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 ____April ____ 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 Management's Discussion and Analysis
and
TELUS Corporation Consolidated Financial Statements
for the year ended December 31, 2003
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TELUS Management's Discussion and Analysis
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Forward-looking statements
==============================================================================
This document and the management's discussion and analysis contain statements
about expected future events and financial and operating results of TELUS
Corporation (TELUS or the Company) that are forward-looking. By their nature,
forward-looking statements require the Company to make assumptions and are
subject to inherent risks and uncertainties. There is significant risk that
predictions and other forward-looking statements will not prove to be accurate.
Readers are cautioned not to place undue reliance on our 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 and the United
States.
See the Risks and uncertainties section in Management's discussion 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.
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Management's discussion and analysis
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the years ended December 31,
2003 and 2002. This discussion contains forward-looking information that is
qualified by reference to, and should be read together with, the Company's
discussion regarding Forward-looking statements (see Forward-looking
statements). The Consolidated financial statements of TELUS have been prepared
in accordance with Canadian generally accepted accounting principles (GAAP),
which differ in certain respects from U.S. GAAP. See Note 22 to the
Consolidated financial statements for a summary of the principal differences
between Canadian and U.S. GAAP as they relate to TELUS. The 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.
Management's discussion and analysis is comprised of the following:
1. Core business, vision and strategy
2. Key performance drivers
3. Capability to deliver results
4. Results
* Critical accounting estimates
* Accounting policy developments
* Financial impact of price cap decisions
* Selected financial information
* Quarterly information
* Performance to 2003 targets and guidance
* Results of operations
* Liquidity and capital resources
* 2004 Outlook
* 2004 financial and operating targets and issues
* 2004 financing plan
5. Risks and uncertainties
1. Core business, vision and strategy
=====================================
Core business
TELUS Corporation, as the largest telecommunications company in Western Canada
and the second largest in Canada, provides a full range of telecommunications
products and services including data, Internet protocol (IP), voice and
wireless services. TELUS earns the majority of its revenue from access to, and
usage of, the Company's telecommunications infrastructure, or from providing
products and services that facilitate access and usage of the Company's
infrastructure.
Vision and strategy
TELUS' strategic intent, or vision, is to unleash the power of the Internet to
deliver the best solutions to Canadians at home, in the workplace and on the
move. TELUS' strategy for growth is to focus exclusively on core
telecommunications business in Canada. As a result it has evolved from a
regional telecommunications company in 1999, serving 28% of Canada's
population, to a strong national, facilities-based player in the growth areas
of wireless, data and IP. The Company embarked on this strategy to take
advantage of the significant growth opportunities that the national market
offers.
Corporate background
TELUS Corporation was created from the 1999 merger of BC TELECOM and the former
TELUS - two Western Canadian incumbent local exchange carriers (ILECs) - and
the acquisition in 2000 of both the Eastern Quebec ILEC QuebecTel (now TELUS
Quebec) and the national digital wireless company Clearnet Communications Inc.
(Clearnet). BC TELECOM and TELUS were long-established, regional full-service
telecommunications companies. At the time of the 1999 merger, TELUS announced
its plans to provide telecommunications services in other parts of Canada. From
1999 through 2001, TELUS constructed a national fibre-optic network,
subsequently supplemented by fibre rings in major centres in Central Canada. In
2000, TELUS began offering business voice, data and other services outside its
Western base, principally in the province of Ontario, and wireless resale
services in the provinces of Ontario, Manitoba and Saskatchewan. The purchase
of QuebecTel in June 2000 allowed TELUS to accelerate its market entry into the
province of Quebec. With the acquisition of Clearnet in October 2000, and the
subsequent integration of mobility services, TELUS became a leading Canadian
wireless service provider.
Early in 2001, TELUS acquired additional wireless spectrum in major population
areas in the Industry Canada PCS spectrum auction. During 2001, TELUS sold
non-core assets including its directory advertising business and real estate,
and exited the equipment leasing business. The Company also acquired six
smaller data/IP, hosting and application development companies and assets
largely focused on Central Canada. In 2002, TELUS implemented a new advanced
intelligent national long distance and card service platform, integrated TELUS
Quebec's Internet backbone with TELUS' national Internet backbone, completed
national integration of TELUS' wireless operations in Alberta and B.C. with
Clearnet Communications and QuebecTel Mobilite, upgraded to a next generation
1X wireless data network across Canada, began transforming the Company's
national network to IP-based technology, completed several billing system
integrations and conversions at TELUS Mobility and TELUS Communications, and
began to realize significant operating savings in TELUS Communications from
implementation of the Operational Efficiency Program. In 2003, the Company
became the first in Canada, and one of the first in the world, to deploy an
IP-based network that is designed to carry high-quality voice, data and video
applications. Significant improvements in profitability and free cash flow were
realized in 2003 from TELUS Communications as a result of the Operational
Efficiency Program, and from TELUS Mobility operations as a result of network
revenue growth and scale efficiencies.
The Company's principal subsidiaries are TELUS Communications Inc. (including
TELE-MOBILE COMPANY partnership), TELUS Quebec Inc. (including TELUS
Communications (Quebec) Inc.) and TELUS Services Inc. (including TELUS Services
Partnership).
The Company's reportable segments, which reflect TELUS' organization structure
and are used to manage the business, are TELUS Communications and TELUS
Mobility. The two segments are differentiated based on products and services,
distribution channels, technology, and regulatory treatment. Intersegment sales
are recorded at the exchange value, which is the amount agreed to by the
parties. Segmented information is presented in Note 20 of the Consolidated
financial statements, and discussed in the following sections.
Strategic imperatives
TELUS continues to be guided by its six strategic imperatives established more
than three years ago that serve as a guideline for the Company's actions. Some
examples of TELUS' progress in 2003 against these imperatives follow:
1. Building national capabilities across data, IP, voice and wireless
* A call centre was established in Montreal to in-source Internet help
desk services from a third party.
* TELUS Mobility enhanced its national Mike's Direct Connect digital
2-way radio features to allow roaming in different regions in Canada.
Mike's service area now stretches across most of Canada, and in 2004
push-to-talk roaming across North America is planned through roaming
agreements with Nextel.
2. Providing integrated solutions that differentiate TELUS from its
competitors
* TELUS started migrating toll voice traffic onto its next generation
network (NGN) in July 2003, beginning the transformation of the TELUS
network to a single IP network designed to carry high-quality voice,
data and video applications, and giving TELUS a competitive advantage in
the business marketplace. For business customers, TELUS IP-One was
launched to provide a full suite of IP-based advanced application
services and the ability to integrate voice mail, e-mail, data and video
through a user-friendly online Web portal.
* For consumers, additional emerging broadband applications are
currently being explored. The Company now offers a legal high-quality
music download service. In addition, TELUS received a broadcasting
distribution licence from the Canadian Radio-television and
Telecommunications Commission (CRTC) in the fall of 2003 to offer
digital television service in select communities across
Alberta and B.C., as well as a licence to offer commercial
video-on-demand (VOD) services. Using TELUS' existing high-speed
infrastructure, these licences could enable the Company to compete with
cable companies and satellite service providers for TV entertainment
services. TELUS is testing these services and further evaluating them
for potential introduction in 2004.
3. Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy and focus TELUS' resources on core business
* A partnership with the Calgary Health Authority was established to
deliver end-to-end human resources solutions to health care and other
organizations.
* TELUS Mobility, with Spotnik Mobile, began a national roll-out of
public Wi-Fi Hotspots and have acquired the rights to provide public
Wi-Fi access in more than 450 sites in transportation facilities,
hotels, office complexes, food service establishments and other
high-traffic locations.
* TELUS continues its strategic relationship with Verizon
Communications, the largest U.S. provider of wireline communications,
and a major U.S. wireless service provider.
* The Company divested several smaller non-strategic properties for cash
proceeds of $51.2 million in 2003.
4. Focusing relentlessly on the growth markets of data, IP and wireless
* TELUS signed a seven-year, $160 million sub-contract with IBM Canada
to provide TD Bank Financial Group with managed data services across
Canada. Connecting these sites with TELUS' NGN will represent the
largest network migration undertaken in the Canadian telecommunications
industry.
* High-speed Internet subscribers increased by 37% to 561,600.
* TELUS Mobility continued to grow its roster of 1X Wireless Web devices
and services featuring wireless e-mail, text messaging, Web browsers,
organizer applications and Java(tm) support. A brand campaign that
highlighted TELUS' new camera phones and picture messaging service
helped to establish a leadership position for TELUS in this market area.
* In 2003, 52% of TELUS' revenue came from wireless and data, up from
48% in 2002 and 28% three and a half years ago.
5. Going to market as one team, under a common brand, executing a single
strategy
* TELUS' brand, with its fresh, nature-based and non-technical approach
and future-friendly brand promise, achieved high rankings in advertising
awareness in Canada at the end of 2003.
6. Investing in internal capabilities to build a high-performance
culture and efficient operations
* Closed or consolidated 20 additional customer contact centres into
call centre campuses in major centres in order to deploy common systems
and platforms and more effectively handle calls.
2. Key performance drivers
==========================
To focus on the opportunities and challenges and create value for shareholders,
TELUS sets corporate priorities each year.
In 2003, the priorities were as follows:
* delivering operational efficiency
* improving levels of customer service
* enhancing TELUS Mobility's leadership position in North American wireless
industry
* strengthening TELUS' financial position
* improving profitability in Central Canada
* reaching a collective agreement
In 2004, the priorities are as follows:
* reaching a collective agreement
* growing brand value through superior customer service
* revitalizing wireline growth
* driving towards leadership in high-speed Internet
* enhancing TELUS Mobility's leadership position in wireless
* embracing continual cost efficiency.
Operational efficiency
All of the objectives of the Operational Efficiency Program for 2003 were
achieved or exceeded, as shown in the table below. TELUS Communications plans
to continue to reduce costs and internalize a cost-conscious mentality
throughout the organization. In 2004, approximately $96 million of additional
savings from the Operational Efficiency Program are expected, bringing TELUS
Communications ongoing annual savings of $550 million.
TELUS Communications EBITDA (see Non-GAAP measures used by management in notes
following Selected Financial Information for a description of EBITDA) is
expected to be relatively unchanged in 2004 as low revenue growth, additional
Operating Efficiency Program savings and improvement in non-ILEC operating
efficiency are expected to be offset by further negative price cap decision
impacts and inclusion of share-based compensation expense as adopted from
recently confirmed recommendations in Canadian Institute of Chartered
Accountants (CICA) Handbook Section 3870. Capital expenditure levels are
expected to decrease modestly in 2004 with similar levels of investment for
non-ILEC areas, high-speed Internet (ADSL), and other initiatives.
Communications segment cash flow (EBITDA excluding restructuring less capital
expenditures) is expected to be $1.13 to $1.18 billion in 2004, compared with
$1.14 billion in 2003.
2003 2004
Operational improvement objectives Actual results Target (1) Target
2003 Cumulative (2) Cumulative (2) Incremental
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Customer contact centres closed or consolidated 20 44 43 -
Communications segment phone store closures - 33 33 -
Net staff reductions 1,300 7,500 7,300 50 in 2004
Savings ($ millions) 304 454 450 Approx. 96
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(1) As disclosed in Management's discussion and analysis in the 2002
TELUS annual report.
(2) Cumulative refers to the duration of the Operational Efficiency
Program, 2001 through 2003.
Customer service
An important TELUS priority is to grow brand value through superior customer
service, network reliability and customer solutions.
In 2003, TELUS Mobility continued to provide superior customer service as
evidenced by its very low level of customer disconnects called churn - an
average of only 1.5% per month. This was accomplished through the reliability
of the two digital networks, expanded coverage of the networks and excellent
customer care provided from regional centres across Canada.
Service improvements introduced by TELUS Communications during 2003
included:
* Launch and roll-out of an interactive voice recognition tool
that directs callers to the appropriate destination for four contact
centre areas (high-speed Internet, customer care, business billing and
credit). The number of misdirected calls has been reduced substantially,
and productivity and quality of service measures have improved;
* Integration of the Internet support and online billing information Web
site, telus.net, with the Company's portal mytelus.com, provides a more
seamless customer experience. This single integrated Web site provides
customers with 24-hours-per-day, seven-days-per-week access to support,
information and self-serve tools. The benefits of this site to TELUS
include more efficient Web management and customer support data
analysis.
Service levels in most areas in TELUS Communications improved in 2003 as
compared with 2002, with most retail CRTC quality of service measures meeting
or exceeding standards at December 31, 2003.
TELUS Communications' quality of service temporarily deteriorated commencing in
July of 2003 as a result of an unprecedented number of concurrent factors
including fires, windstorms, floods, power outage, computer viruses, heavy
seasonal call volumes, delays in the process of hiring and training contact
centre staff to replace team members who accepted voluntary departure
incentives, and performance and stability problems with a new trouble
management system. The result was short-term service issues and a backlog of
trouble reports, which were reflected in four indicators monitored by the CRTC,
namely: Access to Repair Bureau, Out-of-Service Cleared in 24 Hours, Repair
Appointments Met, and Access to the Business Office.
By the end of December 2003, TELUS was performing well above the CRTC standards
for two of these service areas - Access to Repair Bureau and Access to the
Business Office. Efforts to clear the backlog of trouble reports accumulated
through the fall depressed December service results for Out-of-Service Cleared
in 24 Hours and Repair Appointments Met. By late December and in January 2004,
results to standard were being demonstrated in the urban areas of British
Columbia, and throughout Alberta.
TELUS remains focused on sustaining the improvements made to date and to raise
performance in rural British Columbia above service standard. TELUS call
centres, including operator services, are now outperforming CRTC standards and
historical levels of service. Continued process enhancements and new technology
and tools are expected to help front-line team members deliver industry-leading
levels of customer service in 2004.
Leadership in wireless
In 2003, TELUS Mobility continued to lead the Canadian industry with average
revenue per subscriber unit per month (ARPU) of $57, while maintaining one of
the lowest churn rates in North America at 1.5%. TELUS Mobility EBITDA
(excluding Restructuring and workforce reduction costs) increased by an
industry-leading 52.5%, when compared with 2002. As a result of continued
EBITDA growth and reduced capital expenditures, TELUS Mobility generated
substantially improved cash flow (EBITDA excluding restructuring less capital
expenditures) to a record $455.5 million or 20.9% of Network revenue in 2003,
significantly higher than $75.1 million generated in 2002.
For 2004, TELUS plans to maintain its leadership position in terms of the
financial and operational performance of the wireless business. Innovative
marketing, strong brand, and superior customer service and retention programs
should once again fuel top-quartile industry growth in revenue, profit and cash
flow. TELUS Mobility is targeting 2004 revenue growth of 12 to 14% and EBITDA
growth of 20 to 26%. These are being driven by wireless subscriber growth
expectations of 11 to 12% and continued margin expansion from improved scale
efficiencies. TELUS Mobility 2004 capital expenditures of approximately $350
million are expected to be at a similar level to 2003 and are expected to be
focused on capacity improvements as well as network and efficiency
enhancements. TELUS Mobility cash flow (EBITDA excluding restructuring less
capital expenditures) is expected to increase to $625 to $675 million in 2004,
compared with $455.5 million in 2003.
Wireless revenue and EBITDA as a proportion of TELUS consolidated results are
expected to be approximately 36 and 33%, respectively, in 2004. This compares
with 26 and 14%, respectively, in 2001.
Strengthening TELUS' financial position
In 2003, the Company reduced net debt by $872 million, paid down a portion of
its accounts receivable securitization program and continued to improve its
financial ratios. The net debt to EBITDA ratio decreased from 3.3 times at the
end of 2002 to reach the original 2003 year-end target of 3.0 times by mid
-year, and was reduced to 2.6 times at December 31, 2003. During 2003, the
credit rating agencies improved their outlooks or trend for TELUS debt to one
'positive' and three 'stable' assessments from four 'negative' assessments at
the beginning of the year. On December 18, 2003, Moody's Investors Service
placed the long-term credit rating of TELUS Corporation under review for
possible upgrade, and subsequently announced the upgrade in the credit rating
to Baa3 (investment grade) with a stable outlook on March 2, 2004. In the bond
markets, prices on TELUS Corporation notes have appreciated by approximately
14%, while interest rate spreads over the relevant benchmark government bonds
have narrowed over the last year by 72% on average.
TELUS has set a target for the net debt to EBITDA ratio of 2.5 times or less
for the end of 2004, and 2.2 times or less for the longer term. TELUS'
long-term leverage policy for net debt to total capitalization is 45 to 50%,
compared with an actual 53% at the end of 2003. TELUS' financial targets for
2004 are outlined in more detail (see 2004 financial and operating targets and
issues).
Improving profitability in Central Canada
In 2003, TELUS Communications' non-ILEC EBITDA in Central Canada improved to a
negative $28.7 million, exceeding the original annual target of negative $60
million. This compares favourably with the negative $107.1 million recorded in
2002. Operating performance improved because of cost containment efforts and
increasing services provided on TELUS facilities (on-net). In 2004, non-ILEC
revenues are targeted to increase by approximately $55 million or 10%, while
non-ILEC EBITDA is targeted to improve by approximately $34 million to positive
$5 million.
Reaching a collective agreement
In 2000, TELUS commenced collective bargaining with the Telecommunications
Workers Union (TWU) for a new collective agreement replacing four legacy
agreements from BC TELECOM and Alberta-based TELUS. During 2003, the Company
participated in an extended conciliation process that was completed on January
12, 2004 without an agreement being reached. The parties then entered a 21-day
cooling-off period until February 2, 2004, at which time on 72 hours notice a
legal work stoppage could have occurred.
From January 5 to 26, 2004, the TWU conducted a second strike vote among its
members. On January 15, 2004, the federal Department of Labour appointed the
two conciliators as mediators to continue to work with TELUS and the TWU
towards a possible resolution. On January 19, 2004, TELUS tabled a final offer
to the TWU at a meeting with the mediators. On January 28, 2004, the Canadian
Industrial Relations Board (CIRB), in response to an unfair labour practice
complaint from the TWU, ordered TELUS Communications Inc. to offer binding
arbitration to the TWU as an option to reach a collective agreement. On January
29, 2004, given the arbitration offer, the Company withdrew its final offer and
on the same day the TWU announced that they had 86% support from those voting
for a strike mandate. However, on January 30, 2004 the TWU announced that they
had accepted the offer of binding arbitration in order to reach a new
collective agreement.
Binding arbitration has the following advantages for the parties:
* a collective agreement should be in place during 2004;
* when issues cannot be agreed to by the negotiating parties, the
arbitrator(s) will usually make a determination based on terms of
reference and typically include the business circumstances of the
company and the industry; and
* labour disruption is avoided.
Subsequently, on February 17, 2004, TELUS filed an application with the CIRB
for reconsideration of its various decisions limiting TELUS' ability to
communicate and the direction to offer binding arbitration. At the same time,
TELUS also filed an appeal with the Federal Court related to this
reconsideration application. However, TELUS is continuing to participate in the
arbitration process. At the time of writing, the Company, the TWU and the
mediators were engaged in selecting the arbitrator(s), determining the process
to be used and setting the terms of reference to be used in arbitration and
timeline. This remains an objective to be accomplished in 2004.
The following two corporate priorities are new for 2004.
Revitalizing wireline growth
TELUS Communications revenue growth in 2003 was negative 4%. In 2004 revenue is
expected to range between zero and 1% after further negative regulatory price
cap decision impacts of approximately $24 million. While this is an
industry-wide phenomenon, TELUS is targeting growth in data and IP revenues to
offset declining voice and other revenues.
TELUS plans to set the stage for revitalizing wireline growth through a
step-change improvement in marketing and sales effectiveness, which is an
important component of the Company's growth strategy over the next few years.
TELUS cannot continue to grow its wireline business by simply cutting costs,
and aims to revitalize revenue. TELUS also plans to exploit its lead in
deploying the NGN and launch of innovative data and IP applications like TELUS
IP-One.
Driving towards leadership in high-speed Internet
Another priority is to accelerate TELUS Communications' progress towards a
leadership position in high-speed Internet access. Three years ago, TELUS had a
market share of 8% and at the end of 2003 TELUS served an estimated 38% of the
high-speed market in its incumbent areas. For 2004, the target is to add
approximately 125,000 high-speed Internet subscribers, compared with 151,600
net additions in 2003.
In Alberta, B.C. and Eastern Quebec, growth in high-speed Internet access helps
protect voice revenues and provides a platform for TELUS to roll out advanced
services like TELUS IP-One, wireless local area networks and other potential
services including IP telephony and TV entertainment. TELUS' goal is to present
a unified front to customers and deliver integrated solutions across its
wireline and wireless capabilities.
3. Capability to deliver results
================================
Operational capabilities - TELUS Communications
In addition to continued operating efficiency savings, it is important for
TELUS Communications to begin addressing the decline of its revenue line. The
Company is focused on revitalizing revenue growth through new product
introductions and more effective marketing and sales. Additionally, continued
productivity and improved processes, while operating with a stable staff
levels, are expected to offset inflationary increases and maintain EBITDA
levels.
Operational capabilities - TELUS Mobility
TELUS Mobility is expected to continue to realize scale efficiencies as a
result of growing its operations nationally. A high proportion of each
additional network revenue dollar is expected to continue to flow through to
EBITDA, as TELUS Mobility expects to have sufficient resources to serve its
growing subscriber base, with continued cost control and modest hiring.
Liquidity and capital resources
During 2003, TELUS generated sufficient cash flow internally to fund capital
expenditures, payments under restructuring programs, and a reduction in
securitized receivables and debt. TELUS believes that its internally generated
cash flow, combined with its ability to access external capital, provides
sufficient resources to finance its cash requirements during 2004 and to
maintain appropriate available liquidity. The Company generally expects to
maintain a minimum of $1 billion in unutilized liquidity and to maintain or
improve its credit ratings in 2004.
4. Results
==========
Critical accounting estimates
-----------------------------
TELUS' significant accounting policies are described in Note 1 of the
Consolidated financial statements. The preparation of financial statements in
conformity with generally accepted accounting principles 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.
General
* Unless otherwise specified in the discussion of the specific critical
accounting estimates, the Company is not aware of trends, commitments,
events or uncertainties that it reasonably expects to materially affect
the methodology or assumptions associated with the critical accounting
estimates, subject to the items identified in the Forward-looking
statements section of this Management's discussion and analysis.
* During the last two fiscal years, changes were made to assumptions
underlying all critical accounting estimates to reflect current economic
conditions, updating of historical information used to develop the
assumptions and changes in the Company's debt ratings, where applicable.
Unless otherwise specified in the discussion of the specific critical
accounting estimates, it is expected that no material changes in overall
financial performance and financial statement line items would arise
either from reasonably likely changes in material assumptions underlying
the estimate or within a valid range of estimates, from which the
recorded estimate was selected, were used.
* All critical accounting estimates are uncertain at the time of making
the estimate and affect the following consolidated income statement line
items: income taxes (except for estimates about goodwill) and Common
Share and Non-Voting Share income. Similarly, all critical accounting
estimates affect the following consolidated balance sheet line items:
current assets (income and other taxes receivable); future income tax
assets or liabilities; and shareholders' equity (retained earnings).
Generally, the discussion of each critical accounting estimate does not
differ between the Company's two segments: Communications and Mobility.
The critical accounting estimates affect the consolidated income
statement and consolidated balance sheet line items as follows:
Consolidated income statement| Operating expenses
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| Restructuring Amortization
| and workforce of intangible Other
Consolidated balance sheet | Operations reduction costs Depreciation assets expense, net
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Accounts receivable X
Inventories X
Capital assets and goodwill(1) X X
Investments X
Payroll and other employee-related liabilities(2) X X X
Restructuring and workforce reduction costs X
Employee defined benefit pension plans(2) X X X
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(1) Accounting estimate, as applicable to intangible assets with
indefinite lives and goodwill, primarily affects the Company's Mobility
segment.
(2) Accounting estimate impact due to internal labour
capitalization rates.
Accounts receivable
General
* The Company considers the business area that gave rise to the accounts
receivable, performs statistical analysis of portfolio delinquency
trends and performs specific account identification when determining its
allowance for doubtful accounts. This information is also used in
conjunction with current market-based rates of borrowing to determine
the fair value of its residual cash flows arising from accounts
receivable securitization. The fair value of the Company's residual cash
flows arising from the accounts receivable securitization is also
referred to as its 'retained interest'.
* Assumptions underlying the allowance for doubtful accounts include
portfolio delinquency trends and specific account assessments made when
performing specific account identification. Assumptions underlying the
determination of the fair value of residual cash flows arising from
accounts receivable securitization include those developed when
determining the allowance for doubtful accounts as well as the effective
annual discount rate.
* These accounting estimates are in respect of the Accounts receivable
line item on the Company's consolidated balance sheet comprising
approximately 4% of total assets as at December 31, 2003. If the future
were to adversely differ from management's best estimates of the fair
value of the residual cash flows and the allowance for doubtful
accounts, the Company could experience a bad debt charge in the future.
Such a bad debt charge does not result in a cash outflow.
Key economic assumptions used to determine the fair value of residual cash
flows arising from accounts receivable securitization
* The estimate of the Company's fair value of its retained interest
could materially change from period to period due to the fair value
estimate being a function of the amount of accounts receivable sold,
which can vary on a monthly basis. See Note 9 of the Consolidated
financial statements for further analysis.
The allowance for doubtful accounts
* The estimate of the Company's allowance for doubtful accounts could
materially change from period to period due to the allowance being a
function of the balance and composition of accounts receivable, which
can vary on a month-to-month basis. The variance in the balance of
accounts receivable can arise from a variance in the amount and
composition of operating revenues, from a variance in the amount of
accounts receivable sold to the securitization trust and from variances
in accounts receivable collection performance.
Inventories
The allowance for inventory obsolescence
* The Company determines its allowance for inventory obsolescence based
upon expected inventory turnover, inventory aging and current and future
expectations with respect to product offerings.
* Assumptions underlying the allowance for inventory obsolescence
include future sales trends and offerings and the expected inventory
requirements and inventory composition necessary to support these future
sales offerings. The estimate of the Company's allowance for inventory
obsolescence could materially change from period to period due to due to
changes in product offerings and consumer acceptance of those products.
* This accounting estimate is in respect of the Inventory line item on
the Company's consolidated balance sheet, which comprises approximately
1% of total assets as at December 31, 2003. If the allowance for
inventory obsolescence was inadequate, the Company could experience a
charge to operations expense in the future. Such an inventory
obsolescence charge does not result in a cash outflow.
Capital assets and Goodwill
General
* The accounting estimates for Capital assets and Goodwill represent
approximately 66% and 18%, respectively, of the Company's consolidated
balance sheet, as at December 31, 2003. If the Company's estimated
useful lives of assets were incorrect, the Company could experience
increased or decreased charges for amortization of intangible assets or
depreciation in the future. If the future were to adversely differ from
management's best estimate of key economic assumptions and associated
cash flows were to materially decrease, the Company could potentially
experience future material impairment charges in respect of its
intangible assets with indefinite lives and goodwill. If intangible
assets with indefinite lives were determined to have finite lives at
some point in the future, the Company could experience increased charges
for amortization of intangible assets. Such charges do not result in a
cash outflow and of themselves would not affect the Company's immediate
liquidity.
The estimated useful lives of assets; the recoverability of tangible assets
* The estimated useful lives of assets are determined by a continuing
program of asset life studies. The recoverability of tangible assets is
significantly impacted by the estimated useful lives of assets.
* Assumptions underlying the estimated useful lives of assets include
timing of technological obsolescence, competitive pressures and future
infrastructure utilization plans. See Note 2(h) of the Consolidated
financial statements for discussion of changes made to the Company's
estimated useful lives of assets during the past two fiscal years.
The recoverability of intangible assets with indefinite lives; the
recoverability of goodwill
* Consistent with current industry-specific valuation methods, the
Company uses a discounted cash flow model combined with a market-based
approach in determining the fair value of its spectrum licences and
goodwill. See Note 10(c) of the Consolidated financial statements for
further discussion of methodology.
* The most significant assumptions underlying the recoverability of
intangible assets with indefinite lives and goodwill include: future
cash flow and growth projections including economic risk assumptions and
estimates of achieving desired key operating metrics and drivers; future
weighted average cost of capital; and annual earnings multiples. The
significant factors impacting these assumptions include estimates of
future market share, key operating metrics such as churn and ARPU, level
of competition, technological developments, interest rates, market
economic trends, debt levels and debt ratings. See Note 10(c) of the
Consolidated financial statements for a discussion of assumption
sensitivity testing.
Investments
The recoverability of long-term investments
* The Company assesses the recoverability of its long-term investments
on a regular, recurring basis. The recoverability of investments is
assessed on a specific identification basis taking into consideration
expectations about future performance of the investments and comparison
of historical results to past expectations.
* The most significant assumptions underlying the recoverability of
long-term investments are the achievement of future cash flow and
operating expectations. The estimate of the Company's recoverability of
long-term investments could materially change from period to period due
to the recurring nature of the recoverability assessment and due to the
nature of long-term investments (the Company does not control them).
* If the allowance for recoverability of long-term investments were
inadequate, the Company could experience an increased charge to Other
expense in the future. Such a provision for recoverability of long-term
investments does not result in a cash outflow.
Future income tax assets and future income tax liabilities
The composition of future income tax assets and future income tax liabilities
* Future income tax assets and liabilities are comprised of temporary
differences between the carrying amount and tax basis of assets and
liabilities as well as tax losses carried forward. The timing of the
reversal of the temporary differences is estimated and the tax rate
substantively enacted for the period of reversal is applied to the
temporary difference. The carrying amounts of assets and liabilities are
based upon the amounts recorded in the financial statements and are
therefore subject to accounting estimates that are inherent in those
balances. The tax basis of assets and liabilities as well as tax losses
carried forward are based upon the applicable income tax legislation,
regulations and interpretations, all of which in turn are subject to
interpretation. The timing of the reversal of the temporary differences
is estimated based upon assumptions of expectations of future results of
operations.
* Assumptions underlying the composition of future income tax assets and
future income tax liabilities include expectations about future results
of operations and the timing of reversal of deductible temporary
differences and taxable temporary differences. These assumptions also
affect classification between income and other taxes receivable and
future income tax assets. See Risks and uncertainties, Tax matters. The
composition of future income tax assets and future income tax
liabilities is reasonably likely to change from period to period because
of the significance of these uncertainties.
* This accounting estimate is in respect of material asset and liability
line items on the Company's consolidated balance sheet comprising
approximately 5% of total assets and 6% of total liabilities and
shareholders' equity, respectively, as at December 31, 2003. If the
future were to adversely differ from management's best estimate of future
results of operations and the timing of reversal of deductible temporary
differences and taxable temporary differences, the Company could
experience material future income tax adjustments. Such future income
tax adjustments do not result in immediate cash outflows and, of
themselves, would not affect the Company's immediate liquidity.
Accounts payable and accrued liabilities (payroll and other employee-related
liabilities)
The accruals for payroll and other employee-related liabilities
* As discussed elsewhere in this Management's discussion and analysis,
TELUS Communications Inc. is in collective bargaining with the
Telecommunications Workers Union and is proceeding to binding
arbitration. The outcome of achieving a new collective agreement could
differ from the Company's accrued estimates. Also contained within the
accruals for payroll and other employee-related liabilities is a
significant accrual in respect of performance-based, employee incentive
compensation that may vary by quarter based upon estimates of achieving
the pre-determined annual corporate objectives.
* Assumptions underlying the accruals for payroll and other
employee-related liabilities that are uncertain at the time of making
the estimate include the decision of the arbitrator in the settlement of
the collective agreement, personal performance of employees, and
operational and financial performance as compared to pre-determined
annual business unit and corporate objectives.
* These accounting estimates are included in the operating expense line
within the Company's consolidated income statement. If the settlement of
the collective agreement or performance objective achievement resulted
in the Company's associated accrual being materially understated, the
immediate impact on the Company's financial position could be a larger
than accrued demand on liquidity and a material adjustment recorded in
the results of operations.
Restructuring and workforce reduction costs
The accruals for restructuring and workforce reduction costs
* As required by generally accepted accounting principles, the accrual
for Restructuring and workforce reduction costs was built up from a
sufficiently detailed action plan that included a cost estimate for each
action therein.
* Assumptions underlying the accruals for Restructuring and workforce
reduction costs that are uncertain at the time of making the estimate
include the proportion of eligible participants accepting offers under
the Operational Efficiency Program.
* This accounting estimate is in respect of a material line item on the
Company's consolidated income statement for the years ended December 31,
2003 and 2002. If the accrual for Restructuring and workforce reduction
costs was inadequate, the Company could experience an increased charge
to operations expense in the future.
Employee defined benefit pension plans
Certain actuarial and economic assumptions used in determining defined benefit
pension costs, accrued pension benefit obligations and pension plan assets
* The Company reviews industry practices, trends, economic conditions
and data provided by actuaries when developing assumptions used in the
determination of defined benefit pension costs and accrued pension
benefit obligations. Pension plan assets are generally valued using
market prices, however some assets are valued using market estimates
when market prices are not readily available. Defined benefit pension
costs are also affected by the quantitative methods used to determine
estimated returns on pension plan assets. Actuarial support is obtained
for interpolations of experience gains and losses that affect the
defined benefit pension costs and accrued benefit obligations. The
discount rate, which is used to determine the accrued benefit
obligation, is usually based upon the yield on long-term, high-quality
fixed term investments. The expected long-term rate of return is based
upon forecasted returns of the major asset categories and weighted by
plans' target asset allocations. Future increases in compensation are
based upon the current benefits policies and economic forecasts.
* Assumptions used in determining defined benefit pension costs, accrued
pension benefit obligations and pension plan assets include: discount
rates, long-term rates of return for plan assets, market estimates and
rates of future compensation increases. Material changes in overall
financial performance and financial statement line items would arise
from reasonably likely changes, because of revising assumptions to
reflect updated historical information and updated economic conditions,
in the material assumptions underlying this estimate. See Note 19(g) of
the Consolidated financial statements for further analysis.
* This accounting estimate is in respect of a component of the largest
operating expense line item on the Company's consolidated income
statement. If the future were to adversely differ from management's best
estimate of assumptions used in determining defined benefit pension
costs, accrued benefit obligations and pension plan assets, the Company
could experience future increased defined benefit pension expense. The
magnitude of the immediate impact is lessened, as the excess of net
actuarial gains and losses in excess of 10% of the greater of the
benefit obligation and the fair value of the plan assets is amortized
over the average remaining service period of active employees of the
plan.
Accounting policy developments
------------------------------
Guarantees
Commencing with the Company's 2003 fiscal year, the new guidelines of the
Canadian Institute of Chartered Accountants (CICA) for the disclosure of
guarantees (CICA Accounting Guideline AcG-14) apply to the Company (see Note
17(e) of the Consolidated financial statements). The guideline elaborates on
required disclosures by a guarantor in its financial statements about
obligations under certain types of guarantees that it has issued.
Asset retirement obligations
During the Company's 2003 fiscal year, the Company early adopted the new
recommendations of the CICA for accounting for asset retirement obligations
(CICA Handbook Section 3110) (see Note 1(m) of the Consolidated financial
statements). The new section focuses on the recognition and measurement of
liabilities for statutory, contractual or legal obligations, normally when
incurred, associated with the retirement of property, plant and equipment when
those obligations result from the acquisition, construction, development or
normal operation of the assets. All amounts arising from the application of
this accounting policy were not significant.
Employee future benefits
During the fourth quarter of 2003, the Company adopted the recommendations of
the CICA dealing with incremental disclosure related to employee benefit plans
(CICA Handbook Section 3461) (see Note 19 of the Consolidated financial
statements).
Share-based compensation
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) will apply to the Company. The amendments
will result in the Company no longer being able to use the intrinsic method of
accounting for share options granted to employees. The Company has selected the
modified-prospective transition method (also referred to as the retroactive
application without restatement method), which will be implemented effective
January 1, 2004.
Hedging relationships
Commencing with the Company's 2004 fiscal year, the new guidelines of the CICA
for accounting for hedging relationships (CICA Accounting Guideline AcG-13)
apply to the Company. The Company's existing hedge accounting policy is
compliant with the new guideline (see Note 1(g) of the Consolidated financial
statements).
Financial impact of price cap decisions
---------------------------------------
On May 30, 2002 and July 31, 2002, the CRTC announced its decisions on the
Regulatory Framework for the Second Price Cap Period for the ILECs (incumbent
local exchange carriers), or Telecom Decision 2002-34 and Telecom Decision
2002-43, which established the framework for regulation of ILECs, including
TELUS. These decisions cover a four-year period beginning June 2002 for TELUS
Communications Inc. (TCI) and beginning August 2002 for TELUS Communications
(Quebec) Inc. (TCQI). In an effort to foster competition for residential basic
service in non-high cost service areas (non-HCSAs), the concept of a deferral
account mechanism was introduced by the CRTC, as an alternative to mandating
price reductions. The deferral account arises from the CRTC requiring the
Company to defer the income statement recognition of a portion of the monies
received in respect of residential basic services provided to non-HCSAs. The
Company has adopted the liability method of accounting for the deferral
account. Other than for the interest accrued on the balance of the deferral
account, which would be included in financing costs, all income statement
effects of the deferral account are recorded through operating revenues (see
Risks and uncertainties, Regulatory - Price cap regulation).
On March 18, 2003, the CRTC issued Telecom Decision 2003-11, which finalized
for the industry the assignment of tariffed services to the service baskets
established in the Regulatory Framework for the Second Price Cap Period. Also
on March 18, 2003, the CRTC released Telecom Decision-2003-18, TELUS
Communications Inc. - 2002 Annual Price Cap Filing, in which it approved, on a
final basis, the majority of the applications filed in 2002 by TELUS proposing
rate changes pursuant to Decision 2002-34. On August 27, 2003, the CRTC
released Telecom Order 2003-352 - 2003 Annual Price Cap Filing. This order
approved all of TCI's tariff applications, for implementation on a prospective
basis, to meet its 2003 price cap commitments.
On August 22, 2003, the CRTC issued Telecom Decision 2003-56, which finalized
for TCQI the assignment of tariffed services to the service baskets established
in Decision 2002-43. The assignment was made in a manner very similar with the
assignments for large ILECs in Decision 2003-11. Also on August 22, 2003, the
CRTC issued Telecom Decision 2003-57, which approved, with changes,
applications filed by TCQI for rate changes and directed TCQI to file further
rate changes to meet its 2002 price cap commitment. All other TCQI rates were
approved on a final basis.
The impact of these decisions on TELUS was a decrease in Communications segment
Operating revenues of $78.2 million in 2003, when compared with 2002. In
addition, TELUS Communications' EBITDA (excluding restructuring) decreased by
$78.5 million in 2003, when compared with 2002.
Selected financial information
------------------------------
The following selected three-year consolidated financial information has been
derived from and should be read in conjunction with the audited Consolidated
financial statements of TELUS for the year ended December 31, 2003, and its
annual audited Consolidated financial statements for previous years.
Three-year data 2003 2002 2001
($ in millions except per share amounts)
---------------------------------------------------------------------------------------------------------------------------------
Consolidated financial information
Operating revenues 7,146.0 7,006.7 7,080.5
Operations expense 4,301.9 4,488.1 4,550.9
Restructuring and workforce reduction costs 28.3 569.9 198.4
Financing costs and other 651.3 646.8 607.5
Income taxes (recovery) 176.9 (42.5) 93.4
Income (loss) from continuing operations 331.5 (229.0) (138.8)
Discontinued operations - - 592.3
------------- ------------- -------------
Net income (loss) 331.5 (229.0) 453.5
Common Share and Non-Voting Share income (loss) 320.9 (239.3) 443.0
Earnings (loss) per common share(1) - basic
Continuing operations 0.92 (0.75) (0.51)
Discontinued operations - - 2.02
-------------- ------------- -------------
Net income 0.92 (0.75) 1.51
Earnings (loss) per common share(1) - diluted
Continuing operations 0.91 (0.75) (0.51)
Discontinued operations - - 2.02
------------- ------------- -------------
Net income 0.91 (0.75) 1.51
Cash dividends declared per common share(1) 0.60 0.60 1.20
Total assets 17,477.5 18,219.8 19,265.6
Current maturities of long-term debt 221.1 190.3 229.9
Long-term debt 6,469.4 8,197.4 8,651.4
Pension, post-retirement, deferred hedging liability
and other long-term liabilities 983.8 193.9 188.7
------------- ------------- -------------
Total long-term financial liabilities 7,453.2 8,391.3 8,840.1
Future income tax liabilities 1,007.0 992.3 1,326.6
Non-controlling interest 10.7 11.2 8.0
Common equity 6,442.7 6,214.4 6,767.6
Convertible debentures 149.6 148.5 147.4
Preference and preferred share capital 69.7 69.7 69.7
Cash provided by operating activities 2,144.0 1,741.0 1,407.8
Capital expenditures 1,252.7 1,697.9 2,605.3
Other information
EBITDA (excluding restructuring)(2) 2,844.1 2,518.6 2,529.6
EBITDA(3) 2,815.8 1,948.7 2,331.2
Free cash flow(4) 960.6 (1.4) (1,339.3)
Free cash flow (2004 method)(5) 844.9 (139.6) (1,143.9)
---------------------------------------------------------------------------------------------------------------------------------
(1) Includes Common Shares and Non-Voting Shares.
Non-GAAP measures used by management to evaluate performance of business
units and segments
(2) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) excluding Restructuring and workforce reduction costs is
calculated as:
($ in millions) 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
Operating revenues 7,146.0 7,006.7 7,080.5
Less Operations expense 4,301.9 4,488.1 4,550.9
---------------------------------------------------------------------------------------------------------------------------------
EBITDA excluding Restructuring and workforce reduction costs 2,844.1 2,518.6 2,529.6
---------------------------------------------------------------------------------------------------------------------------------
The Company has issued guidance on and reports EBITDA excluding
Restructuring and workforce reduction costs because it is a key measure
used by management to evaluate performance of business units and it is
utilized in measuring compliance with debt covenants. The Company also
believes EBITDA is a measure commonly reported and widely used by
investors as an indicator of a company's operating performance and
ability to incur and service debt. The Company believes EBITDA assists
investors in comparing a company's performance on a consistent basis
without regard to depreciation and amortization, which are non-cash in
nature and can vary significantly depending upon accounting methods or
non-operating factors such as historical cost; and without regard to
Restructuring and workforce reduction costs, which can be transitional
in nature. 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.
(3) Targets for 2004 have been set based upon EBITDA including
Restructuring and workforce reduction costs. The definition of EBITDA
was amended for 2004 to reflect a change in how the Company measures
operating performance, as restructuring costs are anticipated to occur
for the foreseeable future. See table below for the calculation. The
2004 target also reflects adoption of CICA Handbook Section 3870 for
share-based compensation and other share-based payments on a prospective
basis, which is expected to be approximately $45 million in 2004.
($ in millions) 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
Operating revenues 7,146.0 7,006.7 7,080.5
Less Operations expense 4,301.9 4,488.1 4,550.9
Less Restructuring and workforce reduction costs 28.3 569.9 198.4
---------------------------------------------------------------------------------------------------------------------------------
EBITDA 2,815.8 1,948.7 2,331.2
(4) Free cash flow excludes Restructuring and workforce reduction costs
and payments, 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
receivables) and after funding capital expenditures and dividends. This
measure is useful to reflect ongoing cash flows as restructuring and
workforce reduction costs and payments can change dramatically and are
not indicative of ongoing cash flow levels. The following reconciles
Free cash flow with Cash provided by operating activities:
($ in millions) 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 2,144.0 1,741.0 1,407.8
Less Net employee defined benefit plans expense (credits) 53.0 (9.8) (45.7)
Less Employer contributions to employee defined benefit plans (99.8) (75.3) (48.1)
Less Non-cash working capital changes,
except change in taxes and interest 49.2 279.4 48.0
Less Other, net operating activities 44.0 (11.6) (7.8)
Capital expenditures (1,252.7) (1,697.9) (2,605.3)
---------------------------------------------------------------------------------------------------------------------------------
Free cash flow (2004 method) 844.9 (139.6) (1,143.9)
Add back Restructuring and workforce reduction cash payments 287.7 273.8 129.8
Dividends (172.0) (135.6) (325.2)
---------------------------------------------------------------------------------------------------------------------------------
Free cash flow 960.6 (1.4) (1,339.3)
Free cash flow and free cash flow (2004 method) are calculated below.
The measures for 2002 and 2001 have been restated on a consistent basis
to include interest received, which, in 2003 and 2002 was primarily for
the settlement of tax matters.
($ in millions) 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
EBITDA (excluding restructuring) 2,844.1 2,518.6 2,529.6
Cash interest paid (657.5) (675.8) (623.3)
Cash interest received 41.6 24.5 14.6
Income taxes received (paid) 165.5 18.6 (329.7)
Capital expenditures (1,252.7) (1,697.9) (2,605.3)
Dividends (172.0) (135.6) (325.2)
Investment tax credits received
(included in both EBITDA and cash income taxes (recovery)) (8.4) (53.8) -
---------------------------------------------------------------------------------------------------------------------------------
Free cash flow 960.6 (1.4) (1,339.3)
Restructuring and workforce reduction cash payments (287.7) (273.8) (129.8)
Add back Dividends 172.0 135.6 325.2
---------------------------------------------------------------------------------------------------------------------------------
Free cash flow (2004 method) (5) 844.9 (139.6) (1,143.9)
(5) Targets for 2004 have been set based upon free cash flow after
restructuring payments and before dividend 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.
Quarterly information
---------------------
($ in millions,
except per
share amounts) 2003 Q4 2003 Q3 2003 Q2 2003 Q1 2002 Q4 2002 Q3 2002 Q2 2002 Q1
---------------------------------------------------------------------------------------------------------------------------------
Operating revenues 1,825.6 1,806.2 1,773.3 1,740.9 1,794.4 1,766.3 1,748.0 1,698.0
Restructuring and
workforce reduction
costs 16.2 2.3 3.3 6.5 241.0 313.3 3.1 12.5
Net income (loss) 49.6 115.9 74.8 91.2 (139.2) (107.4) 18.4 (0.8)
Per weighted average
Common Share and
Non-Voting Share
outstanding
- basic 0.13 0.32 0.21 0.26 (0.41) (0.35) 0.05 (0.01)
- diluted 0.13 0.32 0.21 0.26 (0.41) (0.35) 0.05 (0.01)
Dividends declared
per Common Share
and Non-Voting
Share outstanding 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15
---------------------------------------------------------------------------------------------------------------------------------
Performance to 2003 targets and guidance
----------------------------------------
TELUS exceeded or met all of its original targets and final guidance for TELUS
Mobility and exceeded or met all of the original targets and final guidance for
consolidated results, except for the original target for consolidated revenue,
which was negatively impacted by performance of the TELUS Communications. The
Communications segment exceeded or met its original targets for non-ILEC
EBITDA, capital expenditures and high-speed Internet subscriber net additions,
however, the original targets for segment revenue and segment EBITDA were not
achieved. The original target for non-ILEC revenue was met, when adjusted for
the revenue impact of asset dispositions. Communications segment results also
did not achieve final guidance for segment revenues and slightly exceeded final
guidance for capital expenditures, while meeting all other final guidance
targets. See the Results of operations for discussion of 2003 results, as
compared with 2002.
Performance to 2003 targets
and guidance 2003 2002 Met M Met M
Results Annual report Revised
targets for Not guidance for Not
2003 Met X 2003 Met X
=================================================================================================================================
Consolidated
Revenues $7.15 billion $7.2 to $7.1 to $7.2 billion(2) M
$7.3 billion X
---------------------------------------------------------------------------------------------------------------------------------
EBITDA
(excluding restructuring) $2.84 billion $2.7 to M $2.75 to $2.85 billion(2) M
$2.8 billion $2.8 to $2.85 billion(3) M
---------------------------------------------------------------------------------------------------------------------------------
Earnings per share - basic 92 cents 35 to 55 cents M 50 to 70 cents(1) M
80 to 90 cents(2) M
85 to 95 cents(3) M
---------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $1.253 billion Approx. M $1.2 to $1.3 billion(2) M
$1.5 billion $1.2 to $1.25 billion(3) ~
Approx. $1.25 billion(4) M
---------------------------------------------------------------------------------------------------------------------------------
Free cash flow $961 million $500 to M $800 million to
$600 million $1 billion(2) M
$900 million to
$1 billion(3) M
$915 to $965 million(4) M
---------------------------------------------------------------------------------------------------------------------------------
Net debt to EBITDA ratio 2.6 times 3.0 times M 2.8 times or less(2) M
2.7 times or less(3) M
---------------------------------------------------------------------------------------------------------------------------------
Communications segment
Revenue (external) $4.79 billion $5.0 to X $4.85 to $4.9 billion(2) X
$5.05 billion $4.8 to $4.85 billion(3) X
---------------------------------------------------------------------------------------------------------------------------------
Non-ILEC revenue $555.4 million $575 million ~ (5) Approx. $555 million(4) M
---------------------------------------------------------------------------------------------------------------------------------
EBITDA
(excluding restructuring) $2.029 billion $2.075 to X $2.0 to $2.075 billion(2) M
$2.15 billion $2.025 to $2.05 billion(3) M
---------------------------------------------------------------------------------------------------------------------------------
Non-ILEC EBITDA $(28.7) million Approx. M Approx. $(30) million(2) M
$(60) million
---------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $893 million Approx. M $850 to $900 million(2) M
$1.05 billion $850 to $875 million(3) X
Approx. $875 million(4) X
---------------------------------------------------------------------------------------------------------------------------------
High-speed Internet net additions 151,600 150,000 to M Approx. 125,000(2) M
175,000 M Approx. 150,000(3) M
---------------------------------------------------------------------------------------------------------------------------------
Mobility segment
Revenue (external) $2.36 billion $2.2 to M $2.25 to $2.3 billion(2) M
$2.25 billion $2.3 to $2.35 billion(3) M
---------------------------------------------------------------------------------------------------------------------------------
EBITDA $815 million $625 to M $675 to $700 million(1) M
$650 million $750 to $775 million(2) M
$775 to $800 million(3) M
---------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $360 million Approx. M $350 to $400 million(2) M
$450 million $350 to $375 million(3) M
Approx. $375 million(4) M
---------------------------------------------------------------------------------------------------------------------------------
Wireless subscriber net additions 431,100 400,000 to M Approx. 350,000(1) M
450,000 M 350,000 to 375,000(2) M
Approx. 400,000(3) M
---------------------------------------------------------------------------------------------------------------------------------
(1) First quarter revised guidance.
(2) Second quarter revised guidance.
(3) Third quarter revised guidance.
(4) December 18, 2003 final guidance.
(5) Revised downward by $20 million for the divestiture of application
development assets.
Results of operations
---------------------
During the first quarter of 2003, the Canadian economy was operating at near
full production capacity due to strong domestic demand. However, due to
unforeseen developments over the second and third quarters of 2003 (e.g. SARS,
mad cow disease, power blackout in Ontario), economic growth was weaker than
expected. In addition, the 21% appreciation of the Canadian dollar against the
U.S. dollar constrained Canadian economic growth. Softness in wireline services
continued in 2003, and TELUS Communications experienced a decrease of about 4%
in revenues compared with expectations at the beginning of the year of flat to
1% growth. In contrast, strong growth occurred in the wireless industry, and
TELUS Mobility revenues increased by about 17% compared with the 9 to 11%
growth expected at the beginning of 2003.
Consolidated operating revenues increased by 2.0% and consolidated EBITDA
(excluding restructuring) increased by 12.9% for the year ended December 31,
2003, when compared with 2002. Revenue increased primarily because of 18.9%
network revenue growth and 14.3% subscriber growth in the TELUS Mobility, while
TELUS Communications revenues decreased by 4.0% because of negative regulatory
price cap impacts, continued price competition in long distance and lower
customer premises equipment sales. Consolidated EBITDA (excluding
restructuring) increased primarily because of revenue growth and scale
efficiencies in TELUS Mobility, which resulted in a 52.5% increase in TELUS
Mobility EBITDA (excluding restructuring), and savings realized in TELUS
Communications. TELUS Communications savings were a result of the Operational
Efficiency Program and reduced losses in non-incumbent operations, partly
offset by a higher pension expense in 2003 and significant non-recurring
investment tax credits recorded in 2002. TELUS Communications realized $304.0
million of incremental savings in 2003 from a cumulative reduction of
approximately 7,500 staff positions, the cumulative closure or consolidation of
44 customer contact centres, and the closure in 2002 of 33 retail phone stores.
Restructuring and workforce reduction costs decreased by $541.6 million in
2003, when compared with 2002, because the majority of the costs associated
with the second and third phases of the Operational Efficiency Program were
required to be expensed in 2002. Depreciation and amortization expenses
increased by $82.5 million or 5.3%, primarily as a result of the growth in
assets with shorter lives, including software and data network assets.
Interest on long-term and short-term debt decreased by $43.2 million in 2003,
when compared with 2002, primarily as a result of debt repurchases and
retirements. The decrease in interest on long-term and short-term debt was more
than offset by a non-recurring $82.7 million pre-tax gain on debt redemption
recorded in 2002. In addition, interest income increased by $17.4 million in
2003, primarily for the settlement of tax matters relating to prior years.
Net income increased to $331.5 million and earnings per share increased to 92
cents in 2003, compared with a net loss of $229.0 million and a net loss per
share of 75 cents in 2002. The improvement was due primarily to significant
growth in EBITDA and the lower charge for Restructuring and workforce reduction
costs in 2003.
[Basic income (loss) per Share] Graph
During 2003, the Company generated free cash flow of $960.6 million, including
the receipt of $223.0 million of income taxes and interest for the settlement
of tax matters relating to prior years. Free cash flow after payments under
restructuring and workforce reduction initiatives and before dividend payments
was $844.9 million. As a result of strong free cash flow, TELUS reduced net
debt by $872.0 million in 2003. The net debt to EBITDA ratio improved to 2.6
times from 3.3 times at the start of 2003, while the EBITDA interest coverage
ratio improved to 4.5 times from 3.7 times at the beginning of the year, both
as a result of debt reduction and improvement in EBITDA (excluding
restructuring). Reduced leverage in TELUS was recognized by the four credit
rating agencies, which improved their credit rating outlooks or trends to one
'positive' and three 'stable' assessments at the end of 2003, from four
'negative' assessments at the beginning of the year. On March 2, 2004, Moody's
Investors Service announced it had upgraded TELUS' credit rating to Baa3
(investment grade) with a stable outlook from Ba1 with a positive outlook. In
the bond markets, TELUS Corporation notes appreciated during 2003 by
approximately 14%, while interest rate spreads over the relevant benchmark
government bonds narrowed by 72% on average.
Consolidated highlights
Years ended December 31 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
($ in millions except per share amounts)
Operating revenues 7,146.0 7,006.7 139.3 2.0
EBITDA (excluding restructuring) 2,844.1 2,518.6 325.5 12.9
Restructuring and workforce reduction costs 28.3 569.9 (541.6) (95.0)
EBITDA 2,815.8 1,948.7 867.1 44.5
Net income (loss) 331.5 (229.0) 560.5 -
Earnings (loss) per share (EPS), basic 0.92 (0.75) 1.67 -
Cash dividends per share 0.60 0.60 - -
Cash provided by operating activities 2,144.0 1,741.0 403.0 23.1
Capital expenditures 1,252.7 1,697.9 (445.2) (26.2)
Free cash flow 960.6 (1.4) 962.0 -
Free cash flow (2004 method) 844.9 (139.6) 984.5 -
---------------------------------------------------------------------------------------------------------------------------------
The discussion below for Operating revenues, Operations expense, EBITDA
(excluding restructuring), Restructuring and workforce reduction costs and
Capital expenditures is presented on a segmented basis. All other discussion is
presented for the consolidated financial results.
Operating revenues - Communications segment
Years ended December 31 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
($ in millions)
Voice local(1) 2,087.5 2,106.5 (19.0) (0.9)
Voice contribution 73.2 89.4 (16.2) (18.1)
Voice long distance(2) 961.1 1,016.0 (54.9) (5.4)
Data(3) 1,368.1 1,366.6 1.5 0.1
Other 296.5 410.8 (114.3) (27.8)
---------------------------------------------------------------------------------------------------------------------------------
External operating revenue 4,786.4 4,989.3 (202.9) (4.1)
Intersegment revenue 94.5 95.3 (0.8) (0.8)
---------------------------------------------------------------------------------------------------------------------------------
Total operating revenue 4,880.9 5,084.6 (203.7) (4.0)
---------------------------------------------------------------------------------------------------------------------------------
(1) Voice local - incremental regulatory price cap reductions of
$16.0 million for the fourth quarter and $48.2 million for the year
ended December 31, 2003.
(2) Voice long distance - incremental regulatory price cap changes of
positive $0.6 million for the fourth quarter and negative $0.6 million
for the year ended December 31, 2003.
(3) Data - incremental regulatory price cap reductions of $4.3 million
for the fourth quarter and $29.4 million for the year ended December 31,
2003.
TELUS' Communications segment continued its strategic focus on driving
increased profitability by focusing on operational efficiency and cost control
in the face of declining revenues.
Voice local revenue is generated from access to the Company's network, which is
provided to customers on a monthly subscription basis, and from the Company's
optional and pay-per-use enhanced services. Local access revenue decreased by
$31.5 million in 2003, when compared with 2002, due to price cap decision
impacts and fewer access lines - partly offset by growth in non-ILEC business.
Increased local enhanced services revenue of $12.5 million in 2003 partly
offset the decline in local access revenues. Excluding the negative price cap
impacts, voice local revenue increased by $29.2 million or 1.4% in 2003, when
compared with 2002.
Consumer network access lines decreased by 36,000 in 2003 compared with a
decrease of 32,000 in 2002. Consumer line losses were a result of technological
substitution and competitive activity. Technological substitution included the
loss of lines to wireless services, making the traditional measurement of local
market share based on the share of lines a less useful metric, particularly
when basic wireline services are closely regulated and wireless services are
not. Business network access lines decreased by 5,000 in 2003 compared with a
decrease of 24,000 in 2002. Business lines decreased primarily as a result of
continued migration to more efficient ISDN services, offset by gains in Central
and Eastern Canada exceeding competitive losses in Western Canada. The 0.8%
decrease in total access lines in 2003 was slightly lower than the 1.1%
decrease in 2002.
Voice contribution revenue, which represents TELUS' share of contribution pool
funds for providing service in high cost rural service areas, decreased in
2003, when compared with 2002. The decrease was a result of a lower shortfall
calculated according to the methods prescribed by the CRTC for TELUS and other
industry competitors.
Voice long distance revenue decreased in 2003, when compared with 2002,
primarily as a result of fewer consumer and business minutes and price
competition. Consumer revenues decreased as a result of competitive pressures
including 'dial-around' services, partly offset by an increase in the monthly
long distance plan administration fee from $1.25 to $2.95 in February 2003.
Business revenues decreased as a result of fewer minutes and lower rates.
Wholesale settlement revenues were relatively unchanged in 2003 as higher
volumes were offset by lower prices. Substitution to alternative technologies
such as e-mail, Internet and wireless contributed to long distance revenue and
minute erosion. The traditional measurement of wireline long distance market
share is a less reliable measure as a result of IP and wireless substitution.
Data revenues include Internet access, hosting and applications, LAN/WAN,
gateway service, internetworking and remote access, managed information
technology (IT) services and legacy data services such as private line,
switched data services, data local access, data settlements and data equipment
sales. Wireless data revenues are included in Mobility segment Network
revenues. Communications segment data revenue growth was relatively flat as
increased Internet-related revenues were offset by price cap impacts and lower
revenues for data equipment sales and other services. This included a reduction
of application development revenues by approximately $21 million in 2003, when
compared with 2002, due to the disposal of certain assets during the second
quarter of 2003. Data revenue growth normalized for the disposal of assets and
the negative price cap impacts was $51.8 million or 3.8% in 2003, as compared
with 2002. Internet service revenues increased by $71.9 million in 2003,
primarily as a result of growth in the Internet subscriber base, partly offset
by lower introductory pricing. TELUS high-speed Internet subscriber additions
decreased by 22.4% for the year in line with market growth, but were up 5.3% to
45,500 during the fourth quarter of 2003 due in part to the success of a new
introductory offer, as well as strong market demand.
Other revenue decreased in 2003, when compared with 2002, primarily as a result
of lower voice equipment rental and sales, as well as lower rent from support
structures, lower installation and contract services, and lower individual line
service grants in respect of the conversion of multi-party lines to single
lines in high cost rural areas in Alberta in the early 1990s.
Total external operating revenue discussed above included non-ILEC revenues of
$555.4 million for the year ended December 31, 2003, compared with $527.2
million for the same period in 2002, an increase of $28.2 million or 5.3%.
Growth in non-ILEC application development revenues was affected by the
disposal of certain assets discussed in data revenues above, reducing the
revenues by approximately $21 million in 2003, when compared with 2002.
Normalized for such asset disposals, non-ILEC revenues increased by
approximately $49.2 million or 9% for the full year.
Intersegment revenues represent services provided by the Communications segment
to the Mobility segment. These revenues are eliminated upon consolidation
together with the associated expense in TELUS Mobility.
Key operating indicators - Communications segment
(000s) 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
As at December 31
-----------------
Network access lines, end of year 4,870 4,911 (41) (0.8)
Total Internet subscribers(1), end of year 881.4 801.7 79.7 9.9
Dial-up 319.8 391.7 (71.9) (18.4)
High-speed 561.6 410.0 151.6 37.0
Years ended December 31
-----------------------
Change in network access lines (41) (56) 15 26.8
Total Internet subscriber net additions(1) 79.7 131.8 (52.1) (39.5)
Dial-up (71.9) (63.4) (8.5) (13.4)
High-speed 151.6 195.2 (43.6) (22.3)
---------------------------------------------------------------------------------------------------------------------------------
(1) As a result of a subscriber audit following a billing system
conversion in the third quarter of 2002, Internet subscriber counts and
net additions for 2003 are net of reductions of approximately 13,000
dial-up subscribers and approximately 4,700 high-speed Internet
subscribers.
[TELUS Mobility Revenue] Graph
Operating revenues - Mobility segment
Years ended December 31 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
($ in millions)
Network revenue 2,183.7 1,852.7 331.0 17.9
Equipment revenue 175.9 164.7 11.2 6.8
---------------------------------------------------------------------------------------------------------------------------------
External operating revenue 2,359.6 2,017.4 342.2 17.0
Intersegment revenue 15.7 17.5 (1.8) (10.3)
---------------------------------------------------------------------------------------------------------------------------------
Total operating revenue 2,375.3 2,034.9 340.4 16.7
---------------------------------------------------------------------------------------------------------------------------------
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
significantly for the year ended December 31, 2003 as compared with 2002. The
Network revenue growth was a result of the continued expansion of TELUS
Mobility's subscriber base by 14.3% to approximately 3.4 million subscribers
from 3.0 million subscribers one year ago. In addition, ARPU increased to $57
in 2003 as compared with $55 in 2002.
TELUS Mobility's execution of its strategic focus on profitable revenue growth
and subscriber retention resulted in a higher ARPU and an improved churn rate
year over year. The improved ARPU was a result of increased usage and
disciplined pricing changes including per-minute billing and the reduction of
eligible hours included in certain 'free evening and weekend' rate plan
features. Average minutes of use (MOU) per subscriber per month were 350 in
2003 as compared with 290 in 2002. At December 31, 2003, postpaid subscribers
accounted for 82.1% of the total cumulative subscriber base as compared with
83.1% one year earlier and have been stable during the current year. Net
postpaid additions represented 74.5% of all net additions in 2003 as compared
with 72.2% in 2002. Annual total net subscriber additions of 431,000 increased
compared with last year. This was driven in part by a successful fourth quarter
advertising campaign that highlighted TELUS' new camera phones and picture
messaging service. The campaign helped to establish a market leadership
position for TELUS Mobility in the camera phone marketplace.
Blended postpaid and prepaid churn rate improved significantly to 1.5% in 2003,
as compared with 1.8% in 2002 Deactivations for the full year of 2003 were
556,100 as compared with 599,100 for the same period last year, representing a
7.2% decline despite a larger subscriber base. The decline in churn can be
attributed to improved network quality and coverage, improved client service
levels, client contracting as part of loyalty and retention programs, and
specific grandfathered rate plans related to per-second billing and the change
to certain 'free evening and weekend' rate plan features.
Equipment sales, rental and service revenue in 2003 increased by $11.2 million
or 6.8% to $175.9 million despite a decline in gross subscriber additions from
1,016,900 to 987,200, principally due to product mix and higher handset prices.
Intersegment revenues represent services provided by the Mobility segment to
the Communications segment and are eliminated upon consolidation along with the
associated expense in TELUS Communications.
Key operating indicators - Mobility segment
(000s for subscribers and additions) 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
As at December 31
-----------------
Subscribers - postpaid 2,811.8 2,490.6 321.2 12.9
Subscribers - prepaid(1) 612.2 504.9 107.3 21.3
---------------------------------------------------------------------------------------------------------------------------------
Subscribers - total 3,424.0 2,995.5 428.5 14.3
Total POPs(2) covered including
roaming/resale (millions)(3) 29.9 27.5 2.4 8.7
Years ended December 31
-----------------------
Net subscriber additions - postpaid 321.2 301.6 19.6 6.5
Net subscriber additions - prepaid(1) 109.9 116.2 (6.3) (5.4)
---------------------------------------------------------------------------------------------------------------------------------
Net subscriber additions - total 431.1 417.8 13.3 3.2
Churn, per month (%)(1)(4a) 1.5 1.8 (0.3) -
Acquisition COA(4b)
per gross subscriber addition ($)(4c) (5) 430 425 5 1.2
ARPU ($)(4d) 57 55 2 3.6
EBITDA(4e) to network revenue (%) 37.3 28.9 8.4 -
Retention COA to network revenue (%) 4.7 3.9 0.8 -
EBITDA(4e) excluding
Acquisition COA ($ millions)(4f) 1,240.0 944.0 296.0 31.4
---------------------------------------------------------------------------------------------------------------------------------
(1) Based on an audit of the prepaid platform in the fourth quarter of
2003, a one-time adjustment was made to the prepaid subscriber base.
Cumulative subscribers were reduced by approximately 7,600 in the
period. Of the 7,600, net additions as recorded for 2003 reflected a
5,000 adjustment for current year deactivations. Management believes the
deactivations related to the prior period are immaterial and therefore
net additions have not been restated. Furthermore, 2003 churn was
calculated to reflect the 5,000 deactivations in the current year.
(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
December 31, 2003, TELUS Mobility PCS digital population coverage was
22.2 million and 29.5 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.
b. 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.
c. Acquisition COA per gross subscriber addition is Acquisition COA
divided by gross subscriber activations during the period.
d. ARPU is calculated as network service revenue divided by the
average number of units on the network during the period, expressed
as a rate per month.
e. Excluding restructuring of $6.5 million in 2002.
f. EBITDA excluding Acquisition COA is a measure for operational
profitability normalized for the period costs of adding new
customers.
(5) For the year ended December 31, 2002, Acquisition COA of $425
excluded the effect of the $21.0 million favourable clarification of tax
legislation by the Ontario Provincial Sales Tax (PST) authorities,
representing a reversal of a cumulative COA liability.
Operations expense - Communications segment
($ in millions) 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 2,852.2 3,100.8 (248.6) (8.0)
---------------------------------------------------------------------------------------------------------------------------------
Operations expense for the Communications segment decreased in 2003, when
compared with 2002, primarily due to the traction of the Operational Efficiency
Program as well as lower non-ILEC expenses and lower equipment costs of sales,
partly offset by an increased pension expense in 2003. In addition, expenses
for 2002 were reduced by significant investment tax credits as a result of a
settlement of tax matters. The significant changes in operating expenses for
the year ended December 31, 2003, when compared with the same period in 2002,
were:
Operational Efficiency Program and staffing-related changes
Cumulative savings achieved since the inception of the Operational Efficiency
Program in 2001 were $454 million and all of the program targets for the end of
2003 were attained or exceeded.
* Savings in salaries, benefits, employee-related overhead costs,
contracting and consulting costs, advertising and promotions expense and
other such costs under this program were $304.0 million. Net staff
departures in 2003 under this program were approximately 1,500 for the
full year. Two small divestitures reduced staff levels by 200 for the
full year. Partly offsetting these staff reductions were the addition of
161 staff from a newly formed partnership with the Calgary Health
Authority (TELUS Sourcing Solutions) and the addition of 215 staff to
in-source Internet help desk services to a new Montreal call centre.
Neither of these two initiatives were anticipated when the Operational
Efficiency Program was announced. Consequently, Communications segment
overall staff count decreased by 1,303 for the full year. There were
18,430 full-time equivalent employees at the end of 2003, a decrease of
1,238 when compared with 19,668 at the end of 2002;
* Expenses increased by $22.5 million in 2003, when compared with 2002, as a
result of lower labour capitalization representing lower capital build
activities as a result of Operational Efficiency Program savings;
Significant non-recurring items
* Expenses for 2002 were lowered by $50.5 million as a result of
significant non-recurring investment tax credits, partly offset by $1.3
million of investment tax credits for the full year of 2003. The
investment tax credits were recognized as a result of a settlement with
tax authorities for previous years' claims and were recorded as a
reduction of operations expense;
Other changes
* Transit and termination costs decreased by $34.8 million as a result
of a significant decrease in the cost per minute of outbound traffic,
despite an increase in traffic;
* Equipment cost of sales decreased by $71.0 million, primarily as a
result of lower sales of voice and data equipment. This included
approximately $15 million of lower high-speed Internet cost of sales as
a result of reduced gross additions of high-speed Internet subscribers,
lower modem prices and recognition of certain promotional discounts to
customers recorded as an offset against revenues;
* Bad debt expense decreased by $14.6 million as a result of the effects
in 2002 of the unstable global telecom and high technology industries on
non-ILEC results, as well as reduced exposure in 2003 arising from
improved credit and collections processes;
* Revenue taxes, which are contributions to the national fund for
providing service in high cost rural service areas, decreased by $12.5
million. The decrease was primarily a result of the December 19, 2003
CRTC Decision that reduced the 2003 contribution rate from 1.3% in 2002
to 1.1% of eligible revenues;
* The expense for the Software and Related Technology and Service
Agreements with Verizon Communications Inc. (Verizon) was $8.1 million
lower in 2003, primarily because of the appreciation of the Canadian
dollar against the U.S. dollar;
* Pension expense for defined benefit and defined contribution plans
increased by $49.9 million;
* Overtime expenses increased by $11.9 million in the second half of
2003, as compared with the same period in 2002. These costs were
incurred primarily to improve customer service and clear backlogs
created by a number of natural disasters, staffing and system conversion
issues in the third quarter of 2003;
* Additional costs for the new partnership with the Calgary Health
Authority and establishment of the Montreal call centre were $7.4
million in 2003. The partnership with the Calgary Health Authority was
established to deliver end-to-end human resources solutions to health
care and other organizations, while the Montreal call centre has been
established to in-source Internet help desk services from a third party;
* Inflation and all other changes increased expenses by $54.5 million.
Included in the total segment expenses discussed above are non-ILEC operations
expenses for 2003 of $580.0 million, as compared with $634.5 million in 2002.
This represented a decrease of $54.5 million or 8.6% as a result of increasing
the proportion of on-net traffic, increased competitive data network access
discounts and other operating efficiencies including a lower bad debt expense.
Operations expense - Mobility segment
($ in millions) 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 1,559.9 1,500.1 59.8 4.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Mobility operations expense increased by $38.8 million or 2.6% in 2003
when compared with 2002 (after normalizing for the $21.0 million favourable PST
ruling in 2002). TELUS Mobility has been able to achieve significant economies
of scale as evidenced by growth in subscribers of 14.3% in 2003 and 17.9%
growth in Network revenue, with only a nominal increase in operating expenses
year-over-year.
Expenses related to equipment sales increased by $7.5 million or 2.0% in 2003
when compared with 2002. However, prior year expenses included a $21.0 million
reduction resulting from a clarification of provincial sales tax legislation
related to handset subsidies, which represented the reversal of a cumulative
liability previously recorded in marketing cost of acquisition (COA). Once
normalized to exclude the 2002 provincial sales tax credit, equipment expense
for 2003 decreased by $13.5 million or 3.4%, as compared with 2002. This
decrease was principally due to a decline in gross subscriber activations and
improved handset pricing, including favourable exchange rates, offset partially
by the introduction of a new suite of products, including the camera phone in
the fourth quarter, and increased retention activity. Gross subscriber
activations were 987,200 in 2003 as compared with 1,016,900 in 2002. Handset
costs are included in marketing COA.
Network operating expenses consist of site-related expenses, transmission
costs, spectrum licence fees, contribution revenue taxes, and other direct
costs related to network operations. Network operating expenses increased to
$371.0 million in 2003 as compared with $366.7 million in 2002. This occurred
as a result of increases in transmission and site-related expenses to support
the increased number of cell sites, a larger subscriber base, and improved
network quality and coverage. These costs were partially offset by a reduction
in Industry Canada spectrum licence fees. TELUS Mobility 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 continues to build out microwave
facilities to continue the reduction in future transmission costs. TELUS
Mobility's digital population coverage expanded by 2.1 million to 29.5 million
in 2003 due to the continued activation of digital roaming regions and network
expansion.
Marketing expenses excluding handset subsidies were $297.4 million in 2003 as
compared with $249.4 million in 2002. The increases were primarily due to
higher advertising expenses and dealer compensation costs associated with the
expanded subscriber base and to increased re-contracting activity. Despite the
higher marketing expenses, acquisition COA remained relatively flat in 2003 at
$430 as compared with $425 in 2002 (excluding any benefit from the $21.0
million PST clarification). The year-over-year cost remained relatively flat as
Mobility continued to grow profitably. Combined with the improved churn, this
indicates COA over the life of the subscriber continued to improve
significantly in 2003 as compared with 2002.
General and administration (G&A) expenses consist of employee compensation and
benefits, facilities, client services, bad debt and various other expenses. G&A
expenses were unchanged in 2003 at $512.8 million despite subscriber base
growth of 14.3% and Network revenue growth of 17.9%. TELUS Mobility increased
full-time equivalent employees (FTEs) by 4.4% to 5,387 from 5,161 one year
earlier to support the significant growth in the subscriber base and continued
expansion of its company-owned retail stores. Higher payroll costs were offset
by lower bad debts. The improvements in bad debts can be attributed to the
completion of billing system conversions in 2002 and improvement in credit and
collections. TELUS Mobility completed five major billing system conversions by
October 2002 after an 18-month integration period.
EBITDA (excluding restructuring) by segment
Years ended December 31 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
($ in millions)
Communications segment 2,028.7 1,983.8 44.9 2.3
Mobility segment 815.4 534.8 280.6 52.5
---------------------------------------------------------------------------------------------------------------------------------
TELUS Consolidated 2,844.1 2,518.6 325.5 12.9
---------------------------------------------------------------------------------------------------------------------------------
EBITDA (excluding restructuring) margin percentage(1) by segment
Years ended December 31 2003 2002 Change
---------------------------------------------------------------------------------------------------------------------------------
%
Communications segment 41.6 39.0 2.6
Mobility segment (2) 34.3 26.3 8.0
TELUS Consolidated 39.8 35.9 3.9
---------------------------------------------------------------------------------------------------------------------------------
(1) EBITDA (excluding restructuring) divided by total revenue.
(2) EBITDA (excluding restructuring of $6.5 million in 2002) as a
percentage of network revenue was 37.3% for 2003, as compared with 28.9%
(27.7% before PST clarification) for 2002.
Communications segment EBITDA (excluding restructuring) for 2002 was positively
impacted by $50.5 million of significant non-recurring investment tax credits.
Normalized for the 2002 investment tax credits and the price cap decision
impacts, Communications segment EBITDA (excluding restructuring) increased by
$173.9 million or 9.0% in 2003 as compared with 2002. EBITDA (excluding
restructuring) and the related margin improved in 2003 primarily as a result
of:
* Operational Efficiency Program savings of $304 million;
* non-ILEC EBITDA (excluding restructuring) improvements of $78.4
million;
* partly offset by negative price cap decision impacts, decreasing long
distance and other revenues, and increased pension costs.
Improved TELUS Mobility segment EBITDA (excluding restructuring of $6.5 million
in 2002) and the related margin is attributable to strong ARPU and subscriber
growth combined with a significant reduction in the churn rate and cost
containment. Consequently, EBITDA (excluding restructuring) grew by 52.5% to
$815.4 million in 2003. When the $21.0 million favourable PST clarification in
2002 is excluded, EBITDA (excluding restructuring) for 2003 increased by 58.7%.
The EBITDA (excluding restructuring) margin, when calculated as a percentage of
network revenue, improved to 37.3% for 2003 as compared with 28.9% (27.7%
before the PST clarification) for 2002.
[ Consolidated EBITA (escluding restructuring)] Graph
Restructuring and workforce reduction costs
Years ended December 31 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
($ in millions)
Communications segment 28.3 563.4 (535.1) (95.0)
Mobility segment - 6.5 (6.5) (100.0)
---------------------------------------------------------------------------------------------------------------------------------
TELUS Consolidated 28.3 569.9 (541.6) (95.0)
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction costs were recorded for initiatives under
the Company's Operational Efficiency Program. In 2001, the Company initiated
the phased Operational Efficiency Program aimed at improving operating and
capital productivity and competitiveness. The second and third phases commenced
in 2002, with the third phase continuing into 2003. The Company achieved its
target for closing or consolidating 44 Communications segment customer contact
centres by the end of 2003. It is currently expected that two additional call
centres will be closed or consolidated in 2005. The restructuring charge for
2003 exceeded the originally anticipated $20 million by $8.3 million, in part
for costs associated with approximately 50 remaining departures under the
program during the first quarter of 2004. As of December 31, 2003, no future
costs remain to be recorded under the Operational Efficiency Program.
Net staff reductions under the Operational Efficiency Program in the
Communications segment were approximately 6,700 between January 2002 and
December 2003. Since the inception of the Operational Efficiency Program in
2001, the Company has reduced its staff count by approximately 7,500, comprised
of 5,500 bargaining unit positions and 2,000 management positions. An
additional 50 staff reductions will occur under this program during 2004.
It is expected that approximately $30 million of restructuring charges will be
recorded in 2004, primarily in respect of new efficiency initiatives.
Savings in the Communications segment since inception of the Operational
Efficiency Program have increased to approximately $454 million by the end of
2003. As a result of exceeding targeted staff count reductions, TELUS believes
that the previously announced annual recurring savings from this program will
be met in 2004.
Depreciation and amortization
Years ended December 31 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
($ in millions)
Depreciation 1,272.9 1,213.7 59.2 4.9
Amortization of intangible assets 379.9 356.6 23.3 6.5
---------------------------------------------------------------------------------------------------------------------------------
1,652.8 1,570.3 82.5 5.3
---------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expenses increased in 2003, when compared with
2002, primarily as a result of growth in capital assets with shorter lives,
including billing system and customer relationship management software, and
data network capital assets. This included a write-off of Communications
segment customer relationship management software assets of $25.0 million in
2003, partially offset by lower amortization for fully amortized software
assets.
Other expense
($ in millions) 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 23.3 42.7 (19.4) (45.4)
---------------------------------------------------------------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense, income or
impairments in portfolio investments including 2002 discontinued operations,
gains and losses on disposal of property, and charitable donations.
* Accounts receivable securitization expense increased by $3.6 million
to $13.5 million in 2003, when compared with 2002. The increase was a
result of expanding the securitization program in July 2002. While the
proceeds from securitization averaged $453 million in 2003, compared
with $255 million in 2002, the proceeds at the end of 2003 were $300
million.
* Losses from portfolio investments of $11.8 million in 2003 were offset
by gains from the sale of properties of $9.2 million in 2003. For 2002,
losses from portfolio investments and properties were $27.6 million.
* Consistent with the Company's objective of contributing 1% or more of
pre-tax income, as defined under the Imagine formula, charitable
donations expense increased to $7.4 million in 2003, compared with $6.8
million in 2002.
Financing costs
($ in millions) 2003 2002 Change %
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Years ended December 31 628.0 604.1 23.9 4.0
---------------------------------------------------------------------------------------------------------------------------------
Financing costs include interest expense on long-term and short-term debt,
gains on debt repurchases, interest income, foreign exchange gains and losses
and amortization of debt issue costs.
* Financing costs in 2002 were net of an $82.7 million pre-tax gain on
debt redemption. The gain arose from the repurchase of approximately
$410 million principal amount of notes and debentures of TELUS
Corporation and TELUS Communications Inc. for a cash outlay of
approximately $318 million, including commissions and net of cross
currency swap unwind proceeds.
* Interest on long-term and short-term debt was $671.7 million in 2003,
representing a decrease of $43.2 million, when compared with 2002,
primarily a result of debt repurchases and retirements. TELUS maintains
a hedging program using cross currency swaps, and as a result, long-term
financing costs were generally unaffected by the appreciation of the
Canadian dollar against the U.S. dollar in 2003. Debt, including
long-term debt, current maturities and the deferred hedging liability
(asset), was $7,436 million at December 31, 2003 and $8,261 million at
December 31, 2002. The average debt outstanding in 2003 was $7,872
million, as compared with $8,699 million in 2002.
* Interest income, which has the effect of reducing financing costs,
increased by $17.4 million in 2003, when compared with 2002. Interest
income in both years was recognized primarily as a result of tax refunds
received from the settlement of various tax matters.
[Net Financing Costs] Graph
Income taxes (recovery)
($ in millions) 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 176.9 (42.5) 219.4 -
---------------------------------------------------------------------------------------------------------------------------------
The increase in Income taxes in 2003, when compared with 2002, was primarily
related to the $780.1 million increase in income before taxes. The effective
tax rate in 2003 was significantly impacted by two tax factors: (i) a positive
$47.0 million income tax adjustment for settlement of tax matters relating to
prior years, which had higher tax rates, partly offset by (ii) an increase in
tax expense resulting from a revaluation of future income tax assets and future
income tax liabilities caused by an increase in the tax rate in the Province of
Ontario.
Non-controlling interest
($ in millions) 2003 2002 Change %
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Years ended December 31 3.3 3.1 0.2 6.5
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Non-controlling interest primarily represents a partner's interest in a
small foreign subsidiary.
Preferred dividends
($ in millions) 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 3.5 3.5 - -
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There were no significant changes to quarterly dividends on preferred shares.
Interest on convertible debentures
($ in millions) 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 7.1 6.8 0.3 4.4
---------------------------------------------------------------------------------------------------------------------------------
The interest on convertible debentures is presented net of related income
taxes. As these debentures are convertible into Non-Voting Shares and are
classified as equity on the balance sheet, the related interest is recorded as
a charge to retained earnings rather than an interest expense.
Liquidity and capital resources
-------------------------------
Cash provided by operating activities
($ in millions) 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 2,144.0 1,741.0 403.0 23.1
---------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities increased in 2003, when compared with
2002, principally due to improvement in operating profitability, the recovery
of income taxes in 2003 associated with settlement of tax matters, an increase
in advance billings and customer deposits and lower interest, partly offset by
the reduction in securitized account receivables in 2003 compared with an
increase in securitized account receivables in 2002. EBITDA (excluding
restructuring) increased by $325.5 million in 2003. Interest paid decreased by
$18.3 million to $657.5 million in 2003 as a result of debt reduction, while
interest received increased by $17.1 million to $41.6 million in 2003,
primarily from the settlement of tax matters. Cash recovery of income taxes
associated with settlement of prior years' tax matters was $183.5 million or
$165.5 million net of tax installments in 2003, compared with $18.6 million net
of tax installments in 2002. Advanced billings and customer deposits increased
by $114.7 million during 2003 due to the continued deferral of revenue under
the price cap regime and the increase in the Mobility subscriber base. The
Company made accounts receivable securitization reduction payments of $175
million in 2003, whereas in 2002, the Company increased the amount of
securitized receivables by $150 million. Restructuring payments were $287.7
million in 2003 as compared with $273.8 million in 2002.
Cash used by investing activities
($ in millions) 2003 2002 Change %
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Years ended December 31 (1,197.8) (1,691.1) 493.3 29.2
---------------------------------------------------------------------------------------------------------------------------------
Cash used by investing activities decreased in 2003, when compared with 2002,
primarily as a result of reduced capital expenditures. The Company also
disposed of non-strategic properties and investments for total proceeds of
$51.2 million, including an administrative property under the terms of a sale
and leaseback transaction, on which an $8.2 million pre-tax gain, on total cash
proceeds of $19.3 million, was deferred and is being amortized over the term of
the lease. In 2002, the Company disposed of its remaining directory operations
in the U.S. for proceeds of $7.8 million.
Capital expenditures by segment
Years ended December 31 2003 2002 Change %
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($ in millions)
Communications segment 892.8 1,238.2 (345.4) (27.9)
Mobility segment 358.4 455.1 (96.7) (21.2)
---------------------------------------------------------------------------------------------------------------------------------
Capital expenditures - general 1,251.2 1,693.3 (442.1) (26.1)
Mobility segment - wireless spectrum 1.5 4.6 (3.1) (67.4)
---------------------------------------------------------------------------------------------------------------------------------
Total capital expenditures 1,252.7 1,697.9 (445.2) (26.2)
===========================================================================================================----------------------
Capital expenditure intensity (1) (%) 17.5 24.2 (6.7)
---------------------------------------------------------------------------------------------------------------------------------
(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 capital expenditures decreased significantly in 2003,
when compared with 2002, a result of Operational Efficiency Program initiatives
and completion of several national expansion initiatives in 2002. Non-ILEC
expenditures decreased by $91.6 million to $122.8 million as the Company
concentrated its deployment activity on meeting growth demands through the use
of assets in place. ILEC capital expenditures decreased by $253.8 million to
$770.1 million in 2003 when compared with 2002. The primary changes in ILEC
capital expenditures were:
* high-speed Internet (ADSL) facilities and systems expenditures
decreased by $94.9 million to $97.6 million in 2003 due to a focus on
higher utilization of existing facilities, the completion of accelerated
facility and system deployment in 2002, and slower growth in the
industry;
* there were no purchases of software licences from Verizon in 2003
compared with $65.1 million in 2002; and
* spending on network infrastructure decreased due to lower demand for
facilities, while spending on internal systems and processes also
decreased due to completion of initiatives in 2002, as planned, such as
the national long distance and card service platform and internal Web
enablement projects, partly offset by increased spending on new service
development.
The Communications segment capital intensity ratio was 18.3% in 2003 as
compared with 24.4% in 2002, mainly due to the significant reduction of capital
expenditures on relatively flat revenues. Cash flow (EBITDA excluding
restructuring less capital expenditures) increased by $390.3 million to
$1,135.9 million in 2003 when compared with 2002.
Mobility capital expenditures significantly decreased in 2003 when compared
with 2002. TELUS Mobility continued the enhancement of digital wireless
coverage and started building out a significant amount of microwave in 2003
aimed at reducing future leased line transmission costs. Capital spending
declined significantly year-over-year principally as a result of:
* implementation of the 1X digital network in 2002;
* digital conversion of analog networks in 2002;
* reduced coverage expansion costs in 2003 due to operationalized
roaming/resale agreements in 2002 with Bell Mobility and Aliant Telecom
Wireless; and
* improved infrastructure equipment costs and a stronger Canadian dollar.
Capital expenditure intensity for TELUS Mobility decreased to 15.2% in 2003
from 22.6% in 2002, due to both lower capital spending and significant growth
in Network revenues. As a result of continued strong growth in EBITDA
(excluding restructuring) and reduced capital expenditure intensity, Mobility
generated substantially improved cash flow (EBITDA excluding restructuring less
capital expenditures) of $455.5 million or 20.9% of Network revenue in 2003, as
compared with $75.1 million or 4.1% in 2002.
Both segments have contributed to significantly improved consolidated cash flow
(EBITDA excluding restructuring less capital expenditures) of $1,591.4 million
in 2003, when compared with $820.7 million in 2002.
[Capital Expenditures] Graph
Cash used by financing activities
($ in millions) 2003 2002 Change %
---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 (931.0) (76.0) (855.0) -
---------------------------------------------------------------------------------------------------------------------------------
Cash used by financing activities increased in 2003, when compared with 2002 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 option plans were $86.6 million for 2003, compared with
proceeds of $92.2 million for 2002 under the same plans, from exercised
warrants and from additional shares purchased by Verizon pursuant to
anti-dilutive rights.
* Public issuance of Non-Voting Shares - $nil in 2003; $337.4 million in
2002. In September 2002, a public issuance of 34.25 million Non-Voting
Shares was offered concurrently in Canada and the U.S. at a share price
of $9.85 (Canadian dollars) for aggregate gross proceeds of $337.4
million. The net proceeds of $322.9 million were used to repurchase and
repay debt, including bank debt incurred to repurchase notes of TELUS
Corporation and notes and debentures of TELUS Communications Inc., and
for general corporate purposes. The debt was repurchased at an average
discount of 21%, while equity dilution was limited to 10% from the
September 2002 public share issuance.
* Dividends to shareholders - Cash dividends paid to shareholders
increased by $36.4 million for 2003, when compared with 2002. The
increase in cash dividends resulted from an increased number of shares
outstanding, partly offset by a higher enrolment in dividend
reinvestment plans (approximately 25% for the dividend paid in October
2003, compared with approximately 21% one year earlier). The 15-cent
quarterly dividend paid per Common Share and Non-Voting Share remained
unchanged from one year earlier.
* Net debt redemptions (Long-term debt issued net of Redemptions and
repayment of long-term debt and Change in short-term obligations) were
$828.7 million in 2003. This compares with net debt repurchases and
redemptions of $341.2 million in 2002. Net debt redemptions in 2003
included approximately $645 million of bank facilities, $151 million of
medium-term notes, and $30 million of First Mortgage Bonds. In the
second half of 2002, the Company repurchased approximately $410 million
principal amount of notes and bank debt for a cash outlay of
approximately $318 million, including commissions, and net of cross
currency swap unwind proceeds.
Liquidity and capital resource measures
Dec. 31, Dec. 31,
Period ended 2003 2002 Change
---------------------------------------------------------------------------------------------------------------------------------
Components of debt and coverage ratios
Net debt(1) ($ millions) 7,518.2 8,390.3 (872.1)
Total capitalization(2) - book value ($ millions) 14,190.9 14,834.1 (643.2)
EBITDA (excluding restructuring) ($ millions) 2,844.1 2,518.6 325.5
Net interest cost(3) ($ millions) 628.0 686.8 (58.8)
Debt ratios
Fixed rate debt as a proportion of total indebtedness (%) 100.0 93.4 6.6
Average term to maturity of debt (years) 6.2 6.6 (0.4)
Net debt to total capitalization (%) 53.0 56.6 (3.6)
Net debt to EBITDA(4) 2.6 3.3 (0.7)
Coverage ratios
Earnings coverage(5) 1.7 0.6 1.1
EBITDA(6) interest coverage(7) 4.5 3.7 0.8
Other measures
Free cash flow(8) ($ millions) 960.6 (1.4) 962.0
---------------------------------------------------------------------------------------------------------------------------------
(1) Net debt is defined as Long-term debt plus current maturities of
long-term debt and cheques outstanding less Cash and temporary
investments and cross currency foreign exchange hedge asset (plus cross
currency foreign exchange hedge liability) related to U.S. dollar notes.
The cross currency foreign exchange hedge liability was $745.8 million
as at December 31, 2003 ($126.8 million hedge asset as at December 31,
2002). Net debt as calculated herein, includes a notional amount related
to accounts receivable securitization of approximately $88.1 million at
December 31, 2003 ($120.4 million at December 31, 2002), which is
required to be included in the numerator of the Leverage Ratio covenant
calculation in TELUS' credit facilities. Net debt is unaffected by
foreign exchange fluctuations because it includes (deducts) the net
deferred hedging liability (asset).
2) Total capitalization is defined as net debt plus Non-controlling
interest and Shareholders' equity.
(3) Net interest cost is defined as Net financing cost before 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. Excluding interest income, net
interest costs for the years ended December 31, 2003 and 2002,
respectively, were $671.3 million and $712.7 million.
(4) Net debt to EBITDA is defined as net debt as at the end of the
period divided by 12-month trailing EBITDA excluding Restructuring and
workforce reduction costs. This measure is substantially the same as the
Leverage Ratio covenant in TELUS' credit facilities.
(5) Earnings coverage ratio is calculated on a 12-month trailing basis
as Net income before interest expense on total debt and income tax
expense divided by interest expense on total debt.
(6) Excluding Restructuring and workforce reduction costs.
(7) EBITDA interest coverage is defined as EBITDA excluding
Restructuring and workforce reduction costs divided by Net interest
cost. Excluding interest income, the ratios for the 12-month periods
ended December 31, 2003 and 2002, respectively, were 4.2 and 3.5. This
measure is substantially the same as the Coverage Ratio covenant in
TELUS' credit facilities.
(8) See Note 4 of the Selected Financial Information table.
The long-term debt balance, including current maturities, was $6,691
million as at December 31, 2003, a decrease of $1,697 million from
December 31, 2002. This reduction in the debt balance included an $872.6
million decrease in the Canadian dollar value of U.S. dollar denominated
Notes as a result of an approximate 21% appreciation of the Canadian
dollar during 2003. TELUS' U.S. dollar debt is fully hedged, resulting
in a corresponding increase of $872.6 million being recorded in the net
Deferred hedging liability (the Deferred hedging asset of $126.8 million
as at December 31, 2002 has become a Deferred hedging liability of
$745.8 million as at December 31, 2003). The remaining reduction was
from debt repayment and repurchases. TELUS expects to continue applying
surplus cash flow to reduce accounts receivable securitization and other
possible debt redemptions, with the objective of reducing the net debt
to EBITDA ratio to 2.5 times or less by the end of 2004, and to 2.2
times or less in the longer term.
The proportion of debt with fixed interest rates increased as at
December 31, 2003, when compared with one year earlier, as the amount of
utilized bank facilities decreased to $7 million from $655 million one
year earlier.
[Net debt to total capitalization] Graph
The net debt to total capitalization ratio measured at December 31, 2003
decreased, when compared with one year earlier. The Company's
Operational Efficiency Program, improved non-ILEC margins, reduced
capital expenditures, improved Mobility cash generation and tax refunds
resulted in significant increased free cash flow allowing for additional
debt reduction in 2003. Free cash flow for 2003 exceeded cash payments
for Restructuring and workforce reduction of $287.7 million. The
increase in free cash flow in 2003, when compared with 2002, was due
primarily to increased EBITDA (excluding restructuring), increased cash
income tax recoveries, and lower capital expenditures.
[Net debt to EBITA ratio*] Graph
The net debt to EBITDA ratio measured at December 31, 2003 improved
significantly, when compared with one year earlier, as a result of debt
reduction and an increase in 12-month trailing EBITDA. The earnings
coverage ratio improved significantly because of the improvement in
income before interest and taxes in 2003. The EBITDA interest coverage
ratio also improved as a result of higher EBITDA (excluding
restructuring) and lower net interest costs, including significant
interest income.
[EBITA* interest coverage(%)] Graph
Credit facilities
TELUS' credit facilities at December 31, 2003 consisted of a $1.5 billion (or
U.S. dollar equivalent) revolving credit facility expiring on May 30, 2004 ($7
million drawn along with $98.2 million in outstanding undrawn letters of
credit), an undrawn $600 million (or the U.S. dollar equivalent) 364-day
revolving credit facility extendible at TELUS' option for any amount
outstanding as at May 26, 2004 for one year on a non-revolving basis, and
approximately $74 million in other bank facilities ($3.2 million drawn and
approximately $24.0 million in committed and outstanding undrawn letters of
credit). During the fourth quarter, TELUS repaid $63 million drawn against the
$1.5 billion facility. TELUS expects to renew one or both of the revolving
credit facilities in amounts lower than the current amounts, prior to the
availability termination dates of such facilities.
At December 31, 2003, TELUS had unutilized available liquidity well in excess
of $1 billion. TELUS' credit facilities contain customary covenants including a
requirement that TELUS not permit its consolidated Leverage Ratio (Funded Debt
and Asset Securitization Amount to trailing 12-month EBITDA) to exceed 4.0
times (approximately 2.6 times as at December 31, 2003) and not permit its
consolidated Coverage Ratio (EBITDA to Interest Expense and Asset
Securitization Charges on a trailing 12-month basis) to be less than 2.5 times
(approximately 4.3 times as at December 31, 2003) at the end of any financial
quarter. There are certain minor differences in the calculation of the Leverage
Ratio and Coverage Ratio under the credit agreement as compared with the
calculation of net debt to EBITDA and EBITDA interest coverage. The
calculations are not expected to be materially different. 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 February 11, 2004. The proceeds of securitized receivables were $300
million at December 31, 2003, as compared with $475 million one year earlier.
TELUS' credit facilities require that a portion of sold accounts receivable be
added to debt for purposes of calculating the Leverage Ratio covenant under the
credit agreement. This portion is calculated on a monthly basis and is a
function of the ongoing collection performance of the receivables pool. At
December 31, 2003, this amount, defined as the Asset Securitization Amount, was
$88.1 million.
Credit ratings
On March 2, 2004, Moody's Investors Service upgraded TELUS' credit rating to
Baa3 (investment grade) with a stable outlook. The following rating actions
occurred during 2003:
* On April 16, 2003, Moody's changed the outlook for TELUS Corporation's
senior unsecured credit rating to 'stable' from 'negative'. On September
12, 2003, Moody's affirmed its Ba1 rating and changed its outlook for
TELUS Corporation's senior unsecured credit to 'positive' from 'stable'.
On December 18, 2003, Moody's placed the long-term credit rating of
TELUS Corporation under review for possible upgrade;
* On May 1, 2003, DBRS discontinued its rating on commercial paper
programs of TELUS Corporation, TELUS Communications Inc. and TELUS
Communications (Quebec) Inc. as TELUS had no issues outstanding. On June
17, 2003, DBRS revised the trend from 'negative' to 'stable' for its
ratings on TELUS Corporation, TELUS Communications Inc. and TELUS
Communications (Quebec) Inc. On December 22, 2003, DBRS increased the
long-term and preferred ratings for TELUS Communications Inc. to
BBB(high) and Pfd-3(high), respectively, with stable trends. DBRS also
confirmed the long-term ratings for TELUS Corporation and TELUS
Communications (Quebec) Inc. with stable trends;
* On May 28, 2003, Fitch Ratings changed the outlook to 'stable' from
'negative' for its ratings on TELUS Corporation and TELUS Communications
Inc.; and
* On May 29, 2003, Standard & Poor's Rating Services (S&P) had affirmed
its 'BBB' long-term corporate credit rating for TELUS Corporation, TELUS
Communications Inc. and TELUS Communications (Quebec) Inc., each with a
'negative' outlook. S&P withdrew its short-term corporate credit rating
on TELUS due to the discontinuance of commercial paper programs. S&P
also raised the issue rating on TELUS Communications (Quebec) Inc.'s
first mortgage bonds from BBB+ to A-. On August 8, 2003, S&P affirmed
its 'BBB' long-term corporate credit rating for TELUS Corporation and
revised its outlook to 'stable' from 'negative'. The revised outlook
also applied to TELUS Communications Inc. and TELUS Communications
(Quebec) Inc.; and
TELUS has an objective to preserve access to capital markets at a reasonable
cost by maintaining investment grade credit ratings.
Credit rating summary
As of March 2, 2004 DBRS(1) S&P(1) Moody's(1) Fitch(1)
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation
Senior bank debt --- --- --- BBB
Notes BBB BBB Baa3 BBB
TELUS Communications Inc.
Debentures BBB(high) BBB --- BBB
Medium-term Notes BBB(high) BBB --- BBB
Preferred shares Pfd-3(high) P-3(high) --- ---
TELUS Communications (Quebec) Inc.
First mortgage bonds BBB A- --- ---
Medium-term Notes BBB BBB --- ---
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(1) Outlook or trend 'stable'.
Outstanding share data
The following is a summary of the outstanding shares and principal amounts for
each class of equity at December 31, 2003, which can be found in Note 16 of the
Consolidated financial statements.
Class of equity security Outstanding Amount
shares (millions) ($ in millions)
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Preference and preferred shares
- non-voting first preferred, various issues 1.3 69.7
Common equity - Common Shares 190.8 2,349.1
Common equity - Non-Voting Shares 161.0 3,296.6
Channel stock incentive plan 0.2 0.6
---------------------------------------------------------------------------------------------------------------------------------
On February 12, 2004, TELUS announced its intention to redeem all nine classes
of TELUS Communications Inc.'s outstanding preference and preferred shares
during the third quarter of 2004 for total consideration of approximately $72.8
million.
Off-balance sheet arrangements and contractual liabilities
Financial instruments (Note 3 of the Consolidated financial statements)
TELUS uses various financial instruments, the fair values of which are not
reflected on the balance sheet, to reduce or eliminate exposure to interest
rate and currency risks. These instruments are accounted for on the same basis
as the underlying exposure being hedged.
The Company is exposed to interest rate risk arising from fluctuations in
interest rates on its temporary investments, short-term obligations and
long-term debt. On October 6, 2003, the Company terminated an interest rate
swap that had the effect of fixing the interest rate on $70 million of floating
rate debt that was repaid.
The Company is exposed to currency risks arising from fluctuations in foreign
exchange rates on its U.S. dollar denominated long-term debt. Currency hedging
relationships have been established for the related semi-annual interest
payments and principal payments at maturity. The Company's foreign exchange
risk management also includes the use of foreign currency forward contracts to
fix the exchange rates on short-term foreign currency transactions and
commitments. Hedge accounting is applied to these short-term foreign currency
forward contracts on an exception basis only. As at December 31, 2003, the
Company had entered into foreign currency forward contracts that have the
effect of fixing the exchange rates on U.S.$43.0 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.
Subsequent to December 31, 2003, TELUS hedged its exposure to equity price
movements with respect to certain restricted share units issued as part of
share-based compensation arrangements using cash-settled equity forward
transactions.
The Company is exposed to credit risk with respect to its short-term deposits,
accounts receivable, interest rate swap agreements and foreign exchange hedges.
Credit risk associated with short-term deposits is minimized substantially by
ensuring that these financial assets are placed with governments,
well-capitalized financial institutions and other creditworthy counterparties.
An ongoing review is performed to evaluate changes in the status of
counterparties.
The carrying value of cash and temporary investments, bank indebtedness,
accounts receivable, accounts payable, restructuring and workforce reduction
accounts payable, dividends payable and short-term obligations approximates
their fair values due to the immediate or short-term maturity of these
financial instruments.
Commitments and contingent liabilities (Note 17 of the Consolidated financial
statements)
The Company has a number of commitments and contingent liabilities. The Company
has $141 million in outstanding commitments for its Operational Efficiency
Program as at December 31, 2003. The Company occupies leased premises in
various centres and has land, buildings and equipment under operating leases.
The Company is currently engaged in labour contract negotiations through the
federal arbitration process. In the normal course of the Company's operations,
it enters into commercial agreements that require, as a part of normal terms,
guarantees by the Company. As at December 31, 2003, the Company's known
contractual obligations for 2004 were approximately $1,057 million, including
$221 million for long-term debt maturities, $163 million for operating lease
payments, and $650 million for purchase commitments. The maximum, undiscounted
guarantee amounts for 2004, without regard for the likelihood of having to make
such payment, is $12.3 million.
2004 outlook
------------
Canadian telecommunications operators continue to follow strategies focused on
core operations and increasing cash flow. In 2003, the wireless market was
generally characterized by increased pricing discipline leading to double-digit
revenue growth and enhanced profitability. However, the slow economic rebound
and continued telecom price competition and regulation in Canada meant that
wireline revenue growth remained elusive.
The Canadian telecom industry generated revenues of approximately $31
billion in 2003, with Bell Canada and its affiliated regional
telecommunications companies representing about 54% of the total
revenue. TELUS generated approximately $7.1 billion in 2003, or about
22% of total revenues for the industry.
Overall revenue growth in the Canadian telecom market in 2003 was approximately
2.2%, less than the 2.9% growth experienced in 2002, with weakness evident
especially in the wireline business and wholesale markets. Wireline local voice
experienced flat revenue growth, while long distance continued to decline.
Enhanced data, Internet and wireless growth continued in 2003, but at a slower
rate than previously experienced. It is estimated that wireless revenue growth
in Canada was approximately 14% in 2003. The highest industry growth areas were
consistent with TELUS' strategic focus areas of wireless, data and IP.
In 2004, capital markets are expected to continue their careful scrutiny of
company balance sheets, focusing on current and expected cash flows. The
importance placed on more traditional financial metrics has resulted in
companies emphasizing operating and capital cost containment, with capital
markets rewarding those companies that are able to demonstrate strong positive
cash flows, de-leveraging and profitability growth.
As telecom companies have retrenched and restructured, industry analysts have
begun to turn their attention once again to new revenue generation and growth
opportunities. With telecom valuations in wireless and wireline rebounding in
2003, financing will likely be more readily accessed in 2004, as compared to
the last several years, for new entrants and restructured companies.
Wireline
In 2004, wireline operators are expected to continue to focus on capital
and operating cost containment to support enhanced profitability.
Concentrating on core capabilities continues to be paramount for
telecommunications companies and the divestiture of non-core businesses
and assets is likely to continue as an industry trend. From a market
segment perspective, the business and wholesale telecommunications
markets are expected to remain weak, with the residential market showing
relative signs of strength. The long distance market continues to
experience strong price competition from many competitors, resulting in
projected long distance revenue declines this year. High-speed Internet
and related broadband services to the home are the key stabilizing
factors on the residential market. The continued migration of customers
to broadband and wireless services, leading to the erosion of telephone
lines, is expected to be mitigated at TELUS due to the strength of
TELUS' high-speed Internet incumbent business and national wireless
franchises. The continued wireline to wireless migration is expected to
be a net benefit to the Company, as TELUS will retain a portion of the
substitution in its incumbent territories, and gain from wireline to
wireless substitution in the much larger non-incumbent market.
For 2004, traditional wireline services are expected to continue to
exhibit slow or negative growth as a result of technological
substitution, continuing competition and regulatory impacts. Growth is
expected to come from new IP-based broadband services. Competition in
the residential market is projected to continue with the penetration of
new broadband services and applications, such as online games, online
music, telephony and broadcast television services. One new entrant
competitor has already launched voice over Internet protocol (VoIP)
telephony service. Other new entrants, including cable-TV companies,
have announced plans to launch IP services later in 2004 or 2005.
Telecom companies are generally expected by industry analysts to respond
with their own version of IP telephony services as well as broadband and
television offerings.
In the business market, telecom companies are expected to remain focused on
small and medium enterprises and key large business customers. Telecom
providers are projected to migrate voice and data traffic to a single IP-based
platform, achieving cost efficiencies while providing combined IP voice, data
and video solutions.
In terms of wireline regulation, the CRTC continues to encourage
competition in the industry. Following its 2002 announcement of the new
four-year price cap regime, the CRTC has maintained close scrutiny of
incumbent telephone companies to foster competition. Key CRTC decisions
during 2003 include directing ILECs to provide their respective digital
subscriber line Internet services to any residential competitive local
exchange carrier (CLEC) primary exchange customer when requested (July
2003) and establishing conditions under which wireless carriers could
offer services as wireless CLECs (August 2003). The CRTC is expected to
continue to examine ways to provide lower cost access for CLECs to ILEC
facilities, while maintaining the facilities-based regulatory framework.
Wireless
The wireless sector continues to exhibit strong growth. Wireless penetration in
Canada grew to more than 42% of the population in 2003, though it still lags
the penetration levels in other countries. The robustness of the overall
wireless industry in 2003 resulted from a focus on churn management and
subscriber retention, more rational pricing behaviour in the marketplace and
improved capital intensity among providers due to completed network upgrades,
network sharing agreements and a slower roll-out of third generation wireless
services. 2003 represented the first year with an increase in ARPU in more than
five years.
Wireless subscriber growth is expected to continue, with more than one million
net additions forecast for 2004. In addition to subscriber growth, wireless
industry revenues are expected to be supported by increased usage, and an
expanding range of wireless data and IP products. Wireless competition in
Canada remains intense as all operators have introduced new products and
bundled offerings to differentiate their services in the marketplace, and one
has launched a low priced, unlimited local minute plan in Vancouver, which it
may roll out to other urban centres across Canada in 2004 or 2005.
Revenues from wireless data are expected to grow due to increased data traffic
from text messaging services, wireless Internet access and picture messaging
with new camera phones. Wireless networking "Hotspots" are expected to continue
to appear in new locations, allowing customers to access their computer
networks in public places.
TELUS' strategic focus on delivering national capabilities in data and IP, and
its large exposure to the fast-growing Canadian wireless market, positions the
Company well for growth in 2004 and beyond.
2004 financial and operating targets and issues
-----------------------------------------------
The 2004 objectives in the table below were publicly announced on
December 18, 2003. The definition of free cash flow (2004 method) has
changed since the December announcement to exclude dividend payments as,
in the long run, the level of dividend payments is determined based on
free cash flows prior to dividend payments. Investors are encouraged to
review the Forward-looking statements and Risks and uncertainties
sections for the various economic, competitive, regulatory and company
factors that could cause actual future financial and operating results
to differ from those currently expected.
2003 results Targets for 2004 Change
---------------------------------------------------------------------------------------------------------------------------------
Consolidated
Revenues $7.15 billion $7.45 to $7.55 billion $300 to $400 million
EBITDA (1) $2.816 billion $2.95 to $3.05 billion $134 to $234 million
Earnings per share - basic 92 cents $1.05 to $1.25 13 to 33 cents
Capital expenditures $1.253 billion Approx. $1.225 billion Approx. $(28) million
Free cash flow (2003 method)(2) $961 million $1.0 to $1.1 billion $39 to $139 million
Free cash flow (2004 method) (3) $845 million $1.13 to $1.23 billion $285 to $385 million
Net debt to EBITDA(4) 2.6 times 2.5 times or less Decrease of 0.1 or more
---------------------------------------------------------------------------------------------------------------------------------
Communications segment
Revenue (external) $4.79 billion $4.8 to $4.85 billion $10 to $60 million
Non-ILEC revenue $555 million Approx. $610 million Approx. $55 million
EBITDA $2.000 billion $1.975 to $2.025 billion $(25) to $25 million
Non-ILEC EBITDA $(29) million Approx. $5 million Approx. $34 million
Capital expenditures $893 million Approx. $875 million Approx. $(18) million
High-speed Internet net additions 151,600 Approx. 125,000 Approx. (26,600)
---------------------------------------------------------------------------------------------------------------------------------
Mobility segment
Revenue (external) $2.36 billion $2.65 to $2.7 billion $290 to $340 million
EBITDA $815 million $975 million to $1.025 billion $160 to $210 million
Capital expenditures $360 million Approx. $350 million Approx. $(10) million
Wireless subscriber net additions 431,100 375,000 to 425,000 (56,100) to (6,100)
---------------------------------------------------------------------------------------------------------------------------------
(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, which is expected to be approximately $45 million in 2004.
($ in millions) 2003 2004 target range
---------------------------------------------------------------------------------------------------------------------------------
Operating revenues 7,146 7,450 to 7,550
Less Operations expense 4,302 4,470 4,470
Less Restructuring and workforce reduction costs 28 30 30
---------------------------------------------------------------------------------------------------------------------------------
EBITDA 2,816 2,950 to 3,050
---------------------------------------------------------------------------------------------------------------------------------
(2) Defined as EBITDA excluding Restructuring and workforce reduction
costs less cash interest paid, cash taxes, capital expenditures, and
cash dividends, plus cash interest received. The method for 2003
excludes Restructuring and workforce reduction costs and payments and
includes dividend payments.
(3) 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.
($ in millions) 2003 2004 target range
---------------------------------------------------------------------------------------------------------------------------------
EBITDA 2,816 2,950 to 3,050
Restructuring and workforce reduction costs 28 30 30
Excess of share compensation expense over payments - 35 35
Cash interest paid net of cash interest received (616) (650) (650)
Income taxes received (paid) 166 105 105
Capital expenditures (1,253) (1,225) (1,225)
Investment tax credits received
(included in both EBITDA and cash income taxes (recovery)) (8) - -
Restructuring and workforce reduction payments (288) (115) (115)
---------------------------------------------------------------------------------------------------------------------------------
Free cash flow (2004 method) 845 1,130 to 1,230
(4) 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.
For 2004, TELUS public targets reflect the strong cash flow generation from
operations. Free cash flow (2004 method) is expected to increase by $285 to
$385 million in 2004. TELUS expects to continue applying surplus cash flow to
reduce its accounts receivable securitization program and to retire
approximately $220 million of debt with the objective of reducing the net debt
to EBITDA ratio to 2.5 times or less by the end of 2004, and to 2.2 times or
less in the longer term. TELUS has also set a long-term leverage policy target
range for net debt to total capital of 45 to 50%, compared with the year-end
2003 rate of 53%.
TELUS expects earnings per share to improve significantly primarily as a result
of an expected $160 to $210 million increase in Mobility segment EBITDA.
TELUS Communications revenue growth in 2004 is expected to range between zero
and 1.2%. TELUS Communications EBITDA is expected to be relatively unchanged as
additional Operating Efficiency Program savings and improvement in non-ILEC
operating efficiency are expected to be offset by the further negative price
cap decision impacts and the inclusion of share-based compensation expense as
adopted from recently confirmed recommendations in CICA Handbook Section 3870.
Capital expenditure levels are expected to decrease modestly in 2004 with
similar levels of investment for non-ILEC areas, high-speed Internet (ADSL) and
other initiatives. TELUS Communications cash flow (EBITDA excluding
restructuring less capital expenditures) is expected to be $1.13 to $1.18
billion in 2004, compared with $1.14 billion in 2003.
For TELUS Mobility, targeted 2004 revenue growth is 12 to 14% and targeted
EBITDA growth is 20 to 26%. Both revenue and EBITDA are being driven by
wireless subscriber growth expectations of 11 to 12% and continued margin
expansion from improved scale efficiencies. TELUS Mobility 2004 capital
expenditures are expected to be focused on capacity improvements as well as
network and efficiency enhancements. TELUS Mobility cash flow (EBITDA excluding
restructuring less capital expenditures) is expected to increase to $625 to
$675 million in 2004, compared with $455.5 million in 2003.
Key assumptions and sensitivities for 2004 targets
The Company publicly set certain estimated financial and operational targets
for 2004 on December 18, 2003. For projection purposes, the following
assumptions were made: economic growth consistent with provincial and national
estimates by the Conference Board of Canada that were available in November
2003; continued softness in wireline demand; no material change in pension
expense; 3.5 to 4.0% wireless market penetration gain; and approximately 15%
industry growth in high-speed Internet subscribers in TELUS incumbent
territories in B.C., Alberta and Quebec. Commencing in 2004, TELUS is adopting
recently confirmed recommendations in CICA Handbook Section 3870 for
share-based compensation and other share-based payments, estimated to be a $45
million expense. No impact has been assumed for the possibility of a work
stoppage resulting from the collective bargaining process in Alberta and B.C.
Other assumptions include:
* diminishing incremental negative regulatory impacts of approximately
$24 million on revenue and $20 million on EBITDA;
* the potential impacts from future regulatory decisions and appeals are
not considered;
* a four-player wireless market;
* no change in foreign ownership rules;
* minimal cash income taxes due to utilization of tax losses carried
forward;
* cash outflow in respect of workforce reductions is expected to be
approximately $115 million;
* no prospective significant acquisitions or divestitures are reflected;
* no equity issues other than through employee share purchase plans,
dividend reinvestment plans, exercised options and warrants, and no
exercise of Verizon's anti-dilutive rights;
* cash dividend payments of approximately $180 million;
* participation rate in dividend re-investment plans of 20%;
* debt retirements of approximately $220 million in 2004 will be funded
from operating cash flows;
* securitized accounts receivables will be further reduced; and
* maintenance or improvement of credit ratings.
There is no assurance that these assumptions or the 2004 financial and
operating targets and projections will turn out to be accurate.
2004 financing plan
-------------------
TELUS' financing plan for 2004 is to use free cash flow generated by its
business operations to reduce or repurchase indebtedness and amounts
outstanding under its accounts receivable securitization program and to redeem
its publicly held preference and preferred shares. Dispositions of assets and
sales of certain businesses currently carried on by TELUS may also provide a
source of funds. TELUS also plans to renew its $2.1 billion in credit
facilities expiring in May 2004 for a reduced amount. Equity or quasi-equity
issuances, especially in connection with any acquisition activity, could form a
part of the financing activities. TELUS expects to maintain its current
position of fully hedging its foreign exchange exposure. At the end of 2003,
approximately 100% of TELUS' total debt was borrowed on a fixed-rate basis.
TELUS plans to decrease its proportion of fixed-rate debt with an increased
amount of floating-rate obligations. Short-term obligations totalled $221
million at December 31, 2003 and the weighted average term to maturity of total
debt was 6.2 years. TELUS believes that its internally generated cash flow,
combined with its ability to access external capital, provides sufficient
resources to finance its cash requirements during 2004 and to maintain
appropriate available liquidity. The Company generally expects to maintain a
minimum of $1 billion in unutilized liquidity.
5. Risks and uncertainties
==========================
The following sections summarize the major risks and uncertainties that could
affect TELUS' future business results going forward.
Competition
Increased competition may adversely affect market shares, volumes and pricing
in certain TELUS business segments
Competition is expected to remain intense. Competitors are focused on local
access, data and IP services in the business market and high-speed Internet and
wireless services across both the consumer and business markets, as these
services offer the highest growth potential. Wireline long distance is
experiencing negative revenue growth and voice local access is experiencing a
slight decline in network access lines. However, competitors remain intent on
winning market share in the business local and long distance voice market as a
way to sell additional (increasingly bundled) data, Internet and wireless
services.
Wireline voice and data
TELUS expects local access competition activity in 2004 to continue to focus
mainly on the business market, though one competitor in particular has also
combined residential local, long distance and wireless services (through a
marketing alliance) into one bundled monthly rate. TELUS' competitors offer
varying arrays of long distance, local and advanced data/IP services and they
are increasingly bundling long distance with price-discounted local access,
wireless and advanced data, Web-based and e-commerce services. Certain TELUS
competitors, having built extensive local fibre-optic facilities throughout
Western Canada over the past several years, are increasingly focusing on
marketing and revenue generation, particularly in the small and medium-sized
business market due to the size of this market, its concentrated geographic
urban clustering and consequent attractive margins. Some of these competitors
have sound financial strength and other resources, while other re-capitalized
competitors may gain improved financial strength and competitive viability as a
result of their re-emergence into the industry.
Competition is likely to continue to remain strongest in the large business
market. TELUS was formerly a member of Stentor, an alliance of the major
regional Canadian telecommunications companies established to facilitate the
provision of long distance and data services that cross provincial and national
boundaries, and to facilitate planning and co-ordination of the provision of
national services. In 1998, the former Stentor members agreed to unwind
existing arrangements and replace them with a new set of commercial agreements.
The former members, including TELUS, have largely developed their own systems
and replacement products and services, and competition in the large business
market has intensified accordingly among them.
During the past few years, TELUS has been active in building and acquiring
local and cross-Canada fibre-optic facilities and Internet data centres (IDCs)
in Central and Western Canada. TELUS is also continuing to build up a Central
Canadian sales organization and an increasingly broader portfolio of
business-oriented data and IP products and services. TELUS has been successful
in increasing Central Canadian revenues to approximately $845 million in 2003
as compared with negligible revenues in 1999. This growth has been accomplished
through a combination of acquisition and internal growth. However, there can be
no assurance that TELUS will continue to be successful in its efforts to expand
its market share and profitability in Central Canada, that it will achieve its
2004 non-incumbent targets for revenue and EBITDA, or that pricing will remain
at reasonable levels as competition remains significant.
Wireline Internet access
Despite an industry-leading dial-up subscriber base, TELUS was slower to deploy
and market high-speed Internet services. Consequently, despite obtaining a
majority of high-speed Internet subscriber net additions since the fall of
2001, the market share split between TELUS and its cable-TV competitors in each
market is only 38 to 62%. In response to increased high-speed Internet coverage
and effective marketing by TELUS, cable-TV companies have increased their
marketing efforts. With a Western Canadian industry high-speed Internet
penetration rate typically double that of the U.S., industry growth for
Internet service may slow more quickly than anticipated, resulting in reduced
net additions for all industry competitors and posing a constraint on TELUS'
ability to increase its share of total high-speed subscribers in the market.
TELUS Communications is targeting approximately 125,000 high-speed net
additions in 2004 and there can be no assurance that it will achieve this
objective.
TELUS could also experience high future rates of churn or subscriber
deactivations if its current quality of service and competitive pricing are not
maintained. Residential dial-up Internet access competition and growth have
declined dramatically, in large part due to increased high-speed Internet
availability and lower pricing. Losses to high-speed services of competitors
are mitigated by TELUS' efforts to transfer these customers to its own
high-speed Internet service. However, there can be no assurance that the rate
of loss of dial-up subscribers or market share retained by TELUS will be as
expected, as TELUS will continue to face significant competition from cable-TV
high-speed Internet services.
Voice over Internet protocol (VoIP)
Internet telephony, also referred to as VoIP, continues to be a developing
service that could negatively impact TELUS' local and long distance business
over the next few years. This technology has been in operation for several
years with new entrants announcing their intention to launch services in
Canada. Primus Canada launched such service in January 2004. In addition, next
generation cable-TV modems are expected to allow cable-TV companies, from a
technological standpoint, to begin offering VoIP over their cable networks.
Cable-TV companies also need to make considerable investments in back-office
functions and infrastructure in order to deliver voice service comparable to
the quality offered by traditional wireline service providers.
It is expected that cable-TV companies in Canada may begin offering VoIP
telephony late in 2004 and in 2005, however, there can be no assurance that
their plans will not change. TELUS began developing its IP telephony initiative
in the fall of 2001 and began the transition from circuit-based switching to IP
in the summer of 2003. This presents an opportunity for new services, network
simplification and cost reduction. However, there can be no assurance that the
adoption of VoIP services in the market or provision of such services by TELUS
would not cannibalize existing revenues. If significant VoIP competition
develops, it could erode TELUS' existing market share of traditional local and
long distance services and adversely affect future revenues and profitability.
Wireless
Competition in the Canadian wireless market is expected to remain intense in
2004 in all regions of the country, including Western Canada. TELUS Mobility is
targeting approximately 375,000 to 425,000 net subscriber additions in 2004,
and there can be no assurance that it will achieve its objective given the
level of competition and the possibility of declining growth rates in the
Canadian wireless industry.
With up to four players, including TELUS Mobility, currently operating in each
region in the Canadian wireless marketplace, competitive rivalry is intense.
Aggressive advertising and innovative marketing approaches are expected to
continue to be the norm. Certain competitors have offered unlimited local
airtime packages in specific markets, subsidized low or zero-cost handsets,
and/or lowered airtime prices, and may continue to do so. This could increase
churn rates, cause marketing costs of subscriber acquisitions to remain high,
and lower average revenue per subscriber. Microcell Telecommunications Inc.,
having restructured its balance sheet, may enhance its future competitiveness
as a result of its ongoing re-financing efforts or alternatively be acquired by
an existing competitor. Accordingly, other competitors may have increased scale
resulting from consolidation or the financially weaker competitor may gain
improved financial strength from re-capitalization.
Bell Mobility entered Western Canada in the fall of 2001, built its own network
and operational capabilities, and launched its own 1X data network in urban
centres in Alberta and B.C. in the fall of 2002. In addition, the
roaming/resale agreements among TELUS Mobility, Bell Mobility and affiliates,
and Aliant Telecom Wireless, first operationalized in mid-2002, allowed Bell
Mobility to expand the availability and range of its wireless services to
approximately 2.5 million incremental POPs throughout rural Alberta and B.C.
This allowed Bell Mobility to expand into Western Canada earlier and more
cost-effectively than if it had to wait to fully build out its own rural
network coverage. The entry of Bell Mobility in these rural areas has increased
the effective number of competitors to three in these regions. Roaming/resale
agreements have similarly allowed TELUS Mobility, on a reciprocal basis, to
expand its PCS network coverage and distribution in Central and Atlantic Canada
by close to seven million people, generally served by two other competitors,
bringing TELUS Mobility's national digital coverage and addressable market to
29.5 million. There can be no assurance that TELUS Mobility's marketing efforts
will be as successful in the new markets as in existing coverage areas.
Wireless competition is also coming from new digital wireless technologies,
which may be offered from both traditional and non-traditional sources,
utilizing licensed and/or unlicensed spectrum, that deliver higher speed data
and Internet services over current and next generation wireless devices. Such
availability may lead to increased re-subsidization costs related to the
migration of existing subscribers to advanced feature handsets based on newer
technologies. There can be no assurance that new services offered by TELUS
Mobility will be available on time, or that TELUS Mobility will be able to
charge incrementally for the services. (See Technology.)
Fixed wireless
In September 2003, Industry Canada stated its intention to auction wireless
spectrum in the 2.3 GHz and 3.5 GHz bands in early 2004. The auction was held
and concluded in February 2004. While TELUS participated and obtained the
limited amount of spectrum that it sought in the auction, most of the spectrum
was acquired by other parties. This spectrum is expected to be utilized
primarily for services such as the provision of fixed wireless, which could be
used as an alternative technology for delivering high-speed Internet and voice
services. This could strengthen existing competitors or could result in new
competitors formed by other successful bidders.
Economic fluctuations
Economic fluctuations may adversely impact TELUS
After having demonstrated relatively strong economic growth compared to its
trading partners over the last several years, Canada lagged behind the United
States during 2003. The impacts of several unforeseen developments over the
second and third quarter of 2003 such as SARS, mad cow disease and a major
power outage, in addition to the lagged effect of earlier interest rate rises
and Canadian dollar appreciation, caused economic growth to be weaker than
expected. Although Canada is expected to benefit from any further economic
growth in the United States, it may be limited by the substantial appreciation
of the Canadian dollar and its potential impact on exports.
During a period of slow economic growth, including that caused by global
turmoil, residential and business telecommunications customers may delay new
service purchases, reduce volumes of use and/or discontinue use of services.
Economic fluctuations could adversely impact TELUS' profitability and free cash
flow, realization of income tax losses carried forward, return on invested
pension assets and associated pension expenses, bad debt expense and/or require
the Company to record impairments of the carrying value of its assets,
including, but not limited to, its intangible assets with indefinite lives
(spectrum licences) and its goodwill. Impairments to the carrying value of
assets would result in a charge to earnings and a reduction in shareholders'
equity.
Financing and debt requirements
TELUS' business plans and growth could be negatively affected if existing
financing is not sufficient
TELUS may finance its future capital requirements with internally generated
funds as well as, from time to time, borrowings under the unutilized portion of
its bank facility or through the issuance of securities. In May 2003, the
364-day portion of the bank facility was renewed for $600 million (a reduction
of $400 million from the original $1 billion) on substantially the same terms.
Continued availability of the $600 million 364-day portion of the bank facility
on a revolving basis is dependent on renewal of this portion of the facility on
or prior to its maturity on May 26, 2004 on terms acceptable to TELUS. There
can be no assurance that the 364-day portion of the bank facility will be
renewed on terms acceptable to the Company. Failing such renewal, any amount
drawn by TELUS on the 364-day portion of the facility that remains outstanding
on May 26, 2004 will be available only for one year on a non-revolving basis.
TELUS has not borrowed under and does not currently intend to borrow under the
364-day portion of the bank facility.
Disruptions in the capital markets, increased bank capitalization regulations,
reduced lending to the telecom sector, or a reduced number of active Canadian
chartered banks as a result of reduced activity or consolidation could reduce
capital available for corporate credits such as TELUS. The $1.5 billion,
three-year revolving term portion of the bank facility matures on May 30, 2004.
There can be no assurance that the bank facility will be renewed on terms and
in an amount acceptable to the Company. In the absence of such renewal, the
Company's available liquidity may be negatively affected.
On July 26, 2002, TELUS Communications Inc. (TCI), a wholly-owned subsidiary of
TELUS, entered into an agreement with an arm's-length securitization trust
under which it is able to sell an interest in certain of its trade receivables
up to a maximum of $650 million. As at December 31, 2003, TCI had received
aggregate cash proceeds of $300 million. Under the program, TCI is required to
maintain at least a BBB(low) credit rating by Dominion Bond Rating Service. In
the event this rating is not maintained, the Company may be required to wind
down the program.
Consistent with its financial policy, TELUS intends to reduce its future debt
leverage and is targeting a net debt to EBITDA ratio of less than or equal to
2.5 times by December 2004 and a long-term target of less than or equal to 2.2
times. TELUS' financial policy is to target a long-term optimal net debt to
total capitalization policy of approximately 45 to 50% (53% as at December 31,
2003) and to achieve over time debt credit ratings in the range of BBB+ to A-
(split ratings of BBB and Baa3 as at March 2, 2004). A change in credit rating
could impact TELUS' cost of and access to capital. There can be no assurance
that TELUS can maintain or improve current credit ratings.
While cash flow is expected to be sufficient to meet its current needs and
reduce leverage, these intentions could constrain TELUS' ability to invest in
its operations for future growth. There can be no assurance that TELUS will
significantly reduce its debt leverage or achieve its target credit ratings on
a timely basis, if at all.
Tax matters
Income tax assets may not be realized as expected
The operations of TELUS are complex and related tax interpretations,
regulations and legislation pertaining to TELUS' activities are continually
subject to change. The Company has significant amounts of income taxes
receivable, future income tax assets, including tax loss carry forwards, and
future income tax liabilities. Potential changes to either or both the amounts
and the timing of the realization of such amounts can affect the determination
of net income or realization of cash in future periods.
Timing surrounding the monetization or realization of future income tax assets
is uncertain, since the timing is dependent on future earnings of the Company
and other events. The amounts of future income tax assets and future income tax
liabilities are also uncertain since the amounts are based upon the
substantially enacted future income tax rates in effect at the time, which can
be changed by governments. The amount of future income tax assets is also based
upon the Company's anticipated mix of revenues among the jurisdictions in which
TELUS operates, which is also subject to future events.
The timing of the collection of income taxes receivable is substantially out of
the control of the Company and is dependent on expected assessments,
reassessments and other processes by the Canada Revenue Agency (CRA) and other
provincial tax authorities. Therefore, there can be no assurance that income
taxes will be sheltered as anticipated and/or the amount and timing of receipt
or use of these assets will be as currently expected.
Dividends
Current dividend level may change
While there is no current plan to change the dividend payout rate, TELUS
reviews its dividend policy quarterly and there can be no assurance that a
future change will not be implemented. On July 25, 2002, TELUS announced that
it was committed to the maintenance of the existing dividend policy of 15 cents
per share per quarter. TELUS expects to generate material free cash flow in
2004 which would be available to, amongst other things, reduce debt and amounts
outstanding under the accounts receivable securitization program, redeem
preference and preferred shares as well as to pay dividends to shareholders.
TELUS' quarterly dividend policy will depend on an ongoing assessment of free
cash flow generation and financial indicators including leverage, dividend
yield and payout ratio.
Human resources
The outcome of outstanding labour relations issues may result in
unanticipated increased costs and / or reduced productivity
In 2000, TELUS commenced collective bargaining with the Telecommunication
Workers Union (TWU), which represents approximately 11,300 employees, for a new
collective agreement, in both the Communications and Mobility business segments,
replacing legacy agreements from BC TELECOM and Alberta-based TELUS. Since the
fourth quarter of 2002, the Company and the TWU were engaged in a multi-phased
federal conciliation process that concluded on January 12, 2004 without an
agreement being reached. On January 28, 2004 the Canadian Industrial Relations
Board (CIRB) in response to an unfair labour practice complaint from the TWU,
ordered the Company to offer binding arbitration to the TWU to settle the
collective agreement. Two days later the TWU announced acceptance of the offer
of binding arbitration. Subsequently on February 16, 2004, TELUS filed an
application with the CIRB for reconsideration of its finding of an unfair
labour practice and the order to offer binding arbitration. At the same time,
TELUS also filed an appeal of the CIRB's decision with the Federal Court of
Appeal.
TELUS continues to participate in discussion with the TWU related to binding
arbitration with the assistance of federal mediators. This includes selecting
the arbitrator(s), determining the process to be used, setting the terms of
reference to be used in arbitration and timeline. While the arbitration process
eliminates any measurable degree of risk of a legal labour disruption, there
can be no assurance that compensation expenses will be as planned or that
reduced productivity will not occur as a result of negotiations or the
arbitration decision. If the application to the CIRB for reconsideration
reverses the original order to offer binding arbitration, a potential outcome
is the resumption of collective bargaining, which could give rise to the
associated risk of reduced productivity and work disruptions in TELUS'
operations.
In March 2001, the TWU made an application to the CIRB to extend its existing
TELUS bargaining unit in Alberta and B.C to include TELE-MOBILE employees. In
its application, the TWU is seeking to include non-unionized former Clearnet
employees and unionized employees in the former QuebecTel Mobilite operations.
The TWU also challenged TELUS' position that unionized wireless employees in
Alberta and B.C. are, for the purposes of labour relations, employees of
TELE-MOBILE. In TELUS' view, by operation of law, TELE-MOBILE employees form a
separate bargaining unit and collective bargaining in respect of unionized
TELE-MOBILE employees should be conducted between TELE-MOBILE and the TWU. Both
these issues are the subject of proceedings currently before the CIRB, which
are anticipated to result in decisions in 2004.
In addition to the TELE-MOBILE application, the TWU has made three further
applications seeking to extend its existing TELUS bargaining unit beyond
Alberta and B.C. to include employees working at TELUS National Systems Inc.
(TNS), other TELUS employees working east of Alberta (with the exception of
unionized employees working at TELUS Quebec) and employees in Montreal employed
by TELUS solutions de soutien (TSS). The TNS hearing concluded in October of
2003 and the decision has not yet been rendered. The "employees east of
Alberta" application was filed in November 2002, while the TSS application was
filed in December 2003. Neither of these two cases have proceeded to hearings.
All of these applications seek to include currently non-unionized employees. In
addition, the TNS and "employees east of Alberta" applications seek to impose
the BC TEL-TWU collective agreement on the affected employees. There can be no
assurance that compensation expenses will be as planned, or that reduced
productivity will not occur as a result of or following any decisions made by
the CIRB.
Reliance on key personnel
The success of TELUS is largely dependent on the abilities and experience of
its key employees. Competition for highly skilled and entrepreneurial
management and other key employees is intense in the communications industry.
The majority of existing share options are currently trading at less than their
respective exercised prices, diminishing their effectiveness as a retention
incentive. There can be no assurance that TELUS can retain its current key
employees or attract and retain additional executive officers or key employees
as needed. The loss of certain key employees, or a deterioration in employee
morale resulting from organizational changes or ongoing cost reductions, could
have an adverse impact upon TELUS' growth, business and profitability.
Technology
Changing technology in data, IP and wireless may adversely affect revenues,
costs and the value of assets
The rapid pace and expanding scope of technological advancements in the
communications industry are expected to continue. Three of the universal
characteristics of technological advancements are lower unit costs,
lower operating costs and increasing flexibility. This creates
opportunities for new and existing competitors to offer new services,
price reductions and service differentiation to gain market share.
TELUS' future success depends in part upon its ability to anticipate,
invest in and implement new technologies with high levels of service and
competitive prices, while defending customers from computer viruses and
spam. TELUS may be required to make more capital expenditures than are
currently expected if a technology's performance falls short of
expectations. TELUS' earnings may also be affected if technological
advances shorten the useful life of certain existing assets.
In 2002 and 2003, TELUS continued its transition from core circuit-based
switching infrastructure to leading-edge IP technology through the
operationalization of its next generation network (NGN). This conversion allows
TELUS to: (a) offer integrated services across voice, data and video
applications to customers; (b) improve capital and operating efficiencies; and
(c) deliver improved operating effectiveness in launching and supporting new
application services. Although select customers have already begun adopting the
first applications, including managed and integrated voice, data and video
solutions with secure IP virtual private network (VPN) connectivity for large
corporate customers and TELUS IP-One for small and medium-sized businesses,
there can be no assurance that sufficient applications will be available or
accepted as planned, that competitors will not begin to launch similar
services, or that the efficiencies will materialize as expected.
Reliance on systems and information technology (IT) may cause operational
problems and financial exposures
TELUS, as a complex telecommunications company, is reliant on many legacy and
new IT systems and applications such as billing systems, customer relationship
management software, order entry and service systems, network systems,
commissioning system,and the associated complex computer equipment and
software. For example, customer service levels were negatively impacted during
2003 partly due to implementation difficulties with a new trouble management
system. Additionally, depreciation and amortization expenses were negatively
impacted by a write-off for a failed implementation of new customer
relationship management software. Hence, customer service, revenue generation
and the value of IT assets could be negatively affected if the cost of IT
solutions is uneconomic, legacy systems fail, projects to integrate systems and
applications or introducing new systems and software are not effective, and/or
third party suppliers fail to or do not meet their performance or delivery
obligations.
The digital protocols and technologies utilized by TELUS Mobility may become
technologically inferior
The wireless industry continues to expand the deployment of second (2.5G) and
third generation (3G) technologies to deliver increased data speeds required
for many new wireless IP and data services. TELUS Mobility's Mike service uses
the iDEN technology protocol and has had operational 2.5G packet data
capability and service offerings for over three years. TELUS Mobility
implemented 1X protocol 3G services on its digital CDMA PCS and cellular
networks during 2002. While the Company believes that TELUS Mobility's CDMA
protocol has a reasonable and cost-effective migration path to future
evolutions of higher speed 3G, there can be no assurance that it will be
successful and timely. Work is ongoing to determine an optimal migration path
for iDEN to 3G, but there can be no assurance that the selected path will be
successful or that operating expenses and capital expenditures will be
economical.
Furthermore, there can be no assurance that the digital wireless technologies
utilized by TELUS Mobility today will continue to enjoy favourable market
pricing. The pricing for handsets and network infrastructure is subject to
change due to world market buying patterns and foreign exchange rates and as a
result, there may be an adverse impact on TELUS' future expenditures.
TELUS' Mike digital wireless iDEN network is in part differentiated by
its wide-area, high-capacity digital push-to-talk (PTT) 2-way radio
dispatch services, which are marketed as Mike's Direct Connect, as well
as its installed base of customer work groups. One of TELUS' major
wireless competitors announced plans to develop and launch PTT services
over CDMA in 2004, and PTT capabilities continue to advance for other
carriers using different technologies. In the future, there can be no
assurance that TELUS' current market advantage of extensive product
sales and marketing experience, and large installed base of Mike iDEN
users and work groups, will be maintained. TELUS also operates a CDMA
network and may operationalize CDMA PTT services during 2004, which may
be competitive with the iDEN technology utilized by its Mike network.
There can be no assurance that successful deployment and marketing of
competitive CDMA or other PTT technologies will not reduce or eliminate
the competitive differentiation of TELUS' Mike network.
Wireless technologies and protocols continue to be developed and extended for a
variety of applications and circumstances, such as the Institute of Electrical
and Electronics Engineers (IEEE) suite of 802 series of standards. A number of
wireless technologies are capable of exploiting both licensed and unlicensed
spectrum. While TELUS constantly reviews and examines such developments, and
may from time to time choose to utilize a number of these technologies, there
can be no assurance that these developments may not adversely impact TELUS in
the future.
Regulatory
Regulatory developments could have an adverse impact on TELUS' operating
procedures, costs and revenues
TELUS' telecommunications and broadcasting services are regulated under federal
legislation by the CRTC, Industry Canada and Canadian Heritage. The CRTC has
taken steps to forbear from regulating prices for services offered in
competitive markets, such as long distance and some data services, and does not
regulate the pricing of wireless services. Major areas of regulatory review
currently include a reassessment of some of the ILEC services to be made
available to competitors at cost-based rates, the terms of interconnection
between local exchange carriers and competitive pricing safeguards for ILEC
services, such as price floors and bundling rules.
The outcome of the regulatory reviews, proceedings and court or Federal Cabinet
appeals discussed below and other regulatory developments could have a material
impact on TELUS' operating procedures, costs and revenues.
Price cap regulation
The rules for price cap regulation and local competition were announced in
major regulatory decisions issued in 1997. The CRTC adopted a facilities-based
competition model that encouraged competitors to invest in facilities and did
not provide discounts for use of incumbent facilities. In March 2001, the CRTC
began its scheduled public review of the regulatory regime for 2002 and beyond.
TELUS and other incumbent telecommunications companies sought to modify the
price cap regime to achieve greater pricing flexibility for regulated services.
Certain CLECs requested changes to the regulatory framework that would require
the ILECs to provide their facilities to the CLECs at large discounts. Some
parties also requested that the CRTC impose penalties on the incumbent
companies for failure to meet CRTC-established quality of service indicators.
On May 30, 2002, the CRTC announced its decision on the regulatory framework
for the second price cap period for the ILECs, which established the framework
for regulation of ILECs, including TELUS. This decision covers a four-year
period beginning June 2002. On July 31, 2002, the CRTC released its price cap
decision for TELUS Communications (Quebec) Inc., which established a four-year
price cap period beginning August 2002 and moved TELUS Communications (Quebec)
Inc. from rate of return regulation to price cap regulation. The impact of
these decisions was a decrease in consolidated EBITDA for TELUS of $78.5
million for the 12-month period ended December 31, 2003 when compared with one
year earlier.
The CRTC 2002 price cap decisions reaffirmed the CRTC's preferred
facilities-based competition framework, which TELUS supports. The decisions did
not introduce the large discounts of up to 70% for use of ILEC facilities
sought by competitors, and allowed TELUS the opportunity to benefit from annual
inflation-adjusted productivity improvements greater than 3.5% on most tariffed
services. However, the decisions extended the regulation of local prices and
service levels, reduced the ability of the ILECs to raise prices, introduced
more complexity and caused a negative impact on TELUS earnings. The 2002 price
cap decisions also initiated a number of implementation proceedings, some of
which are still underway.
As a result of the price cap decisions, TELUS anticipates an approximate $20
million incremental negative impact on EBITDA for 2004. TELUS can give no
assurance that earnings will not be further adversely affected as regulatory
rules continue to be reviewed, adjusted or changed. The price cap decision also
established a rate adjustment plan for ILECs that do not meet the quality of
service standards approved by the CRTC. TELUS will pay approximately $6.5
million in rate adjustments for the initial reporting period ending May 2003,
and would anticipate a similar level of rate adjustments in 2004 if quality of
service results for the last seven months of 2003 were to continue until the
end of the second reporting period in May 2004. However, quality of service has
improved significantly as new systems and processes have been introduced and
TELUS may not be required to pay further rate adjustments in 2004.
Nevertheless, TELUS has no assurance that these rate adjustments will not
significantly affect earnings in the future.
On September 25, 2003, the CRTC approved TELUS' $21.4 million total service
improvement program for extending and upgrading service where required in
Alberta and B.C., to be completed over four years ending in 2006. The cost of
the service improvement program will be recovered from TELUS' deferral account
established in the 2002 price cap decisions. The CRTC has not yet determined
the process for drawing funds from the deferral account or how the remaining
balance of the deferral account liability will be utilized.
In the 2002 price cap decisions, the CRTC established new lower prices for some
digital services provided by the ILECs and made those new lower prices
available only to competitors. The CRTC then initiated a proceeding to consider
whether the ILECs should be required to provide more digital services to
competitors at prices below normal tariffed rates. The proceeding to consider
Competitor Digital Network Access (CDNA) service, which was initiated in the
2002 price cap decisions, was completed in December 2003 and a decision is
expected in 2004. The results of this proceeding will finalize the scope of the
CDNA service and the terms and conditions under which it will be made
available. CDNA service was initially made available to competitors at lower
than tariffed rates on an interim basis. Only the access and link components of
the retail Digital Network Access (DNA) service were made available. The CRTC's
decision in the CDNA proceeding will determine whether further components of
the retail DNA service and certain digital inter-exchange transport facilities
will be added to the CDNA service. If the scope of the CDNA service is expanded
to include additional components, the CRTC will also determine the effective
date for any rate changes, including the possibility of retroactive rate
reductions. The CRTC has already established that the initial revenue loss
resulting from the introduction of CDNA service will be recovered against the
revenue realized as a result of the reversal of exogenous adjustments at the
end of the first price cap period in May 2002. If the scope of the CDNA service
is expanded, the CRTC will also determine if the additional revenue loss may be
recovered in a similar manner to the initial revenue loss or by some other
means. There can be no assurance that the implementation of CDNA will not
result in further revenue losses for TELUS. The CRTC is not expected to render
its decision in this proceeding before the second quarter of 2004.
Pricing safeguard review
The CRTC has initiated a proceeding to review pricing safeguards and is
proposing modifications to the service bundle pricing rules as well as the
introduction of a new pricing safeguard for volume and term contracts for
retail tariffed services. The CRTC is also proposing to modify the imputation
test that is used when ILECs propose rate decreases. If the CRTC implements the
changes it has proposed to the pricing safeguards, the ILECs will have less
pricing flexibility and TELUS' ability to respond to competitive pressures will
be constrained. TELUS' business operations could be negatively affected by the
CRTC's decision in this proceeding. The CRTC is not expected to render its
decision in this proceeding before late 2004.
Terms of access
In 1999, the CRTC had ordered power companies to grant access to their power
poles to cable companies at fixed rates significantly lower than the
expectations of the power companies. The Federal Court of Appeal determined the
CRTC did not have jurisdiction over power poles of provincially regulated power
companies, and on May 16, 2003, the Supreme Court of Canada upheld that
decision. TELUS may be negatively affected by this decision to the extent that
it relies on power poles to deliver services to its customers, rates may
escalate over time, and it has facilities placed on approximately 200,000 poles
owned by power companies. As part of the follow-up process to Decision 2003-11,
a proposal was made to reassign the ILECs' support structure services so as to
make them available at cost-based rates (cost plus an approved mark-up). The
CRTC has yet to make a determination on this proposal which may result in a
reduction of the revenues that TELUS receives for the use of its support
structure facilities.
On July 21, 2003, the CRTC directed the incumbent telephone companies to
provide their retail high-speed Internet services to residential customers
receiving primary local telephone service from competitors upon request.
Currently, the provision of high-speed Internet service is directly linked to
the local telephone line. TELUS has determined that a plan to reconfigure
numerous automated systems and processes to implement this decision could cost
up to an estimated $10 million in capital and operating costs. There can be no
assurance that the success of implementation and estimated costs will be as
planned. A similar request has been made to the CRTC for high-speed Internet
services for business customers.
On June 30, 2003, the CRTC ruled on a proceeding to establish terms of access
to tenants in multi-dwelling units (MDUs), such as office complexes and
apartment buildings. Building owners were demanding substantial fees for such
access. In its decision, the CRTC announced principles that allow for access by
all local telephone companies to equipment and wiring in MDUs. The decision
reduced considerably the uncertainty TELUS faced in gaining access to such
buildings. From a financial perspective, the decision reduced TELUS' exposure
to potential significantly increased costs of building access. However, on
November 8, 2003, an association representing building owners was granted leave
to appeal this decision by the Federal Court of Appeal. It is possible that
future costs to TELUS may materialize as a result of court challenges.
Interconnection
The CRTC concluded a proceeding in early 2003 that reviewed the interconnection
regime between local exchange carriers (LECs) and a decision is expected in
this proceeding in 2004. The interconnection proceeding reviewed the current
rules concerning the point of interconnection for LECs, the current trunking
rules for LECs and compensation arrangements for the exchange of traffic
between LECs. It is likely that the CRTC will allow expanded interconnection
arrangements between LECs in addition to the current interconnection
arrangements. There can be no assurance that the interconnection decision will
not reduce TELUS' revenues for interconnection services, increase TELUS'
operating costs for interconnection with CLECs in its ILEC territory, or
require additional capital expenditures for the expansion of interconnection
facilities.
TELUS' broadcasting distribution undertakings
On August 20, 2003, the CRTC approved applications by TELUS Communications Inc.
(TCI) to operate terrestrial broadcasting distribution undertakings to serve
various communities in Alberta and British Columbia. On September 9, 2003, the
CRTC approved TELUS' application for a video-on-demand undertaking licence with
the same terms and conditions as previously licensed video-on-demand
undertakings in Canada. The licence is national in scope and extends for a
seven-year term. TCI continues to test and assess this opportunity. There can
be no assurance that implementation costs or projected revenues and expenses
will be as planned or that a launch will in fact occur.
Voice over Internet protocol
On February 12, 2004, the Federal Communications Commission (FCC) in the U.S.
announced that it was initiating a major proceeding to seek public comment on
the premise that Internet services (including voice services) should continue
to be subject to minimal regulation. The proceeding will also assess whether
mechanisms to provide public safety, emergency 911, law enforcement access,
consumer protections and access for people with disabilities will need to
change as communications migrate to Internet-based services. The FCC stated its
desire to provide a measure of regulatory stability to the communications
market and to support the continuing development of Internet-based services.
The CRTC currently has before it an application requesting that a similar
proceeding be initiated in Canada. If a CRTC proceeding is conducted, there can
be no assurance that TELUS will not be materially adversely affected by a
decision arising from it.
Radiocommunication licences regulated by Industry Canada
All wireless communications depend on the use of radio transmissions and
therefore require access to radio spectrum. Under the Radiocommunication Act,
Industry Canada regulates, manages and controls the allocation of spectrum in
Canada and licenses frequency bands and/or radio channels within various
frequency bands to service providers and private users. Voice and data wireless
communications via cellular, SMR, ESMR and PCS systems, among others, require
such licences. TELUS Mobility's PCS and cellular licences include various terms
and conditions, such as: meeting certain performance levels, meeting Canadian
ownership requirements, obligations regarding coverage and build-out, spending
at least 2% of certain PCS and cellular revenues on research and development,
annual reporting, and resale to competitors. While TELUS believes that it is
substantially in compliance with its licence conditions, there can be no
assurance that it will be found to comply with all licence conditions, or if
found not to be compliant that a waiver will be granted, or that the costs to
be incurred to achieve compliance will not be significant. Initial licence fees
and annual renewal fees are payable for licences which have not been obtained
via spectrum auction. There can be no assurance that Industry Canada will not
seek to increase these fees in the future.
Foreign ownership restrictions
TELUS and its subsidiaries are subject to the foreign ownership restrictions
imposed by the Telecommunications Act and the Radiocommunication Act. Although
TELUS believes that TELUS Corporation and its subsidiaries are in compliance
with the relevant legislation, there can be no assurance that a future CRTC or
Industry Canada determination, or events beyond TELUS' control, will not result
in TELUS ceasing to comply with the relevant legislation. If such a development
were to occur, the ability of TELUS' subsidiaries to operate as Canadian
carriers under the Telecommunications Act or to maintain, renew or secure
licences under the Radiocommunication Act could be jeopardized and TELUS'
business could be materially adversely affected.
Process risks
TELUS systems and processes could negatively impact financial results and
customer service
Billing/revenue assurance
TELUS has merged with and acquired several companies, which have a variety of
billing systems. The number of different billing systems at TELUS presents the
risk that the systems are not sufficiently integrated, causing unrecognized
revenue leakage, billing errors in customer accounts, and the sharing of
incorrect and inaccurate information. Although TELUS has a finance department
that focuses on revenue assurance and increasing the accuracy and completeness
of billing, the risk associated with the volume and variety of billing system
transactions could result in adverse effects on TELUS' earnings.
Also, as a result of the various staff reductions, system changes and training
requirements arising from TELUS' Operational Efficiency Program, there is a
potential impact on the operations of TELUS' internal processes involved with
billing that could negatively affect TELUS' earnings.
Efficiency
To remain cost competitive and maintain profitability when prices are lowered
by regulatory and/or competitor actions, it is important for TELUS to continue
reducing costs. Beginning in 2001, TELUS' multi-phase Operational Efficiency
Program aimed at improving operating and capital productivity and
competitiveness. This multi-faceted program focused on reducing staff,
optimizing the use of resources, and maintaining and ultimately improving
customer service. This has been accomplished by consolidating functions,
closing and consolidating facilities, and streamlining processes. At the end of
2003, TELUS exceeded its two-year 6,500 net staff reduction by 200, however,
there can be no assurance that the financial goals and maintenance and
improvement of customer service levels will be achieved going forward. If TELUS
is unable to control costs, the Company may not achieve cost competitiveness
and the profitability required to be attractive to investors.
Further, with the local price cap formula regime, certain local prices decrease
by a 3.5% productivity factor less inflation until 2006. It is expected that
ongoing efficiency programs are necessary in order to avoid an adverse impact
on earnings.
Cost and availability of services
The availability of various data, video and voice services in CLEC (competitive
local exchange carrier) regions where TELUS' wireline network is only
partly available represents a significant challenge in terms of delivery
deadlines, quality and costs of services. The lease of facilities from other
telecommunications companies and rebilling for the use of their networks may
prove to be costly and unprofitable. To offset these costs and to enhance
profitability, the Company must implement an efficient capital investment plan
that enables the migration of these services on to its own network. Although
efforts continue in this regard, the Company cannot provide assurance as to
results.
Health and safety
Concerns about health and safety, particularly in the wireless business,
may affect future prospects
Radio frequency emission concerns
Some studies have asserted that radio frequency emissions from wireless
handsets may be linked to certain adverse health effects. However, there is
substantial evidence, as determined and published in numerous scientific
studies worldwide, supporting the conclusion that there is no demonstrated
public health risk associated with the use of wireless phones. TELUS believes
that the handsets sold by TELUS Mobility comply with all applicable Canadian
and U.S. government safety standards.
There can be no assurance that future health studies, government regulations or
public concerns about the health effects of radio frequency emissions would not
have an adverse effect on the business and prospects for TELUS' wireless
business. For example, public concerns could reduce customer growth and usage
or increase costs from modifying handsets and product liability lawsuits.
Responsible driving
The Insurance Corporation of B.C. and the University of Montreal have released
studies showing an increase in distraction levels for drivers using wireless
phones while driving. In December 2002, Newfoundland & Labrador banned drivers'
use of handheld wireless phones (as with other bans on handheld phones, the
province allows the use of hands-free wireless kits).
There are similar examples in the United States. In January 2004, New Jersey
followed a precedent set by New York by passing legislation that bans handheld
wireless phone use by drivers. In Washington, D.C., the Responsible Use of Cell
Phones Act was introduced to City Council in 2003. The act, currently being
reviewed by Washington's mayor before a review by Congress, would ban the use
of handheld wireless phones while driving.
TELUS promotes responsible driving and recommends that driving safely should be
every wireless customer's first responsibility. TELUS believes that current
laws adequately address all forms of careless and negligent driving, and laws
that are specific to mobile phones are unnecessary and counterproductive.
There can be no assurance that additional laws against using wireless phones
while driving will not be passed and that if passed, such laws will not have a
negative effect on subscriber growth rates, usage levels and wireless revenues.
Strategic partners
TELUS' interests may conflict with those of its strategic partners
While strategic alliance partners such as Verizon are expected to assist TELUS
in executing its growth strategy in Canada, their interests may not always
align with those of TELUS. This could potentially affect the speed and outcome
of strategic and operating decisions.
Sales of substantial amounts of TELUS shares by its strategic partners may
cause TELUS' share price to decline
Some of TELUS' strategic partners may decide to sell all or part of their share
positions. For example, Motorola is permitted to sell its 9.7 million
Non-Voting Shares, a 2.8% economic interest. Verizon could sell a portion of
its 73.5 million Common Shares and Non-Voting Shares, a 20.9% economic
interest, although it is not permitted until February 2009 to reduce its
shareholding to less than 19.9% of all outstanding Common Shares and Non-Voting
Shares without the prior approval of a majority of the independent directors on
the TELUS Board. Sales of substantial amounts of TELUS shares, or the
perception that these sales may occur, could adversely affect the market price
of TELUS shares.
Legal and ethical compliance
TELUS relies on its employees, officers, Board of Directors, key suppliers and
partners to demonstrate reasonable legal and ethical standards. TELUS has
instituted for its employees, officers and Directors an ethics policy and a
toll-free EthicsLine for anonymous reporting by anyone of issues or complaints.
However, there can be no assurance that these standards will be adhered to by
all parties and that results will not be negatively affected.
Litigation
Claims and lawsuits
Given the size of TELUS, claims and lawsuits seeking damages and other relief
are regularly threatened or pending against the Company and its subsidiaries.
TELUS cannot predict with any certainty the outcome of such claims and lawsuits
and as such, there can be no assurance that results will not be negatively
impacted.
Privacy compliance
TELUS has been subject to federal privacy legislation, the Personal Information
Protection and Electronic Documents Act (PIPEDA), since January 1, 2001. TELUS
has an industry-leading privacy compliance program that is overseen by a
designated privacy officer. Notwithstanding this, situations might occur where
personal information of a TELUS customer or employee is inadvertently
collected, used or disclosed in a manner which is not fully compliant with
PIPEDA, thereby exposing TELUS to the possibility of sanctions under that Act.
Although management cannot predict outcomes with certainty, management believes
it is unlikely that any such sanctions would be material.
==============================================================================
TELUS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
==============================================================================
Management's Report
Management is responsible to the Board of Directors for the preparation of the
consolidated financial statements of the Company and its subsidiaries. These
financial statements have been prepared in accordance with Canadian Generally
Accepted Accounting Principles ("GAAP") and necessarily include some amounts
based on estimates and judgements. Financial information presented elsewhere in
this annual report is consistent with that in the consolidated financial
statements.
The Company maintains a system of internal controls that provides management
with reasonable assurance that assets are safeguarded and that reliable
financial records are maintained. This system includes written policies and
procedures, an organizational structure that segregates duties and a
comprehensive program of periodic audits by the internal auditors. The Company
has also instituted policies and guidelines that require TELUS team members
(including Board members and Company employees) to maintain the highest ethical
standards, and has established mechanisms for the reporting to the audit
committee of perceived accounting and ethics policy complaints. Annually the
Company performs an extensive risk assessment process, which includes
interviews with senior management, a web-enabled risk and control assessment
survey distributed to a large sample of employees and input from the Company's
strategic planning activities. Results of this process influence the
development of the internal audit program. Key enterprise-wide risks are
assigned to executive owners for the development and implementation of
appropriate risk mitigation plans. During 2002, the Company implemented a
Sarbanes-Oxley certification enablement process, which, among other things,
cascades informative certifications from the key stakeholders within the
financial reporting process, which are reviewed by the Chief Executive Officer
and the Chief Financial Officer as part of their due diligence process.
The Company has adopted a formal Policy on Corporate Disclosure and
Confidentiality of Information, which sets out policies and practices including
forming a Disclosure Committee.
The Chief Executive Officer and the Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures related to
the preparation of the management's discussion and analysis and the
consolidated financial statements as well as other information contained in
this report. They have concluded that the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known
to them by others within those entities, particularly during the period in
which the management's discussion and analysis and the consolidated financial
statements contained in this report were being prepared.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
when they were evaluated, nor were there any significant deficiencies or
material weaknesses in these controls requiring corrective actions.
TELUS' Chief Executive Officer and Chief Financial Officer expect to certify
TELUS' annual filing with the United States' Securities and Exchange Commission
on Form 40-F as required by the United States Sarbanes-Oxley Act.
The Board of Directors has reviewed and approved these consolidated financial
statements. To assist the Board in meeting its oversight responsibilities, it
has appointed an audit committee, which is comprised entirely of independent
directors. All the members of the committee are financially literate and the
Chair of the committee is an audit committee financial expert as defined in
accordance with applicable securities laws. The committee oversees the
Company's accounting and financial reporting, internal controls and disclosure
controls, legal and regulatory compliance, ethics policy and timeliness of
filings with regulatory authorities, the independence and performance of the
Company's external and internal auditors, the management of the Company's
risks, its credit worthiness, treasury plans and financial policy and its
whistleblower and accounting and ethics complaint procedures. The committee
meets no less than quarterly and, as a standard feature of regularly scheduled
meetings, holds an in-camera session with the external auditors and separately
with the internal auditors without other management,including management
directors present. It oversees the work of the external auditors and approves
the annual audit plan. It also receives reports on the external auditor's
internal quality control procedures and independence. Furthermore, the audit
committee reviews: the Company's major accounting policies including
alternatives and potential key management estimates and judgements; the
Company's financial policies and compliance with such policies; the evaluation
by either the internal or external auditors of management's internal control
systems; the evaluation by management of the adequacy and effectiveness in the
design and operation of the Company's disclosure controls and internal controls
for financial reporting. The audit committee also considers reports on the
Company's business continuity and disaster recovery plan; reports on financial
risk management including derivative exposure and policies; tax planning,
environmental risk management and management's approach for safeguarding
corporate assets and regularly reviews key capital expenditures. The committee
pre-approves all audit, audit-related and non-audit services provided to the
Company by the external auditors (and its affiliates). The committee's terms of
reference are available, on request, to shareholders and are available on the
Company's website.
"Robert G. McFarlane"
Robert G. McFarlane
Executive Vice-President
and Chief Financial Officer
Auditors' Report
To the Shareholders of TELUS Corporation
We have audited the consolidated balance sheets of TELUS Corporation as at
December 31, 2003 and 2002 and the consolidated statements of income, retained
earnings and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2003 and 2002 and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles. As required by the Company Act (British Columbia), we report that,
in our opinion, except for the changes in accounting policies described in Note
2, these principles have been applied on a consistent basis.
"Deloitte & Touche LLP"
Deloitte & Touche LLP
Chartered Accountants
Vancouver, B.C.
February 2, 2004, except as to Note 16(c), which is as of February 12, 2004
Consolidated Statements of Income
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 7,146.0 $ 7,006.7
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OPERATING EXPENSES
Operations 4,301.9 4,488.1
Restructuring and workforce reduction costs (Note 4) 28.3 569.9
Depreciation 1,272.9 1,213.7
Amortization of intangible assets 379.9 356.6
---------------------------------------------------------------------------------------------------------------------------------
5,983.0 6,628.3
---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,163.0 378.4
Other expense, net 23.3 42.7
Financing costs (Note 5) 628.0 604.1
---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 511.7 (268.4)
Income taxes (recovery) (Note 6) 176.9 (42.5)
Non-controlling interest 3.3 3.1
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 331.5 (229.0)
Preference and preferred share dividends 3.5 3.5
Interest on convertible debentures, net of income taxes 7.1 6.8
---------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE AND NON-VOTING SHARE INCOME (LOSS) $ 320.9 $ (239.3)
=================================================================================================================================
INCOME (LOSS) PER COMMON SHARE AND NON-VOTING SHARE ($) (Note 7)
- Basic 0.92 (0.75)
- Diluted 0.91 (0.75)
DIVIDENDS DECLARED PER COMMON SHARE AND NON-VOTING SHARE ($) 0.60 0.60
TOTAL WEIGHTED AVERAGE COMMON SHARES AND NON-VOTING SHARES OUTSTANDING (millions)
- Basic 349.3 317.9
- Diluted 351.8 317.9
---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Retained Earnings
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 630.4 $ 1,654.8
Transitional impairment of intangible assets with indefinite lives (Note 2(g)) - (595.2)
---------------------------------------------------------------------------------------------------------------------------------
Adjusted opening balance 630.4 1,059.6
Net income (loss) 331.5 (229.0)
---------------------------------------------------------------------------------------------------------------------------------
961.9 830.6
Less: Common Share and Non-Voting Share dividends paid, or payable, in cash 165.8 150.9
Common Share and Non-Voting Share dividends reinvested, or to be reinvested,
in shares issued from Treasury 43.8 39.0
Preference and preferred share dividends 3.5 3.5
Interest on convertible debentures, net of income taxes 7.1 6.8
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR (Note 16) $ 741.7 $ 630.4
=================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Balance Sheets
As at December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ 6.2 $ -
Accounts receivable (Notes 9, 18(b)) 723.8 640.4
Income and other taxes receivable 187.4 134.0
Inventories 123.5 96.5
Prepaid expenses and other (Note 18(b)) 172.4 163.5
Current portion of future income taxes (Note 6) 304.0 138.8
---------------------------------------------------------------------------------------------------------------------------------
1,517.3 1,173.2
---------------------------------------------------------------------------------------------------------------------------------
Capital Assets, Net (Note 10)
Property, plant, equipment and other 7,764.3 8,025.9
Intangible assets subject to amortization 844.7 998.5
Intangible assets with indefinite lives 2,954.6 2,950.1
---------------------------------------------------------------------------------------------------------------------------------
11,563.6 11,974.5
---------------------------------------------------------------------------------------------------------------------------------
Other Assets
Deferred charges (Note 11) 610.7 729.1
Future income taxes (Note 6) 626.0 1,170.3
Investments 41.9 48.1
Goodwill (Note 12) 3,118.0 3,124.6
---------------------------------------------------------------------------------------------------------------------------------
4,396.6 5,072.1
---------------------------------------------------------------------------------------------------------------------------------
$17,477.5 $18,219.8
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ - $ 9.0
Accounts payable and accrued liabilities (Note 18(b)) 1,294.1 1,198.8
Restructuring and workforce reduction accounts payable and accrued liabilities (Note 4) 141.0 400.4
Dividends payable 53.5 52.2
Advance billings and customer deposits (Note 18(b)) 445.0 330.3
Current maturities of long-term debt (Note 14) 221.1 190.3
---------------------------------------------------------------------------------------------------------------------------------
2,154.7 2,181.0
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (Note 14) 6,469.4 8,197.4
---------------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities (Note 15) 1,173.7 405.3
---------------------------------------------------------------------------------------------------------------------------------
Future Income Taxes (Note 6) 1,007.0 992.3
---------------------------------------------------------------------------------------------------------------------------------
Non-Controlling Interest 10.7 11.2
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Note 16)
Convertible debentures 149.6 148.5
Preference and preferred shares 69.7 69.7
Common equity 6,442.7 6,214.4
---------------------------------------------------------------------------------------------------------------------------------
6,662.0 6,432.6
---------------------------------------------------------------------------------------------------------------------------------
$17,477.5 $18,219.8
=================================================================================================================================
Commitments and Contingent Liabilities (Note 17)
The accompanying notes are an integral part of these consolidated financial statements
Approved by the Directors:
Director: Director:
"Brian F. MacNeill" "Brian A. Canfield"
----------------- -----------------
Brian F. MacNeill Brian A. Canfield
Consolidated Statements of Cash Flows
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 331.5 $ (229.0)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization 1,652.8 1,570.3
Future income taxes 398.6 9.2
Gain on redemption of long-term debt - (82.7)
Net employee defined benefit plans expense (credits) 53.0 (9.8)
Employer contributions to employee defined benefit plans (99.8) (75.3)
Restructuring and workforce reduction costs, net of cash payments (Note 4) (259.4) 290.7
Other, net 44.0 (11.6)
Net change in non-cash working capital (Note 18(c)) 23.3 279.2
---------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 2,144.0 1,741.0
---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (Note 10(a)) (1,252.7) (1,697.9)
Proceeds from the sale of property (Note 10(d)) and other assets 51.2 8.2
Other 3.7 (1.4)
---------------------------------------------------------------------------------------------------------------------------------
Cash used by investing activities (1,197.8) (1,691.1)
---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 86.6 92.2
Public issuance of Non-Voting Shares - 337.4
Cost of public issuance of Non-Voting Shares - (14.5)
Dividends to shareholders (172.0) (135.6)
Long-term debt issued (Note 14) 373.0 644.2
Redemptions and repayment of long-term debt (Note 14) (1,201.7) (901.0)
Change in short-term obligations (commercial paper and bank borrowings) - (84.4)
Interest on convertible debentures (10.2) (10.2)
Other (6.7) (4.1)
---------------------------------------------------------------------------------------------------------------------------------
Cash used by financing activities (931.0) (76.0)
---------------------------------------------------------------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in cash and temporary investments, net 15.2 (26.1)
Cash and temporary investments, net, beginning of year (9.0) 17.1
---------------------------------------------------------------------------------------------------------------------------------
Cash and temporary investments, net, end of year $ 6.2 $ (9.0)
=================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Interest paid $ 657.5 $ 675.8
=================================================================================================================================
Interest received $ 41.6 $ 24.5
=================================================================================================================================
Income taxes (inclusive of Investment Tax Credits (Note 6)) received $ 165.5 $ 18.6
=================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements
Notes to Consolidated Financial Statements
DECEMBER 31, 2003
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. Summary of Significant Accounting Policies
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada and are
expressed in Canadian dollars.
The terms "TELUS" or "Company" are used to mean TELUS Corporation and, where
the context of the narrative permits or requires, its subsidiaries.
(a) Consolidation
The consolidated financial statements include the accounts of the Company and
all of the Company's subsidiaries, of which the principal one is TELUS
Communications Inc. (including the TELE-MOBILE COMPANY partnership).
The financing arrangements of the Company and all of its subsidiaries do not
impose restrictions on inter-corporate dividends.
On a continuing basis, TELUS Corporation reviews its corporate organization and
effects changes as appropriate so as to enhance its value. This process can,
and does, affect which of the Company's subsidiaries are considered principal
subsidiaries at any particular point in time.
(b) Use of Estimates
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.
Examples of significant estimates include: the key economic assumptions used to
determine the fair value of residual cash flows arising from accounts
receivable securitization; the allowance for doubtful accounts; the allowance
for inventory obsolescence; the estimated useful lives of assets; the
recoverability of tangible assets; the recoverability of intangible assets with
indefinite lives; the recoverability of long-term investments; the
recoverability of goodwill; the composition of future income tax assets and
future income tax liabilities; the accruals for payroll and employee-related
liabilities; the accruals for restructuring and workforce reduction costs; and
certain actuarial and economic assumptions used in determining defined benefit
pension costs, accrued pension benefit obligations and pension plan assets.
(c) Revenue Recognition
The Company earns the majority of its revenue (voice local, voice contribution,
voice long distance, data and mobility network) from access to, and usage of,
the Company's telecommunication infrastructure. The majority of the balance of
the Company's revenue (other and mobility equipment) arises from providing
products facilitating access to, and usage of, the Company's telecommunication
infrastructure.
The Company offers complete and integrated solutions to meet its customers'
needs. These solutions may involve the delivery of multiple services and
products occurring at different points in time and/or over different periods of
time. As appropriate, these multiple element arrangements are separated into
their component accounting units, consideration is measured and allocated
amongst the accounting units and then the Company's relevant revenue
recognition polices are applied to them.
Voice Local, Voice Long Distance, Data and Mobility Network: The Company
recognizes revenues on the accrual basis and includes an estimate of revenues
earned but unbilled. Wireline and wireless service revenues are recognized
based upon usage of the Company's network and facilities and upon contract
fees.
Advance billings are recorded when billing occurs prior to rendering the
associated service; such advance billings are recognized as revenue in the
period in which the services are provided. Similarly, and as appropriate,
upfront customer activation and installation fees, along with the corresponding
direct costs not in excess of the revenues, are deferred and recognized over
the average expected term of the customer relationship.
When the Company receives no identifiable, separable benefit for consideration
given to a customer, such as that which might arise in a customer loyalty
program, the consideration is recorded as a reduction of revenue rather than as
an expense as the Company considers this to result in a more appropriate
presentation of transactions in the financial statements.
The Company follows the liability method of accounting for its quality of
service penalties that arise from the jurisdiction of the Canadian
Radio-television and Telecommunications Commission ("CRTC").
Voice Contribution: The CRTC has established a portable subsidy mechanism to
subsidize Local Exchange Carriers, such as the Company, that provide
residential service to high cost service areas ("HCSAs"). The CRTC has
determined the per line/per band portable subsidy rate for all Local Exchange
Carriers. The Company recognizes the portable subsidy on an accrual basis by
applying the subsidy rate to the number of residential network access lines it
has in HCSAs.
Other and Mobility Equipment: The Company recognizes product revenues,
including wireless handsets sold to re-sellers and customer premises equipment,
when the products are delivered and accepted by the end-user customers.
Revenues from operating leases of equipment are recognized on a systematic and
rational basis (normally a straight-line basis) over the term of the lease.
When the Company receives no identifiable, separable benefit for consideration
given to a customer, the consideration is recorded as a reduction of revenue
rather than as an expense as the Company considers this to result in a more
appropriate presentation of transactions in the financial statements.
Non-HCSA Deferral Account: On May 30, 2002, and on July 31, 2002, the CRTC
issued Decision 2002-34 and Decision 2002-43, respectively, pronouncements that
will affect the Company's wireline revenues for four-year periods beginning
June 1, 2002, and August 1, 2002, respectively. In an effort to foster
competition for residential basic service in non-high cost service areas
("non-HCSAs"), the concept of a deferral account mechanism was introduced by
the CRTC, as an alternative to mandating price reductions.
The deferral account arises from the CRTC requiring the Company to defer the
income statement recognition of a portion of the monies received in respect of
residential basic services provided to non-HCSAs. The revenue deferral is based
on the rate of inflation (as measured by a chain-weighted GDPPI index), less a
productivity offset of 3.5%, and an "exogenous factor" that is associated with
allowed recoveries in previous price cap regimes that have now expired. The
Company may recognize the deferred amounts upon the undertaking of qualifying
actions, such as Service Improvement Programs ("SIPs") in qualifying non-HCSAs,
rate reductions (including those provided to competitors as required in
Decision 2002-34 and Decision 2002-43) and/or rebates to customers. To the
extent that a balance remains in the deferral account, interest is required to
be accrued at the Company's short-term cost of borrowing.
The Company has adopted the liability method of accounting for the deferral
account. This results in the Company recording a liability to the extent that
activities it has undertaken, realized rate reductions for Competitor Services
and other future qualifying events do not extinguish the balance of the
deferral account. This also results in the Company continuing to record
incremental liability amounts, subject to reductions for the mitigating
activities, for the remaining duration of the Decisions' four-year periods.
Other than for the interest accrued on the balance of the deferral account,
which would be included in financing costs, all income statement effects of the
deferral account are recorded through operating revenues.
(d) Advertising Costs
Costs of advertising production, airtime and space are expensed as incurred.
(e) Research and Development
Research and development costs are expensed except in cases where development
costs meet certain identifiable criteria for deferral. Deferred development
costs are amortized over the life of the commercial production, or in the case
of serviceable property, plant and equipment, are included in the appropriate
property group and are depreciated over its estimated useful life.
(f) Depreciation and Amortization
Assets are depreciated on a straight-line basis over their estimated useful
life as determined by a continuing program of studies. The composite
depreciation rate for the year ended December 31, 2003, was 6.6% (2002 - 6.6%).
Depreciation includes amortization of assets under capital leases. Intangible
assets with finite lives ("intangible assets subject to amortization") are
amortized on a straight-line basis over their estimated lives; estimated lives
are annually reviewed. Estimated useful lives for the majority of the Company's
capital assets subject to depreciation and amortization are as follows:
Estimated
useful lives
---------------------------------------------------------------------------------------------------------------------------------
Property, plant, equipment and other
Telecommunication assets
Outside plant 17 to 40 years
Inside plant 8 to 20 years
Mobility site equipment 6.5 to 8 years
Balance of depreciable property, plant, equipment and other 5 to 20 years
Intangible assets subject to amortization
Subscriber base (see Note 2(g))
Wireline 50 years
Wireless 7 years
Software 3 to 5 years
Access to rights-of-way and other 7 to 30 years
---------------------------------------------------------------------------------------------------------------------------------
The Company chose to depreciate and amortize its assets on a straight-line
basis as it believes that this method better reflects the consumption of
resources related to the economic life span of the assets than use of an
accelerated method and thus is more representative of the economic substance of
the underlying use of the assets.
Commencing January 1, 2002, rather than being systematically amortized, the
carrying value of intangible assets with indefinite lives, and goodwill, are
periodically tested for impairment. The frequency of the impairment test
generally is the reciprocal of the stability of the relevant events and
circumstances, but intangible assets with indefinite lives and goodwill must,
at a minimum, be tested annually; the Company has selected December as its
annual test time. No impairment amounts arose from the December 2003 and
December 2002 annual tests. The test is applied to each of the Company's two
reporting units (the reporting units being identified in accordance with the
criteria in the Canadian Institute of Chartered Accountants ("CICA") Handbook
section for intangible assets and goodwill): Communications and Mobility.
The Company assesses its goodwill by applying the prescribed method of
comparing the fair value of its reporting units to the carrying amounts of its
reporting units. Consistent with current industry-specific valuation methods,
the Company uses a combination of the discounted cash flow and the market
comparable approaches in determining the fair value of its reporting units.
(g) Translation of Foreign Currencies
General: Trade transactions completed in foreign currencies are translated
into Canadian dollars at the rates prevailing at the time of the transactions.
Monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at the rate of exchange in effect at the
balance sheet date with any resulting gain or loss being included in the
Consolidated Statements of Income (see Note 5).
The Company has a minor foreign subsidiary that is considered to be
self-sustaining. Accordingly, foreign exchange gains and losses arising from
the translation of the minor foreign subsidiary's accounts into Canadian
dollars are deferred and reported as cumulative foreign currency translation
adjustment in the equity section of the Consolidated Balance Sheets (see Note
16(a)).
Hedge accounting: The Company applies hedge accounting to the financial
instruments used to establish designated currency hedging relationships for its
U.S. Dollar denominated long-term debt future cash outflows (semi-annual
interest payments and principal payments at maturity) (see Note 3 and Note
14(b)). Hedge accounting is applied to future purchase commitments on an
exception basis only. The purpose of hedge accounting, in respect of the
Company's designated currency hedging relationships, is to ensure that
counterbalancing gains and losses are recognized in the same periods.
The Company chose to apply hedge accounting, as it believes this is more
representative of the economic substance of the underlying transactions.
In order to apply hedge accounting, a high correlation (which indicates
effectiveness) is required in the offsetting changes in the values of the
financial instruments (the "hedging items") used to establish the designated
currency hedging relationships and of the U.S. Dollar denominated long-term
debt (the "hedged items"). The Company assesses the anticipated effectiveness
of designated hedging relationships at inception and for each reporting period
thereafter. A designated hedging relationship is considered effective by the
Company if the following critical terms match between the hedging item and the
hedged item: the notional amount of the hedging item and the principal of the
hedged item; maturity dates; payment dates, and interest rate index. Any
ineffectiveness, such as from a difference between the notional amount of the
hedging item and the principal of the hedged item, is reflected in the
Consolidated Statements of Income as "Financing costs".
In the application of hedge accounting, an amount (the "hedge value") is
recorded in respect of the fair value of the hedging items only to the extent
that their value counterbalances the difference between the Canadian dollar
equivalent of the value of the hedged items at the rate of exchange at the
balance sheet date and the Canadian dollar equivalent of the value of the
hedged items at the rate of exchange in the hedging items. Unrealized changes
in the fair value of hedging items, net of the hedge value recorded (see Note
11 and Note 15), are recognized when all the hedged cash flows have occurred
(see Note 5). If a previously effective designated hedging relationship becomes
ineffective, all gains or losses relating to the hedging item are prospectively
reflected in the Consolidated Statements of Income as "Financing costs".
(h) Income Taxes
The Company follows the liability method of accounting for income taxes. Under
this method, current income taxes are recognized for the estimated income taxes
payable for the current year. Future income tax assets and liabilities are
recognized for temporary differences between the tax and accounting bases of
assets and liabilities as well as for the benefit of losses available to be
carried forward to future years for tax purposes that are more likely than not
to be realized.
The Company's research and development activities may be eligible to earn
Investment Tax Credits. The Company's research and development activities and
their eligibility to earn Investment Tax Credits is a complex matter and, as a
result, the threshold of more likely than not is normally only achieved after
the relevant taxation authorities have made specific determinations. When it is
more likely than not that the Investment Tax Credits will be received, they are
accounted for using the cost reduction method whereby such credits are deducted
from the expenditures or assets to which they relate (see Note 6).
(i) Share-Based Compensation
The Company applies the intrinsic value based method of accounting for
share-based compensation awards granted to employees. Accordingly, no
compensation cost is recorded in the accounts for its share option plans.
Canadian GAAP requires that a fair value be determined for share options at the
date of grant and that such fair value is recognized in the financial
statements. In respect of share options awarded to employees, it is permissible
to use either the fair value based method or the intrinsic value based method,
however, if the intrinsic value based method is used, pro forma disclosure is
required so as to show what the effect would have been had the fair value based
method been applied (see Note 8(a) and Note 2(d)). Proceeds arising from the
exercise of share options are credited to share capital.
The Company has chosen to apply the intrinsic value method of accounting for
share-based compensation since estimating share-based compensation with
reasonable accuracy is not determinable and the effect the fair value method
would have on reducing the meaningfulness of the Consolidated Statements of
Income. As well, the Company believes that the majority of companies operating
in the same capital markets as the Company apply the intrinsic value method of
accounting for share-based compensation and thus the Company has selected the
intrinsic value method rather than the fair value method of accounting for the
reason of increasing the comparability of its financial reporting.
In respect of restricted share units, the Company accrues a liability equal to
the product of the vesting and vested restricted share units multiplied by the
fair market value of the corresponding shares at the end of the reporting
period (see Note 8(b)).
When share-based compensation vests in one amount at a future point in time
("cliff vesting"), the expense is recognized by the Company, either in the
Consolidated Statements of Income or in the pro forma disclosures in Note 8(a),
on a straight-line basis over the vesting period. When share based compensation
vests in tranches ("graded vesting"), the expense is recognized by the Company,
either in the Consolidated Statements of Income or in the pro forma disclosures
in Note 8(a), using the accelerated expense attribution method.
(j) Cash and Temporary Investments, Net
Cash and temporary investments, which include investments in money market
instruments that are purchased three months or less from maturity, are
presented net of outstanding items including cheques written but not cleared by
the bank as at the balance sheet date. Cash and temporary investments, net, are
classified as a liability on the balance sheet when the amount of the cheques
written but not cleared by the bank exceeds the amount of the cash and
temporary investments.
(k) Sales of Receivables
Effective July 1, 2001, transfers of receivables in securitization transactions
are recognized as sales when the Company is deemed to have surrendered control
over the transferred receivables and consideration, other than for its
beneficial interests in the transferred receivables, has been received. When
the Company sells its receivables, it retains reserve accounts, which are
retained interests in the securitized receivables, and servicing rights. When a
transfer is considered a sale, the Company derecognizes all receivables sold,
recognizes at fair value the assets received and the liabilities incurred and
records the gain or loss on sale in the Consolidated Statements of Income as
"Other expense, net". The amount of gain or loss recognized on the sale of
receivables depends in part on the previous carrying amount of the receivables
involved in the transfer, allocated between the receivables sold and the
retained interests based upon their relative fair market value at the sale
date. The Company estimates the fair value for its retained interests based on
the present value of future expected cash flows using management's best
estimates of the key assumptions - credit losses, the weighted average life of
the receivables sold and discount rates commensurate with the risks involved.
(l) Inventories
The Company's inventory consists primarily of wireless handsets, parts and
accessories and communications equipment held for resale. Inventories of
wireless handsets, parts and accessories are valued at the lower of cost and
replacement cost, with cost being determined on an average cost basis.
Inventories of communications equipment are valued at the lower of cost and net
realizable value, with cost being determined on an average cost basis.
(m) Capital Assets
General: Property is recorded at historical cost and, with respect to
self-constructed property, includes materials, direct labour and applicable
overhead costs. In addition, where construction projects exceed $20 million and
are of a sufficiently long duration, an amount is capitalized for the cost of
funds used to finance construction (see Note 5). The rate for calculating the
capitalized financing costs is based on the Company's one-year cost of
borrowing.
When property, plant and/or equipment are sold by the Company, the historical
cost less accumulated depreciation is netted against the sale proceeds and the
difference is included in the Consolidated Statements of Income as "Other
expense, net".
Asset retirement obligations: Liabilities are recognized for statutory,
contractual or legal obligations, normally when incurred, associated with the
retirement of property, plant and equipment (primarily certain items of the
outside plant and mobility site components of the Company's telecommunications
assets) when those obligations result from the acquisition, construction,
development or normal operation of the assets. The obligations are measured
initially at fair value (using present value methodology) and the resulting
costs capitalized into the carrying amount of the related asset. In subsequent
periods, the liability is adjusted for the accretion of discount and any
changes in the amount or timing of the underlying future cash flows. The
capitalized asset retirement cost is depreciated on the same basis as the
related asset; discount accretion is included in determining the results of
operations.
(n) Leases
Leases are classified as capital or operating depending upon the terms and
conditions of the contracts.
Where the Company is the lessee, asset values recorded under capital leases are
amortized on a straight-line basis over the period of expected use. Obligations
recorded under capital leases are reduced by lease payments net of imputed
interest.
For the year ended December 31, 2003, real estate and vehicle operating lease
expenses, which are net of the amortization of the deferred gain on the
sale-leaseback of buildings (see Note 10(d) and Note 15), were $167.6 million
(2002 - $151.2 million).
(o) Investments
The Company accounts for its investments in affiliated companies over which it
has significant influence using the equity basis of accounting whereby the
investments are initially recorded at cost and subsequently adjusted to
recognize the Company's share of earnings or losses of the investee companies
and reduced by dividends received. The excess of the cost of equity investments
over the underlying book value at the date of acquisition, except for goodwill,
is amortized over the estimated useful lives of the underlying assets to which
it is attributed.
The Company accounts for its other investments using the cost basis of
accounting whereby investments are initially recorded at cost and earnings from
such investments are recognized only to the extent received or receivable.
Carrying values of equity and cost investments are reduced to estimated market
values if there is other than a temporary decline in the value of the
investment; such reduction recorded is included in the Consolidated Statements
of Income as "Other expense, net".
(p) Other Long-Term Liabilities - Individual Line Service Program
Included in "Other Long-Term Liabilities" are past contributions from the
Government of Alberta under the Individual Line Service program, which are
recognized as revenue on a straight-line basis over the estimated useful life
of the related assets. The amount to be recognized as revenue within one year
is included with "Advance billings and customer deposits" in the Consolidated
Balance Sheets.
(q) Employee Future Benefit Plans
The Company accrues its obligations under employee defined benefit plans and
the related costs, net of plan assets. The cost of pensions and other
retirement benefits earned by employees is actuarially determined using the
projected benefit method pro-rated on service and management's best estimate of
expected plan investment performance, salary escalation and retirement ages of
employees. For the purpose of calculating the expected return on plan assets,
those assets are valued at fair value. The excess of the net actuarial gain
(loss) over 10% of the greater of the benefit obligation and the fair value of
the plan assets is amortized over the average remaining service period of
active employees of the plan, as are past service costs and transitional assets
and liabilities.
The Company uses defined contribution accounting for the union pension plan
that covers certain of the Company's employees.
(r) Comparative Amounts
Certain of the comparative amounts have been reclassified to conform to the
presentation adopted currently.
2. Accounting Policy Developments
(a) Disclosure of Guarantees
Commencing with the Company's 2003 fiscal year, the new guidelines of the
Canadian Institute of Chartered Accountants ("CICA") for the disclosure of
guarantees (CICA Accounting Guideline AcG-14) apply to the Company (see Note
17(e)). The Guideline elaborates on required disclosures by a guarantor in its
financial statements about obligations under certain types of guarantees that
it has issued.
(b) Asset Retirement Obligations
During the Company's 2003 fiscal year, the Company early adopted the new
recommendations of the CICA for accounting for asset retirement obligations
(CICA Handbook Section 3110) (see Note 1(m)). The new section focuses on the
recognition and measurement of liabilities for statutory, contractual or legal
obligations, normally when incurred, associated with the retirement of
property, plant and equipment when those obligations result from the
acquisition, construction, development or normal operation of the assets. All
amounts recorded and arising from the application of this accounting policy
were not significant.
(c) Employee Future Benefits
Effective December 31, 2003, the Company early adopted the new recommendations
of the CICA dealing with incremental disclosure related to employee benefit
plans (CICA Handbook Section 3461) (see Note 19).
(d) Share-Based Compensation
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) will apply to the Company. The amendments
will result in the Company no longer being able to use the intrinsic method of
accounting for share options granted to employees. The Company has selected the
modified-prospective transition method (also referred to as the retroactive
application without restatement method), which will be implemented effective
January 1, 2004. The modified-prospective transition method will result in no
share option expense being recognized in the Consolidated Statements of Income
in fiscal years prior to 2004. 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.
(e) Hedging Relationships
Commencing with the Company's 2004 fiscal year, the new guidelines of the CICA
for accounting for hedging relationships (CICA Accounting Guideline AcG-13)
apply to the Company. The Company's existing hedge accounting policy is
compliant with the new Guideline (see Note 1(g)).
(f) Equity Settled Obligations
Commencing with the Company's 2005 fiscal year, 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) apply to the Company. The amendments will result in
the Company's convertible debentures being classified as a liability on the
Consolidated Balance Sheets and the associated interest expense will
correspondingly be classified with financing costs on the Consolidated
Statements of Income. In advance of the mandatory adoption date, the Company
will implement the amended standard on a retroactive basis in 2004.
(g) Intangible Assets and Goodwill
Commencing with the Company's 2002 fiscal year, the new recommendations of the
CICA for intangible assets and goodwill (CICA Handbook Section 3062) apply to
the Company (see Note 1(f)).
The Company's intangible assets with indefinite lives, which are its spectrum
licences, were tested for impairment as at January 1, 2002, and the impairment
amount (the "transitional impairment amount") of $595.2 million ($910.0 million
before tax) was considered to arise from a change in accounting policy and was
charged directly to opening retained earnings.
Similarly, goodwill was also to be tested for impairment as at January 1, 2002.
The Company completed this test in the first quarter of 2002 and determined
there was no goodwill transitional impairment amount.
As required, TELUS reviewed the estimated useful lives associated with its
intangible assets that are subject to amortization. Generally accepted
accounting principles require that changes in estimates, such as the useful
lives of assets, be applied prospectively. The Company's review resulted in the
following changes, effected in the first quarter of 2002, to the estimated
useful lives of intangible assets that are subject to amortization:
Estimated useful lives
Current Former
---------------------------------------------------------------------------------------------------------------------------------
Subscribers - wireline 50 years 40 years
Subscribers - wireless 7 years 7 to 10 years
---------------------------------------------------------------------------------------------------------------------------------
3. Financial Instruments
The Company's financial instruments consist of cash and temporary investments,
accounts receivable, investments accounted for using the cost method (see Note
1(o)), accounts payable, restructuring and workforce reduction accounts
payable, dividends payable, short-term obligations, long-term debt, interest
rate swap agreements, foreign exchange hedges and convertible debentures.
The Company uses various financial instruments, the fair values of some which
are not reflected on the balance sheets, to reduce or eliminate exposure to
interest rate and foreign currency risks. These instruments are accounted for
on the same basis as the underlying exposure being hedged. The majority of
these instruments, which were newly added during 2001, pertain to TELUS' U.S.
Dollar borrowing. Use of these instruments is subject to a policy, which
requires that no derivative transaction be effected for the purpose of
establishing a speculative or a levered position, and sets criteria for the
credit worthiness of the transaction counterparties.
Price risk - interest rate: The Company is exposed to interest rate risk
arising from fluctuations in interest rates on its temporary investments,
short-term obligations and long-term debt.
Price risk - currency: The Company is exposed to currency risks arising from
fluctuations in foreign exchange rates on its U.S. Dollar denominated long-term
debt. Currency hedging relationships have been established for the related
semi-annual interest payments and principal payments at maturity (see Note 1(g)
and Note 14(b)).
The Company's foreign exchange risk management also includes the use of foreign
currency forward contracts to fix the exchange rates on short-term foreign
currency transactions and commitments. Hedge accounting is applied to these
short-term foreign currency forward contracts on an exception basis only.
As at December 31, 2003, the Company had entered into foreign currency forward
contracts that have the effect of fixing the exchange rates on U.S.$43.0
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.
Credit risk: The Company is exposed to credit risk with respect to its
short-term deposits, accounts receivable, interest rate swap agreements and
foreign exchange hedges.
Credit risk associated with short-term deposits is minimized substantially by
ensuring that these financial assets are placed with governments,
well-capitalized financial institutions and other creditworthy counterparties.
An ongoing review is performed to evaluate changes in the status of
counterparties.
Credit risk associated with accounts receivable is minimized by the Company's
large customer base, which covers all consumer and business sectors in Canada.
The Company follows a program of credit evaluations of customers and limits the
amount of credit extended when deemed necessary. The Company maintains
provisions for potential credit losses, and any such losses to date have been
within management's expectations.
Counterparties to the Company's interest rate swap agreements and foreign
exchange hedges are major financial institutions that have all been accorded
investment grade ratings by a primary rating agency. The dollar amount of
credit exposure under contracts with any one financial institution is limited
and counterparties' credit ratings are monitored. The Company does not give or
receive collateral on swap agreements and hedges due to its credit rating and
those of its counterparties. While the Company is exposed to credit losses due
to the nonperformance of its counterparties, the Company considers the risk of
this remote; if all counterparties were not to perform, the pre-tax effect
would be limited to the value of the deferred hedging asset (Note 11).
Fair value: The carrying value of cash and temporary investments, accounts
receivable, accounts payable, restructuring and workforce reduction accounts
payable, dividends payable and short-term obligations approximates their fair
values due to the immediate or short-term maturity of these financial
instruments. The carrying values of the Company's investments accounted for
using the cost method would not exceed their fair values.
The fair values of the Company's long-term debt and convertible debentures are
estimated based on quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same maturity as well
as the use of discounted future cash flows using current rates for similar
financial instruments subject to similar risks and maturities. The fair values
of the Company's derivative financial instruments used to manage exposure to
interest rate and currency risks are estimated similarly.
2003 2002
(millions) Carrying Carrying
amount Fair value amount Fair value
---------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 6,690.5 $ 7,682.8 $ 8,387.7 $ 8,338.2
Convertible debentures $ 149.6 $ 157.4 $ 148.5 $ 137.6
Derivative financial instruments used to manage
exposure to interest rate and currency risks (1)
- Deferred hedging liability (Note 15) $ 739.6 $ 858.6 $ - $ -
- Deferred hedging asset (Note 11) $ - $ - $ 134.1 $ 315.7
---------------------------------------------------------------------------------------------------------------------------------
(1) Notional amount outstanding $4,822.9 (2002 - $4,925.7).
4. Restructuring and Workforce Reduction Costs
In 2001, the Company initiated the phased Operational Efficiency Program aimed
at improving the Company's operating and capital productivity and
competitiveness. The first phase of the Operational Efficiency Program was to
complete merger-related restructuring activities in TELUS Mobility and the
reorganization for TELUS Communications. Approximately one-half of the 2001
charge was related to integration costs for TELUS Mobility including the
write-down of redundant capital assets, handset reconfiguration costs and
employee severance costs. The remaining charge was related to reorganization
costs in TELUS Communications, including employee severance costs and capital
asset impairment charges.
The second phase of the Operational Efficiency Program, which commenced at the
beginning of 2002, continued to focus on reducing staff, but also entailed a
comprehensive review of enterprise-wide processes to identify capital and
operational efficiency opportunities. Consequently, the Company initiated a
program offering an Early Retirement Incentive Plan and a Voluntary Departure
Incentive Plan to 11,000 of over 16,000 bargaining unit employees and announced
details on Operational Efficiency Program initiatives including: streamlining
of business processes; reducing the TELUS product portfolio and processes that
support them; optimizing the use of real estate, networks and other assets;
improving customer order management; reducing the scope of corporate support
functions; consolidating operational and administrative functions; and
consolidating customer contact centres.
The third phase of the Operational Efficiency Program, which commenced in the
third quarter of 2002, was focused on operationalizing the above noted
initiatives. Consolidation of administrative offices was largely completed by
December 31, 2002.
As at December 31, 2003, no future costs remain to be recorded under the
Operational Efficiency Program, but variances from estimates currently recorded
may impact amounts ultimately recorded.
The following table presents the program costs to date and the changes in
program costs in the year as well as the corresponding liabilities and changes
in the corresponding liabilities for the year.
Program(1) Program(1) Program(1) Program(1)
inception to Year ended inception to Year ended inception to items not Total
December 31, December 31, December 31, December 31, December 31, yet eligible program
(millions) 2001 2002 2002 2003 2003 for recording (1)(2)
---------------------------------------------------------------------------------------------------------------------------------
Workforce reduction costs
Voluntary (Early
Retirement Incentive
Plan, Voluntary
Departure Incentive
Plan and other) $ 94.6 $ 403.9 $ 498.5 $ 1.9 $ 500.4 $ - $ 500.4
Involuntary and other 67.3 153.5 220.8 13.1 233.9 - 233.9
---------------------------------------------------------------------------------------------------------------------------------
161.9 557.4 719.3 15.0 734.3 - 734.3
Lease termination charges 6.0 10.1 16.1 2.4 18.5 - 18.5
Asset write-offs 30.5 - 30.5 - 30.5 - 30.5
Other charges - 2.4 2.4 10.9 13.3 - 13.3
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce
reduction costs 198.4 569.9 768.3 28.3 796.6 $ - $ 796.6
---------------------------------------------------------------------------------------------------------------------------------
Less:
Payments (Note 18(c)) 58.2 273.8 332.0 287.7 619.7
Asset write-offs related
to restructuring 30.5 - 30.5 - 30.5
Reclassified to other
long-term liabilities
(pension and other
post-retirement benefit
liabilities) - 5.4 5.4 - 5.4
---------------------------------------------------------------------------------------------------
88.7 279.2 367.9 287.7 655.6
---------------------------------------------------------------------------------------------------
Restructuring and
workforce reduction
accounts payable and
accrued liabilities(3) $ 109.7 $ 290.7 $ 400.4 $ (259.4) $ 141.0
---------------------------------------------------------------------------------------------------
(1) Program includes phases 1, 2 and 3 of the Operational Efficiency Program.
(2) Amounts were updated during the fourth quarter of 2003.
(3) Included in the December 31, 2003, balance of $141.0 is $47.7 related to
early retirement benefits (see Note 19(h)) of which $23.8 will be funded after
2004.
The following table presents the status of various Operational Efficiency
Program initiatives. The expense and liability for the Early Retirement
Incentive Plan and Voluntary Departure Incentive Plan programs are recognized
when the employee accepts the Company's formalized offer. As a result,
Operational Efficiency Program costs may be, and have been, as appropriate and
required, recorded in advance of when the underlying event occurs.
Program(1) Program(1) Program(1)
inception to Year ended inception to Year ended inception to Total
December 31, December 31, December 31, December 31, December 31, program
(millions) 2001 2002 2002 2003 2003 Future (1)(2)
---------------------------------------------------------------------------------------------------------------------------------
Customer contact centre
consolidation - 24 24 20 44 2 46
=================================================================================================================================
TELUS store closures - 33 33 - 33 - 33
=================================================================================================================================
Staff reductions (net of
targeted hiring)
Phase 1 800 - 800 - 800 - 800
Phases 2 and 3 - 5,200 5,200 1,500 6,700 50 6,750
---------------------------------------------------------------------------------------------------------------------------------
800 5,200 6,000 1,500 7,500 50 7,550
=================================================================================================================================
(1) Program includes phases 1, 2 and 3 of the Operational Efficiency Program.
(2) Amounts were updated during the fourth quarter of 2003.
5. Financing Costs
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt $ 666.7 $ 711.3
Interest on short-term obligations and other 5.0 3.6
Foreign exchange(1) (0.4) (1.5)
Gain on redemption of long-term debt(2) - (82.7)
---------------------------------------------------------------------------------------------------------------------------------
671.3 630.7
Capitalized interest during construction - (0.7)
Interest income (including interest on tax refunds) (43.3) (25.9)
---------------------------------------------------------------------------------------------------------------------------------
$ 628.0 $ 604.1
=================================================================================================================================
(1) For the year ended December 31, 2003, these amounts include gains (losses)
of $0.5 (2002 - NIL) in respect of hedge ineffectiveness.
(2) This amount includes a gain of $4.3, which arose from the associated
settlement of financial instruments which hedged U.S. dollar denominated
long-term debt that was extinguished during the third quarter of 2002.
6. Income Taxes
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Current $ (221.7) $ (51.7)
Future 398.6 9.2
---------------------------------------------------------------------------------------------------------------------------------
$ 176.9 $ (42.5)
=================================================================================================================================
The Company's income tax expense (recovery) differs from that calculated by
applying statutory rates for the following reasons:
Years ended December 31 ($ in millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 189.9 37.1% $ (105.0) 39.1%
Tax rate differential on settlement of prior
year tax issues (47.0) 2.4
Revaluation of future tax assets and liabilities
for changes in statutory tax rates 13.6 31.3
Non-tax effected elements of income (loss)
before income taxes and non-controlling interest 1.9 10.0
Non-taxable portion of gains - (16.4)
Other (2.8) 11.0
---------------------------------------------------------------------------------------------------------------------------------
155.6 30.4% (66.7) 24.9%
Large corporations tax 21.3 24.2
---------------------------------------------------------------------------------------------------------------------------------
Income tax expense (recovery) per Consolidated
Statements of Income $ 176.9 34.6% $ (42.5) 15.8%
=================================================================================================================================
As referred to in Note 1(b), the Company must make significant estimates in
respect of the composition of its future income tax assets and future income
tax liabilities. The operations of the Company are complex, and related tax
interpretations, regulations and legislation are continually changing. As a
result, there are usually some tax matters in question. Temporary differences
comprising the future tax assets (liabilities) are estimated as follows:
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Capital assets
Property, plant, equipment, other and intangible assets subject to amortization $ 95.3 $ 291.2
Intangible assets with indefinite lives (1,007.0) (992.3)
Reserves not currently deductible 156.1 145.7
Losses available to be carried forward 622.2 765.8
Other 56.4 106.4
---------------------------------------------------------------------------------------------------------------------------------
$ (77.0) $ 316.8
=================================================================================================================================
Presented on the Consolidated Balance Sheets as:
Future tax assets
Current $ 304.0 $ 138.8
Non-current 626.0 1,170.3
---------------------------------------------------------------------------------------------------------------------------------
930.0 1,309.1
Future tax liabilities (1,007.0) (992.3)
---------------------------------------------------------------------------------------------------------------------------------
Net future tax assets (liabilities) $ (77.0) $ 316.8
=================================================================================================================================
The Company expects to be able to fully utilize its non-capital losses over the
next several years. The Company's assessment is that the risk of expiry of such
non-capital losses is remote.
The Company conducts research and development activities, which are eligible to
earn Investment Tax Credits. During the year ended December 31, 2003, the
Company recorded Investment Tax Credits of $1.5 million (2002 - $67.2 million)
of which $1.3 million (2002 - $50.5 million) 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 (loss) per Common Share and Non-Voting Share is calculated by
dividing Common Share and Non-Voting Share income (loss) by the total weighted
average Common Shares and Non-Voting Shares outstanding during the year.
Diluted income (loss) 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.
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3 31.5 $ (229.0)
Deduct:
Preference and preferred share dividends 3.5 3.5
Interest on convertible debentures, net of income taxes 7.1 6.8
---------------------------------------------------------------------------------------------------------------------------------
Basic and diluted Common Share and Non-Voting Share income (loss) $ 320.9 $ (239.3)
=================================================================================================================================
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Basic total weighted average Common Shares and Non-Voting Shares outstanding 349.3 317.9
Effect of dilutive securities
Exercise of share options and warrants 2.5 -
---------------------------------------------------------------------------------------------------------------------------------
Diluted total weighted average Common Shares and Non-Voting Shares outstanding 351.8 317.9
=================================================================================================================================
Certain outstanding share options, in the amount of 17.9 million for the year
ended December 31, 2003, were not included in the computation of diluted income
(loss) per Common Share and Non-Voting Share because the options' exercise
prices were greater than the average market price of the Common Shares and
Non-Voting Shares during the year. Similarly, convertible debentures, which
were convertible into 3.8 million shares in the year ended December 31, 2003,
were not included in the computation of diluted income (loss) per Common Share
and Non-Voting Share because the conversion price was greater than the average
market price of the Non-Voting Shares during the year.
8. Share-Based Compensation
(a) Share Options
The Company applies the intrinsic value based method of accounting for
share-based compensation awards granted to employees. Accordingly, no
compensation cost is recorded in the accounts in respect of its share option
plans. For share options granted after 2001, disclosure of the impact on net
income (loss) and net income (loss) per Common Share and Non-Voting Share as if
the fair value based method of accounting for the share-based compensation had
been applied is required. Such impact, using weighted average fair values of
$6.63 (2002 - $5.10) for options granted in 2003 would approximate the
following pro forma amounts:
Years ended December 31 (millions except per share amounts) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Compensation cost $ 18.4 $ 6.9
Net income (loss)
As reported $ 331.5 $ (229.0)
Pro forma $ 313.1 $ (235.9)
Net income (loss) per Common Share and Non-Voting Share
Basic
As reported $ 0.92 $ (0.75)
Pro forma $ 0.87 $ (0.77)
Diluted
As reported $ 0.91 $ (0.75)
Pro forma $ 0.86 $ (0.77)
---------------------------------------------------------------------------------------------------------------------------------
As only share options granted after 2001 are included, these pro forma
disclosures are not likely to be representative of the effects on reported net
income for future years.
The fair value of each option granted is estimated at the time of grant using
the Black-Scholes model with weighted average assumptions for grants as
follows:
Years ended December 31 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Risk free interest rate 4.5% 4.9%
Expected lives (years) 4.5 6.2
Expected volatility 40.0% 36.6%
Dividend yield 2.9% 3.8%
---------------------------------------------------------------------------------------------------------------------------------
Forfeitures of options are accounted for in the period of forfeiture.
Had weighted average assumptions for grants of share options which are
reflected in the pro forma disclosures above been varied by 10 per cent and 20
per cent changes, the pro forma compensation cost arising from share options
for the year ended December 31, 2003, would have varied as follows:
Hypothetical change in
assumptions(1)
($ in millions) 10% 20%
---------------------------------------------------------------------------------------------------------------------------------
Risk free interest rate $ 0.4 $ 0.9
Expected lives (years) $ 0.4 $ 0.8
Expected volatility $ 1.5 $ 3.1
Dividend yield $ 0.7 $ 1.4
---------------------------------------------------------------------------------------------------------------------------------
(1) These sensitivities are hypothetical and should be used with caution.
Favourable hypothetical changes in the assumptions result in a decreased
amount, and unfavourable hypothetical changes in the assumptions result in an
increased amount, of the pro forma compensation cost arising from share
options. As the figures indicate, changes in fair value based on a 10 per cent
variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be
linear; in particular, variations in expected lives are constrained by vesting
periods and legal lives. Also, in this table, the effect of a variation in a
particular assumption on the amount of the pro forma compensation cost arising
from share options is calculated without changing any other assumption; in
reality, changes in one factor may result in changes in another (for example,
increases in risk free interest rates may result in increased dividend yields),
which might magnify or counteract the sensitivities.
(b) Other Share-Based Compensation
The Company uses restricted share units as a form of incentive compensation.
Each restricted share 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 share units during the
life of the restricted share unit. During the year ended December 31, 2003,
238,660 restricted share units (2002 - 77,970 restricted share units) were
granted at a weighted average value of $16.50 each (2002 - $16.75 each). The
restricted share units become payable as they vest over their, currently, three
year lives. Reflected in the Consolidated Statements of Income as "Operations
expense" for the year ended December 31, 2003, is compensation expense arising
from restricted share units of $1.6 million (2002 - $4.0 million).
9. Accounts Receivable
On July 26, 2002, TELUS Communications Inc., a wholly-owned subsidiary of
TELUS, entered into an agreement (the "2002 Securitization") with an
arm's-length securitization trust under which TELUS Communications Inc. is able
to sell an interest in certain of its trade receivables up to a maximum of $650
million. As 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.
On September 30, 2002, this securitization agreement was amended in order to
make available for purchase by the securitization trust an interest in a
certain class of TELUS Communications Inc.'s trade receivables, which were
previously of the type sold to a different arm's-length securitization trust
under a prior securitization agreement dated November 20, 1997. During the
third quarter of 2002, TELUS Communications Inc. delivered a notice of
termination in respect of this prior securitization; collection and final
remittances of the corresponding accounts receivable had been completed by
September 27, 2002.
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Total managed portfolio $ 1,036.9 $ 1,139.0
Securitized receivables (369.5) (595.4)
Retained interest in receivables sold 56.4 96.8
---------------------------------------------------------------------------------------------------------------------------------
Receivables held $ 723.8 $ 640.4
=================================================================================================================================
For the year ended December 31, 2003, the Company recognized losses of $3.9
million (2002 - $3.7 million) on the sale of receivables arising from the 2002
Securitization.
Cash flows from the 2002 Securitization are as follows:
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, beginning of year $ 475.0 $ -
Proceeds from new securitizations 34.0 475.0
Securitization reduction payments (209.0) -
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, end of year $ 300.0 $ 475.0
=================================================================================================================================
Proceeds from collections reinvested in revolving period securitizations $ 4,112.3 $ 1,419.7
=================================================================================================================================
Proceeds from collections pertaining to retained interest $ 875.1 $ 281.5
=================================================================================================================================
The key economic assumptions used to determine the loss on sale of receivables,
the future cash flows and fair values attributed to the retained interest (see
Note 1(k)) are as follows:
Years ended December 31 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Expected credit losses as a percentage of accounts receivable sold 1.5% 2.4%
Weighted average life of the receivables sold (days) 40 39
Effective annual discount rate 4.3% 4.2%
Servicing 1.0% 1.0%
---------------------------------------------------------------------------------------------------------------------------------
Generally, the sold trade receivables do not experience prepayments.
At December 31, 2003, key economic assumptions and the sensitivity of the
current fair value of residual cash flows to immediate 10 per cent and 20 per
cent changes in those assumptions are as follows:
Hypothetical change in assumptions(1)
$ in millions) 2003 10% 20%
---------------------------------------------------------------------------------------------------------------------------------
Carrying amount/fair value of future cash flows $ 56.4
Expected credit losses as a percentage of accounts
receivable sold 1.0% $ 0.4 $ 0.7
Weighted average life of the receivables sold (days) 40 $ - $ 0.1
Effective annual discount rate 4.1% $ - $ 0.1
---------------------------------------------------------------------------------------------------------------------------------
(1) These sensitivities are hypothetical and should be used with
caution. Favourable hypothetical changes in the assumptions result in an
increased value, and unfavourable hypothetical changes in the
assumptions result in a decreased value, of the retained interest in
receivables sold. As the figures indicate, changes in fair value based
on a 10 per cent variation in assumptions generally cannot be
extrapolated because the relationship of the change in assumption to the
change in fair value may not be linear. Also, in this table, the effect
of a variation in a particular assumption on the fair value of the
retained interest is calculated without changing any other assumption;
in reality, changes in one factor may result in changes in another (for
example, increases in market interest rates may result in increased
credit losses), which might magnify or counteract the sensitivities.
10. Capital Assets
(a) Capital Assets, Net
Accumulated
Depreciation and
Cost Amortization Net Book Value
---------------------------------------------------------------------------------------------------------------------------------
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Property, plant, equipment and other
Telecommunications assets $16,530.1 $ 10,527.7 $ 6,002.4 $ 6,252.9
Assets leased to customers 417.1 357.1 60.0 77.5
Buildings 1,576.5 744.5 832.0 836.0
Office equipment and furniture 870.1 605.1 265.0 280.8
Assets under capital lease 25.6 11.4 14.2 10.3
Other 346.4 232.6 113.8 144.0
Land 49.0 - 49.0 55.4
Plant under construction 405.0 - 405.0 341.6
Materials and supplies 22.9 - 22.9 27.4
---------------------------------------------------------------------------------------------------------------------------------
20,242.7 12,478.4 7,764.3 8,025.9
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscriber base 362.9 73.2 289.7 311.6
Software 1,084.0 610.3 473.7 600.3
Access to rights-of-way and other 115.5 34.2 81.3 86.6
---------------------------------------------------------------------------------------------------------------------------------
1,562.4 717.7 844.7 998.5
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 3,973.1 1,018.5 2,954.6 2,950.1
---------------------------------------------------------------------------------------------------------------------------------
$25,778.2 $14,214.6 $11,563.6 $11,974.5
=================================================================================================================================
(1) Accumulated amortization of spectrum licences is amortization
recorded prior to 2002 and the transitional impairment amount.
Included in capital expenditures for the year ended December 31, 2003, were
additions of intangible assets subject to amortization of $213.0 million (2002
- $350.3 million) and intangible assets with indefinite lives of $1.5 million
(2002 - $4.6 million).
(b) Intangible Assets Subject to Amortization
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at December 31, 2003, for
each of the next five fiscal years is as follows:
Years ending December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2004 $ 291.8
2005 188.8
2006 75.1
2007 30.3
2008 15.8
(c) Intangible Assets with Indefinite Lives
As referred to in Note 1(f) and Note 1(b), the carrying value of intangible
assets with indefinite lives and goodwill are periodically tested for
impairment and this test represents a significant estimate for the Company.
There is a material degree of uncertainty with respect to this estimate given
the necessity of making key economic assumptions about the future. The Company
considers a range of reasonably possible amounts and decides upon an amount
that represents management's best estimate. If the future was to adversely
differ from management's best estimate of key economic assumptions and
associated cash flows were to be materially adversely affected, the Company
could potentially experience future material impairment charges in respect of
its intangible assets with indefinite lives and goodwill.
Consistent with current industry-specific valuation methods, the Company uses a
discounted cash flow model combined with a market-based approach as a part of
determining the fair value of its spectrum licences and goodwill. The
discounted cash flow methodology uses management's best estimate of the cash
flows and a discount rate established by calculating a weighted average cost of
capital for each reporting unit. The market comparable approach uses current
(at the time of test) market consensus estimates and equity trading prices for
U.S. and Canadian firms in the same industry. In addition, the Company ensures
that the combination of the valuation of the reporting units is reasonable
based on current market values of the Company.
Based upon sensitivity testing conducted as a part of the December 2003 annual
test, and the results of operations for 2003, the Company estimates that its
annual cash flows would be sufficient to recover its carrying value of its
intangible assets with indefinite lives and goodwill. A component of the
sensitivity testing was a break-even analysis; an assumption of no growth rate,
with all other assumptions being held constant, resulted in the Company
continuing to be able to recover its carrying value of intangible assets with
indefinite lives and goodwill for the foreseeable future. Stress testing
included moderate declines in annual cash flows with all other assumptions
being held constant; this too resulted in the Company continuing to be able to
recover its carrying value of intangible assets with indefinite lives and
goodwill for the foreseeable future.
(d) Sale of Property
During the first quarter of 2003, the Company disposed of a non-strategic
property under the terms of a sale-leaseback transaction. The pre-tax gain of
$8.2 million, arising from net proceeds of $19.3 million, has been deferred and
is being amortized over the term of the lease.
During the second quarter of 2003, the Company disposed of non-strategic
properties and realized pre-tax gains totaling $7.3 million, arising from net
proceeds of $11.7 million.
11. Deferred Charges
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Recognized transitional pension assets and pension plan contributions
in excess of charges to income (Note 19(a)) $ 426.8 $ 367.9
Cost of issuing debt securities, less amortization 39.2 53.4
Deferred hedging asset - 134.1
Deferred customer activation and installation costs (Note 1(c)) 80.8 100.3
Other 63.9 73.4
---------------------------------------------------------------------------------------------------------------------------------
$ 610.7 $ 729.1
=================================================================================================================================
12. Goodwill
For the year ended December 31, 2003, goodwill additions, arising from
acquisitions, and in 2003, contingent consideration paid in respect of a prior
year's acquisition, were $1.2 million (2002 - $3.7 million). For the year ended
December 31, 2003, goodwill reductions arising from the disposition of a minor
business, and in 2002 from discontinued operations, were $7.8 million (2002 -
$6.3 million).
During 2002, the Company updated its estimate of the net income tax benefits
that were obtained in the course of acquiring Clearnet Communications Inc. on
October 19, 2000. This resulted in an increase to the future income tax asset
of $193.2 million in 2002, which has been recorded as a reduction of the
unamortized balance of goodwill arising from the acquisition.
13. Short-Term Obligations
At December 31, 2003, the Company's available bilateral bank facilities
totalled $74 million (2002 - $74 million), of which $3.3 million (2002 - NIL)
was utilized in the form of an overdraft and $24 million (2002 - $5 million)
was utilized as outstanding undrawn letters of credit.
14. Long-Term Debt
(a) Details of Long-Term Debt
($ in millions)
Series Rate Maturity 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Notes
CA 7.5%(1) June 2006 $1,572.1 $1,569.7
U.S. 7.5%(1) June 2007 1,507.4 1,835.5
U.S. 8.0%(1) June 2011 2,484.4 3,026.6
---------------------------------------------------------------------------------------------------------------------------------
5,563.9 6,431.8
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Credit Facilities 4.875%(2) May 2004 7.0 655.0
---------------------------------------------------------------------------------------------------------------------------------
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 0.1 151.0
---------------------------------------------------------------------------------------------------------------------------------
20.1 171.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Senior Discount Notes 0.4 0.8
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications (Quebec) Inc. First Mortgage Bonds
T 10.80%(1) March 2003 - 30.0
U 11.50%(1) July 2010 30.0 30.0
---------------------------------------------------------------------------------------------------------------------------------
30.0 60.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications (Quebec) Inc. Medium Term Notes
1 7.10%(1) February 2007 70.0 70.0
---------------------------------------------------------------------------------------------------------------------------------
Capital leases issued at varying rates of interest from 5.3% to 18.0% and maturing on various
dates up to 2008 10.3 10.1
---------------------------------------------------------------------------------------------------------------------------------
Other 0.3 0.5
---------------------------------------------------------------------------------------------------------------------------------
Total debt 6,690.5 8,387.7
Less - current maturities 221.1 190.3
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 6,469.4 $ 8,197.4
=================================================================================================================================
(1) Interest is payable semi-annually.
(2) Weighted average rate as at December 31, 2003 (2002 - 4.325%).
(b) TELUS Corporation Notes
The notes are senior, unsecured and unsubordinated obligations of the Company
and rank equally in right of payment with all existing and future unsecured,
unsubordinated obligations of the Company and are senior in right of payment to
all existing and future subordinated indebtedness of the Company, and are
effectively subordinated to all existing and future obligations of, or
guaranteed by, the Company's subsidiaries.
The indentures governing the notes contain certain covenants which, among other
things, place limitations on the ability of TELUS and certain of its
subsidiaries to: grant security in respect of indebtedness, enter into sale and
lease-back transactions and incur new indebtedness.
2006 (Canadian Dollar) Notes: In May 2001, the Company issued $1.6 billion
Notes at a price of $992.30 per $1,000.00 of principal to the public. The notes
are redeemable at the option of the Company, in whole at any time, or in part
from time to time, on not fewer than 30 nor more than 60 days' prior notice, at
a redemption price equal to the greater of (a) the present value of the notes
discounted at the Government of Canada yield plus 35 basis points, or (b) 100%
of the principal amount thereof. In addition, accrued and unpaid interest, if
any, will be paid to the date fixed for redemption.
2007 and 2011 (U.S. Dollar) Notes: In May 2001, the Company issued
U.S.$1.3 billion 2007 Notes at a price of U.S.$995.06 per U.S.$1,000.00 of
principal to the public and U.S.$2.0 billion 2011 Notes at a price of
U.S.$994.78 per U.S.$1,000.00 of principal to the public. The notes are
redeemable at the option of the Company, in whole at any time, or in part from
time to time, on not fewer than 30 nor more than 60 days' prior notice, at a
redemption price equal to the greater of (a) the present value of the notes
discounted at the Adjusted Treasury Rate plus 25 basis points in the case of
the 2007 Notes and 30 basis points in the case of the 2011 Notes, or (b) 100%
of the principal amount thereof. In addition, accrued and unpaid interest, if
any, will be paid to the date fixed for redemption.
2007 and 2011 Cross Currency Interest Rate Swap Agreements: With respect
to the 2007 and 2011 (U.S. Dollar) Notes, U.S.$3.1 billion (2002 - U.S.$3.1
billion) in aggregate, the Company entered into cross currency interest rate
swap agreements which effectively convert the principal repayments and interest
obligations to Canadian dollar obligations with effective fixed interest rates
of 8.109% (2002 - 8.109%) and 8.493% (2002 - 8.493%), respectively. The
counterparties of the swap agreements are highly rated financial institutions
and the Company does not anticipate any non-performance. TELUS has not required
collateral or other security from the counterparties due to its assessment of
their creditworthiness (see Note 3).
As disclosed in Note 1(g), the Company translates items such as the U.S. Dollar
notes into equivalent Canadian dollars at the rate of exchange in effect at the
balance sheet date. The swap agreements, which at December 31, 2003, comprised
a deferred hedging liability of $739.6 million (see Note 15) (2002 - deferred
hedging asset of $134.1 million, see Note 11), in addition to fixing the
Company's effective interest rate, effectively fix the economic exchange rate
of the U.S. Dollar notes at $1.5374:U.S.$1.00 (2002 - $1.5374:U.S.$1.00). The
asset value of the swap agreements increases (decreases) when the balance sheet
date exchange rate increases (decreases) the Canadian dollar equivalent of the
U.S. Dollar notes.
Repurchases: During the third quarter of 2002, the Company repurchased 2006
(Canadian Dollar) Notes, 2007 and 2011 (U.S. Dollar) Notes, with face values of
$22.0 million, U.S.$133.5 million and U.S.$75.0 million, respectively. The gain
on repurchasing these Notes and the gain on the corresponding amount of the
2007 and 2011 Cross Currency Interest Rate Swap Agreements terminated have been
included as a component of financing costs (gain on redemption on long-term
debt) (Note 5). Proceeds from the public issuance of Non-Voting Shares (Note
16(k)) in the third quarter of 2002 were, effectively, used to repurchase these
Notes as well as TELUS Communications Inc. Debentures and TELUS Communications
Inc. Medium Term Notes.
(c) TELUS Corporation Credit Facilities
TELUS Corporation's unsecured syndicated bank credit facilities at December 31,
2003, consisted of: i) a $1.5 billion (or the U.S. Dollar equivalent) revolving
credit facility with a three-year term expiring on May 30, 2004, used for
general corporate purposes, and ii) a 364-day facility with $600 million (or
the U.S. Dollar equivalent) in available credit on a revolving basis until May
26, 2004, at which time it may be extended, given majority lender approval, for
an additional 364-day revolving period or, if an extension is not granted, on a
non-revolving basis for 364 days for any amounts outstanding at May 26, 2004.
The 364-day facility may be used for general corporate purposes including the
backstop of commercial paper issued by the Company or TELUS Communications Inc.
The $1.5 billion and the 364-day facilities bear interest at prime rate, U.S.
Dollar Base Rate, Bankers' Acceptance rate or LIBOR, plus applicable margins.
Outstanding undrawn letters of credit under the $1.5 billion facility at
December 31, 2003, totalled $98.2 million (2002 - $47.0 million). The 364-day
facility was undrawn at year-end and there were no outstanding undrawn letters
of credit.
(d) TELUS Communications Inc. Debentures
The outstanding Series 1 through 5 debentures were issued by BC TEL, a
predecessor corporation of TELUS Communications Inc., under a Trust Indenture
dated May 31, 1990 and are non-redeemable.
The outstanding Series A Debentures and Series B Debentures were issued by AGT
Limited, a predecessor corporation of TELUS Communications Inc., under a Trust
Indenture dated August 24, 1994 and a supplemental trust indenture dated
September 22, 1995 relating to Series B Debentures only. They are redeemable at
the option of the Company, in whole at any time or in part from time to time,
on not less than 30 days' notice at the Government of Canada Yield plus 15
basis points. During 1995 the Company terminated an interest rate swap contract
relating to the Series A Debentures and realized a gain on early termination in
the amount of $16.8 million which is being amortized and credited to interest
expense over the remaining term of the Series A Debentures. The amortization of
the gain resulted in an effective rate of interest on Series A Debentures in
2003 of 8.79% (2002 - 8.79%).
Pursuant to an amalgamation on January 1, 2001, all these Debentures became
obligations of TELUS Communications Inc. The debentures are not secured by any
mortgage, pledge or other charge and are governed by certain covenants
including a negative pledge and a limitation on issues of additional debt,
subject to a debt to capitalization ratio and interest coverage test.
Repurchases: During the second half of 2002, the Company repurchased TELUS
Communications Inc. Debentures, due August 2004, with a face value of $10.5
million. The gain on repurchasing these Debentures has been included as a
component of financing costs (gain on redemption on long-term debt) (Note 5).
Proceeds from the public issuance of Non-Voting Shares (Note 16(k)) in the
third quarter of 2002 were, effectively, used to repurchase some of these
Debentures as well as TELUS Corporation Notes and TELUS Communications Inc.
Medium Term Notes.
(e) TELUS Communications Inc. Medium Term Note Programs
At December 31, 2003, TELUS Communications Inc. had two series of extendible
medium term notes outstanding. These unsecured notes were originally issued by
BC TEL pursuant to a Trust Indenture dated May 31, 1990 and a supplement dated
October 24, 1994. In June 2000, $200 million of 6.4% notes were issued that
were to mature in June 2003 and were extendible to 2030 at the option of the
holder. If extended, the coupon rate increases to 7.25%. In June 2003, $150.9
million of the notes matured and were repaid. At December 31, 2003, the
remaining series of medium term notes, totaling $20.1 million, have maturities
of $20 million in 2004 and $0.1 million in 2030. The $20 million note, which
currently has a maturity date of August 2004, is extendible at the option of
TELUS Communications Inc. on a periodic basis through 2007.
Repurchases: During the third quarter of 2002, the Company repurchased TELUS
Communications Inc. 6.4% Medium Term Notes with a face value of $49.0 million.
The gain on repurchasing these Notes has been included as a component of
financing costs (gain on redemption on long-term debt) (Note 5). Proceeds from
the public issuance of Non-Voting Shares (Note 16(k)) in the third quarter of
2002 were, effectively, used to repurchase these Notes as well as TELUS
Corporation Notes and TELUS Communications Inc. Debentures.
(f) TELUS Communications Inc. Senior Discount Notes
In June 2001, the indentures governing the notes were amended by supplemental
indentures pursuant to an Offer to Repay and Consent Solicitation. The effect
of the supplemental indentures was to remove the limitations on business
activities previously imposed by restrictive covenants. The Offer to Repay
resulted in the redemption of approximately 99.9% of the four series of Senior
Discount Notes.
During the third quarter of 2002, the 11.75% Senior Discount Notes, due 2007,
were called for redemption and were redeemed. Pursuant to a corporate
reorganization effected September 30, 2002, the outstanding Clearnet Inc.
Senior Discount Notes, which mature in 2008 and 2009, became obligations of
TELUS Communications Inc.
(g) TELUS Communications (Quebec) Inc. First Mortgage Bonds
The first mortgage bonds of all series are secured equally and rateably by an
immovable hypothec and by a movable hypothec charging specifically certain
immovable and movable property of the subsidiary TELUS Communications (Quebec)
Inc., such as land, buildings, equipment, apparatus, telephone lines,
rights-of-way and similar rights as well as by an hypothec on all of the
movable and the immovable property, present and future of TELUS Communications
(Quebec) Inc. The first mortgage bonds are not redeemable prior to maturity.
(h) TELUS Communications (Quebec) Inc. Medium Term Note Program
The medium term notes were issued under a trust indenture dated September 1,
1994 as supplemented from time to time, and are unsecured and not redeemable
prior to maturity. New issues of medium term notes are subject to restrictions
as to debt ratio and interest coverage.
(i) 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) Credit facilities Other(1) Total(1)
---------------------------------------------------------------------------------------------------------------------------------
2004 $ 7.0 $ 214.1 $ 221.1
2005 - 1.5 1.5
2006 - 1,579.5 1,579.5
2007 - 1,869.7 1,869.7
2008 - 1.8 1.8
(1) Where applicable, repayments reflect hedged foreign exchange rates
15. Other Long-Term Liabilities
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Deferred gain on sale-leaseback of buildings $ 109.1 $ 111.1
Pension and other post-retirement liabilities (Note 19(a)) 161.3 149.7
Deferred hedging liability 739.6 -
Deferred customer activation and installation fees (Note 1(c)) 80.8 100.3
Other 82.9 44.2
---------------------------------------------------------------------------------------------------------------------------------
$ 1,173.7 $ 405.3
=================================================================================================================================
16. Shareholders' Equity
(a) Details of Shareholders' Equity
($ in millions except per share amounts) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Convertible debentures (b) $ 149.6 $ 148.5
---------------------------------------------------------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------------------------------------
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) 2,349.1 2,275.1
Non-Voting Shares (d) 3,296.6 3,243.2
Options and warrants (e) 51.5 56.8
Accrual for shares issuable under channel stock incentive plan (f) 0.6 0.3
Cumulative foreign currency translation adjustment (2.7) 1.2
Retained earnings 741.7 630.4
Contributed surplus 5.9 7.4
---------------------------------------------------------------------------------------------------------------------------------
6,442.7 6,214.4
---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 6,662.0 $ 6,432.6
---------------------------------------------------------------------------------------------------------------------------------
(b) Convertible Debentures
The 6.75% convertible debentures are unsecured, subordinated obligations of the
Company which mature on June 15, 2010, and are convertible at the holders'
option into Non-Voting Shares of the Company at a rate reflecting a share price
of $39.73. The convertible debentures were not redeemable prior to June 15,
2003. Redemption in the period from June 15, 2003 through June 15, 2005, is
allowed provided that the average trading price of Non-Voting Shares for a
defined period exceeds 125% of the conversion price.
The holders' conversion option is valued using the residual value approach. As
the Company has the unrestricted ability to settle the interest, principal and
redemption payments through the issuance of Non-Voting Shares, the convertible
debentures have been classified as equity. Accordingly, the principal amount is
included in Shareholders' Equity on the Consolidated Balance Sheets. Interest
payments, net of income taxes, are classified as dividends and charged directly
to retained earnings.
(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 February 12, 2004, TELUS
Communications Inc. announced its intention to redeem all nine classes of its
outstanding preference and preferred shares during the third quarter of 2004
for total consideration of approximately $72.8 million.
(d) Changes in Common Shares and Non-Voting Shares
Years ended December 31 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Number of Amount Number Amount
shares (millions) of shares (millions)
---------------------------------------------------------------------------------------------------------------------------------
Common Shares
Beginning of year 187,271,994 $ 2,275.1 181,386,310 $ 2,186.4
Exercise of share options (g) 36,682 0.7 77,937 1.7
Exercise of pre-emptive rights (h) - - 596,993 13.3
Employees' purchase of shares (i) 3,175,129 67.1 4,806,260 68.1
Dividends reinvested in shares 316,210 6.2 404,494 5.6
---------------------------------------------------------------------------------------------------------------------------------
End of year 190,800,015 $ 2,349.1 187,271,994 $ 2,275.1
=================================================================================================================================
Non-Voting Shares
Beginning of year 158,407,931 $ 3,243.2 120,840,391 $ 2,861.4
Exercise of warrants (e) - - 28,667 1.1
Channel stock incentive plan (f) 46,150 1.0 26,950 0.3
Exercise of share options (g) 346,357 11.6 30,511 0.7
Acquisitions and other (j) (16) - (25,288) (0.9)
Public issuance of shares (k) - - 34,250,000 327.8
Dividend Reinvestment and Share Purchase Plan (l)
Dividends reinvested in shares 2,189,432 39.8 3,112,647 51.1
Optional cash payments 52,515 1.0 144,053 1.7
---------------------------------------------------------------------------------------------------------------------------------
End of year 161,042,369 $ 3,296.6 158,407,931 $ 3,243.2
=================================================================================================================================
(e) Options and Warrants
Upon its acquisition of 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 (see (d)), 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 December 31,
2003, 0.8 million (2002 - 0.8 million) warrants remained outstanding.
(f) Channel Stock Incentive Plan
The Company initiated the Plan to increase sales of various products and
services by providing additional performance-based compensation in the form of
Non-Voting Shares. The Company has reserved 0.2 million (2002 - 0.3 million)
shares for issuance under the Plan. As at December 31, 2003, shares earned, but
not yet issued, are accrued as a component of Common Equity.
(g) 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 December 31, 2003, 29.5 million (2002 - 25.8
million) shares are reserved for issuance under the share option plans.
The following table presents a summary of the activity related to the Company's
share options plans for the years ended December 31.
Years ended December 31 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Number of average option Number of average option
shares price shares price
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 24,689,860 $ 25.60 19,668,368 $ 29.11
Granted 3,485,225 21.32 7,000,720 17.19
Exercised (383,039) 14.53 (108,448) 20.56
Forfeited (1,801,305) 30.50 (1,827,553) 31.17
Expired (and cancelled) (216,909) 25.03 (43,227) 34.82
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 25,773,832 24.85 24,689,860 25.60
=================================================================================================================================
The following is an option price stratification of the Company's share options outstanding as at December 31, 2003.
Options outstanding Options exercisable
----------------------------------------------------------------------------
Weighted
average Weighted Weighted
Number of remaining average option Number of average option
Range of option prices shares contractual life price shares price
---------------------------------------------------------------------------------------------------------------------------------
$ 4.43 - 5.95 116,457 4.9 years $ 5.91 116,457 $ 5.91
6.81 - 10.01 415,615 2.9 years 7.91 350,877 7.82
10.51 - 15.30 1,911,286 5.9 years 13.90 820,628 12.90
15.98 - 23.75 5,944,076 7.0 years 16.72 1,249,854 17.27
24.00 - 35.90 15,483,979 7.1 years 28.10 10,734,281 29.05
36.78 - 46.75 1,902,419 5.8 years 39.65 1,498,015 39.94
---------------------------------------------------------------------------------------------------------------------------------
25,773,832 14,770,112
=================================================================================================================================
(h) Pre-Emptive Rights
Verizon Communications Inc., a significant shareholder, has the right to
acquire, from Treasury, its pro rata share of any issue, at the time of issue,
by the Company of Common Shares and Non-Voting Shares, other than by way of
grant of share options.
(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. During 2003, the Company contributed
$20.6 million (2002 - $23.9 million) 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.
(j) Acquisitions and Other
During 2001, the Company issued Non-Voting Shares as partial consideration for
acquisitions made during the year. Some of these Non-Voting Shares, which were
held in an escrow account, represented contingent consideration that met the
requirements for recording as capital at the time of the acquisition. The
excess of the amount of contingent consideration over the amount actually
earned has been recorded as a reduction of Non-Voting Share capital.
(k) Public Issuance of Non-Voting Shares
In the third quarter of 2002, the Company sold 34,250,000 Non-Voting Shares by
way of a public offering in Canada and the United States at a price of $9.85
per share. Proceeds of $337.4 million were reduced by costs of issue of $14.5
million, less related future income taxes of $4.9 million.
(l) 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. Prior
to July 1, 2001, when the acquisition of shares from Treasury commenced, all
Non-Voting Shares were acquired in the market at normal trading prices.
17. Commitments and Contingent Liabilities
(a) CRTC Decisions 2002-34 and 2002-43 Deferral Accounts
On May 30, 2002, and on July 31, 2002, the CRTC issued Decision 2002-34 and
2002-43, respectively, and introduced the concept of a deferral account (see
Note 1(c)). The Company records a liability ($76 million as of December 31,
2003 (2002 - $23 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.
(b) Labour Negotiations
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. This is the first round of collective bargaining
since the merger of BC TELECOM and TELUS Alberta and the Company's aim is to
replace the multiple legacy collective agreements with a single collective
agreement for the new bargaining unit.
During the fourth quarter of 2002, the Company's application to the Federal
Minister of Labour, as provided for under the Canada Labour Code, requesting
the appointment of a federal conciliator was granted. While the conciliation
process is underway, the Canada Labour Code prohibits a strike or lock out.
In January 2003, the Company and the Telecommunications Workers Union signed a
Maintenance of Activities agreement, as required by federal legislation. This
agreement ensures the continuation of services to 911 emergency, police, fire,
ambulance, hospitals and coast guard, with provisions to cover other potential
emergency services necessary to prevent immediate and serious danger to the
health or safety of the public, in the event of a work stoppage.
Also in January 2003, the Company and the Telecommunications Workers Union
agreed to an extension of the conciliation process to include a global review
of all outstanding issues and a subsequent 60-day conciliation period. In July
2003, the conciliators concluded their global review and released their action
plan, which was agreed to and accepted by the Company and the
Telecommunications Workers Union. The conciliators' action plan set out that a
60-day conciliation period would commence November 14, 2003, while, in the
interim, pensions and employee benefits discussions would continue. The
outstanding issues were not resolved at the end of the 60-day period.
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.
(c) Contractual Obligations
The Company's known contractual obligations at December 31, 2003, are as follows:
Long-term debt maturities(1)
(see Note 14)
------------------------------
All except Other long-term Operating
capital liabilities(2) leases Purchase
(millions) leases Capital leases (see Note 15) (see Note 17(d)) obligations(3) Total
---------------------------------------------------------------------------------------------------------------------------------
2004 $ 217.1 $ 4.0 $ 22.6 $ 163.2 $ 650.5 $1,057.4
2005 - 1.5 17.8 141.9 341.8 503.0
2006 1,578.0 1.5 14.0 126.1 95.0 1,814.6
2007 1,868.2 1.5 14.0 118.4 35.8 2,037.9
2008 - 1.8 14.2 109.8 31.1 156.9
Thereafter 3,785.4 - 109.8 399.3 7.4 4,301.9
---------------------------------------------------------------------------------------------------------------------------------
Total $7,448.7 $ 10.3 $ 192.4 $1,058.7 $1,161.6 $9,871.7
=================================================================================================================================
(1) Where applicable, long-term debt maturities reflect hedged foreign exchange
rates. As disclosed in Note 2(g), long-term debt will include the Company's
convertible debentures (Note 16(b)) commencing January 1, 2004. As the Company
has the unrestricted ability to settle the interest, principal and redemption
payments through the issuance of Non-Voting Shares, the convertible debentures
have not been included in this schedule.
(2) Items that do not result in a future outlay of economic resources, such
as deferred gains on sale-leasebacks of buildings and deferred customer
activation and installation fees, have been excluded. As long-term debt
maturities reflect hedged foreign exchange rates, the deferred hedging
liability is included therein. Funding of pension and other benefit plans has
been included for 2004 for all plans that have a net accrued benefit liability
position as at the current year end; only funding of unfunded plans has been
included in years subsequent to 2004, up to the liability recognized at the
current year end.
(3) Where applicable, purchase obligations reflect foreign exchange rates
as at the current year end. Purchase obligations include both future operating
and capital expenditures that have been contracted for as at the current year
end and include most likely estimates of prices and volumes where necessary. As
purchase obligations reflect market conditions at the time the obligation was
incurred for the items being purchased, they may not be representative of
future years. Obligations arising from personnel supply contracts and other
such labour agreements have been excluded.
The Company's estimate of 2004 expenditures for capital assets is $1,225
million. Substantial purchase commitments have been made in connection with
these capital assets as at December 31, 2003.
(d) Leases
The Company occupies leased premises in various centres and has land, buildings
and equipment under operating leases. As a result of the consolidation of
leased premises arising from the Operational Efficiency Program (see Note 4),
some of the leased building premises were sub-let. At December 31, 2003, the
future minimum lease payments under capital leases and operating leases, and
future receipts from real estate operating sub-leases, are as follows:
Operating lease payments
------------------------------------------------------------------------------
Operating
Land and buildings lease
Capital ----------------------------------------- Vehicles receipts from
lease Occupancy and other sub-let land
(millions) payments Rent costs Gross equipment Total and buildings
2004 $ 4.3 $ 96.9 $ 47.9 $ 144.8 $ 18.4 $ 163.2 $ 1.9
2005 1.7 83.8 43.9 127.7 14.2 141.9 0.8
2006 1.7 75.1 43.5 118.6 7.5 126.1 0.5
2007 1.7 70.9 44.3 115.2 3.2 118.4 -
2008 1.9 65.4 44.0 109.4 0.4 109.8 -
---------------------------------------------------------------------------------------------------------------------------------
Total future
minimum lease
payments 11.3
Less imputed
interest 1.0
---------------------------------------------------------------------------------------------------------------------------------
Capital lease
liability $ 10.3
---------------------------------------------------------------------------------------------------------------------------------
(e) Guarantees
Effective for reporting periods ending after December 31, 2002, Canadian GAAP
requires the disclosure of certain types of guarantees and their maximum,
undiscounted amounts. The maximum potential payments represent a "worst-case
scenario" and do not necessarily reflect results expected by the Company.
Guarantees requiring disclosure are those obligations that require payments
contingent on specified types of future events; in the normal course of its
operations, the Company enters into obligations which GAAP may consider to be
guarantees. As defined by Canadian GAAP, guarantees subject to these disclosure
guidelines do not include guarantees that relate to the future performance of
the Company.
Performance guarantees: Performance guarantees contingently require a guarantor
to make payments to a guaranteed party based on a third party's failure to
perform under an obligating agreement. TELUS provides sales price guarantees in
respect of employees' principal residences as part of its employee relocation
policies. In the event that the Company is required to honour such guarantees,
it purchases (for immediate resale) the property from the employee.
The Company has guaranteed a third party's financial obligation as a part of a
facility naming rights agreement. The guarantee runs through to December 31,
2014, on a declining-balance basis and is of limited recourse.
In 2003, the Company guaranteed a customer's financial obligation to a third
party in respect of telecommunication equipment that the Company is supplying
to the customer. The Company could be required to make a payment to the third
party in the event that the customer does not accept the telecommunications
equipment as a result of a major failure of the equipment that prevents the
equipment from meeting specified service levels. The guarantee runs through to
July 1, 2004, and the Company has recourse to the underlying assets.
As at December 31, 2003, the Company has no liability recorded in respect of
the aforementioned performance guarantees.
Financial guarantees: In conjunction with its 2001 exit from the equipment
leasing business, the Company provided a guarantee to a third party with
respect to certain specified telecommunication asset and vehicle leases. If the
lessee were to default, the Company would be required to make a payment to the
extent that the realized value of the underlying asset is insufficient to pay
out the lease; in some instances, the Company could be required to pay out the
lease on a gross basis and realize the underlying value of the leased asset
itself. As at December 31, 2003, the Company has a liability of $1.5 million
recorded in respect of these lease guarantees.
The following table quantifies the maximum undiscounted guarantee amounts as at
December 31, 2003, without regard for the likelihood of having to make such
payment.
Performance Financial
(millions) guarantees(1) guarantees(1) Total
---------------------------------------------------------------------------------------------------------------------------------
2004 $ 7.2 $ 5.1 $ 12.3
2005 2.0 4.0 6.0
2006 1.8 2.9 4.7
2007 1.6 1.4 3.0
2008 1.4 0.5 1.9
---------------------------------------------------------------------------------------------------------------------------------
(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.
The Company has no liability recorded, as at December 31, 2003, in respect of
indemnification obligations.
(f) Verizon Communications Inc. Agreement
Effective 2001, the Company has entered into an agreement with Verizon
Communications Inc., a significant shareholder, with respect to acquiring
certain rights to Verizon's software, technology, services and other benefits,
thereby replacing and amending a previous agreement between the Company and GTE
Corporation. The agreement is renewable annually at the Company's sole option
up to December 31, 2008, and it has been renewed for 2004. Assuming renewal
through to 2008, the total commitment under the agreement is U.S.$102 million
for the period 2004 to 2008 and the current contractual obligation for 2004,
none of which is capital in nature, is U.S.$20 million (see Note 21).
(g) Claims and Lawsuits
A number of claims and lawsuits seeking damages and other relief are pending
against the Company. It is impossible at this time for the Company to predict
with any certainty the outcome of such litigation. However, management is of
the opinion, based upon information presently available, that it is unlikely
that any liability, to the extent not provided for through insurance or
otherwise, would be material in relation to the Company's consolidated
financial position.
18. Additional Financial Information
(a) Income Statement
Years ended December 31 (millions) 2003 2002
=================================================================================================================================
Advertising expense $ 153.2 $ 153.3
=================================================================================================================================
(b) Balance Sheet
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Accounts receivable
Customer accounts receivable $ 624.1 $ 524.7
Accrued receivables 158.4 179.2
Allowance for doubtful accounts (67.6) (71.8)
Other 8.9 8.3
---------------------------------------------------------------------------------------------------------------------------------
$ 723.8 $ 640.4
=================================================================================================================================
Prepaid expense and other
Prepaid expenses $ 86.6 $ 106.1
Deferred customer activation and installation costs 77.2 57.3
Other 8.6 0.1
---------------------------------------------------------------------------------------------------------------------------------
$ 172.4 $ 163.5
=================================================================================================================================
Accounts payable and accrued liabilities
Trade accounts payable $ 377.2 $ 334.8
Accrued liabilities 384.1 388.1
Payroll and other employee-related liabilities 430.4 359.7
Interest payable 72.4 77.7
Other 30.0 38.5
---------------------------------------------------------------------------------------------------------------------------------
$ 1,294.1 $ 1,198.8
=================================================================================================================================
Advance billings and customer deposits
Advance billings $ 340.9 $ 247.0
Deferred customer activation and installation fees 77.2 57.3
Customer deposits 26.9 26.0
---------------------------------------------------------------------------------------------------------------------------------
$ 445.0 $ 330.3
=================================================================================================================================
(c) Supplementary Cash Flow Information
Years ended December 31 (millions) 2003 2002
=================================================================================================================================
Net change in non-cash working capital
Accounts receivable $ (83.4) $ 327.6
Income and other taxes receivable (53.4) (126.8)
Inventories (27.0) 21.8
Prepaid expenses and other (0.8) 11.1
Accounts payable and accrued liabilities 73.2 26.0
Advance billings and customer deposits 114.7 19.5
---------------------------------------------------------------------------------------------------------------------------------
$ 23.3 $ 279.2
=================================================================================================================================
Disbursements made in conjunction with Operational Efficiency Program
Workforce reduction
Voluntary (Early Retirement Incentive Plan, Voluntary DepartureIncentive Plan and other) $ 184.1 $ 131.0
Involuntary and other 81.7 109.7
Lease termination 7.9 7.0
Other 14.0 26.1
---------------------------------------------------------------------------------------------------------------------------------
$ 287.7 $ 273.8
=================================================================================================================================
19. Employee Future Benefits
The Company has a number of defined benefit and defined contribution plans
providing pension, other retirement and post-employment benefits to most of its
employees. Other benefit plans include TELUS Quebec Inc. healthcare costs. The
benefit plan(s) in which an employee is a participant in reflects the general
development of the Company.
Pension Plan for Management and Professional Employees of TELUS Corporation:
This defined benefit pension plan, which comprises approximately one-quarter of
the Company's total accrued benefit obligation, provides a non-contributory
base level of pension benefits. Additionally, on a contributory basis,
employees can periodically choose increased and enhanced levels of pension
benefits over the base level of pension benefits. At an enhanced level of
pension benefits, the defined benefit pension plan has indexation of 100% of a
specified cost-of-living index, to a maximum of 2%. Pensionable remuneration is
determined by the average of the best five consecutive years.
TELUS Corporation Pension Plan: Management and professional employees in
Alberta who joined the Company prior to January 1, 2001, and certain unionized
employees are covered by this contributory defined benefit pension plan, which
comprises slightly more than one-half of the Company's total accrued benefit
obligation. Indexation is up to 70% of a specified cost-of-living index and
pensionable remuneration is determined by the average of the best five years in
the last ten years preceding retirement.
TELUS Communications Quebec Pension Plan: This contributory defined benefit,
multiple employer pension plan, which comprises approximately one-tenth of the
Company's total accrued benefit obligation, has no indexation and pensionable
remuneration is determined by the average of the best four years.
TELUS Edmonton Pension Plan: This contributory defined benefit pension plan
ceased accepting new participants January 1, 1998. Indexation is 60% of a
specified cost-of-living index and pensionable remuneration is determined by
the annualized average of the best sixty consecutive months in the last ten
years preceding retirement.
Other defined benefit pension plans: In addition to the foregoing plans, the
Company has non-registered, non-contributory supplementary defined benefit
pension plans which have the effect of maintaining the earned pension benefit
once the allowable maximums in the registered plans are attained.
The Company has three contributory, non-indexed pension plans arising from a
pre-merger acquisition which comprise less than 1% of the Company's total
accrued benefit obligation; these plans ceased accepting new participants
September 1989.
Other defined benefit plans: Other defined benefit plans, which are all
non-contributory, are comprised of a disability income plan, a healthcare plan
for retired employees and two life insurance plans. The healthcare plan for
retired employees and one of the life insurance plans ceased accepting new
participants effective January 1, 1997; the second life insurance plan ceased
accepting new participants July 1, 1994.
Telecommunication Workers Pension Plan: Certain employees in British Columbia
are covered by a union pension plan. Contributions are determined in accordance
with provisions of negotiated labour contracts and are generally based on
employee gross earnings.
Defined contribution pension plans: The Company's defined contribution pension
plan requires a base level of Company contributions. Additionally, employees
can annually choose to contribute to the plan, at a rate of between 3% and 6%
of their pay, and the Company will match the contributions of the employees to
a maximum of 50%. Similarly, for certain employees, the Company offers
registered retirement savings plan-based programs; in one program the Company
contributes 3% of employee pay and in the other the Company matches employee
contributions, dollar for dollar, to a maximum of $2,500 per employee.
(a) Defined benefit plans
Information concerning the Company's defined benefit plans, in aggregate, is as follows:
Pension Benefit Plans Other Benefit Plans
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Accrued benefit obligation:
Balance at beginning of year $ 4,585.7 $ 4,400.5 $ 67.3 $ 61.3
Current service cost 100.6 114.2 5.0 4.5
Interest cost 307.0 296.2 3.8 7.5
Benefits paid (b) (234.6) (195.7) (4.9) (4.8)
Early retirement benefits (c) - 9.4 - -
Impact of voluntary departure incentive program - (35.0) - -
Actuarial loss (gain) 280.0 (5.9) (3.5) (1.2)
Plan amendments - 2.0 - -
---------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (d) 5,038.7 4,585.7 67.7 67.3
---------------------------------------------------------------------------------------------------------------------------------
Plan assets (e):
Fair value at beginning of year 4,506.8 4,739.0 52.8 45.7
Annual return on plan assets 599.6 (144.3) 0.9 3.4
Employer contributions (f) 95.3 68.2 0.8 8.5
Employees' contributions 35.3 39.6 - -
Benefits paid (b) (234.6) (195.7) (4.9) (4.8)
---------------------------------------------------------------------------------------------------------------------------------
Fair value at end of year 5,002.4 4,506.8 49.6 52.8
---------------------------------------------------------------------------------------------------------------------------------
Funded status - plan surplus (deficit) (36.3) (78.9) (18.1) (14.5)
Unamortized net actuarial loss (gain) 793.3 806.7 (16.3) (20.0)
Unamortized past service costs 7.3 7.9 - -
Unamortized transitional obligation (asset) (367.6) (412.4) 4.8 5.6
---------------------------------------------------------------------------------------------------------------------------------
Accrued benefit asset (liability) 396.7 323.3 (29.6) (28.9)
Valuation allowance (101.6) (76.2) - -
---------------------------------------------------------------------------------------------------------------------------------
Accrued benefit asset (liability), net of valuation
allowance $ 295.1 $ 247.1 $ (29.6) $ (28.9)
=================================================================================================================================
The accrued benefit asset (liability), net of valuation allowance, is reflected in the Consolidated Balance Sheets as follows:
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Pension benefit plans $ 295.1 $ 247.1
Other benefit plans (29.6) (28.9)
---------------------------------------------------------------------------------------------------------------------------------
$ 265.5 $ 218.2
=================================================================================================================================
Presented on the Consolidated Balance Sheets as:
Deferred charges (Note 11) $ 426.8 $ 367.9
Other long-term liabilities (Note 15) (161.3) (149.7)
---------------------------------------------------------------------------------------------------------------------------------
$ 265.5 $ 218.2
=================================================================================================================================
The measurement date used to determine the plan assets and accrued benefit
obligation was December 31.
The Company's net defined benefit plan costs were as follows:
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Incurred in Matching Recognized Incurred in Matching Recognized
year adjustments(1) in year year adjustments(1) in year
---------------------------------------------------------------------------------------------------------------------------------
Pension benefit plans
Current service cost $ 65.3 $ - $ 65.3 $ 73.9 $ - $ 73.9
Interest cost 307.0 - 307.0 296.2 - 296.2
Return on plan assets (599.6) 265.0 (334.6) 144.3 (506.9) (362.6)
Past service costs - 0.6 0.6 2.0 (2.0) -
Actuarial loss (gain) 280.0 (250.7) 29.3 (5.9) 5.8 (0.1)
Valuation allowance provided
against accrued benefit asset - 25.4 25.4 - 25.4 25.4
Amortization of transitional
obligation (asset) - (44.8) (44.8) - (44.8) (44.8)
---------------------------------------------------------------------------------------------------------------------------------
52.7 (4.5) 48.2 510.5 (522.5) (12.0)
Early retirement benefits - - - 5.4 - 5.4
---------------------------------------------------------------------------------------------------------------------------------
$ 52.7 $ (4.5) $ 48.2 $ 515.9 $(522.5) $ (6.6)
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to recognize the long-term nature of employee
future benefits.
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Incurred in Matching Recognized Incurred in Matching Recognized
year adjustments(1) in year year adjustments(1) in year
---------------------------------------------------------------------------------------------------------------------------------
Other benefit plans
Current service cost $ 5.0 $ - $ 5.0 $ 4.5 $ - $ 4.5
Interest cost 3.8 - 3.8 7.5 - 7.5
Return on plan assets (0.9) (1.8) (2.7) (3.4) 0.1 (3.3)
Actuarial loss (gain) (3.5) 2.3 (1.2) (1.2) (0.6) (1.8)
Amortization of transitional
obligation (asset) - 0.8 0.8 - 0.8 0.8
---------------------------------------------------------------------------------------------------------------------------------
$ 4.4 $ 1.3 $ 5.7 $ 7.4 $ 0.3 $ 7.7
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to recognize the long-term nature
of employee future benefits.
(b) Benefit payments
Estimated future benefit payments from the Company's defined benefit plans are as follows:
Pension Other Benefit
Years ending December 31 (millions) Benefit Plans Plans
---------------------------------------------------------------------------------------------------------------------------------
2004 $ 237.0 $ 5.1
2005 242.8 5.3
2006 253.4 5.5
2007 265.0 5.7
2008 276.9 5.9
2009 - 2013 1,601.6 32.5
(c) Early retirement benefits
A component of the Company's Operational Efficiency Program (see Note 4) was
early retirement incentives. The early retirement incentives allowed qualifying
employees the opportunity to retire with a normal pension earlier than they
otherwise would have. The benefits expense related to the early retirement
incentives has been included in the Consolidated Statements of Income as
"Restructuring and workforce reduction costs".
(d) Benefit obligations
Included in the defined benefit accrued benefit obligations at year-end are the
following amounts in respect of defined benefit plans that are not funded:
Pension Benefit Plans Other Benefit Plans
(millions) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Accrued benefit obligation $ 146.6 $ 148.8 $ 27.7 $ 25.2
=================================================================================================================================
At December 31, 2003 and 2002, undrawn Letters of Credit secured certain of the
unfunded defined benefit pension plans (see Note 14(c)).
The accumulated benefit obligation (which differs from the accrued benefit
obligation in that it does not include assumptions about future compensation
levels) for all defined benefit pension plans at December 31, 2003, was
$4,744.0 million (2002 - $4,277.0 million). The accumulated benefit obligation
for defined benefit pension plans that are not funded at December 31, 2003, was
$128.0 million (2002 - $107.1 million).
(e) Plan investment strategies and policies
The Company's primary goal for the defined benefit plans is to ensure the
security of the retirement income and other benefits of the plan members and
their beneficiaries. A secondary goal of the Company is to maximize the
long-term rate of return of the defined benefit plans' assets within a level of
risk acceptable to the Company.
Risk management: The Company considers absolute risk (the risk of contribution
increases, inadequate plan surplus and unfunded obligations) to be more
important than relative return risk. Accordingly, the defined benefit plans'
designs, the nature and maturity of defined benefit obligations and
characteristics of the plans' memberships significantly influence investment
strategies and policies. The Company manages risk through specifying allowable
and prohibited investment types, setting diversification strategies and
determining target asset allocations.
Allowable and prohibited investment types: Allowable and prohibited investments
types, along with associated guidelines and limits, are set out in each fund's
Pension Benefits Standards Act required Statement of Investment Policies and
Procedures ("SIP&P") which is reviewed and approved annually by management and
the Company's Pension Committee or designated governing fiduciary,
respectively. The SIP&P guidelines and limits are further governed by the
Pension Benefits Standards Regulations' permitted investments and lending
limits. As well as conventional investments, each fund's SIP&P may provide for
the use of derivative products to facilitate investment operations and to
manage risk provided that no short position is taken, no use of leverage is
made and there is no violation of guidelines and limits established in the
SIP&P. Internally managed funds are prohibited from increasing grandfathered
investments in securities of the Company or Verizon Communications Inc., a
significant shareholder; grandfathered investments were made prior to the
merger of BC TELECOM Inc. and TELUS Corporation, the Company's predecessors.
Externally managed funds are permitted to invest in securities of the Company
and Verizon Communications Inc., a significant shareholder, provided that the
investments are consistent with the funds' mandate and are in compliance with
the relevant SIP&P.
Diversification: The Company's strategy for equity security investments is to
be broadly diversified across individual securities, industry sectors and
geographical regions. A meaningful portion (15-25% of total plans' assets) of
the investment in equity securities is allocated to foreign equity securities
with the intent of further increasing the diversification of the plans' assets.
Debt securities may include a meaningful allocation to mortgages with the
objective of enhancing cash flow and providing greater scope for the management
of the bond component of the plans' assets. Debt securities also may include
real return bonds to provide inflation protection, consistent with the indexed
nature of some defined benefit obligations. Real estate investments are used to
provide diversification of plans' assets, potential long-term inflation hedging
and comparatively stable investment income.
Relationship between plan assets and benefit obligations: With the objective of
lowering its long-term costs of defined benefit plans, the Company purposely
mismatches plan assets and benefit obligations. This mismatching is implemented
by including equity investments in the long-term asset mix as well as fixed
income securities and mortgages with durations that differ from the benefit
obligations. Compensation for liquidity issues that may have otherwise arisen
from mismatching of plan assets and benefit obligations comes from broadly
diversified investment holdings (including cash and short-term investment
holdings) and cash flows from dividends, interest and rents from diversified
investment holdings.
Asset allocations: Information concerning the Company's defined benefit plans'
target asset allocation and actual asset allocation is as follows:
Pension Benefit Plans Other Benefit Plans
---------------------------------------------------------------------------------------------------------------------------------
Target Percentage of plan assets Target Percentage of plan assets
allocation at end of year allocation at end of year
2004 2003 2002 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Equity securities 55-65% 63% 57% - - -
Debt securities 35-40% 31% 35% 0-5% - 1%
Real estate 0-5% 3% 4% - - -
Other 0-5% 3% 4% 95-100% 100% 99%
---------------------------------------------------------------------------------------------------------------------------------
100% 100% 100% 100%
=================================================================================================================================
At December 31, 2003 and 2002, shares of TELUS Corporation, combined with
shares of Verizon Communications Inc., a significant shareholder, accounted for
less than 1% of the assets held in the pension and other benefit trusts
administered by the Company.
(f) Employer contributions
The best estimates of fiscal 2004 employer contributions to the Company's
defined benefit plans are $104.8 million and $1.0 million for defined pension
benefit plans and other defined benefit plans, respectively. These estimates
are based upon the mid-year 2003 annual funding reports that were prepared by
actuaries using previous actuarial valuations. The funding reports are based on
the pension plans' fiscal years, which are calendar years. The next annual
funding valuations are expected to be prepared mid-year 2004.
(g) Assumptions
Management is required to make significant estimates about certain actuarial
and economic assumptions to be used in determining defined benefit pension
costs, accrued benefit obligations and pension plan assets. These significant
estimates are of a long-term nature, which is consistent with the nature of
employee future benefits. The significant weighted average actuarial
assumptions arising from these estimates and adopted in measuring the Company's
accrued benefit obligations are as follows:
Pension Benefit Plans Other Benefit Plans
2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Discount rate used to determine:
Net benefit costs for the year ended December 31 6.75% 6.75% 5.64% 6.75%
Accrued benefit obligation as at December 31 6.25% 6.75% 5.51% 5.65%
Expected long-term rate of return on plan assets
used to determine:
Net benefit costs for the year ended December 31 7.48% 7.77% 5.50% 7.75%
Accrued benefit obligation as at December 31 7.50% 7.48% 5.50% 7.50%
Rate of future increases in compensation used to
determine:
Net benefit costs for the year ended December 31 3.80% 4.25% - -
Accrued benefit obligation as at December 31 3.50% 3.80% - -
---------------------------------------------------------------------------------------------------------------------------------
2003 sensitivity of key assumptions Pension Benefit Plans Other Benefit Plans
---------------------------------------------------------------------------------------------------------------------------------
(millions) Change in Change in Change in Change in
obligation expense obligation expense
---------------------------------------------------------------------------------------------------------------------------------
Impact of hypothetical 0.25% change(1) in:
Discount rate $ 167.2 $ 19.5 $ 1.1 $ 0.1
Expected long-term rate of return on plan assets $ 10.8 $ 0.1
Rate of future increases in compensation $ 32.0 $ 6.6 $ - $ -
---------------------------------------------------------------------------------------------------------------------------------
(1) These sensitivities are hypothetical and should be used with caution. Favourable hypothetical changes
in the assumptions result in decreased amounts, and unfavourable hypothetical changes in the assumptions result
in increased amounts, of the obligations and expenses. Changes in amounts based on a 0.25 per cent variation in
assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change
in amounts may not be linear. Also, in this table, the effect of a variation in a particular assumption on the change
in obligation or change in expense is calculated without changing any other assumption; in reality, changes in one
factor may result in changes in another (for example, increases in discount rates may result in increased expectations
about the long-term rate of return on plan assets), which might magnify or counteract the sensitivities.
The Company's health benefit costs for hospital rooms and medication were
estimated to increase at an annual rate of 10% (2002 - 8%), decreasing to an
annual growth rate of 5% (2002 - 5%) over a ten-year period; all other health
benefit costs were estimated to increase at an annual rate of 10% (2002 - 5%),
decreasing to an annual growth rate of 5% (2002 - 5%).
(h) Defined contribution plans
The Company's total defined contribution pension plan costs recognized were as follows:
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Union pension plan contributions
Regular benefits $ 39.6 $ 50.2
Early retirement benefits (c) - 65.7
---------------------------------------------------------------------------------------------------------------------------------
39.6 115.9
Other defined contribution pension plans 10.4 4.4
---------------------------------------------------------------------------------------------------------------------------------
$ 50.0 $ 120.3
=================================================================================================================================
Regular benefit contributions for the union pension plan include other benefit
amounts of $2.8 million (2002 - NIL).
20. Segmented Information The Company's reportable segments, which are used to
manage the business, are Communications and Mobility. The Communications
segment includes voice local, voice long distance, data and other
telecommunication services excluding wireless. The Mobility segment includes
digital personal communications services and wireless Internet services.
Segmentation is based on similarities in technology, the technical expertise
required to deliver the products and services, and the distribution channels
used. Intersegment sales are recorded at the exchange value, which is the
amount agreed to by the parties.
Years ended
December 31 Communications Mobility Eliminations Consolidated
(millions) 2003 2002 2003 2002 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
External revenue$ 4,786.4 $4,989.3 $2,359.6 $2,017.4 $ - $ - $7,146.0 $7,006.7
Inter-segment revenue 94.5 95.3 15.7 17.5 (110.2) (112.8) - -
---------------------------------------------------------------------------------------------------------------------------------
Total operating revenue 4,880.9 5,084.6 2,375.3 2,034.9 (110.2) (112.8) 7,146.0 7,006.7
Operations expense 2,852.2 3,100.8 1,559.9 1,500.1 (110.2) (112.8) 4,301.9 4,488.1
---------------------------------------------------------------------------------------------------------------------------------
EBITDA excluding
restructuring and
workforce reduction
costs 2,028.7 1,983.8 815.4 534.8 - - 2,844.1 2,518.6
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and
work-force reduction
costs 28.3 563.4 - 6.5 - - 28.3 569.9
---------------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $2,000.4 $1,420.4 $ 815.4 $ 528.3 $ - $ - $2,815.8 $1,948.7
=================================================================================================================================
CAPEX(2) $ 892.8 $1,238.2 $ 359.9 $ 459.7 $ - $ - $1,252.7 $1,697.9
=================================================================================================================================
EBITDA excluding
restructuring and
workforce reduction
costs less CAPEX $1,135.9 $ 745.6 $ 455.5 $ 75.1 $ - $ - $1,591.4 $ 820.7
=================================================================================================================================
(1) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
is defined by the Company as operating revenues less operations expense and
restructuring and workforce reduction costs. Previously, the Company defined
EBITDA so as to exclude restructuring and workforce reduction costs; the
definition was amended to reflect a change in how the Company operates. The
Company has issued guidance on, and reports, EBITDA because it is a key measure
used by management to evaluate performance of its business segments and is
utilized in measuring compliance with debt covenants.
(2) Total capital expenditures ("CAPEX").
21. 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 December 31,
2003, in aggregate, $312.1 million (2002 - $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
December 31, 2003, is U.S.$102 million.
In the normal course of operations and on market terms and conditions, ongoing
services and other benefits have been received and expensed. In connection with
the 2001 disposition of TELUS' directory business to Verizon, the Company
rebills, 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, $40.9 million at
December 31, 2003 (2002 - $75.4 million).
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Verizon agreement
Ongoing services and benefits expensed $ 27.7 $ 43.9
Specified software licences and trademark licence acquired and recorded as
capital and other $ - $ 112.8
Sales to Verizon (Verizon customers' usage of TELUS' telecommunication
infrastructure and other) $ 47.2 40.2
and other) $ 35.9 $ 31.5
---------------------------------------------------------------------------------------------------------------------------------
In common with, and on the same basis as, other shareholders of the Company,
Verizon is eligible to participate in the Company's Dividend Reinvestment and
Share Purchase Plan (see Note 16(l)). The following table presents a summary of
the Company's dividend transactions with Verizon, which are included elsewhere
in these financial statements in similarly captioned line item amounts.
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Declared dividends attributable to Verizon's shareholdings
- to be paid in cash $ 43.5 $ 31.6
- to be reinvested in Treasury shares 0.5 12.3
---------------------------------------------------------------------------------------------------------------------------------
44.0 43.9
---------------------------------------------------------------------------------------------------------------------------------
Cash payments 43.0 21.0
Reinvested in Treasury shares 1.0 22.6
---------------------------------------------------------------------------------------------------------------------------------
44.0 43.6
---------------------------------------------------------------------------------------------------------------------------------
Change in dividends payable to Verizon - 0.3
Dividends payable to Verizon, beginning of year 11.0 10.7
---------------------------------------------------------------------------------------------------------------------------------
Dividends payable to Verizon, end of year $ 11.0 $ 11.0
=================================================================================================================================
22. 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:
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with Canadian GAAP $ 331.5 $ (229.0)
Adjustments:
Decrease in depreciation expense (b) 35.8 35.8
Decrease in interest expense (c) 9.6 9.6
Amortization of intangible assets (d) (81.8) (81.8)
Change in future employee benefits (e) (16.9) (16.9)
Asset impairment - decrease in depreciation (f) 57.6 72.1
Interest on convertible debentures (g) (7.1) (6.8)
Accounting for derivatives (h) 2.0 1.3
Taxes on the above adjustments (1.7) (8.6)
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before effect of change in accounting principle 329.0 (224.3)
Effect of change in accounting principles for intangible assets and goodwill (j) - (1,701.6)
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with U.S. GAAP 329.0 (1,925.9)
Other comprehensive income (loss) (h) (n) (205.0) 40.9
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) in accordance with U.S. GAAP $ 124.0 $(1,885.0)
=================================================================================================================================
Net income (loss) in accordance with U.S. GAAP per Common Share and Non-Voting (basic and
diluted):
Before effect of change in accounting principles for intangible assets and goodwill $ 0.93 $ (0.72)
Effect of change in accounting principles for intangible assets and goodwill (j) - (5.35)
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.93 $ (6.07)
=================================================================================================================================
The following is a restatement of major balance sheet categories to reflect the
application of U.S. GAAP:
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Current Assets $ 1,517.3 $ 1,173.2
Capital Assets
Property, plant, equipment and other 7,757.8 7,926.0
Intangible assets subject to amortization 2,666.0 2,901.6
Intangible assets with indefinite lives 2,954.6 2,950.1
Goodwill 3,536.6 3,543.2
Deferred Income Taxes 709.0 1,174.7
Other Assets 623.1 979.9
---------------------------------------------------------------------------------------------------------------------------------
$19,764.4 $20,648.7
=================================================================================================================================
Current Liabilities $ 2,154.7 $ 2,181.0
Long-Term Debt 6,628.4 8,364.9
Other Long-Term Liabilities 1,367.1 499.7
Deferred Income Taxes 1,638.8 1,655.1
Non-Controlling Interest 10.7 11.2
Shareholders' Equity 7,964.7 7,936.8
---------------------------------------------------------------------------------------------------------------------------------
$19,764.4 $20,648.7
=================================================================================================================================
The following is a reconciliation of shareholders' equity incorporating the differences between
Canadian and U.S. GAAP:
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under Canadian GAAP $ 6,662.0 $ 6,432.6
Adjustments:
Purchase versus Pooling Accounting (a) - (e), (k) 1,512.9 1,545.8
Asset impairment (f) - (36.2)
Reclassification of convertible debentures from equity to debt (g) (149.6) (148.5)
Accounting for derivatives (h) (0.1) (1.4)
Additional goodwill on Clearnet purchase (l) 123.5 123.5
Accumulated other comprehensive income (loss) (n) (184.0) 21.0
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under U.S. GAAP $ 7,964.7 $ 7,936.8
=================================================================================================================================
Composition of Shareholders' Equity under U.S. GAAP
Preference and preferred shares
TELUS Communications Inc. Preference Shares and Preferred Shares $ 69.7 $ 69.7
Common equity
Common Shares 4,282.6 4,208.6
Non-Voting Shares 4,585.8 4,532.4
Options and warrants 51.5 56.8
Accrual for shares issuable under channel stock incentive plan 0.6 0.3
Cumulative foreign currency translation adjustment (2.7) 1.2
Retained earnings (deficit) (844.7) (960.6)
Accumulated other comprehensive income (loss) (n) (184.0) 21.0
Contributed surplus 5.9 7.4
---------------------------------------------------------------------------------------------------------------------------------
7,895.0 7,867.1
---------------------------------------------------------------------------------------------------------------------------------
$ 7,964.7 $ 7,936.8
=================================================================================================================================
(a) Merger of BC TELECOM and TELUS
The business combination between BC TELECOM and TELUS Corporation (renamed
TELUS Holdings Inc. which was wound up June 1, 2001) was accounted for using
the pooling of interests method under Canadian GAAP. Under Canadian GAAP, the
application of the pooling of interests method of accounting for the merger of
BC TELECOM and TELUS Holdings Inc. resulted in a restatement of prior periods
as if the two companies had always been combined. Under U.S. GAAP, the merger
is accounted for using the purchase method. Use of the purchase method results
in TELUS (TELUS Holdings Inc.) being acquired by BC TELECOM for $4,662.4
million (including merger related costs of $51.9 million) effective January 31,
1999.
(b) Depreciation
Under the purchase method, TELUS' capital assets on acquisition have been
recorded at fair value rather than at their underlying cost (book values) to
TELUS. Therefore, depreciation of such assets based on fair values at the date
of acquisition under U.S. GAAP will be different than TELUS' depreciation based
on underlying cost (book values). As of March 31, 2004, the amortization of
this difference will have been completed.
(c) Interest
Under the purchase method, TELUS' long-term debt on acquisition has been
recorded at its fair value rather than at its underlying cost (book value) to
TELUS. Therefore, interest expense calculated on the debt based on fair values
at the date of acquisition under U.S. GAAP will be different than TELUS'
interest expense based on underlying cost (book value).
(d) Intangible Assets
As TELUS' intangible assets on acquisition have been recorded at their fair
value, amortization of such assets, other than for those with indefinite lives,
needs to be included under U.S. GAAP; consistent with prior years, amortization
is calculated using the straight-line method.
The incremental amounts recorded as intangible assets arising from the TELUS
acquisition above are as follows:
Cost Accumulated Net Book Value
Amortization
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscribers - wireline $ 1,950.0 $ 219.0 $ 1,731.0 $ 1,769.4
Subscribers - wireless 250.0 159.7 90.3 133.7
---------------------------------------------------------------------------------------------------------------------------------
2,200.0 378.7 1,821.3 1,903.1
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 1,833.3 1,833.3 - -
---------------------------------------------------------------------------------------------------------------------------------
$ 4,033.3 $ 2,212.0 $ 1,821.3 $ 1,903.1
=================================================================================================================================
(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 December 31, 2003, for
each of the next five fiscal years is as follows:
Years ending December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2004 $ 373.6
2005 270.6
2006 117.0
2007 68.7
2008 54.2
(e) Future Employee Benefits
Under U.S. GAAP, TELUS' future employee benefit assets and obligations have
been recorded at their fair values on acquisition. Accounting for future
employee benefits under Canadian GAAP changed to become more consistent with
U.S. GAAP effective January 1, 2000. Canadian GAAP provides that the
transitional balances can be accounted for prospectively. Therefore, to conform
to U.S. GAAP, the amortization of the transitional amount needs to be removed
from the future employee benefit expense.
(f) Asset Impairment
In the first quarter of 1998, BC TELECOM took an asset impairment charge. In
assessing if a capital asset is impaired, estimated future net cash flows are
not discounted in computing the net recoverable amount. Under Canadian GAAP, at
the time the assessment took place, the impairment amount recorded was the
excess of the carrying amount over the recoverable amount; under U.S. GAAP the
impairment amount recorded was the excess of the carrying amount over the
discounted estimated future net cash flows that were used to determine the net
recoverable amount. Under U.S. GAAP the net of tax charge taken in 1998 would
be $232.2 million higher and would not be considered an extraordinary item. The
annual depreciation expense would be approximately $72 million lower subsequent
to when the increased impairment charge was taken under U.S. GAAP. As of
December 31, 2003, the amortization of this difference had been completed.
(g) Convertible Debentures
Under Canadian GAAP, financial instruments such as the convertible debentures
are classified as debt or equity according to their substance rather than their
legal form. Accordingly, due to the substance of the transaction the
convertible debentures have currently been classified as equity and the
corresponding interest expense and the amortization of issue costs has been
charged to the retained earnings rather than to the Consolidated Statements of
Income. Pursuant to U.S. GAAP, the convertible debentures would be included in
long-term debt. The corresponding interest expense on the convertible
debentures and the amortization of issue costs would be charged to the
Consolidated Statements of Income.
(h) 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.
(i) Income Taxes
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Current $ (221.7) $ (51.7)
Deferred 395.4 43.9
---------------------------------------------------------------------------------------------------------------------------------
173.7 (7.8)
Investment Tax Credits (1.3) (50.5)
---------------------------------------------------------------------------------------------------------------------------------
$ 172.4 $ (58.3)
=================================================================================================================================
The Company's income tax expense (recovery), for U.S. GAAP purposes, differs
from that calculated by applying statutory rates for the following reasons:
Years ended December 31 ($ in millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 186.8 37.1% $ (93.3) 39.4%
Tax rate differential on settlement of prior
year tax issues (47.0) 2.4
Revaluation of deferred income tax assets and
liabilities for changes in statutory tax rates 13.0 34.4
Non-tax effected elements of net income before tax 1.9 10.0
Investment Tax Credits (0.8) (30.6)
Non-taxable portion of gains - (16.4)
Other (2.8) 11.0
---------------------------------------------------------------------------------------------------------------------------------
151.1 30.0% (82.5) 34.9%
Large corporations tax 21.3 24.2
---------------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 172.4 34.3% $ (58.3) 24.6%
=================================================================================================================================
As referred to in Note 1(b), the Company must make significant estimates in
respect of the composition of its future income tax assets and future income
tax liabilities. The operations of the Company are complex, and related tax
interpretations, regulations and legislation are continually changing. As a
result, there are usually some tax matters in question. Temporary differences
comprising the deferred tax assets (liabilities) are estimated as follows:
(millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Capital assets
Property, plant, equipment, other and intangible assets subject to amortization $ (534.1) $ (334.4)
Intangible assets with indefinite lives (1,007.0) (992.3)
Reserves not currently deductible 156.1 145.7
Losses available to be carried forward 622.2 765.8
Other 137.0 73.6
---------------------------------------------------------------------------------------------------------------------------------
$ (625.8) $ (341.6)
=================================================================================================================================
Deferred tax assets
Current $ 304.0 $ 138.8
Non-current 709.0 1,174.7
---------------------------------------------------------------------------------------------------------------------------------
1,013.0 1,313.5
Deferred tax liabilities (1,638.8) (1,655.1)
---------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets (liabilities) $ (625.8) $ (341.6)
=================================================================================================================================
(j) Intangible Asset Transitional Impairment Amount and Goodwill
Commencing January 1, 2002, in Canada and the United States, new Generally
Accepted Accounting Principles for intangible assets with an indefinite life
and goodwill apply to the Company (Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets"). As one part of the
transitional implementation, intangible assets with indefinite lives were
tested for impairment as at January 1, 2002. Any such transitional impairment
amount arising is considered to arise from a change in accounting policy and is
charged to earnings, in the period the change is effected, after determining
net income from operations. As a result of the differing accounting treatment
afforded the merger of BC TELECOM and TELUS (see (a) and (d)), the recorded
value of intangible assets with indefinite lives differs materially between
Canadian and U.S. GAAP. The Company has assessed its intangible assets with
indefinite lives and determined it necessary to record a transitional
impairment amount of $595.2 million ($910.0 million before tax) for purposes of
Canadian GAAP; a transitional impairment of $1,701.6 million ($2,609.7 million
before tax) was required under U.S. GAAP. The transitional impairment amount,
under both Canadian and U.S. GAAP, reduced the carrying values of the
intangible assets with indefinite lives to the same amounts, thus eliminating
the corresponding GAAP difference.
Similarly, goodwill was also to be tested for impairment as at January 1, 2002,
and any transitional impairment amount would also be considered to arise from a
change in accounting policy and is charged to earnings, in the period the
change is effected, after determining net income from operations. The Company
completed this test in the first quarter of 2002. By applying the prescribed
method of comparing the fair value of its reporting units to the carrying
amounts of its reporting units, the Company has assessed its goodwill and
determined that there was no goodwill transitional impairment amount.
Consistent with current industry-specific valuation methods, the Company used a
combination of the discounted cash flow model and the market comparable
approach for determining the fair value of its reporting units.
(k) Goodwill
Under the purchase method of accounting, TELUS' assets and liabilities at
acquisition (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.
(l) Additional Goodwill on Clearnet purchase
Under U.S. GAAP, shares issued by the acquirer to affect an acquisition are
measured at the date the acquisition was announced; however, under Canadian
GAAP, at the time the transaction took place, shares issued to effect an
acquisition were measured at the transaction date. This results in the purchase
price under U.S. GAAP being $131.4 million higher than under Canadian GAAP. The
resulting difference is assigned to goodwill. Commencing January 1, 2002,
rather than being systematically amortized, the carrying value of goodwill is
periodically tested for impairment.
(m) Share-Based Compensation
Generally Accepted Accounting Principles require disclosure of the impact on
net income (loss) and net income (loss) per Common Share and Non-Voting Share
as if the fair value based method of accounting had been applied for
share-based compensation. Under Canadian GAAP, this is required in respect of
awards made after 2001; under U.S. GAAP, this is required in respect of awards
made after 1994. The fair values of the Company's options granted in 2003 and
2002, and the weighted average assumptions used in estimating the fair values,
are set out in Note 8(a). Such impact, using the fair values set out in Note
8(a) would approximate the following pro forma amounts:
Years ended December 31 (millions except per share amounts) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Compensation cost $ 43.9 $ 62.3
Net income (loss) in accordance with U.S. GAAP
As reported $ 328.9 $(1,925.9)
Pro forma $ 285.0 $(1,988.2)
Net income (loss) in accordance with U.S. GAAP per Common Share and Non-Voting Share
Basic
As reported $ 0.93 $ (6.07)
Pro forma $ 0.81 $ (6.25)
Diluted
As reported $ 0.93 $ (6.07)
Pro forma $ 0.80 $ (6.25)
---------------------------------------------------------------------------------------------------------------------------------
(n) 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.
Years ended December 31 (millions) 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
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 in year $ (303.8) $ (12.5) $ (316.3) $ 227.8 $(156.5) $ 71.3
Income tax expense (recovery) (114.5) 3.2 (111.3) 92.2 (61.8) 30.4
---------------------------------------------------------------------------------------------------------------------------------
Net (189.3) (15.7) (205.0) 135.6 (94.7) 40.9
Accumulated other comprehensive
income (loss), beginning of year 115.7 (94.7) 21.0 (19.9) - (19.9)
---------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), end of year $ (73.6) $(110.4) $ (184.0) $ 115.7 $(94.7) $ 21.0
=================================================================================================================================
(o) 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: April 12,2004
TELUS Corporation
___"James W. Peters"___
Name: James W. Peters
Title: Corporate Secretary