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 _____October _________ 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:
Press Release dated October 29, 2004 of the Third Quarter Results
______________________________________________________________________________
October 29, 2004
TELUS Reports Third Quarter Results and Raises Guidance for 2004
Strong wireless performance delivers continued earnings and cash flow
growth
Value enhancing initiatives include 33% dividend increase and share
re-purchase program
VANCOUVER, Oct. 29 - TELUS Corporation (TSX: T and T.NV / NYSE: TU)
today reported for the third quarter of 2004 outstanding wireless performance
at TELUS Mobility, steady wireline results at TELUS Communications and a
significant increase in net income and free cash flow. Operating revenues of
$1.9 billion in the quarter increased 8% from a year ago and operating
earnings (EBITDA) were up 9%. Reported earnings per share (EPS) for the second
quarter were 44 cents, up 38% compared to 32 cents for the same period a year
ago. Free cash flow was $503 million during the quarter, a $62 million or 14%
improvement from a year ago.
FINANCIAL HIGHLIGHTS
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C$ in millions, except per share amounts 3 months ended
September 30
(unaudited) 2004 2003 % Change
-----------------------------------------------------------------------------
Operating revenues 1,946.9 1,806.2 7.8
EBITDA(1) 817.9 752.2 8.7
Net income 156.6 114.1 37.2
Earnings per share (EPS), basic 0.44 0.32 37.5
Capital expenditures 319.8 304.0 5.2
Cash provided by operating activities 847.2 849.7 (0.3)
Free cash flow (2) 502.6 440.3 14.1
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring and workforce reduction costs.
(2) For definition, see note 2 of the Consolidated highlights table in
management's discussion and analysis.
Darren Entwistle, president and CEO, stated "third quarter results were
characterized by strong financial performance across both our wireless and
wireline business segments. TELUS Mobility delivered another outstanding
quarter with excellent subscriber growth, ARPU, and churn results which drove
revenue and EBITDA increases of 21% and 32%, respectively. Also noteworthy
were improving wireline results at TELUS Communications, which reported 1%
revenue growth, a first in over two years, led by higher data revenues and
improved performance in our Central Canada non-incumbent operations. Finally,
I am pleased to announce a series of shareholder value enhancing initiatives
including a 33% increase in the quarterly dividend, and a target dividend
payout range to provide guidance in respect of potential future increases in
the dividend. Furthermore, TELUS intends to implement a normal course issuer
bid to repurchase up to 25.5 million common and non-voting shares. These
initiatives are a result of the continued success of our national growth
strategy commenced in the year 2000 and our longstanding commitment to balance
the interests of shareholders and debt holders."
Robert McFarlane, executive vice president and CFO, commented "our strong
operating performance this quarter in both our business segments, and at TELUS
Mobility in particular, generated a 37% increase in bottom line earnings and
significant free cash flow of $503 million. With $1.2 billion of free cash
flow generated in the first nine months of 2004 alone, TELUS has already
achieved our long-term de-leveraging targets 15 months ahead of schedule - net
debt to EBITDA of 2.2 times and net debt to total capitalization of 45 to 50%.
Moreover, we are raising our full year guidance for consolidated revenue,
EBITDA, EPS and free cash flow. Accordingly, we believe that TELUS has the
operational momentum and financial strength to increase cash distributions to
shareholders in the form of dividends and share repurchases, while at the same
time continuing to reduce debt."
OPERATING HIGHLIGHTS
TELUS Mobility
Cash flow improvement of $70 million driven by EBITDA growth of 32%
- revenues grew by a record $127 million or 21% to $747 million in the
third quarter of 2004, when compared with the same period in 2003
- EBITDA increased by $78 million or 32% to $324 million
- EBITDA margin expanded by 4.7 points to a TELUS Mobility record 47% of
Network revenue and by 3.7 points to 43% of total revenue
- ARPU (average revenue per subscriber unit) increased by $2 to $62,
representing a seventh consecutive quarter of year over year increases
- cost of acquisition ("COA") improved to $374 from $406
- net subscriber additions were 136,200 or 35% higher than the third
quarter of 2003 and represented a record third quarter for TELUS
Mobility. Higher revenue-generating postpaid subscriber net additions
of 115,400 increased by 51%, representing 85% of total net additions.
- blended monthly churn improved to 1.34% when compared to the same
quarter a year ago and postpaid churn was 1.05% this quarter
- simple cash flow (EBITDA less capital expenditures) increased by
$70 million or 46% to a quarterly record of $220 million
TELUS Communications
Data revenue growth of 8% contributes to increase in Operating revenues
- revenues increased by $14 million or 1% in the third quarter of 2004,
when compared with the same period in 2003. This positive revenue
growth reverses a two and a half year negative trend since the first
quarter of 2002.
- long-distance revenue declined a modest 2% - the lowest rate since the
first quarter of 2001. The underlying trend was offset in the third
quarter by non-recurring wholesale revenue and a higher retail
administration charge implemented in June
- data revenue increased 8% driven by a 27% increase in the high-speed
Internet subscriber base and higher customer equipment sales
- EBITDA decreased by $12 million or 2% as increased revenues were
offset by a $14 million increase in restructuring and work force
reduction costs and slightly higher operating costs
- high-speed Internet net additions of 30,600, bringing TELUS' total
high-speed Internet subscriber base to 654,900, a 27% increase over
the same period last year
- network access lines of 4.8 million, declined 10,000 in the quarter,
and were down 1.4% from a year ago
- cash flow (EBITDA less capital expenditures) decreased by $20 million
or 7% to $278 million in the third quarter of 2004, primarily due to
increased expenses and increased capital expenditures in non-incumbent
operations in Central Canada due largely to the successful
implementation of several large business contracts
CORPORATE DEVELOPMENTS
New share value enhancing initiatives
The TELUS Board has approved a comprehensive series of shareholder value
enhancing initiatives including:
- a quarterly dividend increase of 33% to 20 cents per share
- disclosure of a dividend payout ratio target of 45 to 55% on net
earnings
- a Normal Course Issuer Bid to repurchase TELUS shares
- measures to restrict earnings dilution by reducing future issuances of
TELUS shares
As a result of de-leveraging well ahead of plan and continued expectation
of strong free cash flow, the TELUS Board has approved a quarterly dividend of
20 cents ($0.20) payable on January 1, 2005 to shareholders of record on
December 10, 2004. See separate news release today for more details.
In addition, the TELUS Board has announced a forward looking target in
respect of a dividend payout ratio range, which provides investors with
greater clarity and is consistent with a dividend growth approach.
TELUS has also received approval from its Board of Directors to make a
Normal Course Issuer Bid for the repurchase of up to 25.5 million of its
common and non-voting shares, subject to TELUS obtaining all necessary
regulatory approvals. The bid will enable TELUS to repurchase, over
approximately a 12 month period, up to a maximum of 14.0 million common shares
and 11.5 million non-voting shares, representing approximately 10% of the
public float of each of the common and non-voting shares. The Company believes
that the proposed purchase of its shares is an attractive investment
opportunity and desirable use of TELUS' funds to enhance the value of the
remaining shares.
TELUS is also amending the TELUS dividend reinvestment plan (Plan) terms
to provide the choice of open market purchases of TELUS shares, as well as
issuing shares from treasury. Effective January 1, 2005, subject to regulatory
approval, the Company will begin open market purchases of shares and will
discontinue the associated discount (previously 3%) on the purchase price of
Plan shares. This change will limit the issuance of additional equity and
associated shareholder earnings dilution, and put TELUS in line with the
dividend reinvestment plans of our North American telecom peers.
TELUS' takeover bid for Microcell Telecommunications expires
Rogers Wireless announced on September 20 offers to purchase Microcell
Telecommunications Inc. at a 21% premium to TELUS' existing bid. TELUS
initially extended its bid on this date with a "view to evaluating the terms
and conditions of the Rogers bid and the likelihood of that bid being
completed" while publicly commenting that we considered our existing bid full
and fair value.
On October 12, TELUS announced that it would not further extend its
offers to purchase Microcell and cancelled a commitment from the Royal Bank of
Canada to provide a Cdn. $500 million credit facility, which was to be
available for general corporate purposes following the completion of our
Microcell bid.
TELUS named to Dow Jones Sustainability Index for fourth consecutive year
For the fourth year in a row, the Dow Jones Sustainability Index (DJSI),
a worldwide 'corporate sustainability' ranking of companies, recognized TELUS
for excellence in corporate sustainability. In the 2004 DJSI rankings, TELUS
was once again the only North American telecommunications company to be
recognized and was one of only 13 Canadian companies of 318 globally to make
the list. Inclusion in the Index influences the investment decisions of asset
managers in 14 countries who use the DJSI to benchmark the leading companies
in global corporate sustainability. This accomplishment reflects TELUS'
commitment to corporate social responsibility and implementing practices and
values that support efforts to achieve long-term, sustainable growth.
New PCS Products from TELUS Mobility
TELUS Mobility introduced a broad roster of new PCS phones in the third
quarter, in preparation for the year-end sales season, and with a focus on its
industry-leading picture messaging service. New in October was the exclusive
Audiovox 8920 "King Kam," Canada's first 1.3 megapixel camera phone. With
resolution four times higher than the current camera phone standard of 300
kilopixels, the King Kam captures the highest-quality images of any camera
phone now available in Canada. Also introduced, was the Samsung A670, an
affordable camera phone with built-in flash, 4X zoom and dual colour displays.
TELUS Mobility now offers five camera phones, including the Samsung A600, the
LG 5450, and the Samsung SPHi700, a Personal Digital Assistant (PDA) with
camera-phone capability.
TELUS Mobility also introduced two other new affordable phones: the
LG 3200, which features an attractive titanium-coloured clamshell design,
colour screen and integrated speakerphone, and the Kyocera K7 494, a stylish,
youth-oriented phone that features a colour screen, changeable faceplates and
even a built-in flashlight. Both phones allow for two-way text messaging and
ringtone and image downloads.
New Mike Products from TELUS Mobility
On The Mike Network, TELUS Mobility introduced Mike's Talk Around, a
unique service available on two new Mike handsets, the Motorola i325 and i315.
Mike's Talk Around operates like traditional short-range, two-way radios,
allowing Mike clients within a three-kilometre range to walkie-talkie each
other when Mike's Direct Connect may be unavailable, such as in remote regions
or in hard-to-reach locations such as underground facilities.
TELUS Mobility also introduced two new ruggedized Mike data modems from
eLutions, Inc. The iR1200 Rugged and iR1200 GPS modems enable Mike clients in
vertical markets such as oil and gas, field services, utilities,
transportation and public safety to connect to the Internet and other data
networks on the job and on the road. Both meet military specifications for
shock, vibration and humidity, and the iR1200 adds an embedded Trimble Lassen
SQ module for Global Positioning System (GPS) applications. The new Mike
modems join a broad offering of rugged PCS modems that operate on TELUS'
national 1X wireless data network.
TELUS signs multi-year contracts with customers in Central Canada
In October, TELUS announced a $10 million, 7-year contract with the
Laurentian Bank. TELUS will manage Laurentian Bank's entire telephony
infrastructure for its 153 branches across Quebec and in Ottawa. This includes
development of business applications, help desk technical support, and
supplying all of its telephone equipment.
In September, TELUS announced a $6 million, 5-year agreement with Jetsgo,
a Canadian airline company, to provide all their information technology
systems. The Jetsgo solution exploits TELUS' Next Generation Network (NGN),
which supports the migration of Jetsgo to an all-IP environment. TELUS will
host and manage all of Jetsgo's online services, including its farm of 16
servers, email communications, corporate website and Internet security
services, using our exclusive IP-based NGN.
TELUS' Next Generation Network (NGN) reaches another milestone
TELUS continues to incrementally migrate toll voice traffic from its
traditional circuit switched network and the Stentor network on to its Next
Generation Internet Protocol (IP) based network. TELUS achieved another
milestone in the migration of long distance voice traffic from competitors to
the NGN, a migration that began in July 2003. On September 8, 2004, all calls
originating in B.C. and Alberta destined to Ontario that had previously been
transported via the Stentor network, were successfully migrated to the NGN. In
May of 2004, all calls originating in B.C. and Alberta destined to Quebec,
were migrated to the NGN. The migration of calls is another step in the
transformation of the TELUS network to a single national IP network designed
to carry high-quality voice, data and video applications. This will eventually
eliminate the need for separate networks to carry these applications and
reduce network costs.
TELUS announces IP-One Evolution(TM)
Building on TELUS' national leadership in delivering IP Solutions for
business, TELUS announced in October plans to launch early in 2005 IP-One
Evolution, the latest suite of sophisticated Internet Protocol (IP) telephony
solutions.
IP-One Evolution is TELUS' newest hosted and managed Voice over Internet
Protocol (VoIP) offering. It is intended for large national and regional
business customers who want the benefits of IP, such as increased
productivity, ease of use, and lower costs, by migrating their existing
Centrex services at a pace that suits their needs.
IP-One Evolution combines the benefits of Centrex with the advantages of
IP telephony. It enables Centrex services to be deployed over an IP network,
which means customers can migrate to IP telephony at their own rate. Customers
can migrate one user at a time or by transforming their entire business
simultaneously with complete interoperability between the two systems.
IP-One Evolution is in final testing with three business customers and
TELUS plans to launch the service nationally in the first quarter of 2005.
TELUS launches services over Alberta SuperNet
TELUS has launched its first services over the Alberta SuperNet network
since becoming an Alberta SuperNet Service Provider. As the Alberta SuperNet
network build progresses and is turned up throughout the province, TELUS is
ready to provide expertise and innovative Next Generation IP solutions to the
Government of Alberta and public sector institutions over SuperNet.
The initial launch of TELUS SuperNet Services includes Internet, hosting,
and videoconferencing solutions. TELUS also consults on SuperNet readiness to
end users and provides Voice over IP (VoIP) and data equipment to connect to
SuperNet.
Calgary International Airport, TELUS partners on wireless data
In October, the Calgary Airport Authority and TELUS announced a major
wireless voice and data initiative at Calgary International Airport, the
nation's third-busiest. The project includes a managed wireless local area
network (WLAN) for airport staff and tenants that supports wireless data
applications such as passenger processing, wireless baggage scanning and
aircraft maintenance, and a TELUS Wi-Fi Hotspot for use by business travelers.
The overall initiative also includes enhanced Mike and PCS telephone and radio
services throughout the airport facility, as well as a new TELUS Mobility
retail location. The initiative follows the introduction of TELUS Mobility
Wi-Fi services at the Vancouver International Airport last fall.
TELUS supports Canada's amateur athletes
In the third quarter of 2004, TELUS announced numerous sponsorships to
support amateur athletic programs and organizations including:
- the Canadian Soccer Association, as its exclusive telecommunications
sponsor. As a gold level sponsor with a seven-year contract, TELUS
will support all 13 Canadian men's and women's national teams and all
international matches played in Canada.
- Alpine Canada Alpin (ACA) with an eight-year, $4 million partnership
agreement, to boost the national ski organization's goal of again
making Canada a world-leading alpine ski racing country. This multi-
year partnership supports both the Alpine Ski Team and the Disabled
Alpine Ski Team.
- the University of Alberta Athletics partnership agreement to support
the 2005 and 2006 national university hockey championships. The TELUS
University Cup will bring together the best six university teams in
the nation for a four-day, seven-game championship format.
Dividend declaration
The Board of Directors declared a quarterly dividend of twenty cents
($0.20) per share on outstanding Common and Non-Voting Shares payable on
January 1, 2005 to shareholders of record on the close of business on
December 10, 2004. This represents a 33% increase from the previous fifteen
cent quarterly dividend.
Media Relations: Investor Relations:
Nick Culo John Wheeler
(780) 493-7236 (780) 493-7310
nick.culo(at)telus.com ir(at)telus.com
TELUS Corporation
Consolidated statements of income
Periods ended September 30 Three months Nine months
(unaudited) (millions) 2004 2003 2004 2003
-----------------------------------------------------------------------------
(restated) (restated)
OPERATING REVENUES $ 1,946.9 $ 1,806.2 $ 5,616.3 $ 5,320.4
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,112.8 1,051.7 3,259.5 3,175.3
Restructuring and
workforce reduction
costs 16.2 2.3 32.8 12.1
Depreciation 327.1 308.9 969.5 949.5
Amortization of
intangible assets 80.5 98.3 256.1 278.9
-------------------------------------------------------------------------
1,536.6 1,461.2 4,517.9 4,415.8
-------------------------------------------------------------------------
OPERATING INCOME 410.3 345.0 1,098.4 904.6
Other (income) expense,
net (3.2) 7.6 - 19.8
Financing costs 158.6 139.3 460.5 475.6
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES
AND NON-CONTROLLING
INTEREST 254.9 198.1 637.9 409.2
Income taxes 97.2 83.0 204.7 129.9
Non-controlling interest 1.1 1.0 3.0 2.7
-------------------------------------------------------------------------
NET INCOME 156.6 114.1 430.2 276.6
Preference and preferred
share dividends 0.1 0.9 1.8 2.6
-------------------------------------------------------------------------
COMMON SHARE AND NON-VOTING
SHARE INCOME $ 156.5 $ 113.2 $ 428.4 $ 274.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INCOME PER COMMON SHARE AND
NON-VOTING SHARE ($)
- Basic 0.44 0.32 1.20 0.79
- Diluted 0.43 0.32 1.19 0.78
DIVIDENDS DECLARED PER
COMMON SHARE AND
NON-VOTING SHARE ($) 0.15 0.15 0.45 0.45
TOTAL WEIGHTED AVERAGE
COMMON SHARES AND
NON-VOTING SHARES OUTSTANDING
(millions)
- Basic 355.7 350.1 354.4 348.5
- Diluted 361.8 353.2 356.7 350.8
TELUS Corporation
Consolidated balance sheets
As at As at
September December
(unaudited) (millions) 30, 2004 31, 2003
-------------------------------------------------------------------------
(restated)
ASSETS
Current Assets
Cash and temporary investments, net $ 622.2 $ 6.2
Accounts receivable 815.1 723.8
Income and other taxes receivable 77.8 187.4
Inventories 84.7 123.5
Prepaid expenses and other 229.5 172.4
Current portion of future income taxes 368.0 304.0
-------------------------------------------------------------------------
2,197.3 1,517.3
-------------------------------------------------------------------------
Capital Assets, Net
Property, plant, equipment and other 7,623.3 7,764.3
Intangible assets subject to amortization 720.8 844.7
Intangible assets with indefinite lives 2,954.6 2,954.6
-------------------------------------------------------------------------
11,298.7 11,563.6
-------------------------------------------------------------------------
Other Assets
Deferred charges 713.3 610.7
Future income taxes 276.1 626.0
Investments 40.2 41.9
Goodwill 3,117.7 3,118.0
-------------------------------------------------------------------------
4,147.3 4,396.6
-------------------------------------------------------------------------
$17,643.3 $17,477.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 1,354.0 $ 1,294.5
Restructuring and workforce reduction accounts
payable and accrued liabilities 85.9 141.0
Dividends payable 53.4 53.5
Advance billings and customer deposits 485.5 445.0
Current maturities of long-term debt 4.0 221.1
-------------------------------------------------------------------------
1,982.8 2,155.1
-------------------------------------------------------------------------
Long-Term Debt 6,514.0 6,609.8
-------------------------------------------------------------------------
Other Long-Term Liabilities 1,305.8 1,173.7
-------------------------------------------------------------------------
Future Income Taxes 1,001.3 1,007.0
-------------------------------------------------------------------------
Non-Controlling Interest 10.9 10.7
-------------------------------------------------------------------------
Shareholders' Equity
Convertible debentures conversion option 8.8 8.8
Preference and preferred shares - 69.7
Common equity 6,819.7 6,442.7
-------------------------------------------------------------------------
6,828.5 6,521.2
-------------------------------------------------------------------------
$17,643.3 $17,477.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
Consolidated statements of cash flows
Periods ended September 30 Three months Nine months
(unaudited) (millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
(restated) (restated)
OPERATING ACTIVITIES
Net income $ 156.6 $ 114.1 $ 430.2 $ 276.6
Adjustments to reconcile
net income to cash
provided by operating
activities:
Depreciation and
amortization 407.6 407.2 1,225.6 1,228.4
Future income taxes 91.4 94.7 281.9 347.9
Share-based compensation 7.3 - 17.9 -
Net employee defined
benefit plans expense 4.9 13.2 14.7 39.5
Employer contributions
to employee defined
benefit plans (25.8) (33.9) (112.3) (69.9)
Restructuring and
workforce reduction
costs, net of cash
payments 6.4 (29.8) (55.1) (221.5)
Other, net (3.9) 2.6 13.7 37.5
Net change in non-cash
working capital 202.7 281.6 107.7 85.5
-------------------------------------------------------------------------
Cash provided by operating
activities 847.2 849.7 1,924.3 1,724.0
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (319.8) (304.0) (975.6) (817.3)
Proceeds from the sale of
property and other assets 1.8 1.3 18.2 39.6
Other 1.5 (5.1) 0.7 1.3
-------------------------------------------------------------------------
Cash used by investing
activities (316.5) (307.8) (956.7) (776.4)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and
Non-Voting Shares issued 27.0 20.6 70.8 61.7
Dividends to shareholders (45.5) (41.6) (136.1) (130.2)
Payment for redemption of
preference and preferred
shares (37.0) - (72.8) -
Long-term debt issued - 56.0 37.8 365.4
Redemptions and repayment
of long-term debt (210.7) (490.4) (247.7) (1,130.6)
Other - (0.8) (3.6) (2.6)
-------------------------------------------------------------------------
Cash used by financing
activities (266.2) (456.2) (351.6) (836.3)
-------------------------------------------------------------------------
CASH POSITION
Increase in cash and
temporary investments, net 264.5 85.7 616.0 111.3
Cash and temporary
investments, net,
beginning of period 357.7 16.6 6.2 (9.0)
-------------------------------------------------------------------------
Cash and temporary
investments, net,
end of period $ 622.2 $ 102.3 $ 622.2 $ 102.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS
Interest (paid) $ (23.1) $ (27.7) $ (339.7) $ (362.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest received $ 2.1 $ 13.7 $ 23.3 $ 15.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income taxes (inclusive of
Investment Tax Credits
received (paid) $ 11.8 $ 38.4 $ 197.4 $ 35.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
Segmented Information
Three months ended
September 30 Communications Mobility
(millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
External revenue $ 1,199.9 $ 1,186.3 $ 747.0 $ 619.9
Inter-segment revenue 24.9 24.6 5.0 4.0
-------------------------------------------------------------------------
Total operating revenue 1,224.8 1,210.9 752.0 623.9
Operations expense 714.2 701.9 428.5 378.4
Restructuring and work-
force reduction costs 16.2 2.3 - -
-------------------------------------------------------------------------
EBITDA(1) $ 494.4 $ 506.7 $ 323.5 $ 245.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 216.4 $ 208.9 $ 103.4 $ 95.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 278.0 $ 297.8 $ 220.1 $ 150.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended
September 30 Eliminations Consolidated
(millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
External revenue $ - $ - $ 1,946.9 $ 1,806.2
Inter-segment revenue (29.9) (28.6) - -
-------------------------------------------------------------------------
Total operating revenue (29.9) (28.6) 1,946.9 1,806.2
Operations expense (29.9) (28.6) 1,112.8 1,051.7
Restructuring and work-
force reduction costs - - 16.2 2.3
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 817.9 $ 752.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 319.8 $ 304.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 498.1 $ 448.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended
September 30 Communications Mobility
(millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
External revenue $ 3,560.0 $ 3,604.0 $ 2,056.3 $ 1,716.4
Inter-segment revenue 72.0 71.4 15.2 11.6
-------------------------------------------------------------------------
Total operating revenue 3,632.0 3,675.4 2,071.5 1,728.0
Operations expense 2,132.7 2,155.7 1,214.0 1,102.6
Restructuring and work-
force reduction costs 32.8 12.1 - -
-------------------------------------------------------------------------
EBITDA(1) $ 1,466.5 $ 1,507.6 $ 857.5 $ 625.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 743.5 $ 589.8 $ 232.1 $ 227.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 723.0 $ 917.8 $ 625.4 $ 397.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended
September 30 Eliminations Consolidated
(millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
External revenue $ - $ - $ 5,616.3 $ 5,320.4
Inter-segment revenue (87.2) (83.0) - -
-------------------------------------------------------------------------
Total operating revenue (87.2) (83.0) 5,616.3 5,320.4
Operations expense (87.2) (83.0) 3,259.5 3,175.3
Restructuring and work-
force reduction costs - - 32.8 12.1
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 2,324.0 $ 2,133.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 975.6 $ 817.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 1,348.4 $ 1,315.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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.
The Company has issued guidance on, and reports, EBITDA because it is
a key measure used by management to evaluate performance of its
business segments and is utilized in measuring compliance with
certain debt covenants.
(2) Total capital expenditures ("CAPEX").
Forward-looking statements
==========================================================================
This document and the management's discussion and analysis contain
statements about expected future events and financial and operating
results of TELUS Corporation (TELUS or the Company) that are
forward-looking. By their nature, forward-looking statements require the
Company to make assumptions and are subject to inherent risks and
uncertainties. There is significant risk that predictions and other
forward-looking statements will not prove to be accurate. Readers are
cautioned not to place undue reliance on forward-looking statements as a
number of factors could cause actual future results, conditions, actions
or events to differ materially from the targets, expectations, estimates
or intentions expressed in the forward-looking statements.
Factors that could cause actual results to differ materially include but
are not limited to: competition; economic fluctuations; financing and
debt requirements; tax matters; dividends; share repurchase
implementation; human resources (including the outcome of outstanding
labour relations issues); technology (including reliance on systems and
information technology); regulatory developments; process risks; health
and safety; strategic partners; litigation; business continuity events
and other risk factors discussed herein and listed from time to time in
TELUS' reports, comprehensive public disclosure documents, including the
Annual Information Form, and in other filings with securities commissions
in Canada (filed on SEDAR at www.sedar.com) and the United States
(filed on EDGAR at www.sec.gov).
For further information, see the Risks and uncertainties section in
TELUS' 2003 annual Management's discussion and analysis, and significant
updates in interim reports for the first, second and third quarters of
2004.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise.
==========================================================================
Management's discussion and analysis - October 26, 2004
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month and nine-month
periods ended September 30, 2004 and 2003, and should be read together with
TELUS' interim consolidated financial statements. This discussion contains
forward-looking information that is qualified by reference to, and should be
read together with, the discussion regarding forward-looking statements above.
TELUS' interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP"),
which differ in certain respects from U.S. GAAP. See Note 20 to the interim
consolidated financial statements for a summary of the principal differences
between Canadian and U.S. GAAP as they relate to TELUS. The interim
consolidated financial statements and Management's discussion and analysis
have been reviewed by TELUS' Audit Committee and approved by TELUS' Board of
Directors. All amounts are in Canadian dollars unless otherwise specified.
The following discussion is comprised of significant updates since
Management's discussion and analysis reported in TELUS' 2003 Annual Report and
in interim reports for the first and second quarters of 2004:
1. Core business, vision and strategy
2. Key performance drivers
3. Capability to deliver results
4. Results
5. Risks and uncertainties
1. Core business, vision and strategy
1.1 Strategic imperatives
TELUS continues to be guided by its six strategic imperatives established
four years ago that serve as a guideline for the Company's actions. Some
recent examples of TELUS' activities in support of these imperatives
follow:
Building national capabilities across data, IP and wireless;
Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy;
Focusing relentlessly on the growth markets of data, IP and wireless
On May 13, 2004, the Company announced its intention to make unsolicited
offers to purchase for cash all of the issued and outstanding Class A
Restricted Voting Shares, Class B Non-Voting Shares, Warrants 2005 and
Warrants 2008 of Microcell Telecommunications Inc. ("Microcell"), which
offers were made May 17, 2004. The offers were extended in June, July and
August, pending outcome of the Competition Bureau's review. On
September 20, 2004, Rogers Wireless Communications Inc. ("Rogers
Wireless") announced an agreement with Microcell to make an all-cash
offer to purchase Microcell shares and warrants, supported by a
recommendation from Microcell's Board. The amount offered by Roger's
Wireless exceeded by 21% the amount offered by TELUS. In addition,
Roger's Wireless had negotiated the right to match any competing bids. On
the same day, TELUS extended its all-cash offers to October 12, 2004, in
order to evaluate the terms and conditions of the rival bid and to
maintain the offers in the event that the Roger's Wireless bid ran into
difficulty.
On October 12, 2004, TELUS announced that it was not extending its offers
to purchase shares and public warrants of Microcell and as a result would
not be taking up shares and public warrants previously deposited. TELUS
also cancelled a commitment for a $500 million credit facility, which was
to be available for general corporate purposes following the completion
of the offers.
TELUS Next Generation Network ("NGN") reached another milestone
Consistent with TELUS' strategy to build national capabilities across
voice, data, IP and wireless, the TELUS Next Generation Network team
achieved another milestone in the migration of long distance voice
traffic from competitors to the NGN, a migration that began in July 2003.
On September 8, 2004, all calls originating in B.C. and Alberta destined
to Ontario, that had previously been transported via the Stentor network,
were successfully migrated to the NGN. In May of 2004, all calls
originating in B.C. and Alberta destined to Quebec, were migrated to NGN.
The migration of calls is another step in the transformation of the TELUS
network to a single ubiquitous Internet Protocol ("IP") network designed
to carry high-quality voice, data and video applications. This should
eventually eliminate the need for separate networks to carry these
applications.
Going to the market as one team, under a common brand, executing a
single strategy
TELUS continues to execute on its commitment to being Canada's premier
corporate citizen by supporting the communities in which employees live
and work. During recent months the Company has announced sponsorships
including Hockey Canada and an eight-year $4 million Alpine Canada Alpin
partnership to boost the national ski organization's goal of again making
Canada a world-leading alpine ski racing country. Also announced was a
$9 million partnership with Science World in Vancouver that will be known
as TELUSphere. The Company also ran in September the TELUS Kits for Kids
program, which puts a backpack full of school supplies in the hands of
kids who need them in numerous communities.
2. Key performance drivers
TELUS is focused on addressing six 2004 corporate priorities to help
drive operational performance. An update on certain priorities follows:
2.1 Reaching a collective agreement
Contract negotiations between TELUS Communications Inc. ("TCI") and the
Telecommunications Workers Union ("TWU") remain at a standstill pending
the resolution of a number of outstanding appeals to the Canada
Industrial Relations Board ("CIRB") and the Federal Court of Appeal.
The parties have filed all the necessary submissions in these cases and
await the CIRB's decisions.
The CIRB reconsideration appeal by TELUS asks that the binding
arbitration order and communication ban be lifted to allow the parties to
resume negotiations towards achieving a new collective agreement covering
some 11,000 unionized employees in Western Canada.
TCI and TELUS Mobility have also appealed CIRB Decision 278, which
declared that TELUS Mobility's non-unionized team members, predominantly
located in Ontario and Quebec, performing work similar to their unionized
Mobility segment counterparts in Alberta and British Columbia, should be
included in the TWU bargaining unit represented by the TWU without a
representational vote. The TCI and TELUS Mobility application to the
Federal Court of Appeal for judicial review of Decision 278 was heard on
October 4-5, 2004. A decision from the Court is pending.
3. Capability to deliver results
3.1 Operational capabilities - TELUS Communications
The Communications segment organization structure was simplified during
the third quarter of 2004, reducing the number of customer-facing
business units from five to four. By early October 2004, the sales,
marketing, solutions development, customer care and shared services of
the two business customer-facing units (one that supported small and
mid-sized customers and one that supported large corporate and government
clients) were integrated. The new Business Solutions unit is expected to
provide improved operational efficiencies through reduced duplication as
well as improved effectiveness. In particular, having one point of
contact will facilitate more effective communication with business
customers. Internally, there will be fewer interfaces with enabling
departments, allowing more effective prioritization of initiatives and
better use of resources.
3.2 Operational capabilities - TELUS Mobility
With the wireless marketplace exhibiting strong growth, TELUS Mobility
has managed best-in-class results in many respects. Focus on customer
care, value-added solutions and superior network quality provides the
customer with an exceptional service experience. With the focus on
profitable wireless growth and operating scale efficiencies, TELUS
Mobility is generating significant EBITDA margins ahead of its peer
group. A significant proportion of every incremental network revenue
dollar earned continues to flow through to EBITDA. TELUS Mobility's
performance in the marketplace and its ability to efficiently provide
value to its customers, have resulted in TELUS Mobility being named the
top ranked wireless operator in North America by N. Moore Capital for the
second time.
3.3 Liquidity and capital resources
TELUS repaid approximately $210 million in debt which matured in August,
reduced the cash proceeds from the sale of securitized accounts
receivable by $150 million and redeemed $72.8 million in Preference and
Preferred shares during the first nine months of 2004. During the same
period, the cash balance increased by $616.0 million to $622.2 million.
TELUS also has access to undrawn credit facilities of $1.6 billion. The
Company believes it has sufficient internally generated cash flow from
operations and access to credit facilities to fund its requirements
including capital expenditures, planned debt repayments, payments under
restructuring programs, dividends and other uses as the need arises. With
the Net Debt to EBITDA ratio of 2.2 times and the Net debt to total
capitalization ratio of 49.7% at September 30, 2004, TELUS has achieved
ahead of schedule, not only its previous 2004 year-end guidance for Net
debt to EBITDA of 2.3 times or less, but also the long-term targets of
2.2 times or less for Net debt to EBITDA and 45 to 50% for Net debt to
total capitalization.
The Board of Directors declared a quarterly dividend of twenty cents
($0.20) per share on the outstanding Common Shares and Non-Voting Shares
of TELUS - an increase of one-third from the fifteen cents declared last
quarter. In addition, on October 29, 2004, TELUS is announcing that it
has received approval from its Board of Directors to make a Normal Course
Issuer Bid for the repurchase of up to 25.5 million in total of its
Common Shares and Non-Voting Shares, subject to obtaining all necessary
regulatory approvals. Refer to the discussion following the Liquidity and
capital resource measures table in section 4.6 Liquidity and Capital
Resources.
4. Results
4.1 Critical accounting estimates
---------------------------------
The Company's critical accounting estimates are discussed in
the Company's 2003 annual Management's discussion and analysis. The
preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
4.2 Accounting policy developments
----------------------------------
Share-based compensation (Note 2(a) of the interim consolidated
financial statements)
Commencing with the Company's 2004 fiscal year, the amended
recommendations of the CICA for accounting for share-based compensation
(such amendments arising in 2003) (CICA Handbook Section 3870) apply to
the Company. The Company has selected the modified-prospective
transition method (also referred to as the retroactive application
without restatement method), implemented effective January 1, 2004. To
reflect the fair value of options granted subsequent to 2001, and vesting
prior to 2004, certain components of common equity in the
December 31, 2003, Consolidated Balance Sheet balances have been
restated.
Equity settled obligations (Note 2(b) of the interim consolidated
financial statements)
Commencing with the Company's 2004 fiscal year, the Company early adopted
the amended recommendations of the CICA for the presentation and
disclosures of financial instruments (CICA Handbook Section 3860)
specifically concerning the classification of obligations that an issuer
can settle with its own equity instruments (such amendments arising in
2003). The amendments result in the Company's convertible debentures
being classified as a liability on the consolidated balance sheets
(previously classified as a component of equity) and the associated
interest expense correspondingly being classified with financing costs on
the consolidated statements of income (previously recorded net of income
taxes as an adjustment to retained earnings). The conversion option
embedded in the convertible debentures continues to be presented as a
component of shareholders' equity. As required, these amended
recommendations have been applied retroactively. As a result of the
reclassification of convertible debentures, minor changes were effected
in historical Net debt to EBITDA ratios, and historical Net debt to total
capitalization ratios. The reclassification of the associated interest
expense also resulted in minor changes in historical EBITDA interest
coverage ratios.
4.3 Materiality for disclosure
------------------------------
Management determines whether or not information is "material" based on
whether it believes a reasonable investor's decision to buy, sell or hold
securities in the Company would likely be influenced or changed if the
information were omitted or misstated.
4.4 Quarterly results summary
-----------------------------
($ in millions, except per
share amounts) 2004 Q3 2004 Q2 2004 Q1
-------------------------------------------------------
Segmented revenue (external)
TELUS Communications segment 1,199.9 1,189.0 1,171.1
TELUS Mobility segment 747.0 676.6 632.7
------- ------- -------
Operating revenues
(consolidated) 1,946.9 1,865.6 1,803.8
Restructuring and workforce
reduction costs 16.2 0.7 15.9
Net income (loss) 156.6 172.3 101.3
Per weighted average Common
Share and Non-Voting Share
outstanding
- basic 0.44 0.48 0.28
- diluted 0.43 0.48 0.28
Dividends declared per Common
Share and Non-Voting Share
outstanding 0.15 0.15 0.15
-------------------------------------------------------
($ in millions, except per
share amounts) 2003 Q4 2003 Q3 2003 Q2 2003 Q1 2002 Q4
-------------------------------------------------------------------------
Segmented revenue (external)
TELUS Communications segment 1,182.4 1,186.3 1,209.2 1,208.5 1,244.2
TELUS Mobility segment 643.2 619.9 564.1 532.4 550.2
------- ------- ------- ------- -------
Operating revenues
(consolidated) 1,825.6 1,806.2 1,773.3 1,740.9 1,794.4
Restructuring and workforce
reduction costs 16.2 2.3 3.3 6.5 241.0
Net income (loss) 47.8 114.1 73.0 89.5 (140.9)
Per weighted average Common
Share and Non-Voting Share
outstanding
- basic 0.13 0.32 0.21 0.26 (0.41)
- diluted 0.13 0.32 0.21 0.26 (0.41)
Dividends declared per Common
Share and Non-Voting Share
outstanding 0.15 0.15 0.15 0.15 0.15
-------------------------------------------------------------------------
The trend in Operating revenues continued to reflect growing TELUS
Mobility segment revenues resulting from subscriber growth and increasing
average revenue per subscriber unit ("ARPU"). For two consecutive
quarters, Communications Segment revenues increased sequentially, as a
result of traction gained from new contracts. Communications segment
revenues also increased in the third quarter of 2004, when compared to
the same period in 2003 due to growth in data revenues. Partially
offsetting recent data revenue growth were decreasing voice local, long
distance, and equipment sales revenues, consistent with the Canadian
wireline industry. Communications segment revenues include the impacts of
regulatory price cap decisions.
Restructuring charges in 2002 and 2003 were recorded primarily as a
result of the Communications segment Operational Efficiency Program,
which contributed to improved operating profitability in 2003 and 2004.
Restructuring charges in 2004 were also for Communications segment
restructuring activities, including the consolidation of two
customer-facing business units in the third quarter of 2004. Net income
and earnings per share reflect improved wireline and wireless operating
profitability, as well as decreasing financing costs.
For five of the periods shown above, Net income and earnings per share
included significant favourable impacts for the settlement of tax matters
(including investment tax credits and related interest) and tax losses
carried back to prior years, as shown in the table below:
($ in millions, except
per share amounts) 2004 2004 2004 2003 2003 2003 2003 2002
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Approximate Net income
impact - 45 13 - 19 - 53 18
Approximate per share
impact - 0.13 0.04 - 0.05 - 0.15 0.05
-------------------------------------------------------------------------
4.5 Results of operations
-------------------------
-------------------------------------------------------------------------
Consolidated highlights
Quarters ended Nine-month periods
($ in millions September 30 ended Sept. 30
except per share
amounts) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Operating revenues 1,946.9 1,806.2 7.8 % 5,616.3 5,320.4 5.6 %
EBITDA(1) 817.9 752.2 8.7 % 2,324.0 2,133.0 9.0 %
Net income 156.6 114.1 37.2 % 430.2 276.6 55.5 %
Earnings per share,
basic 0.44 0.32 37.5 % 1.20 0.79 51.9 %
Earnings per share,
diluted 0.43 0.32 34.4 % 1.19 0.78 52.6 %
Cash dividends
declared per share 0.15 0.15 - 0.45 0.45 -
Cash provided by
operating
activities 847.2 849.7 (0.3)% 1,924.3 1,724.0 11.6 %
Capital expenditures 319.8 304.0 5.2 % 975.6 817.3 19.4 %
Free cash flow(2) 502.6 440.3 14.1 % 1,175.4 773.4 52.0 %
-------------------------------------------------------------------------
Non-GAAP measures used by management to evaluate performance of business
units and segments
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) is calculated as:
Quarters ended Nine-months ended
Sept. 30 Sept. 30
2004 2003 2004 2003
--------------------------------------------------------------------
Operating revenues 1,946.9 1,806.2 5,616.3 5,320.4
Less: Operations expense 1,112.8 1,051.7 3,259.5 3,175.3
Less: Restructuring and
workforce reduction costs 16.2 2.3 32.8 12.1
--------------------------------------------------------------------
EBITDA 817.9 752.2 2,324.0 2,133.0
--------------------------------------------------------------------
The Company has issued guidance on and reports EBITDA because it is a
key measure used by management to evaluate performance of business
units and it is utilized in measuring compliance with debt covenants.
The Company also believes EBITDA is a measure commonly reported and
widely used by investors as an indicator of a company's operating
performance and ability to incur and service debt. The Company
believes EBITDA assists investors in comparing a company's
performance on a consistent basis without regard to depreciation and
amortization, which are non-cash in nature and can vary significantly
depending upon accounting methods or non-operating factors such as
historical cost. EBITDA is not a calculation based on Canadian or
U.S. GAAP and should not be considered an alternative to Operating
income or Net income in measuring the Company's performance or used
as an exclusive measure of cash flow because it does not consider the
impact of working capital growth, capital expenditures, debt
principal reductions and other sources and uses of cash, which are
disclosed in the consolidated statements of cash flows. Investors
should carefully consider the specific items included in TELUS'
computation of EBITDA. While EBITDA has been disclosed herein to
permit a more complete comparative analysis of the Company's
operating performance and debt servicing ability relative to other
companies, investors should be cautioned that EBITDA as reported by
TELUS may not be comparable in all instances to EBITDA as reported by
other companies.
(2) The following shows the calculation of Free cash Flow and reconciles
EBITDA and Free cash flow with Cash provided by operating activities:
Quarters ended Nine-months ended
Sept. 30 Sept. 30
2004 2003 2004 2003
--------------------------------------------------------------------
EBITDA 817.9 752.2 2,324.0 2,133.0
Restructuring and workforce
reduction costs, net of cash
payments 6.4 (29.8) (55.1) (221.5)
Share-based compensation 7.3 - 17.9 -
Cash interest paid (23.1) (27.7) (339.7) (362.5)
Cash interest received 2.1 13.7 23.3 15.0
Income taxes received (paid) 11.8 38.4 197.4 35.1
Capital expenditures (capex) (319.8) (304.0) (975.6) (817.3)
Investment tax credits received
(reported in current or prior
EBITDA or capex, and in Income
taxes received (paid)) - (2.5) (16.8) (8.4)
--------------------------------------------------------------------
Free cash flow 502.6 440.3 1,175.4 773.4
Add back capital expenditures 319.8 304.0 975.6 817.3
Net employee defined benefit
plans expense (credit) 4.9 13.2 14.7 39.5
Employer contributions to
employee defined benefit plans (25.8) (33.9) (112.3) (69.9)
Other net operating activities (3.9) 2.6 13.7 37.5
Non-cash working capital changes
except changes in taxes and
interest 49.6 123.5 (142.8) 126.2
--------------------------------------------------------------------
Cash provided by operating
activities 847.2 849.7 1,924.3 1,724.0
--------------------------------------------------------------------
Free cash flow excludes certain working capital changes, and other
sources and uses of cash, which are disclosed in the consolidated
statements of cash flows. Free cash flow is not a calculation based
on Canadian or U.S. GAAP and should not be considered an alternative
to consolidated statements of cash flows. Free cash flow is a measure
that can be used to gauge TELUS' performance over time. Investors
should be cautioned that Free cash flow as reported by TELUS may not
be comparable in all instances to Free cash flow as reported by other
companies. While the closest GAAP measure is Cash provided by
operating activities, Free cash flow is relevant because it provides
an indication of how much cash is available before changes in working
capital (such as trade payables, and trade receivables, which can be
significantly distorted by securitization changes that do not reflect
operating results) and after funding capital expenditures.
-------------------------------------------------------------------------
Consolidated Operating revenue and EBITDA increased significantly in the
third quarter of 2004, when compared with the same period in 2003,
primarily as a result of 20.5% growth in TELUS Mobility total Operating
revenue, with a corresponding increase of only 13.2% in TELUS Mobility
Operations expense. The strong third quarter operating profitability
improvement included a significant cost of acquisition expense related to
a 21.2% increase in TELUS Mobility gross subscriber additions. TELUS'
Communications segment experienced a 1.1% increase in Operating revenue,
while its Operations expense increased by 1.8%. Restructuring charges
increased by $13.9 million primarily for consolidation of two
customer-facing business units in the Communications segment.
Consolidated Financing costs increased by $19.3 million in the third
quarter of 2004, when compared with the same period in 2003. The increase
was primarily due to lower interest income, which decreased by
$27.9 million, partly offset by a lower interest expense for long-term
and short-term debt. Income before taxes and non-controlling interest
increased by $56.8 million to $254.9 million in the third quarter of 2004
as compared with the third quarter of 2003, as a result of improved
operating profitability.
Basic earnings per share increased by 12 cents and diluted earnings
per share increased by 11 cents in the third quarter of 2004, as compared
with the same period last year as a result of higher Net income, partly
offset by a larger number of shares outstanding.
Cash provided by operating activities was flat in the third quarter of
2004, when compared with the third quarter of 2003, as higher EBITDA was
offset by changes in working capital. Free cash flow increased primarily
due to higher cash from operating activities and lower restructuring
payments, partly offset by lower interest and income taxes received and
higher capital expenditures.
The following discussion for Operating revenues, Operations expense,
Restructuring and workforce reduction costs, EBITDA and Capital
expenditures is presented on a segmented basis. All other discussion is
presented for the consolidated financial results.
Operating revenues - Quarters ended Nine-month periods
Communications September 30 ended Sept. 30
segment
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Voice local 538.3 542.9 (0.8)% 1,611.0 1,623.0 (0.7)%
Voice long
distance 233.5 238.5 (2.1)% 691.6 728.8 (5.1)%
Data 358.1 331.9 7.9 % 1,043.6 1,027.1 1.6 %
Other 70.0 73.0 (4.1)% 213.8 225.1 (5.0)%
-------------------------------------------------------------------------
External operating
revenue 1,199.9 1,186.3 1.1 % 3,560.0 3,604.0 (1.2)%
Intersegment
revenue 24.9 24.6 1.2 % 72.0 71.4 0.8 %
-------------------------------------------------------------------------
Total operating
revenue 1,224.8 1,210.9 1.1 % 3,632.0 3,675.4 (1.2)%
-------------------------------------------------------------------------
Key operating indicators - Communications segment
At September 30
(000s) 2004 2003 Change
----------------------------
Residential network
access lines 1,759 1,784 (1.4)%
Business network
access lines 3,058 3,099 (1.3)%
--------------------------
Total network
access lines(1) 4,817 4,883 (1.4)%
High-speed Internet
subscribers 654.9 516.0 26.9 %
Dial-up Internet
subscribers 292.7 333.7 (12.3)%
--------------------------
Total Internet
subscribers (2) 947.6 849.7 11.5 %
Quarters ended Nine-month periods
September 30 ended Sept. 30
(000s) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------
Change in
residential
network access
lines 5 3 (28) (23)
Change in business
network access
lines (15) (7) (21) (5)
------- ------- ------- -------
Change in total
network access
lines (10) (4) (150.0)% (49) (28) (75.0)%
High-speed
Internet net
additions 30.6 47.2 (35.2)% 93.3 106.0 (12.0)%
Dial-up Internet
net reductions (8.0) (18.1) 55.8 % (27.1) (58.0) 53.3 %
------- ------- ------- ------- ------- -------
Total Internet
subscriber net
additions 22.6 29.1 (22.3)% 66.2 48.0 37.9 %
-------------------------------------------------------------------------
(1) Network access lines are measured at the end of the reporting period
based on information in billing and other systems.
(2) Internet subscribers are measured at the end of the reporting period
based on Internet access counts from billing and other systems.
- Relative to a general industry trend of declining traditional
revenues, the Communications segment performed well due to slowing of
the rate of long distance revenue erosion and improving data service
revenues. Voice local revenue decreased slightly in the third quarter
and first nine months of 2004, when compared with the same periods in
2003. Local revenue for the first nine months of 2004 includes a
positive adjustment of $10.2 million recorded in the second quarter
of 2004 for CRTC Decision 2004-42. In the decision TELUS was allowed
to recover costs to support local number portability and local
competition capital investments for the period June 2002 to May 2004.
Excluding this adjustment, the local service decrease was primarily
as a result of fewer access lines, partly offset by implementation of
approved rate increases for business single and multi-line services
effective June 1, 2004. Interconnection revenue was flat in the third
quarter of 2004 as a result of reduced interconnection tariffs, but
increased modestly for the first nine months of 2004, when compared
with the same periods in 2003. Enhanced service revenues were
relatively unchanged in the third quarter and first nine months of
2004, when compared to the same periods in 2003.
Residential network access lines increased during the third quarters
of 2004 and 2003, as a result of normal seasonal changes when students
return to universities and colleges. Year-over-year, and for the first
nine months of 2004, residential network access lines continued to
decrease as a result of competitive activity and technological
substitution, including substitution to wireless services. Business
lines decreased primarily as a result of incumbent local exchange
carrier ("ILEC") Centrex line losses to competition and migration to
more efficient ISDN data services. Consistent with the general
industry experience, it is expected that the trend of declining
network access lines will continue.
- Voice long distance revenue continued to decrease, but the rate of
decline in the third quarter of 2004 was the lowest since the first
quarter of 2001. This was primarily a result of increased wholesale
revenues. For the first nine months of 2004, long distance revenue
decreased at a rate similar to the negative 5.4% observed for the
full year of 2003. The decreases for the third quarter and first nine
months were primarily a result of fewer consumer minutes, price
competition, and technological substitution, partly offset by a $1
increase this quarter in certain monthly long distance plan
administrative charges, effective June 2004, as well as increased
business and wholesale long distance minute volumes. Price
competition and substitution to alternative technologies are expected
to continue.
- Communications segment data revenue increased by 7.9% in the third
quarter of 2004, when compared to the third quarter of 2003, even
though the third quarter of 2003 included a small amount of revenues
from divested assets. Data revenues increased by $33.1 million or
3.3% for the first nine months of 2004, when normalized for the
disposal of assets in 2003. The revenues associated with disposal of
application development assets in 2003 that do not recur in the third
quarter and first nine months of 2004 were $3.0 million and
$16.7 million, respectively.
Internet and enhanced data service revenues increased by $18.4 million
and $35.9 million, respectively, for the third quarter and first nine
months of 2004, when compared with the same periods in 2003, primarily
as a result of the 26.9% increase in the high-speed Internet
subscriber base over the last 12 months, partly offset by the 12.3%
reduction in dial-up subscribers over the last 12 months. The decrease
in dial-up subscribers has slowed in 2004, and is attributed mainly to
a slower rate of conversion to high-speed Internet. Managed workplace
revenues were flat and increased by $21.5 million, respectively, due
to providing higher functional outsourcing services to TELUS'
customers. Other data services revenue increased by $7.5 million in
the third quarter of 2004, when compared with the same period in 2003,
as a result of an increase in equipment sales. Other data services
revenue decreased by $24.3 million for the first nine months of 2004,
due mainly to lower equipment sales.
- Other revenue decreased in the third quarter and first nine months of
2004, when compared with the same periods in 2003, primarily as a
result of lower voice equipment sales, lower late payment fees and
the conclusion in the first quarter of 2004 of recognition of
deferred individual line service grant revenues. The annual impact of
the conclusion of individual line service grants will be lower
revenues of $6.7 million in 2004, when compared with 2003. Individual
line service grants were provided in respect of the conversion of
multi-party lines to single lines in high cost rural areas in Alberta
in the early 1990s.
- Intersegment revenues represent services provided by the
Communications segment to the Mobility segment. These revenues are
eliminated upon consolidation together with the associated expense in
TELUS Mobility.
Total external operating revenue discussed above included Non-ILEC
revenues of $145.3 million and $404.3 million, respectively, for the third
quarter and first nine months of 2004, as compared with $138.4 million and
$417.7 million for the same periods in 2003. This represents an increase of
$6.9 million or 5.0% for the third quarter of 2004, and a decrease of
$13.4 million or 3.2% for the first nine months 2004. Normalized for asset
disposals, Non-ILEC revenues for the nine months of 2004 increased by
$3.0 million or 0.7%, respectively. The increase was primarily due to a shift
toward recurring longer-term revenues and a number of large contracts, which
were signed in 2003 and are being implemented in 2004, and to higher long
distance traffic volume. Although equipment sales increased in the third
quarter of 2004, when compared with the third quarter of 2003, equipment sales
for the first nine months of 2004 were significantly lower than the first nine
months of 2003.
Operating revenues - Quarters ended Nine-month periods
Mobility segment September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Network revenue 686.0 577.4 18.8 % 1,903.9 1,595.9 19.3 %
Equipment revenue 61.0 42.5 43.5 % 152.4 120.5 26.5 %
-------------------------------------------------------------------------
External operating
revenue 747.0 619.9 20.5 % 2,056.3 1,716.4 19.8 %
Intersegment
revenue 5.0 4.0 25.0 % 15.2 11.6 31.0 %
-------------------------------------------------------------------------
Total operating
revenue 752.0 623.9 20.5 % 2,071.5 1,728.0 19.9 %
-------------------------------------------------------------------------
Key operating indicators - Mobility segment
-------------------------------------------------------------------------
(000s) At September 30
2004 2003 Change
---------------------------
Subscribers
- postpaid 3,095.5 2,691.4 15.0 %
Subscribers
- prepaid 654.5 574.2 14.0 %
-------- -------- -------
Subscribers
- total(1) 3,750.0 3,265.6 14.8 %
Digital POPs(2)
covered including
roaming/resale
(millions)(3) 29.7 29.0 2.4 %
---------------------------
Quarters ended Nine-month periods
September 30 ended Sept. 30
(000s) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------
Subscriber net
additions
- postpaid 115.4 76.4 51.0 % 283.7 200.8 41.3 %
Subscriber net
additions
- prepaid 20.8 24.2 (14.0)% 42.3 69.3 (39.0)%
-------- ------ -------- ------- ------- --------
Subscriber net
additions
- total 136.2 100.6 35.4 % 326.0 270.1 20.7 %
Churn, per month
(%)(4a) 1.34 1.38 - 1.38 1.40 -
COA(4b) per gross
subscriber
addition ($)(4c) 374 406 (7.9)% 379 420 (9.8)%
ARPU ($)(4d) 62 60 3.3 % 59 57 3.5 %
Average minutes of
use per subscriber
per month ("MOU") 393 367 7.1 % 382 342 11.7 %
EBITDA to network
revenue (%) 47.2 42.5 4.7 pts 45.0 39.2 5.8 pts
Retention spend
to network
revenue(4e) (%) 4.1 3.9 0.2 pts 4.6 4.0 0.6 pts
EBITDA excluding COA
($ millions)(4f) 429.6 340.6 26.1 % 1,148.9 904.0 27.1 %
-------------------------------------------------------------------------
pts - percentage points
(1) Subscribers are measured at the end of the reporting period based on
information from billing and other systems.
(2) POPs is an acronym for population. A POP refers to one person living
in a population area, which in whole or substantial part is included
in the coverage areas.
(3) At September 30, 2004, TELUS Mobility PCS digital population coverage
was 22.4 million and 29.7 million including the roaming/resale
agreements principally with Bell Mobility and Aliant Telecom
Wireless. TELUS Mobility has not activated all digital-roaming areas.
(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
subscriber units on the network, expressed as a rate per month.
Prepaid subscribers are deactivated when the subscriber has no
usage for 90 days following expiry of the prepaid card.
(b) Cost of acquisition (COA) consists of the total of handset
subsidies, commissions, and advertising and promotion expenses
related to the initial customer acquisition during a given
period. As defined, COA excludes costs to retain existing
subscribers (Retention spend).
(c) COA per gross subscriber addition is COA divided by gross
subscriber activations during the period.
(d) ARPU is calculated as Network revenue divided by the average
number of subscriber units on the network during the period,
expressed as a rate per month.
(e) Retention Spend to Network revenue represents direct costs
associated with Marketing and promotional efforts aimed at the
retention of the existing subscriber base, divided by Network
revenue.
(f) EBITDA excluding COA is a measure for operational profitability
normalized for the period costs of adding new customers.
-------------------------------------------------------------------------
- TELUS Mobility Network revenue is generated from monthly billings for
access fees, incremental airtime charges, prepaid time consumed or
expired, wireless Internet services and fees for value-added
services. Network revenue increased 18.8% for the quarter ended
September 30, 2004 and 19.3% for the first nine months of 2004 as
compared with the same periods in 2003. This growth was a result of
the continued expansion of the subscriber base by 14.8% to
approximately 3.75 million subscribers combined with increased ARPU.
As a result of an overall 7.1% increase in average minutes of use
("MOU") per subscriber per month, pricing discipline, and increased
usage of data and Internet based products, including picture and text
messaging, ARPU increased to $62 in the third quarter of 2004 as
compared with $60 in 2003, representing a seventh successive quarter
of year over year increases.
Average minutes of use per subscriber per month increased in the third
quarter and first nine months of 2004 as shown in the table above. At
September 30, 2004, postpaid subscribers represented 82.5% of the
total cumulative subscriber base unchanged from one-year earlier,
contributing to the significant ARPU premium TELUS Mobility enjoys
over its competitors. Postpaid subscriber net additions of 115,400
for the third quarter of 2004 represented 84.7% of all net additions
as compared with 76,400 (75.9%) for the corresponding period in 2003.
This represents a significant increase of 51.0% in the post-paid
subscriber net additions when compared to the previous year.
Similarly, postpaid subscriber net additions of 283,700 for the first
nine months of 2004 represented 87.0% of total net additions as
compared with 74.3% for the same period in 2003. This was the fifth
consecutive quarter of year over year positive net postpaid subscriber
growth. Moreover, total subscriber net additions of 136,200
represented a record for all third quarters reported and improved by
35.4% over the same quarter in 2003.
Blended postpaid and prepaid churn improved slightly to 1.34% in the
third quarter of 2004 when compared with the same quarter in 2003.
Deactivations were 147,600 and 442,600 for the third quarter and first
nine months of 2004, respectively, as compared with 133,500 and
393,900 for the same periods last year. The improved churn rates in
the face of increased deactivations were notable accomplishments in a
market characterized by vigorous competition. These churn and
deactivation results reflect a high level of client satisfaction,
which can be attributed to improved network quality and coverage,
excellent client service levels, client contracts for one to three
years as part of loyalty and retention programs and specific
grandfathered rate plans.
- Equipment sales, rental and service revenue increased in the third
quarter and first nine months of 2004 as compared to the corresponding
periods in 2003. Handset revenue increased mainly due to subscriber
growth brought about by a stronger wireless market, increased
promotional, retention and contracting activity, and to a lesser
extent, a shift in product mix to higher price handsets. Gross
subscriber additions grew to 283,800 for the third quarter and 768,600
for the first nine months of 2004 as compared to 234,100 and 664,000
for the same periods in 2003. Handset revenues associated with gross
subscriber activations are included in COA.
- Intersegment revenues represent services provided by the Mobility
segment to the Communications segment and are eliminated upon
consolidation along with the associated expense in TELUS
Communications.
Operations expense - Quarters ended Nine-month periods
Communications September 30 ended Sept. 30
segment
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Salaries, benefits
and other employee-
related costs 412.4 396.2 4.1 % 1,220.2 1,214.8 0.4 %
Other operations
expenses 301.8 305.7 (1.3)% 912.5 940.9 (3.0)%
-------------------------------------------------------------------------
Total operations
expense 714.2 701.9 1.8 % 2,132.7 2,155.7 (1.1)%
-------------------------------------------------------------------------
Full-time
equivalent
employees, end of
period 18,857 18,937 (0.4)%
---------------------------------------------
Communications segment Total operations expense changed slightly in the
third quarter of 2004 and first nine months of 2004, when compared with
the same periods in 2003. The increase in salaries, benefits and related
costs was primarily the result of inflationary increases and costs
relating to assurance of a higher level of service, partly offset by a
lower pension expense and Operational Efficiency Program savings. The
decrease in Other operations expense was due mainly to lower facility
costs, partly offset by increased network support and maintenance costs
with third parties. Full-time equivalent employees at the end of
September 2004 included 528 staff for in-sourcing call centre services in
Montreal and a partnership with Calgary Health Region.
- Salaries, benefits and employee-related expenses increased in the
third quarter and first nine months of 2004, when compared with the
same periods in 2003. Costs associated with temporary staff,
overtime, training and travel increased by $2.4 million in the third
quarter and increased by $27.9 million for the first nine months of
2004, when compared with the same periods in 2003. The increase in
temporary staffing, overtime, training and travel was related to
activities to maintain high customer service levels, improve internal
processes, emergency operations training, and an increased focus on
leadership training and team development. Temporary staff, overtime,
training and travel costs decreased by $8.0 million when compared
with the fourth quarter of 2003, when extra effort was expended to
improve customer service and clear backlogs created in the third
quarter of 2003 by a number of natural disasters, staffing and system
conversion issues.
Additional costs for the new partnership with the Calgary Health
Region and establishment of the new Montreal call centre were
$6.2 million and $19.0 million, respectively, in the third quarter
and first nine months of 2004. These increased costs were partly
offset by savings on outsourcing of approximately $2.5 million and
$6.3 million, respectively, which are included in Other operations
expense. Non-cash share-based compensation expense recognized
commencing January 1, 2004, as discussed in Accounting policy
developments, was $6.9 million in the third quarter of 2004 and
$16.8 million during the first nine months of 2004 ($nil in 2003).
Partly offsetting the increases noted above were savings from the
Operational Efficiency Program (duration 2001 to 2003) of
approximately $11.0 million and $49.0 million for the third quarter
and first nine months of 2004. Pension expense for defined benefit
and defined contribution plans decreased by $4.5 million and $17.7
million, respectively for the third quarter and first nine months,
primarily as a result of increased investment returns. TELUS'
Communications segment annual pension expense is expected to decrease
by approximately $30 million for 2004, when compared with 2003. All
other costs collectively increased in line with inflation rates.
- Other operations expenses were inclusive of additional Operational
Efficiency Program savings of approximately $4 million in the third
quarter and $16 million year-to-date. Other operations expenses
decreased in the third quarter and first nine months of 2004, when
compared with the same periods in 2003, principally due to: (i)
reduced facilities, transit and termination costs, which decreased by
$6.3 million and $38.7 million, respectively, as a result of lower
rates for domestic, U.S. and international traffic termination, as
well as migration to the NGN, partially offset by higher outbound
traffic volumes; (ii) lower bad debt expense that decreased by
$2.4 million and $9.4 million, respectively, as a result of stringent
enforcement of credit policy, more effective collection practices and
reduced loss experience; (iii) decreased contract and consulting
costs of $6.8 million for the third quarter; and (iv) increased
capitalized labour of $5.7 million and $7.6 million, respectively,
related to higher capital expenditure activity. Product and services
cost of sales increased by $4.9 million and decreased by
$3.2 million, respectively, associated with higher equipment sales
for the quarter and lower equipment sales year-to-date. Partially
offsetting lower costs were increased network support and maintenance
costs with third parties of $7.3 million and $19.7 million,
respectively. Advertising and promotion costs increased by
$2.8 million and $5.8 million, respectively, due mainly to the
"premier corporate citizen campaign" and additional sponsorship
costs.
Included in the total segment expenses discussed above are Non-ILEC
operations expenses of $148.3 million and $430.2 million, respectively,
for the third quarter and first nine months of 2004, as compared with
$144.4 million and $444.3 million, respectively, for the same periods in
2003. Normalized for asset disposals, Non-ILEC operations expenses
decreased by $3.8 million or 0.8% in the first nine months of 2004, when
compared with the same periods in 2003. Operations expenses increased in
the third quarter of 2004, when compared with the same period in 2003,
due primarily to increased salaries and benefits, increased transit and
termination costs for higher outbound international and U.S. traffic
volumes, and increased cost of sales associated with higher equipment
sales. Salaries and benefits increased due the requirement for additional
resources in support of growing recurring revenues. Normalized operations
expense decreased for the first nine months of 2004, when compared with
the same period in 2003, primarily due to lower costs of sales associated
with lower equipment sales, migration to NGN and a lower bad debt
expense, partly offset by increased salaries and benefits, and increased
wholesale transit and termination costs for higher outbound international
and U.S. traffic volumes.
Operations expense - Quarters ended Nine-month periods
Mobility segment September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Equipment sales
expenses 111.2 86.4 28.7 % 299.6 259.2 15.6 %
Network operating
expenses 104.3 97.9 6.5 % 301.2 274.7 9.6 %
Marketing expenses 78.4 67.2 16.7 % 213.2 188.3 13.2 %
General and
administration
expenses 134.6 126.9 6.1 % 400.0 380.4 5.2 %
-------------------------------------------------------------------------
Total operations
expense 428.5 378.4 13.2 % 1,214.0 1,102.6 10.1 %
-------------------------------------------------------------------------
Full-time equivalent
employees, end of
period 5,681 5,175 9.8 %
---------------------------------------------
TELUS Mobility operations expense increased in the third quarter and
first nine months of 2004, when compared with the same periods last year.
TELUS Mobility has been able to achieve significant economies of scale as
evidenced by the 14.8% growth in subscribers compared to third quarter
Network revenue growth of 18.8% and a 13.2% increase in total operations
expense.
- Expenses related to equipment sales increased in the third quarter and
first nine months of 2004 when compared with the same periods in
2003, principally due to an increase in gross subscriber activations,
more expensive handset costs and higher retention activity. The
increase related in part to continued marketing promotions including
camera phones. Handset costs associated with gross subscriber
activations are included in COA.
- Network operating expenses consist of site-related expenses,
transmission costs, spectrum licence fees, contribution revenue
taxes, and other direct costs related to network operations.
Transmission and site-related expenses increased to support the
greater number of cell sites, a larger subscriber base, and improved
network quality and coverage. In addition, Industry Canada spectrum
licence fees were higher in 2004 principally due to a $0.8 million
and $7.3 million credit received in third quarter and first nine
months of 2003, respectively as part of a retroactive filing with
Industry Canada for years prior to 2003. Network costs, once
normalized for this event, increased by 5.7% and 6.8% over the same
periods last year. Further, Network roaming costs increased
$2.8 million in the third quarter and $12.3 million for the first
nine months of 2004 as compared to the same periods in 2003 largely
due to successful marketing efforts in non-urban roaming/resale
areas. TELUS Mobility believes this variable cost increase is
reflective of the overall positive industry trend of subscriber
growth and increased subscriber usage evidenced in the ongoing
strength of Network revenue growth. TELUS Mobility also continued to
build out microwave facilities aimed at reducing future leased line
transmission costs. The digital population coverage grew to
29.7 million at September 30, 2004, as a result of continued
activation of digital roaming regions and network expansion.
- Marketing expenses increased primarily due to higher dealer
compensation costs and advertising expenses associated with the
expanded subscriber base and increased re-contracting activity.
Despite the higher marketing expenses and significant subscriber
growth, COA per gross subscriber addition improved by 7.9% in the
third quarter to $374 and improved by 9.8% to $379 in first nine
months as compared with the same periods last year. Combined with the
higher ARPU and improved churn, COA per gross subscriber addition
over the lifetime revenue of the subscriber improved significantly in
the third quarter and first nine months of 2004 as compared with 2003.
- General and administration expenses consist of employee compensation
and benefits, facilities, client services, bad debt and various other
expenses. General and administration expenses increased by only 6.1%
in the third quarter and 5.2% for the first nine months of 2004.
TELUS Mobility increased full-time equivalent employees to support
the significant growth in the subscriber base and continued expansion
of the client care team and company-owned retail stores, partly
offset by a lower bad debt expense due to reduced loss experience.
Restructuring and Quarters ended Nine-month periods
workforce reduction September 30 ended Sept. 30
costs by segment
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications
segment 16.2 2.3 NM 32.8 12.1 171.1 %
Mobility segment - - - - - -
-------------------------------------------------------------------------
TELUS consolidated 16.2 2.3 NM 32.8 12.1 171.1 %
-------------------------------------------------------------------------
NM - not meaningful
Restructuring costs for the third quarter of 2004 were Communications
segment initiatives primarily related to the consolidation of the
Business Solutions and Client Solutions business units. The amount
recorded for the first nine months of 2004 include the following
activities in the Communications segment:
- A departmental reorganization was initiated, primarily in the
information technology resources area, consolidating from 15 locations
to 2 primary locations. This reorganization, which has an estimated
implementation cost in 2004 of approximately $13 million and is
planned for completion in 2004, is expected to enable greater
efficiencies of scale and effectiveness of program delivery. At
September 30, 2004, approximately $12 million of these costs have been
recorded.
- A departmental reorganization was initiated with the merging of two
customer-facing business units. The resulting integration and
consolidation aimed to improve the Company's competitiveness as well
as its operating and capital productivity. This reorganization has an
estimated implementation cost in 2004 of approximately $21 million and
is planned for completion in 2004. At September 30, 2004,
approximately $13 million of these costs have been recorded.
- In addition to the foregoing initiatives, the Company has undertaken
additional activities in 2004 aimed at improving its operating and
capital productivity and competitiveness. These additional activities
have an estimated cost in 2004 of $16 million. At September 30, 2004,
approximately $8 million of these costs have been recorded.
No future costs are expected to be recorded under the 2001 to 2003
Operational Efficiency Program, but variances from estimates currently
recorded may impact amounts ultimately recorded. Cumulative annual cost
structure reductions in the Communications segment under Operational
Efficiency Program were approximately $519 million by September 30, 2004.
The cumulative savings under this program are currently expected to be
between $530 million and $535 million at the end of 2004, or over 96% of
the $550 million target set in mid-2002.
EBITDA by segment Quarters ended Nine-month periods
September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications
segment 494.4 506.7 (2.4)% 1,466.5 1,507.6 (2.7)%
Mobility segment 323.5 245.5 31.8 % 857.5 625.4 37.1 %
-------------------------------------------------------------------------
TELUS consolidated 817.9 752.2 8.7 % 2,324.0 2,133.0 9.0 %
-------------------------------------------------------------------------
EBITDA margin(1) Quarters ended Nine-month periods
by segment September 30 ended Sept. 30
(%) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications
segment 40.4 41.8 (1.4)pts 40.4 41.0 (0.6)pts
Mobility segment 43.0 39.3 3.7 pts 41.4 36.2 5.2 pts
TELUS consolidated 42.0 41.6 0.4 pts 41.4 40.1 1.3 pts
-------------------------------------------------------------------------
(1) EBITDA divided by total revenue.
Communications segment EBITDA decreased for the third quarter due to
increased restructuring charges, inflationary increases in operations
expenses, partly offset by increased data revenues. For the first nine
months of 2004, Communication segment EBITDA decreased primarily due to
increased restructuring charges and lower revenues.
Significant growth in TELUS Mobility EBITDA and EBITDA margin was
attributed to profitable subscriber growth, increased ARPU, a lower cost
of acquisition per gross subscriber addition, a world-class churn rate,
and successful cost containment efforts. The EBITDA margin, when
calculated as a percentage of Network revenue, improved to 47.2% for the
third quarter and 45.0% for the first nine months of 2004 as compared
with 42.5% and 39.2% for the same periods in 2003, representing positive
increases of 4.7 and 5.8 percentage points, respectively.
Depreciation and Quarters ended Nine-month periods
amortization September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Depreciation 327.1 308.9 5.9 % 969.5 949.5 2.1 %
Amortization of
intangible assets 80.5 98.3 (18.1)% 256.1 278.9 (8.2)%
-------------------------------------------------------------------------
407.6 407.2 0.1 % 1,225.6 1,228.4 (0.2)%
-------------------------------------------------------------------------
Depreciation and amortization expenses, in total, were not significantly
changed in the third quarter and first nine months of 2004. Increased
depreciation and amortization for growth in data network and wireless
capital assets, increased depreciation for certain assets, as well as
write-offs of network equipment and software assets in 2004, were largely
matched by lower amortization resulting from certain software
applications becoming fully amortized and from the write-off of software
assets in 2003.
Other expense Quarters ended Nine-month periods
(income) September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
(3.2) 7.6 - - 19.8 (100.0)%
-------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense, income
(loss) or impairments in portfolio investments, gains and losses on
disposal of property, and charitable donations. Accounts receivable
securitization expense decreased by $2.5 million and $8.9 million,
respectively, for the third quarter and first nine months of 2004, when
compared to the same periods in 2003. This was due to the reduction in
the amount of securitized receivables since October 2003. See Liquidity
and capital resources - Accounts receivable sale. In addition, net gains
from portfolio investments and the sale of land and several buildings
were realized in the third quarter of 2004. Charitable donations expense
continues to reflect TELUS' objective of donating 1% or more of average
pre-tax income, as defined under the Imagine Caring Company formula.
Financing costs Quarters ended Nine-month periods
September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Interest on Long-
term Debt, short-
term obligations
and other 161.7 169.2 (4.4)% 494.6 517.5 (4.4)%
Foreign exchange
losses (gains) (0.3) 0.8 - (1.0) - -
Interest income (2.8) (30.7) 90.9 % (33.1) (41.9) 21.0 %
-------------------------------------------------------------------------
158.6 139.3 13.9 % 460.5 475.6 (3.2)%
-------------------------------------------------------------------------
Interest on long-term and short-term debt decreased primarily due to
repayment of bank facilities, Medium-term Notes and First Mortgage Bonds
during 2003. TELUS maintains a hedging program using cross currency
swaps, and as a result, long-term financing costs were generally
unaffected by fluctuations in the value of the Canadian dollar against
the U.S. dollar. Debt, which includes Long-term Debt, Current maturities
and the deferred hedging liability, but excludes cash-on-hand, was
$7,372 million at September 30, 2004, when compared with $7,577 million
at December 31, 2003 and $7,642 million at September 30, 2003. The
average debt outstanding in the first nine months of 2004 was $7,534
million, as compared with $8,085 million in the same period in 2003.
Interest income was recognized primarily as a result of tax refunds from
the settlement of various tax matters.
Income taxes Quarters ended Nine-month periods
September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Blended federal
and provincial
statutory income
tax 88.8 73.3 21.1 % 221.7 151.4 46.4 %
Tax rate
differential on
settlement of
prior year tax
issues (0.3) - - (36.1) (49.7) 27.4 %
Large corporations
tax and other 8.7 9.7 (10.3)% 19.1 28.2 (32.3)%
-------------------------------------------------------------------------
97.2 83.0 17.1 % 204.7 129.9 57.6 %
-------------------------------------------------------------------------
Blended federal
and provincial
statutory tax
rates (%) 34.8 37.0 (2.2)pts 34.8 37.0 (2.2)pts
Effective tax
rates (%) 38.1 41.9 (3.8)pts 32.1 31.7 0.4 pts
-------------------------------------------------------------------------
Blended federal and provincial statutory income tax increased in the
third quarter and first nine months of 2004, when compared with the same
periods in 2003, primarily due to the increase in income before taxes of
$56.8 million and $228.7 million for the same periods, partly offset by
lower blended tax rates. Lower tax recoveries in for the first nine
months of 2004, as compared to 2003, also contributed to higher income
taxes in 2004. The 2004 tax recoveries were related to losses carried
back and settlement of tax matters for prior years that had higher tax
rates. Similarly, 2003 tax recoveries were recorded for the settlement of
tax matters for prior years that had higher tax rates.
Non-controlling Quarters ended Nine-month periods
interest September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
1.1 1.0 10.0 % 3.0 2.7 11.1 %
-------------------------------------------------------------------------
Non-controlling interest primarily represents partners' interests in
several small subsidiaries.
Preference and Quarters ended Nine-month periods
preferred dividends September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
0.1 0.9 (88.9)% 1.8 2.6 (30.8)%
-------------------------------------------------------------------------
No further Preference and preferred dividends will be paid in future
periods as a result of the redemption of all of the publicly held TELUS
Communications Inc. Preference and Preferred Shares, completed on
August 3, 2004.
4.6 Liquidity and capital resources
-----------------------------------
Cash provided by Quarters ended Nine-month periods
operating activities September 30 ended Sept. 30
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
847.2 849.7 (0.3)% 1,924.3 1,724.0 11.6 %
Cash provided by operating activities was flat in the third quarter when
compared with the third quarter of 2003 as increased operating
profitability and lower restructuring payments were offset by working
capital changes and lower income tax recoveries. Cash provided by
operating activities increased for the first nine months of 2004, when
compared with the same period in 2003 principally due to improved
operating profitability, lower payments under restructuring programs, the
recovery of income taxes associated with settlement of tax matters
(including interest income), and lower interest expense, partly offset by
an increase in contributions to defined benefit plans.
- Cash recovery of income taxes associated with settlement of prior
years' tax matters was $16.8 million ($11.8 million net of tax
installments) in the third quarter of 2004, compared with net tax
recoveries of $38.4 million in the third quarter of 2003. For the
first nine months of 2004, tax recoveries and investment tax credits
collected were $213.9 million ($197.4 million net of tax
installments), compared with net tax recoveries of $35.1 million in
the first nine months of 2003.
- EBITDA increased by $65.7 million and $191.0 million, respectively, in
the third quarter and first nine months of 2004, when compared with
the same periods in 2003, reduced by offsetting increases in related
working capital. Included in EBITDA were non-cash share-based
compensation expenses of $7.3 million and $17.9 million,
respectively, for the third quarter and first nine months of 2004.
- Interest paid decreased by $4.6 million and $22.8 million
respectively, for the third quarter and first nine months of 2004,
when compared with the same periods in 2003.
- Payments under restructuring and workforce reduction initiatives
decreased by $22.3 million and $145.7 million, respectively, in the
third quarter and first nine months of 2004, compared with the same
periods in 2003.
- Interest received decreased by $11.6 million and increased by
$8.3 million respectively for the third quarter and first nine months
of 2004, when compared with the same periods in 2003, primarily from
the settlement of tax matters.
- Employer contributions to employee defined benefit plans decreased by
$8.1 million and increased by $42.4 million, respectively, for the
third quarter and first nine months of 2004, when compared with the
same periods in 2003. The increases reflect updated actuarial
valuations and the net acceleration of discretionary funding.
- Non-cash working capital included changes in proceeds from securitized
accounts receivable. Proceeds from securitized accounts receivables
did not change in the third quarter of 2004, but decreased by
$4.0 million in the same period in 2003. For the first nine months of
2004, the Company made payments of $150 million to reduce securitized
accounts receivables, compared with a net increase in securitized
accounts receivable of $6 million in the same period in 2003.
Cash used by Quarters ended Nine-month periods
investing September 30 ended Sept. 30
activities
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
316.5 307.8 2.8 % 956.7 776.4 23.2 %
-------------------------------------------------------------------------
Cash used by investing activities increased in the third quarter and
first nine months of 2004, when compared with the same periods in 2003,
primarily as a result of increased capital expenditures. The Company also
received proceeds of $1.8 million and $18.2 million, respectively, in the
third quarter and first nine months of 2004 from the sale of
non-strategic assets, including several real estate properties. In the
corresponding nine-month period in 2003, the Company disposed of
non-strategic properties and monetized an investment for total proceeds
of $38.3 million. The 2003 proceeds included those from the sale of an
administrative property under the terms of a sale and leaseback
transaction, on which an $8.2 million pre-tax gain was deferred and is
being amortized over the term of the lease.
Capital expenditures Quarters ended Nine-month periods
by segment September 30 ended Sept. 30
($ in millions,
except capital
expenditure
intensity) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications
segment 216.4 208.9 3.6 % 743.5 589.8 26.1 %
Mobility segment 103.4 95.1 8.7 % 232.1 227.5 2.0 %
-------------------------------------------------------------------------
TELUS consolidated 319.8 304.0 5.2 % 975.6 817.3 19.4 %
-------------------------------------------------------------------------
Capital expenditure
intensity(1) (%) 16.4 16.8 (0.4)pts 17.4 15.4 2.0 pts
-------------------------------------------------------------------------
(1) Capital intensity is measured by dividing capital expenditures into
operating revenues, expressed as a percentage. This measure provides
a method of comparing the level of capital expenditures to other
companies of varying size within the same industry.
- Communications segment ILEC capital expenditures were relatively
unchanged at $184.3 million in the third quarter of 2004 and
increased by 21.6% to $625.0 million in the first nine months of
2004, when compared with the same periods in 2003. The increase was
due to significant investments in network infrastructure to improve
customer service and network reliability, as well as investments in
internal systems and processes, delivery of services to new
customers, and the development of new services. In addition, capital
spending in 2003 was constrained by the impact of the Operational
Efficiency Program, which temporarily delayed certain projects.
Expenditures for high-speed Internet (ADSL) increased by
$20.5 million to $86.9 million for the first nine months in order to
support subscriber growth.
Non-ILEC capital expenditures increased by 43.3% to $32.1 million in
the third quarter of 2004 and increased by 55.9% to $118.5 million in
the first nine months of 2004, when compared with the same periods in
2003. The increase in Non-ILEC expenditures was primarily to support
the Company's IP strategy and delivery of services to new customers,
which included implementation of several large contracts.
The Communications segment capital expenditure intensity ratios were
17.7% and 20.5% in the third quarter and first nine months of 2004,
compared with 17.3% and 16.0%, respectively, in the same periods in
2003. Cash flow (EBITDA less capital expenditures) decreased by 6.6%
to $278.0 million in the third quarter of 2004, when compared to the
same period in 2003. For the first nine months of 2004, cash flow
decreased by 21.2% to $723.0 million mainly due to higher capital
spending, increased restructuring charges, and lower revenues for the
first nine months.
- Mobility segment capital expenditures increased by 8.7% in the third
quarter and remained relatively steady for the first nine months of
2004 when compared with same periods in 2003. TELUS Mobility
continued the enhancement of digital wireless coverage and continued
building microwave facilities in the third quarter of 2004 aimed at
reducing future leased line transmission costs. Capital spending
increased over last year principally as a result of higher spending
on network infrastructure equipment to support subscriber growth.
Capital expenditure intensity for TELUS Mobility decreased to 13.8%
in the third quarter of 2004 from 15.2% in the third quarter of 2003,
due primarily to significant growth in Network revenues. Similarly,
the capital expenditure intensity was 11.2% for the first nine months
of 2004 as compared to 13.2% last year. As a result of continued
strong growth in EBITDA and reduced capital expenditure intensity,
Mobility generated a record cash flow (EBITDA less capital
expenditures) of $220.1 million in the third quarter and $625.4
million for the first nine months of 2004 as compared with $150.4
million and $397.9 million, respectively, for the same periods last
year.
Consolidated cash flow (EBITDA less capital expenditures) increased by
11.1% to $498.1 million in the third quarter of 2004, when compared with
the same period in 2003, while for the first nine months, consolidated
cash flow increased by 2.5% to $1,348.4 million.
Cash used by Quarters ended Nine-month periods
financing September 30 ended Sept. 30
activities
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
266.2 456.2 (41.6)% 351.6 836.3 (58.0)%
-------------------------------------------------------------------------
Cash used by financing activities decreased in the third quarter and
first nine months of 2004, when compared with the same periods in 2003,
primarily as a result of greater debt redemptions in 2003. Financing
activities included the following:
- Proceeds from Common Shares and Non-Voting Shares issued increased by
$6.4 million and $9.1 million, respectively, for the third quarter and
first nine months of 2004. Shares were issued from treasury under the
employee share purchase plan and from share-based compensation plans
in 2004 and 2003. In addition, the first nine months of 2004 included
proceeds from the exercise of warrants. Effective November 1, 2004,
TELUS plans to purchase employee share purchase plan shares in the
market rather than issuing from treasury.
- Cash dividends paid to shareholders increased by $3.9 million and
$5.9 million, respectively, for the third quarter and first nine
months of 2004. The increase in cash dividends paid was a result of a
larger number of Common shares and Non-Voting shares outstanding and
a lower enrolment in dividend reinvestment plans. The 15-cent
quarterly dividend paid per Common share and Non-voting share was
unchanged during the third quarter of 2004. The approximate enrolment
in dividend reinvestment plans was 19% for the dividend paid in July
2004 as compared with 24% in July 2003. Effective with the dividend
to be paid January 1, 2005, and subject to regulatory approval, TELUS
plans to purchase dividend reinvestment plan shares in the market
rather than issuing from treasury. The previous 3% plan discount has
also been eliminated.
- The redemption of all of the publicly held TELUS Communications Inc.
Preference and Preferred Shares was completed by August 3, 2004.
Redeemed amounts were $37.0 million and $72.8 million for the third
quarter and first nine months of 2004.
- Debt redemptions in the third quarter of 2004 included $189.5 million
of TELUS Communications Inc. Series A Debentures and $20 million of
TELUS Communications Inc. Medium-term Notes. Debt redemptions for the
first nine months of 2004 also included the first quarter repayment
of the full outstanding bank facility balance of $34.0 million. Debt
redemptions for the first nine months of 2003 included repayment of
$585 million of bank facilities, $151 million of Medium-term Notes
and $30 million of First Mortgage Bonds.
Liquidity and capital resource
measures
Sept. 30, Sept. 30, June 30,
Period ended 2004 2003 Change 2004
-------------------------------------------------------------------------
Components of debt and coverage
-------------------------------
ratios
------
Net debt(1) ($ millions) 6,749.4 7,539.8 (790.4) 7,223.2
Total capitalization(2) - book
value ($ millions) 13,588.8 14,044.0 (455.2) 13,920.2
EBITDA (excluding restructuring)(3)
(12-month trailing) ($ millions) 3,055.8 2,790.3 265.5 2,976.2
Net interest cost(4) (12-month
trailing) ($ millions) 621.5 628.8 (7.3) 602.2
Debt ratios
-----------
Fixed rate debt as a proportion of
total indebtedness (%) 93.2 100.0 (6.8) 93.4
Average term to maturity of debt
(years) 5.6 6.4 (0.8) 5.7
Net debt to total capitalization (%) 49.7 53.7 (4.0) 51.9
Net debt to EBITDA(5) 2.2 2.7 (0.5) 2.4
Coverage ratios
---------------
Earnings coverage(6) 2.1 1.3 0.8 2.0
EBITDA interest coverage(7) 4.9 4.4 0.5 4.9
Other measures
--------------
Free cash flow(8) (three-month
$ millions) 502.6 440.3 62.3 229.5
Free cash flow (12-month trailing,
$ millions) 1,246.9 592.6 654.3 1,184.6
-------------------------------------------------------------------------
(1) Net debt is defined as Long-term Debt plus current maturities of
Long-term Debt and cheques outstanding less Cash and temporary
investments plus cross currency foreign exchange hedge liability
(less cross currency foreign exchange hedge asset) related to U.S.
dollar notes. The cross currency foreign exchange hedge liability was
$853.6 million at September 30, 2004 (compared with deferred hedge
liabilities of $580.8 million at September 30, 2003 and
$630.6 million at June 30, 2004). Net debt is unaffected by foreign
exchange fluctuations because it includes (deducts) the net deferred
hedging liability (asset). Under TELUS' new credit facilities, a
notional amount related to accounts receivable securitization is no
longer added to the numerator of the Leverage Ratio covenant
calculation. Consistent with the new credit facility calculation, Net
debt for current and prior periods excludes notional accounts
receivable securitization amounts.
(2) Total capitalization is defined as net debt plus Non-controlling
interest and Shareholders' equity.
(3) EBITDA (excluding Restructuring and workforce reduction costs of
$49.0 million, $253.1 million and $35.1 million, respectively, for
the 12-month periods ended September 30, 2004, September 30, 2003,
and June 30, 2004). EBITDA (excluding restructuring) is used for the
calculation of Net debt to EBITDA and EBITDA interest coverage,
consistent with the calculation of the Leverage Ratio and the
Coverage Ratio in credit facility covenants.
(4) Net interest cost is defined as Net financing cost before gains on
redemption and repayment of debt, calculated on a 12-month trailing
basis. Gains on redemption and repayment of debt were recorded in the
fourth quarter of 2002.
(5) Net debt to EBITDA is defined as net debt as at the end of the period
divided by 12-month trailing EBITDA (excluding restructuring). This
measure is substantially the same as the Leverage Ratio covenant in
TELUS' credit facilities.
(6) Earnings coverage ratio is calculated on a 12-month trailing basis as
Net income before interest expense on total debt and income tax
expense divided by interest expense on total debt.
(7) EBITDA interest coverage is defined as EBITDA (excluding
restructuring) divided by Net interest cost. This measure is
substantially the same as the Coverage Ratio covenant in TELUS' new
credit facilities.
(8) See Note 2 of the Financial highlights table.
-------------------------------------------------------------------------
The balance of Long-term Debt and Current maturities of Long-term Debt
was $6,518.0 million as at September 30, 2004, a decrease of
$312.9 million from December 31, 2003. The lower debt balance was due
to redemptions and a $107.9 million decrease in the Canadian dollar
value of U.S. dollar denominated Notes, as the Canadian dollar
appreciated against the U.S. dollar by approximately 2.8% during the
first nine months of 2004. TELUS' U.S. dollar debt is fully hedged,
resulting in a corresponding increase of $107.9 million being recorded in
the deferred hedging liability.
While the amount of utilized bank facilities decreased to $nil from
$70 million one year earlier, TELUS converted $500 million of debt from a
fixed rate to a floating rate basis during the first half of 2004,
reducing the proportion of fixed rate debt. The net debt to total
capitalization ratio measured at September 30, 2004 decreased, when
compared with one year earlier, primarily as a result of debt repayments
and increased retained earnings since the third quarter of 2003. The net
debt to EBITDA ratio measured at September 30, 2004 improved
significantly, when compared with one year earlier, as a result of debt
reduction and an increase in 12-month trailing EBITDA (excluding
restructuring). The earnings coverage ratio improved significantly
because of the improvement in income before interest and taxes and
decreased interest on total debt. The EBITDA interest coverage ratio
improved as a result of higher EBITDA (excluding restructuring) and lower
interest costs, partly offset by lower interest income.
Free cash flow measures for the three-month and 12-month periods ended
September 30, 2004, increased when compared with one year earlier
primarily because of improved EBITDA, lower payments under restructuring
programs and lower interest payments, partly offset by increased capital
expenditures. Free cash flow for the 12-month period ended September 30,
2004 also increased due to higher cash tax recoveries than the comparable
period one-year earlier.
The Board of Directors declared a quarterly dividend of twenty cents
($0.20) per share on the outstanding Common Shares and Non-Voting Shares
of TELUS. This represents an increase of one-third from the fifteen cents
declared last quarter. The dividend is payable on January 1, 2005 to
holders of record at the close of business on December 10, 2004. The
TELUS Board also announced that consistent with a dividend growth
approach, it has established a forward-looking dividend payout ratio
guideline of 45 to 55% of net earnings.
On October 29, 2004, TELUS is announcing that it has received approval
from its Board of Directors to make a Normal Course Issuer Bid for the
repurchase of its Common Shares and Non-Voting Shares, subject to
obtaining all necessary regulatory approvals. The repurchase program will
enable TELUS to repurchase, over approximately a 12-month period, up to a
maximum of 14.0 million Common Shares and 11.5 million Non-Voting Shares,
representing approximately 10 per cent of the public float of each of the
Common Shares and Non-Voting Shares. All shares purchased will be
cancelled.
4.7 Credit facilities
---------------------
The following are the credit facilities available to TELUS at
September 30, 2004:
Outstanding
Credit Facilities undrawn
At September 30, 2004 letters of
($ millions) Expiry Available Drawn credit
-------------------------------------------------------------------------
Revolving credit
facility (1) May 7, 2008 800.0 - 102.6
364-day revolving
facility (2) May 6, 2005 800.0 - -
Other bank facilities - 74.0 - 6.9
-------------------------------------------------------------------------
Total 1,674.0 - 109.5
-------------------------------------------------------------------------
(1) Canadian dollars or U.S. dollar equivalent.
(2) Canadian dollars or U.S. dollar equivalent, extendible at the
Company's option on a non-revolving basis for one year for any
amounts outstanding on the May 6, 2005 anniversary date.
Additionally, at September 30, 2004, the Company had accepted a fully
underwritten commitment for a $500 million (or U.S. Dollar equivalent)
unsecured bank credit facility for general corporate purposes. This
364-day credit facility, upon documentation, would have been available
until the earlier of October 31, 2005, and 364 days after the completion
date of the Company's offers to purchase Microcell Telecommunications
Inc., had that event in fact occurred. Subsequent to quarter end, in
conjunction with the expiry of the Company's offers to purchase
Microcell, this bank credit facility commitment was cancelled.
Including cash of $622.2 million and the credit facilities described in
the table above, TELUS had unutilized available liquidity in excess of
$2 billion at September 30, 2004. TELUS' credit facilities contain
customary covenants including a requirement that TELUS not permit its
consolidated Leverage Ratio (Funded Debt to trailing 12-month EBITDA) to
exceed 4.0:1 (approximately 2.2:1 as at September 30, 2004) and not
permit its consolidated Coverage Ratio (EBITDA to Interest Expense on a
trailing 12-month basis) to be less than 2.0:1 (approximately 4.9:1 as at
September 30, 2004) at the end of any financial quarter. There are
certain minor differences in the calculation of the Leverage Ratio and
Coverage Ratio under the credit agreement as compared with the
calculation of net debt to EBITDA and EBITDA interest coverage. The
calculations are not expected to be materially different. The covenants
are not impacted by revaluation of capital assets, intangible assets and
goodwill for accounting purposes, and continued access to TELUS' credit
facilities is not contingent on the maintenance by TELUS of a specific
credit rating.
4.8 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 October 25, 2004. The
proceeds of securitized receivables were $150 million at September 30,
2004, as compared with $481 million one year earlier and $300 million at
December 31, 2003. TELUS Communications Inc. is required to retain a
minimum of $150 million proceeds under this program to keep it active.
Average proceeds from securitization were $191 million for the first nine
months of 2004, compared with $471 million in the same period in 2003.
4.9 Credit ratings
------------------
With the May 13, 2004 announcement of TELUS' bid for Microcell, the four
credit rating agencies covering TELUS issued press releases confirming or
placing under review TELUS' investment grade credit ratings. Following
the expiry of TELUS' bid for Microcell on October 12, 2004, Standard and
Poor's confirmed its BBB long-term credit ratings for TELUS and TELUS
Communications Inc. with a stable outlook. On October 20, 2004, Dominion
Bond Rating Service confirmed its long-term credit ratings of BBB(high)
for TELUS Communications Inc. and BBB for TELUS Corporation, each with a
stable trend. TELUS has an objective to preserve access to capital
markets at a reasonable cost by maintaining investment grade credit
ratings and targeting improved credit ratings in the range of BBB+ to A-,
in future.
4.10 Off-balance sheet arrangements and contractual liabilities
---------------------------------------------------------------
Financial instruments (Note 3 of the interim consolidated financial
statements)
During the first half of 2004, the Company entered into two series of
hedging relationships to which hedge accounting has been applied: one
series of hedging relationships results in fixing the Company's
compensation cost arising from a specific grant of restricted stock
units, and the other series of hedging relationships results in the
notional conversion of $500 million of the 2006 (Canadian Dollar) Notes
from a fixed interest rate of 7.5% to a floating interest rate based upon
the three-month Bankers' Acceptance Canadian Dollar Offered Rate plus a
spread.
As at September 30, 2004, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rates on
U.S.$52.5 million and U.S.$14.5 million of fiscal 2004 and fiscal 2005
purchase commitments, respectively; hedge accounting has been applied to
these foreign currency forward contracts, all of which relate to the
Mobility segment.
Fair value: The fair value of the Company's long-term debt, including the
convertible debentures, is estimated based on quoted market prices for
the same or similar issues or on the current rates offered to the Company
for debt of the same maturity as well as the use of discounted future
cash flows using current rates for similar financial instruments subject
to similar risks and maturities. The fair values of the Company's
derivative financial instruments used to manage exposure to interest rate
and currency risks are estimated similarly. The fair value of the
Company's debt at September 30, 2004 was estimated at $8,559 million
($8,699 million at December 31, 2003).
Commitments and contingent liabilities (Note 15 of the interim
consolidated financial statements)
The Company has a number of commitments and contingent liabilities.
- The Company has $85.9 million in outstanding commitments for its
restructuring programs as at September 30, 2004.
- In accordance with CRTC Price Cap Decisions 2002-34 and 2002-43, the
Company defers a portion of revenues in a deferral account, which at
September 30, 2004, was $114 million. The mechanism for disposing of
balance in this deferral account, other than as already approved by
the CRTC, is currently the subject of a CRTC proceeding.
- On May 21, 2004, the CIRB declared TELE-MOBILE COMPANY and TELUS
Communications Inc. a single employer for labour relations purposes.
The Canadian Industrial Relations Board also determined that TELUS
Mobility's non-unionized team members, predominantly located in
Ontario and Quebec, performing work similar to their unionized TELUS
Mobility counterparts in Alberta and British Columbia, should be
included in the bargaining unit represented by the Telecommunications
Workers Union. TCI's and TELUS Mobility's application with the
Federal Court of Appeal for judicial review of this CIRB decision was
heard on October 4-5, 2004. A decision from the Court is expected
within three months. Should the ultimate operational and financial
impacts of the outcome of the Federal Court of Appeal process differ
from management's assessments and assumptions, a material adjustment
to the Company's financial position and the results of its operations
could result.
Canadian GAAP requires the disclosure of certain types of guarantees and
their maximum, undiscounted amounts. The maximum potential payments
represent a "worst-case scenario" and do not necessarily reflect results
expected by the Company. Guarantees requiring disclosure are those
obligations that require payments contingent on specified types of future
events; in the normal course of its operations, the Company enters into
obligations which GAAP may consider to be guarantees. As defined by
Canadian GAAP, guarantees subject to these disclosure guidelines do not
include guarantees that relate to the future performance of the Company.
As at September 30, 2004, the Company has no liability recorded in
respect of performance guarantees, $1.0 million (December 31, 2003 -
$1.5 million) recorded in respect of lease guarantees. The maximum
undiscounted guarantee amounts as at September 30, 2004, without regard
for the likelihood of having to make such payment, were not significant.
In the normal course of operations, the Company may provide
indemnification in conjunction with certain transactions. The term of
these indemnification obligations range in duration and often are not
explicitly defined. Where appropriate, an indemnification obligation is
recorded as a liability. In many cases, there is no maximum limit on
these indemnification obligations and the overall maximum amount of the
obligations under such indemnification obligations cannot be reasonably
estimated. Other than obligations recorded as liabilities at the time of
the transaction, historically the Company has not made significant
payments under these indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the
Company agreed to bear a proportionate share of the purchaser's increased
directory publication costs if the increased costs were to arise from a
change in the applicable CRTC regulatory requirements. The Company's
proportionate share would be 80% through May 2006, declining to 40% in
the next five-year period and then to 15% in the final five years. As
well, should the CRTC take any action which would result in the purchaser
being prevented from carrying on the directory business as specified in
the agreement, TELUS would indemnify the purchaser in respect of any
losses that the purchaser incurred. As at September 30, 2004, the Company
has no liability recorded in respect of indemnification obligations.
A number of claims and lawsuits seeking damages and other relief are
pending against the Company. It is impossible at this time for the
Company to predict with any certainty the outcome of such litigation.
However, management is of the opinion, based upon legal assessment and
information presently available, that it is unlikely that any liability,
to the extent not provided for through insurance or otherwise, would be
material in relation to the Company's consolidated financial position,
excepting items disclosed previously relating to pay equity, the TELUS
Corporation Pension Plan and TELUS Edmonton Pension Plan and updates
described in 5. Risks and Uncertainties.
4.11 Outstanding share information
----------------------------------
The following is a summary of the outstanding shares for each class of
equity at September 30, 2004 and at October 15, 2004. In addition, for
October 15, 2004, the total number of outstanding and issuable shares is
presented, assuming full conversion of convertible debentures, options
and warrants.
Class of equity security Common Non-Voting Total
Shares Shares Shares
outstanding outstanding outstanding
At September 30, 2004
Common equity - Common
Shares outstanding 193,089,342 - 193,089,342
Common equity -
Non-Voting Shares
outstanding - 163,233,857 163,233,857
----------- ----------- -----------
193,089,342 163,233,857 356,323,199 (1)
----------- ----------- -----------
At October 15, 2004
Common equity - Common
Shares outstanding 193,214,854 - 193,214,854
Common equity
Non-Voting Shares
outstanding - 163,883,312 163,883,312
----------- ----------- -----------
193,214,854 163,883,312 357,098,166
----------- ----------- -----------
Outstanding and issuable
shares(2) at October 15,
2004
Common Shares and
Non-Voting Shares
outstanding 193,214,854 163,883,312 357,098,166
TELUS Corporation
convertible
debentures - 3,765,819 3,765,819
Options (3) 3,253,538 22,206,691 25,460,219
Warrants - 667,412 667,412
Channel stock incentive
plan - 192,925 192,925
----------- ----------- -----------
196,468,382 190,716,159 387,184,541
-----------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share for the
third quarter of 2004, the number of shares outstanding at
September 30, 2004 was 361,814,289.
(2) Assuming full conversion and ignoring exercise prices.
(3) Not reduced by any options that may be forfeited or cancelled during
the period October 1, 2004 to October 15, 2004.
4.12 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 2005. As of September 30, 2004, in aggregate,
$312.1 million of specified software licences and a trademark licence
have been acquired and recorded as capital and other assets. These assets
are valued at fair market value at the date of acquisition as determined
by an arm's-length party's appraisal. Assuming renewal through to 2008,
the total commitment under the agreement is U.S.$377 million for the
period 2001 to 2008 and the commitment remaining after September 30,
2004, is U.S.$87 million (December 31, 2003 - 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 bills customers, and collects, for directory
listings on Verizon's behalf. The Company owed Verizon, on a net basis
and including directory rebilling and collections done on Verizon's
behalf as well as dividends payable, $39.4 million at September 30, 2004
(December 31, 2003 - $40.9 million).
4.13 Revised Guidance for 2004
------------------------------
Management has revised annual guidance for 2004:
- Increased Consolidated and TELUS Mobility revenue and EBITDA guidance,
while narrowing the range of TELUS Communications revenue and EBITDA
guidance. Within the Communications segment, previous Non-ILEC revenue
guidance was maintained, while the range for Non-ILEC EBITDA was
narrowed.
- Increased guidance for earnings per share.
- Updated guidance for Free cash flow and Net debt to EBITDA to reflect
early achievement of targets.
- Increased guidance for TELUS Mobility wireless subscriber net
additions, while maintaining expectations for TELUS Communications
high-speed Internet net additions.
-----------------------------------------------------
Revised guidance 2004 revised 2004 second 2004 original
summary guidance quarter guidance targets
-------------------------------------------------------------------------
Consolidated $7.5 to $7.575 $7.45 to $7.55
Revenues billion No change billion
-------------------------------------------------------------------------
EBITDA(1) $3.025 to $3.075 $2.975 to $3.075 $2.95 to $3.05
billion billion billion
-------------------------------------------------------------------------
Earnings per
share - basic $1.40 to $1.50 $1.30 to $1.50 $1.05 to $1.25
-------------------------------------------------------------------------
Capital Approx. $1.3 Approx. $1.225
expenditures No change billion billion
-------------------------------------------------------------------------
Free cash flow(2) $1.25 to $1.3 $1.15 to $1.25 $1.13 to $1.23
billion billion billion
-------------------------------------------------------------------------
Net debt to EBITDA(3) 2.2 times 2.3 times 2.5 times
or less or less or less
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Communications segment
Revenue (external) $4.725 to $4.775 $4.7 to $4.8 $4.8 to $4.85
billion billion billion
-------------------------------------------------------------------------
Non-ILEC revenue No change $525 to $550 Approx. $610
million million
-------------------------------------------------------------------------
EBITDA $1.925 to $1.95 $1.925 to $1.975 $1.975 to $2.025
billion billon billion
-------------------------------------------------------------------------
Non-ILEC EBITDA $(30) to $(35) $(30) to $(40) Approx. $5
million million million
-------------------------------------------------------------------------
Capital expenditures No change Approx. $950 Approx. $875
million million
-------------------------------------------------------------------------
High-speed Internet
net additions No change No change Approx. 125,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mobility segment
Revenue (external) $2.775 to $2.8 $2.675 to $2.725 $2.65 to $2.7
billion billion billion
-------------------------------------------------------------------------
EBITDA $1.1 to $1.125 $1.05 to $1.1 $975 million to
billion billion $1.025 billion
-------------------------------------------------------------------------
Capital expenditures No change No change Approx. $350
million
-------------------------------------------------------------------------
Wireless subscriber
net additions 425,000 to No change 375,000 to
475,000 425,000
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization as
calculated below. The reconciling items below are Management's best
estimates at this time and are not intended to provide guidance for
each individual reconciling item.
($millions) 2004 revised guidance 2004 original target
---------------------------------------------------------------------
Operating revenues 7,500 to 7,575 7,450 to 7,550
Less Operations expense
and restructuring and
workforce reduction costs 4,475 4,500 4,500 4,500
---------------------------------------------------------------------
EBITDA 3,025 to 3,075 2,950 to 3,050
---------------------------------------------------------------------
(2) Defined as EBITDA, adding Restructuring and workforce reduction
costs, cash interest received and excess of share compensation
expense over share compensation payments, subtracting cash interest
paid, cash taxes, capital expenditures, and cash restructuring
payments. The reconciling items below are Management's best estimates
at this time and are not intended to provide guidance for each
individual reconciling item.
($ millions) 2004 revised guidance 2004 original target
--------------------------------------------------------------------
EBITDA 3,025 to 3,075 2,950 to 3,050
--------------------------------------------------------------------
Restructuring and workforce
reduction costs, net of
cash payments (65) (65) (85) (85)
Excess of share compensation
expense over payments 25 25 35 35
Cash interest paid net of
cash interest received (610) (610) (650) (650)
Income taxes received (paid)
excluding investment tax
credits received 175 175 105 105
Capital expenditures
(capex) (1,300) (1,300) (1,225) (1,225)
--------------------------------------------------------------------
Free cash flow 1,250 to 1,300 1,130 to 1,230
--------------------------------------------------------------------
(3) Net Debt to EBITDA, where EBITDA excludes Restructuring and workforce
reduction costs. This measure is substantially the same as the
Leverage Ratio covenant in TELUS' credit facilities.
-------------------------------------------------------------------------
5. Risks and uncertainties
The following are updates to the risks and uncertainties described in
TELUS' 2003 Annual Report and 2004 first and second quarter Management's
discussion and analyses, including filings on SEDAR (www.sedar.com) and
filings on EDGAR (www.sec.gov).
5.1 Competition
Wireless competition
With Roger's Wireless bid for Microcell and the expected entry of the
Virgin Group to provide services on a resale basis from Bell Mobility,
the four national competitor market will likely be maintained. In
addition, other competitors may offer wireless services regionally or
nationally on a resale basis. There is risk that increased competition by
all industry players could lead to pricing pressures and higher costs of
acquisition in the future. TELUS Mobility intends to manage this risk by
continuing to focus on profitable subscriber growth.
5.2 Regulation - wireline operations
Proceedings under Telecom Public Notice CRTC 2004-2 - Regulatory
framework for voice communication services using Internet Protocol
In September 2004, TELUS made its oral presentation at the CRTC's public
hearings on the regulatory framework for voice communication services
using Internet Protocol, also known as VoIP. The decision on how to
regulate VoIP services will set the Canadian competitive rules for ILECs,
cable-TV companies, foreign-based competitors and others. The CRTC is
expected to announce its decision in the first quarter of 2005.
Positions presented at the hearings included:
- TELUS' argument that all access-independent providers of VoIP services
should be forborne from rate regulation.
- Bell Canada's position that all VoIP services, whether
access-dependent or access-independent, should be forborne from rate
regulation.
- Cable-TV companies' and Competitive Local Exchange Carriers' ("CLECs")
arguments that any VoIP services provided by an ILEC should be fully
regulated when offered in an ILEC territory.
5.3 Process risks
Integration of customer-facing business units in the Communications
Segment
There can be no assurance that the recent integration of sales,
marketing, solutions development, customer care and shared services of
Business Solutions and Client Solutions will result in the operational
efficiencies and organizational effectiveness that management currently
expects.
5.4 Claims and lawsuits
Uncertified class action
------------------------
A class action was brought August 9, 2004, under the Class Actions Act
(Saskatchewan), against a number of past and present wireless service
providers including the Company. The claim alleges that each of the
carriers is in breach of contract and has violated competition, trade
practices and consumer protection legislation across Canada in connection
with the collection of system access fees, and seeks to recover direct
and punitive damages in an unspecified amount. The class has not been
certified and procedural objections to certification have been
identified. The Company further believes the claim is unsound on the
merits. Should the ultimate resolution of this action differ from
management's assessments and assumptions, a material adjustment to the
Company's financial position and the results of its operations could
result.
/For further information:
Media Relations: Investor Relations:
Nick Culo, (780) 493-7236, John Wheeler,(780) 493-7310,
nick.culo(at)telus.com; ir(at)telus.com/
(T. T.NV. TU)
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: October 29, 2004
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary