liabilities, end of period $ 11.2 $ 68.3 $ 79.5 $ 208.7
=================================================================================================================================
(b) 2004 Initiatives
In the first quarter of 2004, a departmental reorganization was initiated,
primarily in the Communications segment information technology resources area,
consolidating from 15 locations to 2 primary locations. This reorganization,
which has an estimated implementation cost in 2004 of $30 million and is
planned for completion in 2004, is expected to enable greater efficiencies of
scale.
(c) Operational Efficiency Program (2001-2003)
In 2001, the Company initiated the phased Operational Efficiency Program aimed
at improving the Company's operating and capital productivity and
competitiveness. The first phase of the Operational Efficiency Program was to
complete merger-related restructuring activities in TELUS Mobility and the
reorganization for TELUS Communications. The second phase of the Operational
Efficiency Program, which commenced at the beginning of 2002, continued to
focus on reducing staff, but also entailed a comprehensive review of
enterprise-wide processes to identify capital and operational efficiency
opportunities. The third phase of the Operational Efficiency Program, which
commenced in the third quarter of 2002, was focused on operationalizing the
initiatives identified during the second phase review and included:
streamlining of business processes; reducing the TELUS product portfolio and
processes that support them; optimizing the use of real estate, networks and
other assets; improving customer order management; reducing the scope of
corporate support functions; consolidating operational and administrative
functions; and consolidating customer contact centres.
As at June 30, 2004, no future costs remain to be recorded under the
Operational Efficiency Program, but variances from estimates currently recorded
may be recorded in subsequent periods.
5. Financing Costs
Periods ended June 30 Three months Six months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
Interest on long-term debt $ 162.9 $ 170.6 $ 326.5 $ 343.9
Interest on short-term obligations and other 4.6 3.4 6.4 4.4
Foreign exchange(1) (0.1) (1.2) (0.7) (0.8)
---------------------------------------------------------------------------------------------------------------------------------
167.4 172.8 332.2 347.5
Interest income, including interest on tax refunds (10.5) (0.8) (30.3) (11.2)
---------------------------------------------------------------------------------------------------------------------------------
$ 156.9 $ 172.0 $ 301.9 $ 336.3
=================================================================================================================================
(1) For the three-month and six-month periods ended June 30, 2004, these
amounts include gains (losses) of $(0.4) (2003 - $0.3) and $(0.7)
(2003 - $0.6), respectively, in respect of hedge ineffectiveness.
6. Income Taxes
Periods ended June 30 Three months Six months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
Current $ (53.8) $ (5.5) $ (83.0) $ (206.3)
Future 98.7 59.3 190.5 253.2
---------------------------------------------------------------------------------------------------------------------------------
$ 44.9 $ 53.8 $ 107.5 $ 46.9
=================================================================================================================================
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) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
Basic blended federal and provincial tax at
statutory income tax rates $ 75.8 34.7% $ 47.3 37.0%
Tax rate differential on settlement of prior
year tax issues (34.2) (2.7)
Share option compensation 1.5 -
Other (2.0) 4.2
---------------------------------------------------------------------------------------------------------------------------------
41.1 18.8% 48.8 38.2%
Large corporations tax 3.8 5.0
---------------------------------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated Statements
of Income $ 44.9 20.6% $ 53.8 42.1%
=================================================================================================================================
Six-month periods ended June 30 ($ in millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
Basic blended federal and provincial tax at
statutory income tax rates $ 132.9 34.7% $ 78.1 37.0%
Tax rate differential on settlement of prior
year tax issues (35.8) (49.7)
Share option compensation 3.4 -
Other (2.1) 7.7
---------------------------------------------------------------------------------------------------------------------------------
98.4 25.7% 36.1 17.1%
Large corporations tax 9.1 10.8
---------------------------------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated Statements
of Income $ 107.5 28.1% $ 46.9 22.2%
=================================================================================================================================
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, 2004, the Company recorded Investment Tax Credits of NIL (2003 - NIL)
and $0.5 million (2003 - $1.2 million), respectively, of which NIL (2003 - NIL)
and $0.5 million (2003 - $1.0 million), respectively, was recorded as a
reduction of "Operations expense" and the balance was recorded as a reduction
of capital expenditures.
7. Per Share Amounts
Basic income per Common Share and Non-Voting Share is calculated by dividing
Common Share and Non-Voting Share income by the total weighted average Common
Shares and Non-Voting Shares outstanding during the period. Diluted income per
Common Share and Non-Voting Share is calculated to give effect to share options
and warrants and shares issuable on conversion of debentures.
The following tables present the reconciliations of the numerators and
denominators of the basic and diluted per share computations.
Periods ended June 30 Three months Six months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
Net income $ 172.3 $ 73.0 $ 273.6 $ 162.5
Deduct:
Preference and preferred share dividends 0.8 0.8 1.7 1.7
Redemption premium on preference and
preferred shares in excess of amount
chargeable to contributed surplus (Note 14(c)) - - 2.3 -
---------------------------------------------------------------------------------------------------------------------------------
Basic Common Share and Non-Voting Share income 171.5 72.2 269.6 160.8
Add: Interest charges applicable to convertible
debentures, net of income tax effects 1.8 - - -
---------------------------------------------------------------------------------------------------------------------------------
Diluted Common Share and Non-Voting Share income $ 173.3 $ 72.2 $ 269.6 $ 160.8
=================================================================================================================================
Periods ended June 30 Three months Six months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Basic total weighted average Common Shares and
Non-Voting Shares outstanding 354.3 348.6 353.7 347.7
Effect of dilutive securities
Exercise of share options and warrants 2.0 2.2 2.3 1.7
Exercise of convertible debentures conversion option 3.8 - - -
---------------------------------------------------------------------------------------------------------------------------------
Diluted total weighted average Common Shares and
Non-Voting Shares outstanding 360.1 350.8 356.0 349.4
=================================================================================================================================
For the three-month and six-month periods ended June 30, 2004, certain
outstanding share options, in the amount of 18.9 million (2003 - 16.2 million)
and 18.6 million (2003 - 16.5 million), respectively, were not included in the
computation of diluted income per Common Share and Non-Voting Share because the
share options' exercise prices were greater than the average market price of
the Common Shares and Non-Voting Shares during the reported periods.
Convertible debentures, which were convertible into 3.8 million shares, were
not included in the computation of diluted income per Common Share and
Non-Voting Share, excepting the computation for the three-month period ended
June 30, 2004, as they were antidilutive.
8. Share-Based Compensation
(a) Share Options
Effective January 1, 2004, for purposes of Canadian Generally Accepted
Accounting Principles, the Company applies the fair value based method of
accounting for share-based compensation awards granted to employees. As the
Company has selected the retroactive application without restatement method
(see Note 2(a)), it must disclose the impact on net income and net income per
Common Share and Non-Voting Share as if the fair value based method of
accounting for the share-based compensation had been applied in the comparative
period.
Periods ended June 30 Three months Six months
(millions except per share amounts) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
Net income
As reported $ 172.3 $ 73.0 $ 273.6 $ 162.5
Add: Share-based compensation arising from
share options included in reported net income 4.4 - 9.8 -
Deduct: Share-based compensation arising from
share options determined under the fair value
based method for all awards (4.4) (4.9) (9.8) (9.0)
---------------------------------------------------------------------------------------------------------------------------------
Pro forma $ 172.3 $ 68.1 $ 273.6 $ 153.5
=================================================================================================================================
Net income per Common Share and Non-Voting Share
Basic
As reported (using fair value method) $ 0.48 N/A(2) $ 0.76 N/A(2)
As reported (using intrinsic value method) N/A(1)(2) $ 0.21 N/A(1)(2) $ 0.46
Pro forma (using fair value method) $ 0.48 $ 0.19 $ 0.76 $ 0.44
Diluted
As reported (using fair value method) $ 0.48 N/A(2) $ 0.76 N/A(2)
As reported (using intrinsic value method) N/A(1)(2) $ 0.21 N/A(1)(2) $ 0.46
Pro forma (using fair value method) $ 0.48 $ 0.19 $ 0.76 $ 0.44
(1) For the three-month and six-month periods ended June 30, 2004, the per
share amount of share-based compensation arising from share options determined
under the fair value based method for all awards per Common Share and
Non-Voting Share would be $0.01 basic and diluted and $0.03 basic and diluted,
respectively.
(2) N/A - Net income per Common Share and Non-Voting Share have not been
presented using the method indicated in the period indicated.
As only share options granted after 2001 are included, these disclosures are
not likely to be representative of the effects on reported net income for
future years. These disclosures reflect weighted average fair values of $6.77
(2003 - $5.44) and $7.74 (2003 - $4.31) for options granted in the three-month
and six-month periods ended June 30, 2004, respectively. Share options
typically vest over a three-year period and the vesting method of options,
which is determined at the date of grant, may be either cliff or graded. The
fair value of each option granted is estimated at the time of grant using the
Black-Scholes model with weighted average assumptions for grants as follows:
Periods ended June 30 Three months Six months
2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Risk free interest rate 3.9% 4.7% 3.8% 5.0%
Expected lives (years) 4.5 4.5 4.5 4.5
Expected volatility 40.0% 40.0% 40.0% 40.0%
Dividend yield 2.7% 3.3% 2.4% 4.0%
---------------------------------------------------------------------------------------------------------------------------------
(b) Other Share-Based Compensation
The Company uses restricted stock units as a form of incentive compensation.
Each restricted stock unit is equal in value to one Non-Voting Share and the
dividends that would have arisen thereon had it been an issued and outstanding
Non-Voting Share are recorded as additional restricted stock units during the
life of the restricted stock unit. The restricted stock units become payable as
they vest over their lives (typically the vesting period is 33 months and the
vesting method, which is determined at the date of grant, may be either cliff
or graded). Reflected in the Consolidated Statements of Income as "Operations
expense" for the three-month and six-month periods ended June 30, 2004, is
compensation expense (recovery) arising from restricted stock units of $1.5
million (2003 - $(0.2 million)) and $2.6 million (2003 - $(0.2 million)),
respectively.
The following table presents a summary of the activity related to the Company's
restricted stock units for the three-month and six-month periods ended June 30,
2004.
Periods ended June 30, 2004 Three months Six months
---------------------------------------------------------------------------------------------------------------------------------
Number of Number of
restricted Weighted restricted Weighted
stock units average price stock units average price
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 1,091,053 316,630
Issued
Initial allocation 11,350 $ 21.80 851,449 $ 24.09
In lieu of dividends 7,532 21.34 15,020 21.84
Exercised - - (73,164) 24.26
Forfeited and cancelled (19,227) 24.79 (19,227) 24.79
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 1,090,708 1,090,708
=================================================================================================================================
With respect to restricted stock units issued in the first quarter of 2004, the
Company entered into a cash-settled equity forward agreement that fixes the
cost to the Company at $26.61 per restricted stock unit in respect of 652,550
restricted stock units.
9. Accounts Receivable
On July 26, 2002, TELUS Communications Inc., a wholly-owned subsidiary of
TELUS, entered into an agreement (the "2002 Securitization"), which was amended
September 30, 2002, with an arm's-length securitization trust under which TELUS
Communications Inc. is able to sell an interest in certain of its trade
receivables up to a maximum of $650 million. As a result of selling the
interest in certain of the trade receivables on a fully-serviced basis, a
servicing liability is recognized on the date of sale and is, in turn,
amortized to earnings over the expected life of the trade receivables. This
"revolving-period" securitization agreement has an initial term ending July 18,
2007. TELUS Communications Inc. is required to maintain at least a BBB (low)
credit rating by Dominion Bond Rating Service or the securitization trust may
require the sale program to be wound down prior to the end of the initial term;
at June 30, 2004, the rating was BBB (high).
As at As at
June 30, December 31,
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Total managed portfolio $ 955.9 $ 1,036.9
Securitized receivables (182.6) (369.5)
Retained interest in receivables sold 26.9 56.4
---------------------------------------------------------------------------------------------------------------------------------
Receivables held $ 800.2 $ 723.8
=================================================================================================================================
For the three-month and six-month periods ended June 30, 2004, the Company
recognized losses of $0.4 million (2003 - $1.8 million) and $0.2 million (2003
- $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 Three months Six months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, beginning
of period $ 150.0 $ 454.0 $ 300.0 $ 475.0
Proceeds from new securitizations - 31.0 - 34.0
Securitization reduction payments - - (150.0) (24.0)
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization,
end of period $ 150.0 $ 485.0 $ 150.0 $ 485.0
=================================================================================================================================
Proceeds from collections reinvested in revolving
period securitizations $ 372.5 $ 981.3 $ 1,055.0 $ 1,999.7
---------------------------------------------------------------------------------------------------------------------------------
Proceeds from collections pertaining to
retained interest $ 68.2 $ 209.9 $ 200.5 $ 416.4
=================================================================================================================================
10. Capital Assets
(a) Capital Assets, Net
Accumulated
Depreciation and
Cost Amortization Net Book Value
---------------------------------------------------------------------------------------------------------------------------------
As at As at
(millions) June 30, 2004 December 31, 2003
---------------------------------------------------------------------------------------------------------------------------------
Property, plant, equipment and other
Telecommunications assets $16,916.9 $11,021.3 $ 5,895.6 $ 6,002.4
Assets leased to customers 415.4 361.9 53.5 60.0
Buildings 1,621.8 783.1 838.7 832.0
Office equipment and furniture 912.0 660.7 251.3 265.0
Assets under capital lease 17.7 7.0 10.7 14.2
Other 332.1 233.2 98.9 113.8
Land 47.7 - 47.7 49.0
Plant under construction 454.0 - 454.0 405.0
Materials and supplies 24.4 - 24.4 22.9
---------------------------------------------------------------------------------------------------------------------------------
20,742.0 13,067.2 7,674.8 7,764.3
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscriber base 362.9 84.0 278.9 289.7
Software 1,054.2 652.7 401.5 473.7
Access to rights-of-way and other 121.0 38.5 82.5 81.3
---------------------------------------------------------------------------------------------------------------------------------
1,538.1 775.2 762.9 844.7
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 3,973.1 1,018.5 2,954.6 2,954.6
---------------------------------------------------------------------------------------------------------------------------------
$26,253.2 $14,860.9 $11,392.3 $11,563.6
=================================================================================================================================
(1) Accumulated amortization of spectrum licences is amortization recorded
prior to 2002 and the transitional impairment amount.
Included in capital expenditures for the three-month and six-month periods
ended June 30, 2004, were additions of intangible assets subject to
amortization of $56.1 million (2003 - $24.3 million) and $89.0 million (2003 -
$44.2 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, 2004, for each of the next five fiscal years is as
follows:
Years ending December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2004 (balance of year) $ 153.9
2005 210.4
2006 101.9
2007 34.1
2008 14.9
11. Deferred Charges
(millions) As at As at
June 30, December 31,
2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Recognized transitional pension assets and pension plan contributions
in excess of charges to income $ 509.7 $ 426.8
Cost of issuing debt securities, less amortization 37.5 39.2
Deferred customer activation and installation costs(1) 85.8 80.8
Other 56.5 63.9
---------------------------------------------------------------------------------------------------------------------------------
$ 689.5 $ 610.7
=================================================================================================================================
(1) Upfront customer activation fees, along with the corresponding direct
costs not in excess of revenues, are deferred and recognized over the
verage expected term of the customer relationship.
12. Long-Term Debt
(a) Details of Long-Term Debt
($ in millions)
As at As at
June 30, December 31,
Series Rate Maturity 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
TELUS Corporation Notes
CA 7.5%(1) June 2006 $1,573.3 $1,572.1
U.S. 7.5%(1) June 2007 1,551.6 1,507.4
U.S. 8.0%(1) June 2011 2,557.0 2,484.4
---------------------------------------------------------------------------------------------------------------------------------
5,681.9 5,563.9
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Convertible Debentures
6.75%(1) June 2010 141.0 140.4
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Credit Facilities -%(2) May 2008 - 7.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Debentures
1 12.00%(1) May 2010 50.0 50.0
2 11.90%(1) November 2015 125.0 125.0
3 10.65%(1) June 2021 175.0 175.0
5 9.65%(1) April 2022 249.0 249.0
A 9.50%(1) August 2004 189.5 189.5
B 8.80%(1) September 2025 200.0 200.0
---------------------------------------------------------------------------------------------------------------------------------
988.5 988.5
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Medium Term Note Debentures
96-9 6.375%(1) August 2004 20.0 20.0
99-1 7.25%(1) June 2030 0.1 0.1
---------------------------------------------------------------------------------------------------------------------------------
20.1 20.1
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Senior Discount Notes - 0.4
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications (Quebec) Inc. First Mortgage Bonds(3)
U 11.50%(1) July 2010 30.0 30.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications (Quebec) Inc. Medium Term Notes(3)
1 7.10%(1) February 2007 70.0 70.0
---------------------------------------------------------------------------------------------------------------------------------
Capital leases issued at varying rates of interest from 5.1% to 17.25% and maturing on
various dates up to 2008 9.6 10.3
---------------------------------------------------------------------------------------------------------------------------------
Other 9.2 0.3
---------------------------------------------------------------------------------------------------------------------------------
Total debt 6,950.3 6,830.9
Less - current maturities 213.8 221.1
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $6,736.5 $6,609.8
=================================================================================================================================
(1) Interest is payable semi-annually.
(2) Weighted average rate as at June 30, 2004 (December 31, 2003 - 4.325%).
(3) Pursuant to a July 1, 2004, internal transaction between two wholly-owned
subsidiaries, these debts became obligations of TELUS Communications Inc. on July 1, 2004.
(b) TELUS Corporation Credit Facilities
TELUS Corporation's syndicated bank credit facilities at June 30, 2004, consist
of: i) an $800 million (or U.S. Dollar equivalent) revolving credit facility
expiring on May 7, 2008, used for general corporate purposes, and ii) an $800
million (or U.S. Dollar equivalent) 364-day revolving credit facility which is
extendible at the Company's option on a non-revolving basis for any amounts
outstanding on May 6, 2005, for one year on a non-revolving basis. These new
facilities replaced the Company's existing committed credit facilities prior to
the availability termination dates of such facilities.
TELUS Corporation's credit facilities are unsecured and bear interest at prime
rate, U.S. Dollar Base Rate, a bankers' acceptance rate or London interbank
offered rate ("LIBOR") (all such terms as used or defined in the credit
facilities), plus applicable margins. The credit facilities contain customary
representations and warranties and covenants including two financial quarter
end financial ratio tests. The financial ratio tests are that the Company may
not permit its long-term debt to operating cash flow ratio to exceed 4.0:1 and
may not permit its operating cash flow to interest expense ratio to be less
than 2.0:1, each as defined under the credit facilities.
Continued access to TELUS Corporation's credit facilities is not contingent on
the maintenance by TELUS Corporation of a specific credit rating.
Additionally, at June 30, 2004, the Company has accepted a fully underwritten
commitment for a $500 million (or U.S. Dollar equivalent) unsecured bank credit
facility for general corporate purposes. This 364-day credit facility, upon
documentation, would be available until the earlier of October 31, 2005, and
364 days after the completion date of the Company's offers to purchase
Microcell Telecommunications Inc., should in fact this event occur (see Note
15(c)). The facility bears interest at prime rate, U.S. Dollar Base Rate,
Bankers' Acceptance rate or London interbank offered rate ("LIBOR"), plus
applicable margins. The facility also contains customary covenants.
(c) Long-Term Debt Maturities
Anticipated requirements to meet long-term debt repayments during each of the
five years ending December 31 are as follows:
(millions) Total(1)
---------------------------------------------------------------------------------------------------------------------------------
2004(balance of year) $ 212.5
2005 3.4
2006 1,586.1
2007 1,870.0
2008 2.4
(1) Where applicable, repayments reflect hedged foreign exchange rates
13. Other Long-Term Liabilities
As at As at
June 30, December 31,
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Deferred gain on sale-leaseback of buildings $ 103.9 $ 109.1
Pension and other post-retirement liabilities 167.4 161.3
Deferred hedging liability 625.3 739.6
Deferred customer activation and installation fees(1) 85.8 80.8
Other 93.9 82.9
---------------------------------------------------------------------------------------------------------------------------------
$ 1,076.3 $ 1,173.7
=================================================================================================================================
(1) Upfront customer activation fees, along with the corresponding direct
costs not in excess of revenues, are deferred and recognized over the average
expected term of the customer relationship.
14. Shareholders' Equity
(a) Details of Shareholders' Equity
As at As at
June 30, December 31,
($ in millions except per share amounts) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
Convertible debentures conversion option (b) $ 8.8 $ 8.8
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Preference Shares and Preferred Shares (c)
Authorized Amount
Non-voting first preferred shares Unlimited
Redemption
Issued Premium
Cumulative
$6.00 Preference 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
Less: Reclassification to current liabilities 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 (d) 2,385.1 2,349.1
Non-Voting Shares (d) 3,333.5 3,296.6
Options and warrants (e) 41.0 51.5
Accrual for shares issuable under channel stock incentive plan (f) 0.5 0.6
Cumulative foreign currency translation adjustment (1.1) (2.7)
Retained earnings 879.8 741.7
Contributed surplus (g) 38.9 5.9
---------------------------------------------------------------------------------------------------------------------------------
6,677.7 6,442.7
---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 6,686.5 $ 6,521.2
=================================================================================================================================
(b) Convertible Debenture Conversion Option
At June 30, 2004, 3.8 million (December 31, 2003 - 3.8 million) shares are
reserved for issuance upon exercise of convertible debenture conversion
options.
(c) TELUS Communications Inc. Preference and Preferred Shares
TELUS Communications Inc. has the right to redeem the Preference and Preferred
shares upon giving three months' previous notice. On March 25, 2004, TELUS
Communications Inc. issued notices of redemption for all nine classes of its
outstanding publicly traded preference and preferred shares for redemption
during the third quarter of 2004 for total consideration of approximately $72.8
million. Of the redemption premium of $3.1 million, $0.8 million is chargeable
against contributed surplus with the balance being charged to retained
earnings. As July 1, 2004, was a Canadian banking holiday, the Company made a
payment of $35.8 million on June 30, 2004, for the July 1, 2004, redemption of
preference and preferred shares. The net carrying amount of the preference and
preferred shares has been reclassified to current liabilities, along with the
associated net redemption premium.
(d) Changes in Common Shares and Non-Voting Shares
Periods ended June 30, 2004 Three months Six months
---------------------------------------------------------------------------------------------------------------------------------
Number of Amount Number of Amount
shares (millions) shares (millions)
---------------------------------------------------------------------------------------------------------------------------------
Common Shares
Beginning of period 191,573,384 $ 2,369.4 190,800,015 $ 2,349.1
Exercise of share options (h) 9,474 0.1 59,718 1.4
Employees' purchase of shares (i) 629,349 14.5 1,301,176 32.1
Dividends reinvested in shares 41,127 1.1 92,425 2.5
---------------------------------------------------------------------------------------------------------------------------------
End of period 192,253,334 $ 2,385.1 192,253,334 $ 2,385.1
=================================================================================================================================
Non-Voting Shares
Beginning of period 162,088,340 $ 3,326.2 161,042,369 $ 3,296.6
Transitional amount for share-based compensation
arising from share options (Note 2(a)) - - - 0.4
---------------------------------------------------------------------------------------------------------------------------------
Adjusted opening balance 162,088,340 3,326.2 161,042,369 3,297.0
Exercise of warrants (e) - - 76,000 2.8
Channel stock incentive plan (f) 11,875 0.2 23,600 0.5
Exercise of share options (h) 56,824 1.2 520,908 15.8
Dividend Reinvestment and Share Purchase Plan (j)
Dividends reinvested in shares 257,648 5.7 743,397 17.0
Optional cash payments 8,536 0.2 16,949 0.4
---------------------------------------------------------------------------------------------------------------------------------
End of period 162,423,223 $ 3,333.5 162,423,223 $ 3,333.5
=================================================================================================================================
(e) Options and Warrants
Upon its acquisition of Clearnet Communications Inc. ("Clearnet") in 2000, the
Company was required to record the intrinsic value of Clearnet options and
warrants outstanding at that time. As these options and warrants are exercised,
the corresponding intrinsic values are reclassified to share capital. As these
options and warrants are forfeited or expire, the corresponding intrinsic
values are reclassified to contributed surplus. Proceeds arising from the
exercise of these options and warrants are credited to share capital.
Under the terms of the arrangement to acquire Clearnet, effective January 18,
2001, TELUS Corporation exchanged the warrants held by former Clearnet warrant
holders. Each warrant entitles the holder to purchase a Non-Voting Share at a
price of U.S.$10.00 per share until September 15, 2005. As at June 30, 2004,
0.7 million (December 31, 2003 - 0.8 million) warrants remained outstanding.
(f) Channel Stock Incentive Plan
The Company initiated the Plan to increase sales of various products and
services by providing additional performance-based compensation in the form of
Non-Voting Shares. The Company has reserved 0.2 million (December 31, 2003 -
0.2 million) shares for issuance under the Plan. As at June 30, 2004, shares
earned, but not yet issued, are accrued as a component of Common Equity.
(g) Contributed Surplus
The following table presents a summary of the activity related to the Company's
contributed surplus for the three-month and six-month periods ended June 30,
2004:
Periods ended June 30, 2004 (millions) Three months Six months
---------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 34.7 $ 5.9
Transitional amount for share-based compensation arising from share options (Note 2(a)) - 24.7
---------------------------------------------------------------------------------------------------------------------------------
Adjusted opening balance 34.7 30.6
Share option expense recognized in period (Note 8(a)) 4.4 9.8
Share option expense reclassified to Non-Voting Share capital account upon exercise
of share options (0.2) (0.7)
Redemption premium on preference and preferred shares (c) - (0.8)
---------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 38.9 $ 38.9
=================================================================================================================================
(h) Share Option Plans
The Company has a number of share option plans under which directors, officers
and other employees receive options to purchase Common Shares and/or Non-Voting
Shares at a price equal to the fair market value at the time of grant. Options
granted under the plans may be exercised over specific periods not to exceed 10
years from the time of grant. At June 30, 2004, 30.9 million (December 31, 2003
- 29.5 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 three-month and six-month periods ended June 30,
2004.
Periods ended June 30, 2004 Three months Six months
---------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Number of average option Number of average option
shares price shares price
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 26,640,734 $ 25.06 25,773,832 $ 24.85
Granted 64,500 22.06 1,736,791 24.69
Exercised (66,298) 15.45 (580,626) 13.50
Forfeited (422,642) 23.97 (582,722) 24.79
Expired and cancelled - - (130,981) 24.76
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 26,216,294 25.09 26,216,294 25.09
=================================================================================================================================
(i) Employee Share Purchase Plan
The Company has an employee share purchase plan under which eligible employees
can purchase Common Shares through regular payroll deductions by contributing
between 1% and 6% of their pay. The Company contributes two dollars for every
five dollars contributed by an employee. The Company records its contributions
as a component of operating expenses. For the three-month and six-month periods
ended June 30, 2004, the Company contributed $5.7 million (2003 - $5.2 million)
and $11.8 million (2003 - $10.9 million), respectively, to this plan. Under
this plan, the Company has the option of offering shares from Treasury or
having the trustee acquire shares in the stock market. Prior to February 2001,
when the issuance of shares from Treasury commenced, all Common Shares issued
to employees under the plan were purchased on the market at normal trading
prices. At June 30, 2004, 2.1 million (December 31, 2003 - 3.5 million) shares
are reserved for issuance under the employee share purchase plan.
(j) Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase Plan under which
eligible shareholders may acquire Non-Voting Shares through the reinvestment of
dividends and additional optional cash payments. Excluding Non-Voting Shares
purchased by way of additional optional cash payments, the Company, at its
discretion, may offer the Non-Voting Shares at up to a 5% discount from the
market price. Shares purchased through optional cash payments are subject to a
minimum investment of $100 per transaction and a maximum investment of $20,000
per calendar year. Under this Plan, the Company has the option of offering
shares from Treasury or having the trustee acquire shares in the market. At
June 30, 2004, 1.5 million (December 31, 2003 - 2.3 million) shares are
reserved for issuance under the Dividend Reinvestment and Share Purchase Plan.
15. Commitments and Contingent Liabilities
(a) CRTC Decisions 2002-34 and 2002-43 Deferral Accounts
On May 30, 2002, and on July 31, 2002, the Canadian Radio-television and
Telecommunications Commission ("CRTC") issued Decisions 2002-34 and 2002-43,
respectively, and introduced the concept of a deferral account. The Company
must make significant estimates and assumptions in respect of the deferral
accounts given the complexity and interpretation required of Decisions
2002-34 and 2002-43. Accordingly, the Company estimates, and records, a
liability ($100 million as of June 30, 2004 (December 31, 2003 - $76
million)) to the extent that activities it has undertaken, other qualifying
events and realized rate reductions for Competitor Services do not extinguish
it. Management is required to make estimates and assumptions in respect of
the offsetting nature of these items. If the CRTC, upon its annual review of
the Company's deferral account, disagrees with management's estimates and
assumptions, the CRTC may adjust the deferral account balance and such
adjustment may be material.
On March 24, 2004, the CRTC issued Telecom Public Notice CRTC 2004-1 "Review
and disposition of the deferral accounts for the second price cap period"
which initiated a public proceeding inviting proposals on the disposition of
the amounts accumulated in the incumbent local exchange carriers' deferral
accounts during the first two years of the second price cap period. The
Company anticipates that the CRTC will make its determination on this
proceeding prior to the end of the current calendar year.
(b) Labour Negotiations
Collective bargaining with the Telecommunications Workers Union: In 2000,
TELUS commenced collective bargaining with the Telecommunications Workers
Union for a new collective agreement replacing the five legacy agreements
from BC TELECOM and Alberta-based TELUS. Following the Clearnet acquisition
and subsequent transactions, the Mobility business assumed responsibility for
separate negotiations for its unionized operations in British Columbia and
Alberta (see Canadian Industrial Relations Board Decision Letter 1088 and
Decision 278 following). This is the first round of collective bargaining
since the merger of BC TELECOM and TELUS Alberta and the Company's aim is to
replace the multiple legacy collective agreements with a single collective
agreement for the new bargaining unit.
During the fourth quarter of 2002, the Company's application to the Federal
Minister of Labour, as provided for under the Canada Labour Code, requesting
the appointment of a federal conciliator was granted.
In 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 the first quarter of 2004, the 60-day period concluded and the
outstanding issues were not resolved.
On January 15, 2004, the Federal Minister of Labour appointed the two
conciliators as mediators to continue to work with the Company and the
Telecommunications Workers Union towards a possible resolution.
On January 28, 2004, the Canadian Industrial Relations Board ruled, in
response to an unfair labour practice complaint filed by the
Telecommunications Workers Union, that the Company must make an offer of
binding arbitration to the Telecommunications Workers Union to settle the
collective agreement between the parties. The Company made the offer of
binding arbitration on January 29, 2004, and on January 30, 2004, the
Telecommunications Workers Union accepted the offer. Under the provisions of
binding arbitration, no legal labour disruption can occur.
With the assistance of mediators, the Company and the Telecommunications
Workers Union have discussed the binding arbitration process including the
selection of an arbitrator, terms of reference/guiding principles that an
arbitrator would take into consideration, hearing location and dates,
however, many of these items remain unresolved.
The Company has filed an application for reconsideration with the Canadian
Industrial Relations Board and an appeal in the Federal Court of Appeal of
the Canadian Industrial Relations Board's decision directing the Company to
offer binding arbitration.
The operational and financial impacts of the outcome of the reconsideration
and appeal processes on the Company are not practicably determinable
currently.
Canadian Industrial Relations Board Letter Decision 1088 and Decision 278: On
May 21, 2004, the Canadian Industrial Relations Board declared TELE-MOBILE
COMPANY and TELUS Communications Inc. a single employer for labour relations
purposes. The Canadian Industrial Relations Board also determined that the
Mobility segment's non-unionized team members, predominantly located in
Ontario and Quebec, performing work similar to their unionized Mobility
segment counterparts in British Columbia and Alberta, should be included in
the Telecommunications Workers Union bargaining unit without a
representational vote.
On June 23, 2004, both TELE-MOBILE COMPANY and TELUS Communications Inc.
filed an application to the Federal Court of Appeal for a stay and a judicial
review of the Canadian Industrial Relations Board Letter Decision 1088 and
the subsequent Decision 278. The stay application was granted in part on July
23, 2004. The Federal Court of Appeal held that the Mobility segment may
communicate with its eastern employees affected by the Canadian Industrial
Relations Board Letter Decision 1088 and Decision 278 (unlike the
communication ban that continues in respect of TELUS Communications Inc.'s
unionized team members represented by the Telecommunications Workers Union).
The other aspects of the stay application were otherwise denied by the
Federal Court of Appeal. However, the Federal Court of Appeal has invited
TELE-MOBILE COMPANY and TELUS Communications Inc. to bring a new application
should circumstances change such that irreparable harm becomes imminent.
Should the ultimate operational and financial impacts of the outcome of the
Federal Court of Appeal process differ from management's assessments and
assumptions, a material adjustment to the Company's financial position and
the results of its operations could result.
(c) Microcell Telecommunications Inc.
On May 13, 2004, the Company announced its intention to make unsolicited
offers to purchase for cash all of the issued and outstanding Class A
Restricted Voting Shares, Class B Non-Voting Shares, Warrants 2005 and
Warrants 2008 of Microcell Telecommunications Inc., which offers were made
May 17, 2004. The total equity value of the transaction is approximately $1.1
billion. The offers, which were to expire on June 22, 2004, were extended to
July 22, 2004, and further extended to August 20, 2004.
(d) Commitments
The Company has bid for, or is negotiating for, certain sponsorships,
including in relation to the 2010 Winter Olympic Games, that encompass
material commitments.
(e) Guarantees
Canadian generally accepted accounting principles require the disclosure of
certain types of guarantees and their maximum, undiscounted amounts. The
maximum potential payments represent a "worst-case scenario" and do not
necessarily reflect results expected by the Company. Guarantees requiring
disclosure are those obligations that require payments contingent on
specified types of future events; in the normal course of its operations, the
Company enters into obligations which GAAP may consider to be guarantees. As
defined by Canadian GAAP, guarantees subject to these disclosure guidelines
do not include guarantees that relate to the future performance of the
Company.
Performance guarantees: Performance guarantees contingently require a
guarantor to make payments to a guaranteed party based on a third party's
failure to perform under an obligating agreement. TELUS provides sales price
guarantees in respect of employees' principal residences as part of its
employee relocation policies. In the event that the Company is required to
honour such guarantees, it purchases (for immediate resale) the property from
the employee.
The Company has guaranteed third parties' financial obligations as part of
facility naming rights agreements. The guarantees, in total, run through to
December 31, 2014, on a declining-balance basis and are of limited recourse.
As at June 30, 2004, the Company has no liability recorded in respect of the
aforementioned performance guarantees.
Financial guarantees: In conjunction with its 2001 exit from the equipment
leasing business, the Company provided a guarantee to a third party with
respect to certain specified telecommunication asset and vehicle leases. If
the lessee were to default, the Company would be required to make a payment
to the extent that the realized value of the underlying asset is insufficient
to pay out the lease; in some instances, the Company could be required to pay
out the lease on a gross basis and realize the underlying value of the leased
asset itself. As at June 30, 2004, the Company has a liability of $1.5
million (December 31, 2003 - $1.5 million) recorded in respect of these lease
guarantees.
The following table quantifies the maximum undiscounted guarantee amounts as at
June 30, 2004, without regard for the likelihood of having to make such
payment.
Performance Financial
(millions) guarantees(1) guarantees(1) Total
---------------------------------------------------------------------------------------------------------------------------------
2004 (balance of year) $ 6.7 $ 3.5 $ 10.2
2005 3.8 3.3 7.1
2006 3.3 2.4 5.7
2007 2.6 1.2 3.8
2008 1.9 0.4 2.3
(1) 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 CRTC regulatory requirements. The Company's
proportionate share would be 80% through May 2006, declining to 40% in the
next five-year period and then to 15% in the final five years. As well,
should the CRTC take any action which would result in the purchaser being
prevented from carrying on the directory business as specified in the
agreement, TELUS would indemnify the purchaser in respect of any losses that
the purchaser incurred.
As at June 30, 2004, the Company has no liability recorded in respect of
indemnification obligations.
(f) Claims and Lawsuits
General: A number of claims and lawsuits seeking damages and other relief are
pending against the Company. It is impossible at this time for the Company to
predict with any certainty the outcome of such litigation. However,
management is of the opinion, based upon legal assessment and information
presently available, that it is unlikely that any liability, to the extent
not provided for through insurance or otherwise, would be material in
relation to the Company's consolidated financial position, excepting the
items enumerated following.
Pay equity: On December 16, 1994, the Telecommunications Workers Union filed
a complaint against BC TEL, a predecessor of TELUS Communications Inc., with
the Canadian Human Rights Commission, alleging that wage differences between
unionized male and female employees in British Columbia were contrary to the
equal pay for work of equal value provisions in the Canadian Human Rights
Act. In December 1998, the Canadian Human Rights Commission advised that it
would commence an investigation of the Telecommunications Workers Union
complaint. In February 2003, the Canadian Human Rights Commission offered to
mediate a settlement of the complaint, but the Company declined the offer. In
2004, the Canadian Human Rights Commission appointed a conciliator to attempt
to bring about a settlement of the complaint. If the conciliator is unable to
settle the complaint, the Canadian Human Rights Commission may refer the
matter to the Canadian Human Rights Tribunal for a formal hearing. The timing
of the resolution of this matter is not practicably determinable, but
resolution is not imminently expected. The Company believes that it has good
defences to the Telecommunications Workers Union's complaint. Should the
ultimate resolution of the pay equity complaint differ from management's
assessment and assumptions, a material adjustment to the Company's financial
position and the results of its operations could result.
TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan: In January
2002, the Company became aware of two statements of claim filed in the
Alberta Court of Queen's Bench on December 31, 2001, and January 2, 2002, by
plaintiffs alleging to be either members or business agents of the
Telecommunications Workers Union. In one action, the three plaintiffs alleged
to be suing on behalf of all current or future beneficiaries of the TELUS
Corporation Pension Plan and in the other action, the two plaintiffs allege
to be suing on behalf of all current or future beneficiaries of the TELUS
Edmonton Pension Plan. The statement of claim in the TELUS Corporation
Pension Plan related action named the Company, certain of its affiliates and
certain present and former trustees of the TELUS Corporation Pension Plan as
defendants, and claims damages in the sum of $445 million. The statement of
claim in the TELUS Edmonton Pension Plan related action named the Company,
certain of its affiliates and certain individuals who are alleged to be
trustees of the TELUS Edmonton Pension Plan and claims damages in the sum of
$15.5 million. On February 19, 2002, the Company filed statements of defence
to both actions and also filed notices of motion for certain relief,
including an order striking out the actions as representative or class
actions. On May 17, 2002, the statements of claim were amended by the
plaintiffs and include allegations, inter alia, that benefits provided under
the TELUS Corporation Pension Plan and the TELUS Edmonton Pension Plan are
less advantageous than the benefits provided under the respective former
pension plans, contrary to applicable legislation, that insufficient
contributions were made to the plans and contribution holidays were taken and
that the defendants wrongfully used the diverted funds, and that
administration fees and expenses were improperly deducted. The Company filed
statements of defence to the amended statements of claim on June 3, 2002. An
application for an order striking out the actions as representative or class
actions was dismissed on December 17, 2003. The Company believes that it has
good defences to the actions. Should the ultimate resolution of these actions
differ from management's assessment and assumptions, a material adjustment to
the Company's financial position and the results of its operations could
result.
16. Additional Financial Information
(a) Income Statement
Periods ended June 30 Three months Six months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Advertising expense $ 35.3 $ 34.1 $ 67.3 $ 60.4
---------------------------------------------------------------------------------------------------------------------------------
(b) Balance Sheet
As at As at
June 30, December 31,
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Accounts receivable
Customer accounts receivable $ 720.3 $ 624.1
Accrued receivables 140.6 158.4
Allowance for doubtful accounts (70.9) (67.6)
Other 10.2 8.9
---------------------------------------------------------------------------------------------------------------------------------
$ 800.2 $ 723.8
=================================================================================================================================
Prepaid expense and other
Prepaid expenses $ 152.5 $ 86.6
Deferred customer activation and installation costs 66.7 77.2
Other 42.8 8.6
---------------------------------------------------------------------------------------------------------------------------------
$ 262.0 $ 172.4
=================================================================================================================================
Accounts payable and accrued liabilities
Trade accounts payable $ 239.2 $ 377.6
Accrued liabilities 460.7 384.1
Payroll and other employee-related liabilities 410.0 430.4
Interest payable 72.0 72.4
Other 42.3 30.0
---------------------------------------------------------------------------------------------------------------------------------
$ 1,224.2 $ 1,294.5
=================================================================================================================================
Advance billings and customer deposits
Advance billings $ 376.5 $ 340.9
Deferred customer activation and installation fees 66.7 77.2
Customer deposits 24.6 26.9
---------------------------------------------------------------------------------------------------------------------------------
$ 467.8 $ 445.0
=================================================================================================================================
(c) Supplementary Cash Flow Information
Periods ended June 30 Three months Six months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Net change in non-cash working capital
Accounts receivable $ (37.5) $ 53.8 $ (76.4) $ 140.8
Income and other taxes receivable 22.6 (5.5) 92.5 (217.1)
Inventories 21.1 4.7 26.8 14.9
Prepaid expenses and other (54.0) (42.6) (89.6) (60.1)
Accounts payable and accrued liabilities (110.1) (93.5) (71.1) (114.8)
Advance billings and customer deposits 12.9 31.4 22.8 40.2
---------------------------------------------------------------------------------------------------------------------------------
$ (145.0) $ (51.7) $ (95.0) $ (196.1)
=================================================================================================================================
17. Employee Future Benefits
(a) Defined benefit plans
The Company's net defined benefit plan costs were as follows:
Three-month periods ended June 30
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
period adjustments(1) period period adjustments(1) period
---------------------------------------------------------------------------------------------------------------------------------
Pension benefit plans
Current service cost $ 17.6 $ - $ 17.6 $ 16.4 $ - $ 16.4
Interest cost 78.1 - 78.1 76.8 - 76.8
Return on plan assets (43.5) (49.7) (93.2) (257.8) 174.2 (83.6)
Past service costs - 0.2 0.2 - 0.1 0.1
Actuarial loss 6.2 - 6.2 7.3 - 7.3
Valuation allowance provided
against accrued benefit asset - 6.3 6.3 - 6.3 6.3
Amortization of transitional asset - (11.2) (11.2) - (11.2) (11.2)
---------------------------------------------------------------------------------------------------------------------------------
$ 58.4 $ (54.4) $ 4.0 $ (157.3) $ 169.4 $ 12.1
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
Six-month periods ended June 30
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
period adjustments(1) period period adjustments(1) period
---------------------------------------------------------------------------------------------------------------------------------
Pension benefit plans
Current service cost $ 35.2 $ - $ 35.2 $ 32.7 $ - $ 32.7
Interest cost 156.2 - 156.2 153.5 - 153.5
Return on plan assets (207.7) 21.2 (186.5) (114.5) (52.8) (167.3)
Past service costs - 0.4 0.4 - 0.3 0.3
Actuarial loss 12.3 - 12.3 14.6 - 14.6
Valuation allowance provided
against accrued benefit asset - 12.7 12.7 - 12.7 12.7
Amortization of transitional asset - (22.4) (22.4) - (22.4) (22.4)
---------------------------------------------------------------------------------------------------------------------------------
$ (4.0) $ 11.9 $ 7.9 $ 86.3 $ (62.2) $ 24.1
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
Three-month periods ended June 30
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
period adjustments(1) period period adjustments(1) period
---------------------------------------------------------------------------------------------------------------------------------
Other benefit plans
Current service cost $ 1.2 $ - $ 1.2 $ 1.2 $ - $ 1.2
Interest cost 0.9 - 0.9 1.0 - 1.0
Return on plan assets (0.6) - (0.6) (0.2) (0.4) (0.6)
Actuarial gain (0.5) - (0.5) (0.3) - (0.3)
Amortization of transitional
obligation - 0.2 0.2 - 0.2 0.2
---------------------------------------------------------------------------------------------------------------------------------
$ 1.0 $ 0.2 $ 1.2 $ 1.7 $ (0.2) $ 1.5
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
Six-month periods ended June 30
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
period adjustments(1) period period adjustments(1) period
---------------------------------------------------------------------------------------------------------------------------------
Other benefit plans
Current service cost $ 2.4 $ - $ 2.4 $ 2.5 $ - $ 2.5
Interest cost 1.7 - 1.7 1.9 - 1.9
Return on plan assets (1.3) - (1.3) (0.4) (0.9) (1.3)
Actuarial gain (0.8) - (0.8) (0.6) - (0.6)
Amortization of transitional
obligation - 0.4 0.4 - 0.4 0.4
---------------------------------------------------------------------------------------------------------------------------------
$ 2.0 $ 0.4 $ 2.4 $ 3.4 $ (0.5) $ 2.9
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
(b) Employer contributions
The best estimate of fiscal 2004 employer contributions to the Company's
defined benefit pension plans has been revised to $136.6 million (December 31,
2003, estimate - $104.8 million) to reflect updated actuarial valuations and
the net acceleration of discretionary funding.
(c) Defined contribution plans
The Company's total defined contribution pension plan costs recognized were as
follows:
Periods ended June 30 Three months Six months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Union pension plan contributions $ 10.0 $ 10.0 $ 19.3 $ 19.3
Other defined contribution pension plans 1.8 1.6 8.1 6.6
---------------------------------------------------------------------------------------------------------------------------------
$ 11.8 $ 11.6 $ 27.4 $ 25.9
=================================================================================================================================
18. Segmented Information
The Company's reportable segments, which are used to manage the business, are
Communications and Mobility. The Communications segment includes voice local,
voice long distance, data and other telecommunication services excluding
wireless. The Mobility segment includes digital personal communications
services and wireless Internet services. Segmentation is based on
similarities in technology, the technical expertise required to deliver the
products and services, and the distribution channels used. Intersegment sales
are recorded at the exchange value, which is the amount agreed to by the
parties.
Three-month periods
ended June 30 Communications Mobility Eliminations Consolidated
(millions) 2004 2003 2004 2003 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
External revenue $ 1,189.0 $ 1,209.2 $ 676.6 $ 564.1 $ - $ - $ 1,865.6 $ 1,773.3
Inter-segment
revenue 22.1 23.4 5.6 3.9 (27.7) (27.3) - -
---------------------------------------------------------------------------------------------------------------------------------
Total operating
revenue 1,211.1 1,232.6 682.2 568.0 (27.7) (27.3) 1,865.6 1,773.3
Operations expense 711.8 714.1 396.0 366.7 (27.7) (27.3) 1,080.1 1,053.5
Restructuring and
work-force
reduction costs 0.7 3.3 - - - - 0.7 3.3
---------------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $ 498.6 $ 515.2 $ 286.2 $ 201.3 $ - $ - $ 784.8 $ 716.5
=================================================================================================================================
CAPEX(2) $ 267.7 $ 227.4 $ 78.4 $ 78.1 $ - $ - $ 346.1 $ 305.5
=================================================================================================================================
EBITDA less CAPEX $ 230.9 $ 287.8 $ 207.8 $ 123.2 $ - $ - $ 438.7 $ 411.0
=================================================================================================================================
Six-month periods
ended June 30 Communications Mobility Eliminations Consolidated
(millions) 2004 2003 2004 2003 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
External revenue $ 2,360.1 $ 2,417.7 $ 1,309.3 $ 1,096.5 $ - $ - $ 3,669.4 $ 3,514.2
Inter-segment
revenue 47.1 46.8 10.2 7.6 (57.3) (54.4) - -
---------------------------------------------------------------------------------------------------------------------------------
Total operating
revenue 2,407.2 2,464.5 1,319.5 1,104.1 (57.3) (54.4) 3,669.4 3,514.2
Operations expense 1,418.5 1,453.8 785.5 724.2 (57.3) (54.4) 2,146.7 2,123.6
Restructuring and
work-force reduction
costs 16.6 9.8 - - - - 16.6 9.8
---------------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $ 972.1 $ 1,000.9 $ 534.0 $ 379.9 $ - $ - $ 1,506.1 $ 1,380.8
=================================================================================================================================
CAPEX(2) $ 527.1 $ 380.9 $ 128.7 $ 132.4 $ - $ - $ 655.8 $ 513.3
=================================================================================================================================
EBITDA less CAPEX $ 445.0 $ 620.0 $ 405.3 $ 247.5 $ - $ - $ 850.3 $ 867.5
=================================================================================================================================
(1) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
is defined by the Company as operating revenues less operations expense and
restructuring and workforce reduction costs. The Company has issued guidance
on, and reports, EBITDA because it is a key measure used by management to
evaluate performance of its business segments and is utilized in measuring
compliance with certain debt covenants.
(2) Total capital expenditures
("CAPEX").
19. Related Party Transactions
In 2001, the Company entered into an agreement with Verizon Communications
Inc. ("Verizon"), a significant shareholder, with respect to acquiring
certain rights to Verizon's software, technology, services and other
benefits, thereby replacing and amending a previous agreement between the
Company and GTE Corporation. The agreement is renewable annually at the
Company's sole option up to December 31, 2008, and it has been renewed for
2004. As of June 30, 2004, in aggregate, $312.1 million of specified software
licences and a trademark licence have been acquired and recorded as capital
and other assets. These assets are valued at fair market value at the date of
acquisition as determined by an arm's-length party's appraisal. Assuming
renewal through to 2008, the total commitment under the agreement is U.S.$377
million for the period 2001 to 2008 and the commitment remaining after June
30, 2004, is U.S.$92 million.
In the normal course of operations and on market terms and conditions,
ongoing services and other benefits have been received and expensed. In
connection with the 2001 disposition of TELUS' directory business to Verizon,
the Company bills customers, and collects, for directory listings on
Verizon's behalf. The Company owed Verizon, on a net basis and including
directory rebilling and collections done on Verizon's behalf as well as
dividends payable, $41.3 million at June 30, 2004 (December 31, 2003 - $40.9
million).
Periods ended June 30 Three months Six months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Verizon agreement - Ongoing services
and benefits expensed $ 6.7 $ 6.8 $ 13.3 $ 14.3
Sales to Verizon (Verizon customers' usage of
TELUS' telecommunication infrastructure and other) $ 13.0 $ 9.0 $ 23.1 $ 21.1
Purchases from Verizon (TELUS customers' usage of
Verizon's telecommunication infrastructure and other) $ 8.3 $ 12.2 $ 20.4 $ 20.9
---------------------------------------------------------------------------------------------------------------------------------
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) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b)) (restated - Note 2(b))
Net income in accordance with Canadian GAAP $ 172.3 $ 73.0 $ 273.6 $ 162.5
Adjustments:
Operating expenses
Operations (b) 0.1 (4.3) 1.3 (8.5)
Depreciation (c) - 27.1 6.5 54.0
Amortization of intangible assets (d) (20.4) (20.4) (40.9) (40.9)
Financing costs (f) 2.2 2.4 4.1 4.8
Accounting for derivatives (g) 0.2 (0.8) 0.2 0.3
Taxes on the above adjustments (h) 7.9 (1.8) 13.3 (3.5)
---------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP 162.3 75.2 258.1 168.7
Other comprehensive income (loss) (i) 6.3 (103.0) (16.2) (83.6)
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) in accordance
with U.S. GAAP $ 168.6 $ (27.8) $ 241.9 $ 85.1
Net income in accordance with U.S. GAAP per
Common Share and Non-Voting
- Basic $ 0.46 $ 0.21 $ 0.72 $ 0.48
- Diluted $ 0.45 $ 0.21 $ 0.71 $ 0.48
The following is a restatement of retained earnings (deficit) to reflect the
application of U.S. GAAP:
Periods ended June 30 Six months
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ (844.7) $ (960.6)
Net income in accordance with U.S. GAAP 258.1 168.7
---------------------------------------------------------------------------------------------------------------------------------
(586.6) (791.9)
Less: Common Share and Non-Voting Share dividends paid, or payable, in cash 93.1 83.5
Common Share and Non-Voting Share dividends reinvested, or to be reinvested,
in shares issued from Treasury 13.3 20.8
Preference and preferred share dividends 1.7 1.7
Redemption premium on preference and preferred shares in excess of amount
chargeable to contributed surplus (Note 14(c)) 2.5 -
---------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ (697.2) $ (897.9)
=================================================================================================================================
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) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Current Assets $ 1,936.2 $ 1,517.3
Capital Assets
Property, plant, equipment and other 7,674.8 7,757.8
Intangible assets subject to amortization 2,543.3 2,666.0
Intangible assets with indefinite lives 2,954.6 2,954.6
Goodwill 3,536.3 3,536.6
Deferred Income Taxes 502.6 709.0
Other Assets 669.6 623.1
---------------------------------------------------------------------------------------------------------------------------------
$19,817.4 $19,764.4
=================================================================================================================================
Current Liabilities $ 2,076.3 $ 2,154.7
Long-Term Debt 6,744.9 6,628.4
Other Long-Term Liabilities 1,276.6 1,367.1
Deferred Income Taxes 1,620.8 1,638.8
Non-Controlling Interest 10.5 10.7
Shareholders' Equity 8,088.3 7,964.7
---------------------------------------------------------------------------------------------------------------------------------
$19,817.4 $19,764.4
=================================================================================================================================
The following is a reconciliation of shareholders' equity incorporating the
differences between Canadian and U.S. GAAP:
As at As at
June 30, December 31,
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
(restated - Note 2(b))
Shareholders' Equity under Canadian GAAP $ 6,686.5 $ 6,521.2
Adjustments:
Purchase versus Pooling Accounting (a), (c) - (f) 1,487.1 1,512.9
Additional goodwill on Clearnet purchase (e) 123.5 123.5
Convertible debentures (including conversion option) (f) (8.6) (8.8)
Accounting for derivatives (g) - (0.1)
Accumulated other comprehensive income (loss) (i) (200.2) (184.0)
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under U.S. GAAP $ 8,088.3 $ 7,964.7
=================================================================================================================================
Composition of Shareholders' Equity under U.S. GAAP
Preference and preferred shares
TELUS Communications Inc. Preference Shares and Preferred Shares (Note 14(c)) $ - $ 69.7
---------------------------------------------------------------------------------------------------------------------------------
Common equity
Common Shares 4,318.6 4,282.6
Non-Voting Shares 4,621.6 4,585.8
Options and warrants 41.0 51.5
Accrual for shares issuable under channel stock incentive plan 0.5 0.6
Cumulative foreign currency translation adjustment (1.1) (2.7)
Retained earnings (deficit) (697.2) (844.7)
Accumulated other comprehensive income (loss) (i) (200.2) (184.0)
Contributed surplus 5.1 5.9
---------------------------------------------------------------------------------------------------------------------------------
8,088.3 7,895.0
---------------------------------------------------------------------------------------------------------------------------------
$ 8,088.3 $ 7,964.7
=================================================================================================================================
(a) Merger of BC TELECOM and TELUS
The business combination between BC TELECOM and TELUS Corporation (renamed
TELUS Holdings Inc. which was wound up June 1, 2001) was accounted for using
the pooling of interests method under Canadian GAAP. Under Canadian GAAP, the
application of the pooling of interests method of accounting for the merger
of BC TELECOM and TELUS Holdings Inc. resulted in a restatement of prior
periods as if the two companies had always been combined. Under U.S. GAAP,
the merger is accounted for using the purchase method. Use of the purchase
method results in TELUS (TELUS Holdings Inc.) being acquired by BC TELECOM
for $4,662.4 million (including merger related costs of $51.9 million)
effective January 31, 1999.
(b) Operating Expenses - Operations
Periods ended June 30 Three months Six months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Future employee benefits $ (4.3) $ (4.3) $ (8.5) $ (8.5)
Share-based compensation 4.4 - 9.8 -
---------------------------------------------------------------------------------------------------------------------------------
$ 0.1 $ (4.3) $ 1.3 $ (8.5)
=================================================================================================================================
Future employee benefits: Under U.S. GAAP, TELUS' future employee benefit
assets and obligations have been recorded at their fair values on
acquisition. Accounting for future employee benefits under Canadian GAAP
changed to become more consistent with U.S. GAAP effective January 1, 2000.
Canadian GAAP provides that the transitional balances can be accounted for
prospectively. Therefore, to conform to U.S. GAAP, the amortization of the
transitional amount needs to be removed from the future employee benefit
expense.
Share-based compensation: Effective January 1, 2004, Canadian GAAP required
the adoption of the fair value method of accounting for share-based
compensation for awards made after 2001 (see Note 2(a) and Note 8(a)). U.S.
GAAP requires disclosure of the impact on net income and net income per
Common Share and Non-Voting Share as if the fair value based method of
accounting had been applied for awards made after 1994. The fair values of
the Company's options granted in 2004 and 2003, and the weighted average
assumptions used in estimating the fair values, are set out in Note 8(a).
Such impact, using the fair values set out in Note 8(a) would approximate the
pro forma amounts in the following table.
Periods ended June 30 Three months Six months
(millions except per share amounts) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP
As reported $ 162.3 $ 75.2 $ 258.1 $ 168.7
Deduct: Share-based compensation arising from
share options determined under fair value
based method for all awards (4.6) (11.3) (11.4) (23.6)
---------------------------------------------------------------------------------------------------------------------------------
Pro forma $ 157.7 $ 63.9 $ 246.7 $ 145.1
=================================================================================================================================
Net income in accordance with U.S. GAAP per
Common Share and Non-Voting Share
Basic
As reported (using intrinsic method) $ 0.46 $ 0.21 $ 0.72 $ 0.48
Pro forma (using fair value method) $ 0.44 $ 0.18 $ 0.69 $ 0.41
Diluted
As reported (using intrinsic method) $ 0.45 $ 0.21 $ 0.71 $ 0.48
Pro forma (using fair value method) $ 0.44 $ 0.18 $ 0.68 $ 0.41
(c) Operating Expenses - Depreciation
Periods ended June 30 Three months Six months
(millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Merger of BC TELECOM and TELUS $ - $ 9.0 $ 6.5 $ 17.9
Asset impairment - 18.1 - 36.1
---------------------------------------------------------------------------------------------------------------------------------
$ - $ 27.1 $ 6.5 $ 54.0
=================================================================================================================================
Merger of BC TELECOM and TELUS: Under the purchase method, TELUS' capital
assets on acquisition have been recorded at fair value rather than at their
underlying cost (book values) to TELUS. Therefore, depreciation of such
assets based on fair values at the date of acquisition under U.S. GAAP will
be different than TELUS' depreciation based on underlying cost (book values).
As of March 31, 2004, the amortization of this difference had been completed.
Asset impairment: In the first quarter of 1998, BC TELECOM took an asset
impairment charge. In assessing if a capital asset is impaired, estimated
future net cash flows are not discounted in computing the net recoverable
amount. Under Canadian GAAP, at the time the assessment took place, the
impairment amount recorded was the excess of the carrying amount over the
recoverable amount; under U.S. GAAP the impairment amount recorded was the
excess of the carrying amount over the discounted estimated future net cash
flows that were used to determine the net recoverable amount. Under U.S.
GAAP, the net of tax charge taken in 1998 would be $232.2 million higher and
would not be considered an extraordinary item. The annual depreciation
expense would be approximately $72 million lower subsequent to when the
increased impairment charge was taken under U.S. GAAP. As of December 31,
2003, the amortization of this difference had been completed.
(d) Operating Expenses - Amortization of Intangible Assets
As TELUS' intangible assets on acquisition have been recorded at their fair
value, amortization of such assets, other than for those with indefinite
lives, needs to be included under U.S. GAAP; consistent with prior years,
amortization is calculated using the straight-line method.
The incremental amounts recorded as intangible assets arising from the TELUS
acquisition above are as follows:
Cost Accumulated
Amortization Net Book Value
---------------------------------------------------------------------------------------------------------------------------------
As at As at
June 30, December 31,
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscribers - wireline $ 1,950.0 $ 238.2 $ 1,711.8 $ 1,731.0
Subscribers - wireless 250.0 181.4 68.6 90.3
---------------------------------------------------------------------------------------------------------------------------------
2,200.0 419.6 1,780.4 1,821.3
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 1,833.3 1,833.3 - -
---------------------------------------------------------------------------------------------------------------------------------
$ 4,033.3 $ 2,252.9 $ 1,780.4 $ 1,821.3
=================================================================================================================================
(1) Accumulated amortization of spectrum licences is amortization recorded
prior to 2002 and the transitional impairment amount.
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at June 30, 2004, for each of
the next five fiscal years is as follows:
Years ending December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2004 (balance of year) $ 194.8
2005 292.2
2006 143.8
2007 72.5
2008 53.3
(e) Goodwill
Merger of BC TELECOM and TELUS: Under the purchase method of accounting,
TELUS' assets and liabilities at acquisition (see (a)) have been recorded at
their fair values with the excess purchase price being allocated to goodwill
in the amount of $403.1 million. Commencing January 1, 2002, rather than
being systematically amortized, the carrying value of goodwill is
periodically tested for impairment.
Additional goodwill on Clearnet purchase: Under U.S. GAAP, shares issued by
the acquirer to affect an acquisition are measured at the date the
acquisition was announced; however, under Canadian GAAP, at the time the
transaction took place, shares issued to effect an acquisition were measured
at the transaction date. This results in the purchase price under U.S. GAAP
being $131.4 million higher than under Canadian GAAP. The resulting
difference is assigned to goodwill. Commencing January 1, 2002, rather than
being systematically amortized, the carrying value of goodwill is
periodically tested for impairment.
(f) Financing Costs Merger of BC TELECOM and TELUS:
Under the purchase method, TELUS' long-term debt on acquisition has been
recorded at its fair value rather than at its underlying cost (book value) to
TELUS. Therefore, interest expense calculated on the debt based on fair
values at the date of acquisition under U.S. GAAP will be different than
TELUS' interest expense based on underlying cost (book value).
Convertible debentures: Under Canadian GAAP, the conversion option embedded
in the convertible debentures is presented separately as a component of
shareholders' equity. Under U.S. GAAP, the embedded conversion option is not
subject to bifurcation and is thus presented as a liability along with the
balance of the convertible debentures. The principal accretion occurring
under Canadian GAAP is not required under U.S. GAAP and the adjustment is
included in the interest expense adjustment in the reconciliation.
(g) Accounting for Derivatives
On January 1, 2001, the Company adopted, for U.S. GAAP purposes, the
provisions of Statement of Financial Accounting Standards No. 133,
"Accounting For Derivative Instruments and Hedging Activities." This standard
requires that all derivatives be recognized as either assets or liabilities
and measured at fair value. This is different from the Canadian GAAP
treatment for financial instruments. Under U.S. GAAP, derivatives which are
fair value hedges, together with the financial instrument being hedged, will
be marked to market with adjustments reflected in income and derivatives
which are cash flow hedges will be marked to market with adjustments
reflected in comprehensive income.
(h) Income Taxes
Periods ended June 30 Three months Six months
(millions) 2004 2003 2004 2003
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Current $ (53.8) $ (5.5) $ (83.0) $ (206.3)
Deferred 90.8 61.1 177.2 256.7
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37.0 55.6 94.2 50.4
Investment Tax Credits - - (0.5) (1.0)
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$ 37.0 $ 55.6 $ 93.7 $ 49.4
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The Company's income tax expense (recovery), for U.S. GAAP purposes, differs
from that calculated by applying statutory rates for the following reasons:
Three-month periods ended June 30 ($ in millions) 2004 2003
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Basic blended federal and provincial tax
at statutory income tax rates $ 69.3 34.7% $ 49.1 37.0%
Tax rate differential on settlement of
prior year tax issues (34.2) (2.7)
Investment Tax Credits - -
Other (1.9) 4.2
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33.2 16.6% 50.6 38.2%
Large corporations tax 3.8 5.0
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U.S. GAAP income tax expense (recovery) $ 37.0 18.5% $ 55.6 41.9%
=================================================================================================================================
Six-month periods ended June 30 ($ in millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax
at statutory income tax rates $ 122.5 34.7% $ 81.4 37.0%
Tax rate differential on settlement of
prior year tax issues (35.8) (49.7)
Investment Tax Credits (0.3) (0.6)
Other (1.8) 7.5
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84.6 24.0% 38.6 17.6%
Large corporations tax 9.1 10.8
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U.S. GAAP income tax expense (recovery) $ 93.7 26.5% $ 49.4 22.5%
=================================================================================================================================
(i) Additional Disclosures Required Under U.S. GAAP - Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", requires that a statement of comprehensive income be displayed with
the same prominence as other financial statements. Comprehensive income,
which incorporates net income, includes all changes in equity during a period
except those resulting from investments by and distributions to owners. There
is currently no requirement to disclose comprehensive income under Canadian
GAAP.
Three-month periods ended June 30
(millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Unrealized Unrealized
fair value of fair value of
derivative Minimum derivative Minimum
cash flow pension cash flow pension
hedges liability Total hedges liability Total
---------------------------------------------------------------------------------------------------------------------------------
Amount arising $ 10.7 $ (0.9) $ 9.8 $ (162.0) $ (1.2) $ (163.2)
Income tax expense (recovery) 3.8 (0.3) 3.5 (59.6) (0.6) (60.2)
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Net 6.9 (0.6) 6.3 (102.4) (0.6) (103.0)
Accumulated other comprehensive income
(loss), beginning of period (95.6) (110.9) (206.5) 135.6 (95.2) 40.4
---------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income
(loss), end of period $ (88.7) $ (111.5) $ (200.2) $ 33.2 $ (95.8) $ (62.6)
=================================================================================================================================
Six-month periods ended June 30 (millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Unrealized Unrealized
fair value of fair value of
derivative Minimum derivative Minimum
cash flow pension cash flow pension
hedges liability Total hedges liability Total
---------------------------------------------------------------------------------------------------------------------------------
Amount arising $ (23.0) $ (1.8) $ (24.8) $ (137.8) $ (2.1) $ (139.9)
Income tax expense (recovery) (7.9) (0.7) (8.6) (55.3) (1.0) (56.3)
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Net (15.1) (1.1) (16.2) (82.5) (1.1) (83.6)
Accumulated other comprehensive income
(loss), beginning of period (73.6) (110.4) (184.0) 115.7 (94.7) 21.0
---------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income
(loss), end of period $ (88.7) $ (111.5) $ (200.2) $ 33.2 $ (95.8) $ (62.6)
=================================================================================================================================
(j) Recently Issued Accounting Standards Not Yet Implemented
As would affect the Company, there are no U.S. accounting standards currently
issued and not yet implemented that would differ from Canadian accounting
standards currently issued and not yet implemented.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 6, 2004
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary