Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of ___May___ 2005
(Commission File No. 000-24876)
TELUS Corporation
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal registered offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
X
Form 20-F _____ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
X
Yes _____ No _____
This Form 6-K consists of the following:
TELUS Corporation First Quarter
Management's Discussion and Analysis
and Consolidated Financial Statements
Forward-looking statements
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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, guidance, 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; human resources (including the ongoing
impact and outcome of outstanding labour relations issues and collective
bargaining); technology (including reliance on systems and information
technology); regulatory developments; process risks (including conversion
of legacy systems); manmade and natural threats; health and safety;
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 2004 Annual Report, 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 Section 10: Risks and uncertainties in
TELUS' annual 2004 Management's discussion and analysis, and updates
included in Section 10 of this first quarter interim report.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise.
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Management's discussion and analysis - May 4, 2005
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the periods ended March 31,
2005 and 2004, 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 18 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
were reviewed by TELUS' Audit Committee on May 3, 2005 and approved by TELUS'
Board of Directors on May 4, 2005. All amounts are in Canadian dollars unless
otherwise specified.
The Company has issued guidance on and reports on certain non-GAAP
measures that are used by management to evaluate performance of business units
and segments. On a consolidated basis, non-GAAP measures are used in measuring
compliance with debt covenants. Because non-GAAP measures do not have a
standardized meaning, securities regulations require that non-GAAP measures be
clearly defined and qualified, reconciled with their nearest GAAP measure and
be given no more prominence than the closest GAAP measure. For the readers'
reference, the definition, calculation and reconciliation of consolidated
non-GAAP measures is provided in Section 11: Reconciliation of non-GAAP
measures and definition of key operating indicators.
Management's discussion and analysis contents
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Section Contents
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1. Overall performance A summary of 2005 first quarter
consolidated results
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2. Core business, vision and Recent examples of TELUS' activities in
and strategy support of its six strategic imperatives
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3. Key performance drivers Recent examples of TELUS' activities in
support of its key performance drivers
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4. Capability to deliver An update on TELUS' capability to deliver
results results
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5. Results from operations A detailed discussion of operating
results for 2005
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6. Financial condition A discussion of significant changes in
the balance sheet since the beginning
of the year
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7. Liquidity and capital A discussion of cash flow, liquidity,
resources credit facilities, off-balance sheet
arrangements and other disclosures
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8. Critical accounting A description of accounting estimates,
estimates and accounting which are critical to determining
policy developments financial results, and changes to
accounting policies
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9. Revised guidance A discussion of revisions to its
guidance for 2005
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10. Risks and uncertainties A update of risks and uncertainties
facing TELUS
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11. Reconciliation of A description, calculation and
non-GAAP measures and reconciliation of certain measures
definition of key used by management
operating indicators
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1. Overall performance
1.1 Materiality for disclosures
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.
1.2 Consolidated highlights
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($ in millions except margin Quarters ended March 31
and per-share amounts) 2005 2004 Change
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Operating revenues 1,974.7 1,803.8 9.5 %
EBITDA(1) 856.2 721.3 18.7 %
EBITDA margin (%) (2) 43.4 40.0 3.4 pts
Operating income 454.0 310.9 46.0 %
Net income 242.2 101.3 139.1 %
Earnings per share, basic 0.67 0.28 139.3 %
Earnings per share, diluted 0.66 0.28 135.7 %
Cash dividends declared per share 0.20 0.15 33.3 %
Cash provided by operating activities 728.4 588.1 23.9 %
Cash used by investing activities 306.2 298.6 2.5 %
Capital expenditures 273.2 309.7 (11.8)%
Cash used by financing activities 71.4 22.2 -
Free cash flow(3) 566.6 443.3 27.8
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(1) Earnings before interest, taxes, depreciation and amortization is a
non-GAAP measure. See Section 11.1 Earnings before interest, taxes,
depreciation and amortization (EBITDA).
(2) EBITDA margin is EBITDA divided by Operating revenues.
(3) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash
flow.
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Consolidated Operating revenues and EBITDA increased significantly in
first quarter 2005, when compared with the same period in 2004, driven by
revenue growth of 19.0% at TELUS Mobility and 4.1% in TELUS' Communications
segment. EBITDA and EBITDA margins also increased as operations expense growth
rates of 8.1% and 1.4%, respectively, at TELUS Mobility and TELUS
Communications, remained well below revenue growth rates. In addition,
restructuring charges in the Communications segment decreased. For these
reasons, and due to lower amortization of intangible assets, operating income
increased by $143.1 million in the first quarter of 2005, when compared with
the same period in 2004.
Net income and earnings per share increased significantly in the first
quarter of 2005, when compared to the first quarter of 2004, due to improved
Operating income, lower net interest expenses as a result of debt repayments
in 2004. In addition, the favourable impact of the change in tax estimates for
available temporary differences, other tax adjustments and related interest
was approximately $54 million or 15 cents per share in the first quarter of
2005. In the corresponding period of 2004, favourable tax settlements
increased earnings per share by approximately four cents per share.
The increase in cash provided by operating activities was primarily due
to improved EBITDA, while cash used by investing activities was relatively
unchanged; lower capital expenditures in the Communications segment were
offset by an investment made in the first quarter of 2005. Free cash flow
increased primarily due to growth in EBITDA.
2. Core business, vision and strategy
TELUS continues to be guided by its six long-standing strategic
imperatives that serve as a guideline for the Company's actions. Some recent
examples of TELUS' activities in support of these imperatives follow.
2.1 Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy
On February 15, 2005, TELUS' international division invested $27.5
million for an effective 49% interest in Ambergris Solutions Inc., a company
with operations in Asia, which provides business process outsourcing solutions
primarily to U.S.-based clients. The new investment resulted in approximately
2,600 new full-time equivalent employees being added to the Communications
segment staff count. TELUS has an option to purchase an additional effective
three and one-half per cent interest in this company, such option expiring in
mid-May, 2005. This investment was made with a view to enhancing the Company's
competitiveness in contact centre offerings.
The acquisition of Ambergris, combined with the acquisition of ADCOM,
Inc. in November 2004 provided incremental data revenues of $18.8 million and
incremental EBITDA of $3.4 million to TELUS' Communications segment in the
first quarter of 2005.
3. Key performance drivers
To focus on the opportunities and challenges, and to create value for
shareholders, TELUS sets corporate priorities each year. An update on certain
priorities follows:
3.1 Leveraging investments in high-speed Internet technology through
Future Friendly Home services in B.C., Alberta and Eastern Quebec
In April 2005, TELUS and the B.C. provincial government announced an
initiative, called Connecting Communities. The initiative is two fold. First,
it consolidates some 340 existing competitive services contracts into one
contract with the Province of B.C. The agreement covers 10 broader public
sector entities, such as Crown corporations and health authorities. Second,
TELUS has committed to bring access to high-speed data and voice services to
119 rural communities by the end of 2006, thereby helping fulfill the
Province's commitment to bridge the Digital Divide in 366 communities across
B.C. TELUS is to invest an estimated $110 million over four years to connect
the communities to high speed Internet and expand broadband services. With the
additional 119 communities, a total of 334 communities in B.C. are to be
connected by TELUS.
This agreement satisfies a number of strategic objectives for TELUS. It
secures TELUS' telecommunications business with the government for at least
four years, and up to seven years on a large share of the government's
wireline and wireless telecoms expenditures. It positions TELUS for new
revenue growth opportunities by enabling the Company to deploy innovative
Internet protocol-based (Next Generation Network) technology and services.
TELUS will create a $12 million innovation fund to allow the public sector in
B.C. to develop pilot opportunities in strategic areas of future growth,
including health care and education. The fund can be used for future upgrades
and infrastructure enhancements, subject to certain criteria and approval by
TELUS, as set out in the contract.
3.2 Accelerating wireline performance in Ontario and Quebec business
markets
Non-incumbent operations in TELUS' Communications segment experienced
revenue and EBITDA growth of $31.1 million and $17.0 million, respectively, in
the first quarter of 2005, when compared with the same period in 2004. It is
notable that non-incumbent EBITDA was positive for two consecutive quarters
for the first time, continuing a long-term trend of EBITDA improvement.
3.3 Driving continual improvements in productivity across TELUS
Continued economies of scale at TELUS Mobility, as well as a number of
smaller initiatives such as operational consolidation, rationalization and
integrations within the TELUS' Communications segment, helped drive
improvement in TELUS' consolidated EBITDA and EBITDA margin.
3.4 Reaching a collective agreement
Reaching a collective agreement remains a priority for TELUS in 2005.
On February 2, 2005, the Canada Industrial Relations Board ("CIRB")
overturned its earlier binding arbitration order and returned the parties to
negotiations. Negotiations resumed on February 10 and by April 13 the Company
had completed tabling of its comprehensive offer of settlement with the
Telecommunications Workers Union ("TWU").
On April 18, 2005, the Company, noting that negotiations were at an
impasse, delivered first notice of lockout measures to the TWU. That notice
contained six specific lock-out measures: the suspension of grievance and
arbitration processes, joint Union management committees, scheduling of
accumulated time off, payment for the first day of sickness absence and the
deferral of wage progression increases and increases in vacation entitlements.
These measures were implemented on April 25, did not include the closing of
operations, and were intended to bring pressure to bear at the negotiating
table. Attempts by the TWU at the Federal Court of Appeal and the CIRB to stop
the implementation of these measures were unsuccessful.
TELUS received notice from the CIRB on May 4, 2005, that the TWU amended a
previous complaint filed with the CIRB to include issues related to the
Company's communication of its comprehensive offer directly to union employees.
The amendment also sought to impose binding arbitration as a remedy sought by
the union. A hearing into the merits of these allegations has not been set at
the time of this interim disclosure.
The status of two outstanding matters follows:
CIRB Decisions 1004 and 271
The CIRB issued a summary decision on February 2, 2005, overturning its
previous ruling that imposed binding arbitration. In addition, the Board set
aside the April 2004 broad communications ban, and re-instated its narrower
January 2004 ban related to communications with bargaining unit team members
on labour relations issues and negotiations. Subsequently, the
Telecommunications Workers Union filed an application in the Federal Court of
Appeal, scheduled to be heard on May 31 - June 1, 2005, seeking to overturn
the Canada Industrial Relations Board's reconsideration decision and restore
the order that placed the parties in binding arbitration.
Appeal of CIRB Decisions 1088 and 278
The CIRB, in Decisions 1088 and 278, 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
without a representational vote. TELUS Mobility applied to the Supreme Court
of Canada for leave to appeal the decision in February 2005. As of the date of
this interim discussion, no decision has yet been rendered on the application
for leave to appeal.
4. Capability to deliver results
4.1 Operational capabilities - TELUS Communications
With agreements such as the one with the Government of B.C., and growth
initiatives in the business markets in Ontario and Quebec, TELUS
Communications is retaining existing customers and positioning itself for
future revenue growth, particularly in the areas of data and IP. This is in
the face of continued competitive pressures including launch this quarter of
local service in Calgary by the cable-TV operator. Measures taken for consumer
services include new Future Friendly Home services last year and the
introduction of a three-year contract option for consumer optional features
bundles. This initiative was launched to help retain customers, lock in
revenues over the contract period, and delay or reduce churn to competitors.
4.2 Operational capabilities - TELUS Mobility
TELUS Mobility continues to execute its plan to grow profitably through
the delivery of excellent customer care, value-added solutions, and superior
network quality. As a result, TELUS Mobility believes it is well positioned to
sustain a pricing premium in the face of new competitive pressures, including
the launch of a new competitor offering prepaid wireless service through
resale during the current quarter. Although the Company has been experiencing
continued ARPU growth, it has slowed and is expected to continue to moderate
in the remainder of the year. Future profitability growth is expected to be
realized from continued subscriber growth and economies of scale through a
well managed client focused organization.
4.3 Liquidity and capital resources
TELUS had more than $1.2 billion of cash at March 31, 2005. With access
to undrawn credit facilities of more than $1.6 billion and expected cash
provided by operating activities, the Company believes it has sufficient
capability to fund its requirements in 2005 and refinancing requirements in
2006. As at March 31, 2005, the Company and its subsidiaries are in compliance
with all of their debt covenants.
TELUS arranged for new credit facilities in May 2005 to replace
$1.6 billion of existing credit facilities. The prior 364-day facility, which
was due to expire, and a term facility with three years remaining to maturity
were replaced with a new three-year facility due in May 2008 and a longer
maturity five-year term facility due in May 2010. The new credit facilities
have no substantial changes in terms and conditions, other than reduced
pricing and the extension of term, which reflect favourable market conditions
and TELUS' strong financial position. See Section 7.5 Credit facilities.
5. Results from operations
5.1 General
The Company's reportable segments, which reflect TELUS' organizational
structure and are used to manage the business, are TELUS Communications
(discussed in Section 5.4 Communications segment results) and TELUS Mobility
(discussed in Section 5.5 Mobility segment results). The two segments are
differentiated based on management, products and services, distribution
channels, technology, and regulatory treatment. Intersegment sales are
recorded at the exchange value. Segmented information may also be found in
Note 17 of the interim consolidated financial statements.
5.2 Quarterly results summary
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($ in millions,
except per share amounts) 2005 Q1 2004 Q4 2004 Q3 2004 Q2
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Segmented revenue (external)
Communications segment 1,222.2 1,209.3 1,199.9 1,189.0
Mobility segment 752.5 755.6 747.0 676.6
-------- -------- -------- --------
Operating revenues (consolidated) 1,974.7 1,964.9 1,946.9 1,865.6
Net income 242.2 135.6 156.6 172.3
Per weighted average Common Share
and Non-Voting Share outstanding
- basic 0.67 0.38 0.44 0.48
- diluted 0.66 0.37 0.43 0.48
Dividends declared per Common Share
and Non-Voting Share outstanding 0.20 0.20 0.15 0.15
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($ in millions,
except per share amounts) 2004 Q1 2003 Q4 2003 Q3 2003 Q2
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Segmented revenue (external)
Communications segment 1,171.1 1,182.4 1,186.3 1,209.2
Mobility segment 632.7 643.2 619.9 564.1
-------- -------- -------- --------
Operating revenues (consolidated) 1,803.8 1,825.6 1,806.2 1,773.3
Net income 101.3 47.8 114.1 73.0
Per weighted average Common Share
and Non-Voting Share outstanding
- basic 0.28 0.13 0.32 0.21
- diluted 0.28 0.13 0.32 0.21
Dividends declared per Common Share
and Non-Voting Share outstanding 0.15 0.15 0.15 0.15
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The trend in consolidated Operating revenues reflects strong wireless
growth at TELUS Mobility as well as sequential growth in TELUS' Communications
segment revenues for the most recent four quarters. Wireless growth resulted
from increases in the subscriber base and average revenue per subscriber unit
("ARPU"). Notable is that TELUS Communications segment first quarter 2005
revenues increased, when compared with the fourth quarter of 2004, due to a
favourable regulatory adjustment in local revenues as well as growth in data
revenues. Long distance revenue erosion was at a lower rate in the first
quarter of 2005 than in the same period in 2004. Communications segment
revenues also include the impacts of regulatory price cap decisions.
Net income and earnings per share continue to reflect the trends of
growing EBITDA and Operating income, combined with decreasing net interest
expense due to increasing cash balances and favourable tax adjustments.
5.3 Consolidated results from operations
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($ in millions except EBITDA Quarters ended March 31
margin and employees) 2005 2004 Change
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Operating revenues 1,974.7 1,803.8 9.5 %
Operations expense 1,109.1 1,066.6 4.0 %
Restructuring and workforce reduction costs 9.4 15.9 (40.9)%
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EBITDA (1) 856.2 721.3 18.7 %
EBITDA margin (%) (2) 43.4 40.0 3.4 pts
Full time equivalent employees,
end of period 27,411 23,892 14.7 %
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(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) EBITDA margin is EBITDA divided by Operating revenues
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Consolidated Operating revenues and EBITDA increased significantly in
first quarter 2005, when compared with same period in 2004, driven by revenue
growth in both TELUS Mobility and TELUS Communications segments. EBITDA and
EBITDA margin also increased as the operations expense growth rate remained
well below the revenue growth rate. In addition, restructuring charges
decreased in the Communications segment. TELUS full time equivalent employees,
measured at March 31, 2005, increased due to two small acquisitions and the
addition of a payroll services contract for the B.C. government, as well as to
support subscriber growth at TELUS Mobility.
For further discussion by segment, see Section 5.4 Communications segment
results and Section 5.5 Mobility segment results.
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Depreciation and amortization Quarters ended March 31
($ in millions) 2005 2004 Change
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Depreciation 329.9 321.7 2.5 %
Amortization of intangible assets 72.3 88.7 (18.5)%
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402.2 410.4 (2.0)%
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Depreciation increased in the first quarter of 2005, when compared with
the same period in 2004, due primarily to growth in shorter life data and
wireless network assets and a reduction in service lives for ADSL equipment,
partly offset lower depreciation arising from full amortization of cell sites.
Amortization of intangible assets decreased in the first quarter of 2005, when
compared with the same period in 2004, as a result of several software assets
becoming fully depreciated.
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Other expense, net Quarters ended March 31
($ millions) 2005 2004 Change
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1.5 1.2 25.0 %
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Other expense includes accounts receivable securitization expense, gains
and losses on disposal of property, income (loss) or impairments in equity or
portfolio investments, and charitable donations. The accounts receivable
securitization expense was $1.0 million in the first quarter of both 2005 and
2004. See Section 7.6 Accounts receivable sale.
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Financing costs Quarters ended March 31
($ millions) 2005 2004 Change
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Interest on Long-term debt, short-term
obligations and other 159.0 165.4 (3.9)%
Foreign exchange losses (gains) 2.5 (0.6) -
Interest income (23.1) (19.8) (16.7)%
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138.4 145.0 (4.6)%
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Interest on long-term and short-term debt decreased primarily due to the
repayment of TCI Debentures and Medium-term Notes in the third quarter of
2004. 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 (the sum of
Long-term Debt, Current maturities and the deferred hedging liability), was
$7,374.9 million at March 31, 2005, when compared with $7,571.3 million one
year earlier. Interest income earned as a result the settlement of various tax
matters was $15.6 million in the first quarter of 2005 (as compared with $17.7
million in the first quarter of 2004). The balance of interest income, earned
primarily from cash and temporary investments, was significant at $7.5 million
in the first quarter of 2005, an increase of $5.4 million from the same period
last year.
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Income taxes Quarters ended March 31
($ millions, except tax rates) 2005 2004 Change
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Blended federal and provincial statutory
income tax 108.7 57.1 90.4 %
Changes in estimates of available temporary
differences in prior years (36.0) - -
Tax rate differential on, and consequential
adjustments from, the reassessment of
prior year tax issues (11.3) (1.6) -
Large corporations tax and other 8.9 7.1 25.4 %
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70.3 62.6 12.3 %
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Blended federal and provincial statutory
tax rates (%) 34.6 34.7 (0.1) pts
Effective tax rates (%) 22.4 38.0 (15.6) pts
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Blended federal and provincial statutory income tax increased due to a
$149.4 million increase in income before taxes. Other reductions in tax
included changes in estimates of available temporary differences in prior
years and a tax rate differential (and consequential adjustments from) the
favourable reassessment of prior year's tax issues.
Based on continuation of the rate of TELUS earnings, the Company expects
to be able to fully utilize its non-capital losses before the end of 2006. The
Company's assessment is that the risk of expiry of such non-capital losses is
remote.
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Non-controlling interest Quarters ended March 31
($ millions) 2005 2004 Change
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1.6 0.8 100.0 %
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Non-controlling interest primarily represents minority shareholders'
interests in several small subsidiaries. The increase in the first quarter of
2005, relative to the same period in 2004, is primarily minority shareholders'
interest in TELUS' recent acquisition of Ambergris.
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Preference and preferred dividends Quarters ended March 31
($ millions) 2005 2004 Change
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- 0.9 (100.0)%
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Preference and preferred dividends ended with the redemption of all of
the publicly held TELUS Communications Inc. Preference and Preferred Shares,
completed on August 3, 2004.
5.4 Communications segment results
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Operating revenues - Communications
segment Quarters ended March 31
($ millions) 2005 2004 Change
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Voice local 552.8 528.9 4.5 %
Voice long distance 226.4 229.6 (1.4)%
Data 377.6 339.8 11.1 %
Other 65.4 72.8 (10.2)%
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External operating revenue 1,222.2 1,171.1 4.4 %
Intersegment revenue 22.6 25.0 (9.6)%
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Total operating revenue 1,244.8 1,196.1 4.1 %
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Key operating indicators - Communications segment
At March 31
(000s) 2005 2004 Change
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Residential network access lines 3,033 3,075 (1.4)%
Business network access lines 1,760 1,773 (0.7)%
------- ------- -------
Total network access lines(1) 4,793 4,848 (1.1)%
High-speed Internet subscribers 711.9 605.2 17.6 %
Dial-up Internet subscribers 270.4 309.1 (12.5)%
------- ------- -------
Total Internet subscribers (2) 982.3 914.3 7.4 %
Quarters ended March 31
(000s) 2005 2004 Change
---------------------------
Change in residential network access lines (14) (11) (27.3)%
Change in business network access lines (1) (11) 90.9 %
------- ------- -------
Change in total network access lines (15) (22) 31.8 %
High-speed Internet net additions 22.2 43.6 (49.1)%
Dial-up Internet net reductions (11.2) (10.7) (4.7)%
------- ------- -------
Total Internet subscriber net additions 11.0 32.9 (66.6)%
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(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.
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Communications segment revenues increased by $48.7 million in the first
quarter of 2005, when compared with the same period in 2004 as a result of
growth in enhanced and managed data services, new revenues from acquisitions,
as well as a favourable regulatory adjustment. The non-recurring portion of
the regulatory adjustment is $6.4 million.
- Voice local revenue increased by $23.9 million in the first quarter of
2005, when compared with the same period in 2004 due primarily to two
regulatory adjustments and the effect of business rate increases
implemented mid-2004, partly offset by the effect of continued line
losses. Contribution revenue in the first quarter of 2005 included a
positive adjustment of $6.4 million for CRTC Decision 2005-4.
Because TELUS used the liability method for recording price cap
deferrals, a favourable adjustment of $18.4 million, drawn from the
price cap deferral account, was recorded in local revenue in the first
quarter of 2005. This favourable adjustment offset mandated additional
discounts for competitor digital network services (basic data
services) pursuant to CRTC Decision 2005-6. See Section 10.1
Regulatory for further discussion of these and other recent CRTC
decisions.
Residential network access lines continued to decrease as a result of
competitive activity and technological substitution, including
substitution to wireless services. Residential line losses were
primarily to existing resellers and VoIP competitors, in comparison to
losses incurred as a result of introduction of cable telephony in
Calgary. Business lines decreased nominally in the first quarter of
2005, as incumbent local exchange carrier ("ILEC") Centrex line losses
to competition and migration to more efficient ISDN data services were
nearly offset by temporary ILEC line gains for the upcoming May 2005
B.C. provincial election and non-incumbent local exchange carrier
("non-ILEC") gains. It is expected that the trend of declining
residential network access lines will worsen in the future due to new
voice telephony service offers from cable-TV competitors, and
continued competition from other resale and VoIP competitors.
- Voice long distance revenues decreased at an improved rate of 1.4% in
the first quarter of 2005, when compared with the same period in 2004.
The decrease in revenues was due to lower average per-minute prices
for increased minute volumes, including growth in non-incumbent
volumes, partly offset by a $1.00 increase in the monthly long
distance administration fee in certain long distance plans.
- Communications segment data revenues increased by $37.8 million in the
first quarter of 2005, when compared with the same period in 2004.
This included $18.8 million of revenues from two recent acquisitions,
including a portion that is seasonal equipment sales. The increase in
data revenues due to acquisitions was nearly offset by the additional
discounts for competitive digital network services mandated by CRTC
Decision 2005-6, as described under voice local revenues above.
The remaining growth in non-acquired data revenues of $19.0 million
was primarily due to: (i) increased Internet and enhanced data service
revenues of $28.0 million as a result of traction from new business
contracts, and continued growth in high-speed Internet subscribers and
a higher average price; (ii) increased managed data revenues for the
provision of business process outsourcing services provided to
customers; (iii) increased data equipment sales; partly offset by (iv)
the additional discounts for competitive digital network services in
basic data services.
The rate of growth in high-speed Internet subscribers has slowed from
that observed in 2004 due to the high existing household penetration
rates for high-speed services in Western Canada and lower gross
additions caused by increased competitive activity. In addition, in
the first quarter last year we experienced high net additions due to a
very attractive introductory marketing offer.
- Other revenue decreased due mainly to lower voice equipment sales as
well as lower late payment and customer financing revenues.
- Intersegment revenue represents 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 $159.5 million in 2005, an increase of $31.1 million or 24.2%,
when compared with the first quarter of 2004. The increase was a result of
growing revenues from the purchase of ADCOM, increased data equipment sales
and as well as other data and voice service revenues.
-------------------------------------------------------------------------
Operations expense - Communications segment Quarters ended March 31
($ millions, except employees) 2005 2004 Change
-------------------------------------------------------------------------
Salaries, benefits and
other employee-related costs 414.1 393.0 5.4 %
Other operations expenses 302.5 313.7 (3.6)%
-------------------------------------------------------------------------
Total operations expense 716.6 706.7 1.4 %
-------------------------------------------------------------------------
Full-time equivalent employees,
end of period 21,519 18,522 16.2 %
-------------------------------------------------------------------------
Operations expenses increased modestly in the first quarter of 2005, when
compared with the same period in 2004, despite structural changes caused by
the addition of two operations in late 2004 (B.C. payroll services and the
acquisition of ADCOM), and a new investment in a business process outsourcing
service provider in February 2005. In aggregate compared to the first quarter
of 2004, these three new operations added approximately 2,825 full-time
equivalent employees, $6.7 million for related salaries, benefits and employee
costs, and $12.9 million for other operations expenses primarily comprised of
cost of sales associated with equipment sales at ADCOM.
- Salaries, benefits and employee-related costs increased by 3.7%, or
$14.4 million, prior to structural changes described above. The
increase was due primarily to increased compensation and increased
full-time equivalent staff. Pension expense for defined benefit and
defined contribution plans was $12.1 million in the first quarter of
2005, a decrease of $3.7 million from the same period in 2004.
- Other operations expenses decreased by 7.7%, or 24.1 million, prior to
structural changes. The reasons for lower other operations expense
included: (i) $10.3 million of reduced facilities, transit and
termination costs associated with moving traffic on-net and to a
lesser extent, discounts from competitor ILECs arising from CRTC
Decision 2005-6; (ii) no payments to Verizon under renegotiated
Software and Related Technology and Service Agreements in the first
quarter of 2005, compared with $8.6 million in the same period in
2004; and (iii) $8.4 million of increased capitalization of labour due
to a higher labour component in capital expenditures in 2005. Contract
and consulting costs and bad debt expenses also decreased in the first
quarter of 2005, offset by increased product and service cost of sales
of $5.2 million and other cost increases.
Included in the total segment expenses discussed above are non-ILEC
operations expenses of $151.6 million in the first quarter of 2005, as
compared with $137.5 million in the same period in 2004. This 10.3% increase
in operations expense supported growth in non-ILEC revenues observed for the
same periods.
-------------------------------------------------------------------------
Restructuring and workforce reduction costs -
Communications segment Quarters ended March 31
($ millions) 2005 2004 Change
-------------------------------------------------------------------------
9.4 15.9 (40.9)%
-------------------------------------------------------------------------
In the first quarter of 2005, the Company undertook a number of smaller
initiatives within the ILEC portion of the Communications Segment, such as
operational consolidation, rationalization and integrations. These initiatives
are aimed to improve the Company's operating and capital productivity.
Management expects that restructuring charges will ramp up during the year and
will be approximately $100 million for the full year of 2005.
-------------------------------------------------------------------------
EBITDA and EBITDA margin - Quarters ended March 31
Communications segment 2005 2004 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 518.8 473.5 9.6 %
EBITDA margin (%) 41.7 39.6 2.1 pts
-------------------------------------------------------------------------
EBITDA and EBITDA margin improved significantly in the first quarter of
2005, when compared with the same period in 2004. These increases were due to
non-ILEC and ILEC revenue growth of 24.2% and 1.6%, respectively, exceeding
the growth rate in the respective operations expenses (non-ILEC operations
expenses increased by only 10.3%, while ILEC operations expenses decreased by
1.8%). Restructuring charges recorded for ILEC operations also decreased.
Non-ILEC EBITDA was $7.9 million in the first quarter of 2005, as compared to
negative $9.1 million in the first quarter of 2004. ILEC EBITDA was
$510.9 million in the first quarter of 2005, up 5.9% as compared to
$482.6 million in the first quarter of 2004.
Communications segment capital expenditures are discussed in Section 7.2
Cash used by investing activities.
5.5 Mobility segment results
-------------------------------------------------------------------------
Operating revenues - Mobility segment Quarters ended March 31
($ millions) 2005 2004 Change
-------------------------------------------------------------------------
Network revenue 695.5 592.4 17.4 %
Equipment revenue 57.0 40.3 41.4 %
-------------------------------------------------------------------------
External operating revenue 752.5 632.7 18.9 %
Intersegment revenue 5.8 4.6 26.1 %
-------------------------------------------------------------------------
Total operating revenue 758.3 637.3 19.0 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Key operating indicators - Mobility segment
-------------------------------------------------------------------------
(000s) At March 31
2005 2004 Change
----------------------------
Subscribers - postpaid 3,315.1 2,876.5 15.2 %
Subscribers - prepaid 701.5 623.6 12.5 %
-------- -------- --------
Subscribers - total(1) 4,016.6 3,500.1 14.8 %
Digital POPs(2) covered including
roaming/resale (millions)(3) 30.2 29.5 2.4 %
----------------------------
Quarters ended March 31
(000s) 2005 2004 Change
----------------------------
Subscriber net additions - postpaid 74.8 64.7 15.6 %
Subscriber net additions - prepaid 5.4 11.4 (52.6)%
-------- -------- --------
Subscriber net additions - total 80.2 76.1 5.4 %
Churn, per month (%)(4) 1.45 1.49 (0.04) pts
COA(5) per gross subscriber addition ($)(4) 355 383 (7.3)%
ARPU ($)(4) 58 57 1.8 %
Average minutes of use
per subscriber per month (MOU) 371 362 2.5 %
EBITDA to network revenue (%) 48.5 41.8 6.7 pts
Retention spend to network revenue(4) (%) 5.5 5.0 0.5 pts
EBITDA ($ millions) 337.4 247.8 36.2 %
EBITDA excluding COA ($ millions)(4) 427.2 336.1 27.1 %
-------------------------------------------------------------------------
pts - percentage points
(1) Subscribers are measured at the end of the reporting period based
on information from billing 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 March 31, 2005, TELUS Mobility PCS digital population coverage
includes expanded coverage of approximately 7.5 million PCS POPs due
to roaming/resale agreements principally with Bell Mobility and
Aliant Telecom Wireless.
(4) See Section 11.3 Definition of key operating indicators. These are
industry measures useful in assessing operating performance of a
wireless company, but are not defined under accounting principles
generally accepted in Canada and the U.S.
(5) Cost of acquisition.
------------------------------------------------------------------------
- TELUS Mobility Network revenue increased by $103.1 million for the
first quarter of 2005, as compared with the same period last year.
This growth was a result of the continued expansion of the subscriber
base by 14.8% to approximately 4.0 million subscribers combined with
increased average revenue per subscriber unit per month ("ARPU"). As a
result of an overall increase in average minutes of use ("MOU") per
subscriber per month, continued pricing discipline, and increased
usage of data and Internet based products, including picture and text
messaging, ARPU increased to $58 in the first quarter of 2005 as
compared with $57 in 2004.
Average minutes of use per subscriber per month increased by 2.5% in
the first quarter of 2005, when compared with the same period in 2004.
At March 31, 2005, postpaid subscribers represented 82.5% of the total
cumulative subscriber base remaining stable from one-year earlier,
contributing to the significant ARPU premium TELUS Mobility enjoys
over its competitors. Postpaid subscriber net additions of 74,800 for
the first quarter of 2005 represented 93.3% of all net additions as
compared with 64,700 (85.0%) for the corresponding period in 2004.
This was the seventh consecutive quarter of year-over-year increased
post-paid subscriber net additions.
Blended postpaid and prepaid monthly churn improved in the first
quarter of 2005 when compared the same quarter in 2004. Deactivations
were 172,800 for the first quarter of 2005 as compared with 154,200
for the same period last year. The improved monthly churn rate was a
notable accomplishment in a market characterized by vigorous
competition including the commercial launch of a pre-paid wireless
resale service by a new competitor in March 2005. The excellent
monthly churn and deactivation results reflect a continued focus on
customer care including successful loyalty and retention efforts,
value-added solutions and superior network quality for an exceptional
service experience.
- Equipment sales, rental and service revenue increased in the first
quarter ended March 31, 2005 as compared to the corresponding period
in 2004. Handset revenue increased mainly due to subscriber growth
brought about by a strong wireless market as well as increased
promotional, retention, and contracting activity. Gross subscriber
additions grew to 253,000 for the first quarter of 2005 as compared to
230,300 for the same period in 2004. Handset revenues associated with
gross subscriber activations are included in COA per gross subscriber
addition.
- 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 - Mobility segment Quarters ended March 31
($ millions, except employees) 2005 2004 Change
-------------------------------------------------------------------------
Equipment sales expenses 104.6 89.2 17.3 %
Network operating expenses 98.4 102.5 (4.0) %
Marketing expenses 74.3 61.4 21.0 %
General and administration expenses 143.6 136.4 5.3 %
-------------------------------------------------------------------------
Total operations expense 420.9 389.5 8.1 %
-------------------------------------------------------------------------
Full-time equivalent employees, end of period 5,892 5,370 9.7 %
-------------------------------------------------------------------------
TELUS Mobility operations expense increased in the first quarter of 2005,
when compared with the same period last year, to support growth in the
subscriber base. TELUS Mobility has been able to achieve significant economies
of scale as evidenced by the 8.1% increase in total operations expense, when
compared to first quarter Network revenue growth of 17.4% and year-over-year
growth in subscribers of 14.8%.
- Expenses related to equipment sales increased in the first quarter of
2005 when compared with the same period in 2004, principally due to an
increase in gross subscriber activations as well as increased
retention activity. Handset costs associated with gross subscriber
activations are included in COA per gross subscriber addition.
- Network operating expenses decreased by 4.0% for the first quarter of
2005, as compared with the same period last year. Network roaming
costs decreased by $4.6 million due to improved roaming rates
negotiated with a number of telecommunications carriers and competitor
digital network service discounts arising from savings from CRTC
Decision 2005-6, partially offset by higher volumes related to
successful marketing efforts in rural roaming/resale areas.
Transmission and site-related expenses increased during the first
quarter of 2005 to support the greater number of cell sites, a larger
subscriber base, and improved network quality and coverage. The
digital population coverage grew to 30.2 million at March 31, 2005, 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.
However, COA per gross subscriber addition improved by 7.3% in the
first quarter to $355 as compared with the same period last year due
to higher gross subscriber additions and lower handset costs. Combined
with the higher ARPU and improved monthly churn, COA per gross
subscriber addition over the lifetime revenue of the subscriber
improved in the first quarter as compared with the same period in
2004.
- General and administration expenses increased by only 5.3% in the
first quarter of 2005, when compared to the same quarter in 2004,
contributing significantly to the bottom line through continued scale
efficiencies. TELUS Mobility increased full-time equivalent employees
to support the significant growth in the subscriber base and continued
expansion of the client care team and company-owned retail stores.
-------------------------------------------------------------------------
EBITDA and EBITDA margin - Quarters ended March 31
Mobility segment 2005 2004 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 337.4 247.8 36.2 %
EBITDA margin (%) 44.5 38.9 5.6 pts
-------------------------------------------------------------------------
Significant growth in TELUS Mobility EBITDA and EBITDA margin was
attributed to its strategic focus on profitable subscriber growth, increased
ARPU, a lower cost of acquisition per gross subscriber addition, a world-class
monthly churn rate, and successful cost containment efforts. The EBITDA
margin, when calculated as a percentage of Network revenue, improved to 48.5%
for the first quarter of 2005, as compared with 41.8% for the same period in
2004, representing a positive increase of 6.7 percentage points. Notably,
incremental Network revenue flowed through to EBITDA at a rate of 86.9% as
compared to 69.0% for the same period in 2004.
Mobility segment capital expenditures are discussed in Section 7.2 Cash
used by investing activities.
6. Financial condition
The following are the significant changes in the consolidated balance
sheets between December 31, 2004 and March 31, 2005.
-------------------------------------------------------------------------
March 31, Dec. 31, Change Explanation
($ millions) 2005 2004
-------------------------------------------------------------------------
Current Assets
Cash and
temporary 1,247.3 896.5 350.8 See Section 7. Liquidity
investments, and capital resources
net
-------------------------------------------------------------------------
Accounts receivable 874.9 863.5 11.4 Related to increased
revenues
-------------------------------------------------------------------------
Income and other 172.7 132.5 40.2 Changes in estimates of
taxes receivable available temporary
differences, reassessments
and interest for prior
years
-------------------------------------------------------------------------
Inventories 111.0 133.3 (22.3) Primarily seasonal
reductions of inventory
-------------------------------------------------------------------------
Prepaid expenses 245.8 183.4 62.4 Prepayment of Mobility
and other licence fees, federal
Canada Pension Plan
contributions and
Employment Insurance
premiums, and maintenance
contracts
-------------------------------------------------------------------------
Current portion 372.0 438.4 (66.4) Decrease in available tax
of future loss pools in the upcoming
income taxes 12 months
-------------------------------------------------------------------------
Current Primarily an increase of
Liabilities accrued interest for
Accounts payable1, 486.9 1,362.6 124.3 semi-annual interest
and accrued payments in June 2005
liabilities
-------------------------------------------------------------------------
Restructuring and 58.4 70.7 (12.3) Decreased as payments
workforce reduction under previous programs
accounts payable exceeded new obligations
and accrued
liabilities
-------------------------------------------------------------------------
Dividends payable 72.3 - 72.3 The first quarter 2005
dividend was payable on
April 1, 2005, while the
dividend for the fourth
quarter of 2004 was
remitted on Dec. 31, 2004
-------------------------------------------------------------------------
Advance billings 532.2 531.5 0.7 -
and customer
deposits
-------------------------------------------------------------------------
Current maturities 4.4 4.3 0.1 Current maturities are
of long-term debt primarily capital leases
-------------------------------------------------------------------------
Working capital (1) 869.5 678.5 191.0 Primarily reflects
accumulation of cash
-------------------------------------------------------------------------
Capital Assets, 11,107.5 11,221.0 (113.5) See Sections 5.3
Net Consolidated results of
operations - Depreciation
and amortization and 7.2
Cash used by investing
activities
-------------------------------------------------------------------------
Other Assets
Deferred charges 746.4 704.4 42.0 Primarily pension plan
contributions in excess
of charges to income.
-------------------------------------------------------------------------
Future income taxes 72.7 99.8 (27.1) Reflects use of loss
carry forward amounts
-------------------------------------------------------------------------
Investments 38.7 38.4 0.3 Consists of a number of
small portfolio
investments
-------------------------------------------------------------------------
Goodwill 3,147.5 3,126.8 20.7 Goodwill of $23.0 million
added for consolidation
of a new investment,
offset in part by foreign
exchange changes since
acquisition
-------------------------------------------------------------------------
Long-Term Debt 6,356.3 6,332.2 24.1 Primarily an increase in
the Canadian dollar value
of U.S. dollar denominated
notes, resulting from a
slight weakening of the
Canadian dollar
-------------------------------------------------------------------------
Other Long-Term 1,486.6 1,506.1 (19.5) Primarily a reduction in
Liabilities the deferred hedging
liability for U.S. dollar
denominated notes,
resulting from a slight
weakening of the Canadian
dollar
-------------------------------------------------------------------------
Future Income Taxes 995.3 991.9 3.4 Increase due to a first
quarter 2005 acquisition
-------------------------------------------------------------------------
Non-Controlling 18.9 13.1 5.8 The increase was from
Interest minority partners' share
of earnings in several
small subsidiaries,
including a first quarter
2005 acquisition
-------------------------------------------------------------------------
Shareholders' Equity
Convertible 8.8 8.8 - Value of the convertible
debentures debentures conversion
option
-------------------------------------------------------------------------
Common equity 7,116.4 7,016.8 99.6 Net income of $242.2
million plus share options
exercised of $92.1 million
less dividends payable of
$72.3 million and normal
course issuer bid costs of
$158.3 million and other
of $4.1 million
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities is an indicator of
the ability to finance current operations and meet obligations as
they fall due.
-------------------------------------------------------------------------
7. Liquidity and capital resources
7.1 Cash provided by operating activities
-------------------------------------------------------------------------
($ millions) Quarters ended March 31
2005 2004 Change
-------------------------------------------------------------------------
728.4 588.1 23.9 %
-------------------------------------------------------------------------
Cash provided by operating activities increased in the first quarter of
2005, when compared with the same period in 2004, due to the following:
- EBITDA increased by $134.9 million in 2005, when compared with 2004
- Restructuring and workforce reduction payments decreased by
$46.7 million
- Interest paid decreased by $9.7 million
- Reduced repayments of securitized accounts receivable (no repayments
in the first quarter of 2005; $150 million repayments in the first
quarter of 2004).
Partly offsetting the above increases were:
- Income taxes paid were $1.1 million in the first quarter of 2005,
compared with an income tax recovery of $104.6 million in the same
period in 2004
- Employer contributions to employee defined benefit plans increased by
$8.8 million due to a change in timing of funding
- A decrease in interest received of $7.9 million
- Other changes in non-cash working capital in the first quarter of each
year.
7.2 Cash used by investing activities
-------------------------------------------------------------------------
($ millions) Quarters ended March 31
2005 2004 Change
-------------------------------------------------------------------------
306.2 298.6 2.5 %
-------------------------------------------------------------------------
Investing activity in the first quarter of 2005 included a $27.5 million
investment in a business process outsourcing service provider, located in
Asia. In the first quarter of 2004, proceeds of $12.1 million were received
from the sale of non-strategic assets. Capital expenditures decreased in the
first quarter of 2005, when compared with the same period in 2004, as
discussed below.
-------------------------------------------------------------------------
Capital expenditures by segment Quarters ended March 31
($ in millions, except capital 2005 2004 Change
expenditure intensity)
-------------------------------------------------------------------------
Communications segment 213.6 259.4 (17.7)%
Mobility segment 59.6 50.3 18.5 %
-------------------------------------------------------------------------
TELUS consolidated 273.2 309.7 (11.8)%
-------------------------------------------------------------------------
Capital expenditure intensity (1) (%) 13.8 17.2 (3.4) pts
-------------------------------------------------------------------------
(1) Measured by dividing capital expenditures by operating revenues.
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 decreased by 11.5% to
$192.2 million in the first quarter of 2005, when compared with the
same period in 2004. The decrease primarily reflected lower spending
on network infrastructure and high-speed Internet, partly offset by
significantly increased investment in internal systems and processes.
While expenditures on high-speed Internet decreased by 56% to
approximately $16 million in the first quarter of 2005, when compared
to the same period last year, this generally reflects different
seasonal priorities in 2005, and it is expected that full year
expenditures will be in line with those in 2004.
Non-ILEC capital expenditures decreased by 49.3% to $21.4 million in
the first quarter of 2005, when compared with the same period in 2004.
The decrease was primarily due to lower spending on network
infrastructure, as expenditures in the same period last year included
up-front costs to support certain major new customers.
The Communications segment capital expenditure intensity ratio was
17.2% in the first quarter of 2005, compared with 21.7% in the first
quarter of 2004. As a result of strong EBITDA growth and reduced
capital expenditures, cash flow (EBITDA less capital expenditures)
increased by 42.6% to $305.2 million in the first quarter of 2005,
when compared with the same period in 2004.
- Mobility segment capital expenditures increased by 18.5% in first
quarter of 2005, when compared with the same period in 2004. The
higher capital spending was attributed to continued enhancement of
digital wireless coverage and continued building of microwave
facilities aimed at reducing future leased line transmission costs.
Capital expenditure intensity for TELUS Mobility was unchanged at 7.9%
in the first quarter of 2005, when compared with the same period in
2004, as increased capital expenditures were offset by significant
growth in Network revenues. As a result of continued strong growth in
EBITDA and stable capital expenditure intensity, Mobility generated a
record cash flow (EBITDA less capital expenditures) of $277.8 million
in the first quarter of 2005 as compared with $197.5 million for the
same period in 2004, representing a 40.7% increase.
Consolidated cash flow (EBITDA less capital expenditures) increased by
41.6% to a record $583.0 million in the first quarter of 2005, when compared
with the same period in 2004.
7.3 Cash used by financing activities
-------------------------------------------------------------------------
($ millions) Quarters ended March 31
2005 2004 Change
-------------------------------------------------------------------------
71.4 22.2 -
-------------------------------------------------------------------------
Cash used by financing activities increased in the first quarter of 2005,
when compared with the same period in 2004, due primarily to repurchases of
shares on the market under the normal course issuer bid. Financing activities
included the following:
- Proceeds from Common Shares and Non-Voting Shares issued increased by
$60.9 million in the first quarter of 2005, mainly due to the exercise
of options.
- Cash dividends paid to shareholders were zero in the first quarter of
2005 (2004 - $42.3 million), as the funds for the dividend payable on
January 1, 2005 were remitted in 2004.
- Under the Normal Course Issuer Bid program, TELUS purchased for
cancellation Common Shares and Non-Voting Shares for a total outlay of
$158.3 million in the first quarter of 2005. This total outlay was
comprised of a reduction to share capital of $68.4 million
representing the book value of shares repurchased, and a reduction to
retained earnings of $89.9 million representing the amount in excess
of book value. At March 31, 2005, the total outlay under this program
since inception in December 2004 was $236.3 million.
Normal Course Issuer Bid to March 31, 2005
-------------------------------------------------------------------------
Purchased
and Purchased, Cumulative
Purchased for cancelled but not shares
cancellation in the first cancelled at purchased
in December quarter of March 31, for
shares) 2004 2005 2005 cancellation
-------------------------------------------------------------------------
Common Shares 755,711 1,750,900 346,200 2,852,811
Non-Voting Shares 1,451,400 1,770,800 265,300 3,487,500
-------------------------------------------------------------------------
2,207,111 3,521,700 611,500 6,340,311
-------------------------------------------------------------------------
----------------------------------
Maximum shares
permitted
for
repurchase
under the
shares) program
----------------------------------
Common Shares 14,000,000
Non-Voting Shares 11,500,000
----------------------------------
25,500,000
----------------------------------
- Redemptions and repayments of long-term debt were $1.0 million in the
first quarter of 2005 (2004 - $34.2 million), as there are no
significant debt maturities in 2005.
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
March 31, March 31,
Periods ended 2005 2004 Change
-------------------------------------------------------------------------
Components of debt and coverage ratios (1)
------------------------------------------
Net debt ($ millions) 6,127.6 7,297.8 (1,170.2)
Total capitalization - book value
($ millions) 13,271.7 13,847.7 (576.0)
EBITDA (excluding restructuring)
($ millions) 3,271.6 2,910.5 361.1
Net interest cost ($ millions) 606.7 620.0 (13.3)
Debt ratios
-----------
Fixed rate debt as a proportion of
total indebtedness (%) 93.2 95.4 (2.2)
Average term to maturity of debt (years) 5.1 6.0 (0.9)
Net debt to total capitalization (%) (1) 46.2 52.7 (6.5) pts
Net debt to EBITDA (1) 1.9 2.5 (0.6)
Coverage ratios (1)
-------------------
Earnings coverage 2.5 1.9 0.6
EBITDA interest coverage 5.4 4.7 0.7
Other measures
--------------
Free cash flow ($ millions) - quarterly (2) 566.6 443.3 123.3
Free cash flow ($ millions) - 12-month
trailing 1,420.6 1,020.6 400.0
Dividend payout ratio (%) (1) 41 64 (23) pts
-------------------------------------------------------------------------
(1) See Section 11.4 Definition of liquidity and capital resource
measures.
(2) See Section 11.2 Free cash flow.
-------------------------------------------------------------------------
Net debt decreased at the end of the first quarter of 2005, when compared
to one year earlier, as a result of an increase of $973.8 million in cash and
temporary investments (netted against debt for the purposes of this
calculation) and debt reduction in the third quarter of 2004. Total
capitalization also decreased for these reasons; partly offset by a
$585 million increase in common equity over this 12-month period. The net debt
to EBITDA ratio measured at March 31, 2005 improved significantly, when
compared with one year earlier, as a result of increased cash, debt reduction
and an increase in 12-month trailing EBITDA (excluding restructuring).
The earnings coverage ratio improved by 0.5 because of increased income
before interest and taxes, and improved by 0.1 because of decreased interest
on total debt. The EBITDA interest coverage ratio improved by 0.6 as a result
of higher EBITDA (excluding restructuring), and improved by 0.1 due to lower
net interest costs. Free cash flow for the first quarter of 2005 increased,
when compared with the same period in 2004, primarily due to growth in EBITDA,
since lower restructuring payments, capital expenditures, and net interest
were slightly offset by reduced tax recoveries. The Free cash flow measure for
the 12-month period ended March 31, 2005 increased, when compared with one
year earlier, primarily because of improved EBITDA, lower payments under
restructuring programs, lower capital expenditures and interest payments,
partly offset by lower tax recoveries and lower interest received.
As announced in October 2004, on a prospective basis, the Company has set
a target guideline for the annual dividend payout ratio of 45 to 55% of net
earnings. The dividend payout ratio of 41% for the first quarter of 2005,
representing four-times the current 20 cent quarterly dividend divided by
twelve-month trailing earnings per share, was below the guideline. When
normalized to exclude the current period, non-recurring 15 cents per share
favourable impact of tax adjustments, the dividend payout ratio was 44%. The
implied dividend payout for 2005 ratio is 41% (44% when normalized to exclude
the non-recurring favourable 15-cent tax impact), based on the mid-point of
revised guidance presented in Section 9. The measurement of the dividend
payout ratio was aligned this quarter to be consistent with market practice of
using the annualized current quarterly dividend per share. Consequently, the
dividend payout ratios calculated on this new basis for the full year of 2004
and the fourth quarter of 2004 are both 51%. The dividend payout ratios for
the first three quarters of 2004, and those for 2003, are unchanged as the
quarterly dividend per share was constant in those periods.
7.5 Credit facilities
Including cash of $1,247.3 million and the credit facilities described in
the table below, TELUS had unutilized available liquidity in excess of
$2.8 billion at March 31, 2005. TELUS' credit facilities contain customary
covenants including a requirement that TELUS not permit its consolidated
Leverage Ratio (Funded Debt to trailing 12-month EBITDA) to exceed 4.0:1
(approximately 1.9:1 at March 31, 2005) and not permit its consolidated
Coverage Ratio (EBITDA to Interest Expense on a trailing 12-month basis) to be
less than 2.0:1 (approximately 5.4:1 at March 31, 2005) at the end of any
financial quarter. There are certain minor differences in the calculation of
the Leverage Ratio and Coverage Ratio under the credit agreement as compared
with the calculation of net debt to EBITDA and EBITDA interest coverage. The
calculations are not expected to be materially different. The covenants are
not impacted by revaluation of capital assets, intangible assets and goodwill
for accounting purposes, and continued access to TELUS' credit facilities is
not contingent on the maintenance by TELUS of a specific credit rating.
The following were the credit facilities available to TELUS at March 31,
2005:
-------------------------------------------------------------------------
Outstanding
Credit Facilities undrawn
At March 31, 2005 letters
($ in millions) Expiry Size Drawn of 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 - 4.6
-------------------------------------------------------------------------
Total - 1,674.0 - 107.2
-------------------------------------------------------------------------
(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.
-------------------------------------------------------------------------
Subsequent to March 31, 2005, TELUS entered into new $1.6 billion
syndicated credit facilities with a number of Canadian financial institutions.
The new credit facilities consist of: (i) an $800 million(or US dollar
equivalent) three-year revolving facility with a maturity date of May 7, 2008;
and (ii) an $800 million facility (or U.S. dollar equivalent) five-year
revolving facility with a maturity date of May 4, 2010. These facilities
replace existing facilities including an $800 million multiyear revolving
credit facility expiring May 7, 2008, and an $800 million 364-day extendible
facility (with a one year term-out option), which had been available until
May 6, 2005. The credit facilities dated May 4, 2005 are therefore
substantially the same as the prior credit facilities, except for an extension
of term and positive adjustments to the pricing grid. The financial tests
continue to be that the Company may not permit its long-term debt ratio to
operating cash flow to exceed 4.0:1 and may not permit its operating cash flow
to interest expense ratio to be less than 2.0:1, each as defined under the
credit facilities.
7.6 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 May 3, 2005. The proceeds of securitized receivables were $150
million at March 31, 2005, unchanged from one year earlier and the end of
2004. It is necessary to retain a minimum of $150 million proceeds under this
program to keep it active.
7.7 Credit ratings
On May 3, 2005, the credit ratings for TELUS and TCI remain investment
grade and were unchanged from the ratings reported in TELUS' 2004 annual
report. 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-, or the equivalent, in
future.
7.8 Off-balance sheet arrangements and contractual liabilities
Financial instruments (Note 3 of the interim consolidated financial
statements)
During the first quarter of 2005, the Company entered into a hedging
relationship that fixes the Company's compensation cost arising from a
specific grant of restricted stock units; hedge accounting has been applied to
this relationship.
As at March 31, 2005, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rate on U.S.
$55 million of fiscal 2005 purchase commitments; hedge accounting has been
applied to these foreign currency forward contracts, all of which relate to
the Mobility segment.
The fair values of the Company's long-term debt and convertible
debentures are estimated based on quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
maturity as well as the use of discounted future cash flows using current
rates for similar financial instruments subject to similar risks and
maturities. The carrying amount and fair value of long-term debt are as
follows:
As at March 31, As at December 31,
2005 2004
-------------------------------------------------------------------------
Carrying Fair Carrying Fair
($ millions) amount value amount value
-------------------------------------------------------------------------
Long-term debt
Principal 6,369.5 7,258.5 6,345.3 7,342.3
Derivative financial instruments
used to manage interest rate and
currency risks associated with
U.S. dollar denominated debt 1,009.5 1,369.4 1,032.6 1,299.5
Derivative financial instruments
used to manage interest rate
risk associated with Canadian
dollar denominated debt - 2.4 - 1.3
-------------------------------------------------------------------------
7,379.0 8,630.3 7,377.9 8,643.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingent liabilities (Note 14 of the interim
consolidated financial statements)
At March 31, 2005, the Company had $51.1 million in outstanding
commitments for restructuring programs prior to 2005 and $7.3 million in
outstanding commitments for restructuring programs initiated in 2005.
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
March 31, 2005, had balance of $127.1 million. Due to the Company's use of the
liability method of accounting for the deferral account, the CRTC Decision
2005-6, as it relates to the Company's provision of competitor digital network
services, is not expected to affect the Company's revenues.
There can be no assurance that, with the resumption of collective
bargaining, compensation increases will be as planned or that reduced
productivity will not occur as a result of a labour disruption. Should the
ultimate operational and financial impacts differ from management's
assessments and assumptions, a material adjustment to the Company's financial
position and the results of its operations could result. The operational and
financial impacts of the outcome of the appeal process on the Company are not
practicably determinable currently.
Canadian generally accepted accounting principles require the disclosure
of certain types of guarantees and their maximum, undiscounted amounts. The
maximum potential payments represent a "worst-case scenario" and do not
necessarily reflect results expected by the Company. Guarantees requiring
disclosure are those obligations that require payments contingent on specified
types of future events; in the normal course of its operations, the Company
enters into obligations which GAAP may consider to be guarantees. As defined
by Canadian GAAP, guarantees subject to these disclosure guidelines do not
include guarantees that relate to the future performance of the Company. At
March 31, 2005, the Company has no liability recorded in respect of
performance guarantees, and has $1.0 million recorded in respect of lease
guarantees. The maximum undiscounted guarantee amounts as at March 31, 2005,
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 new owner'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 owner being prevented from carrying on
the directory business as specified in the agreement, TELUS would indemnify
the owner in respect of any losses that the owner incurred. At March 31, 2005,
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 enumerated in Note
14(d) of the interim consolidated financial statements.
7.9 Outstanding share information
The following is a summary of the outstanding shares for each class of
equity at March 31, 2005 and at April 21, 2005. In addition, for April 21,
2005, 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
(millions of shares) outstanding outstanding outstanding
-------------------------------------------------------------------------
At March 31, 2005
Common equity -
Common Shares outstanding 190.9 - 190.9
Common equity - Non-Voting
Shares outstanding - 167.5 167.5
---------- ---------- ----------
190.9 167.5 358.4 (1)
---------- ---------- ----------
At April 21, 2005
Common equity - Common Shares
outstanding 190.9 - 190.9
Common equity - Non-Voting
Shares outstanding - 167.6 167.6
---------- ---------- ----------
190.9 167.6 358.5
---------- ---------- ----------
Outstanding and issuable shares (2)
at April 21, 2005
Common Shares and Non-Voting
Shares outstanding 190.9 167.6 358.5
TELUS Corporation convertible
debentures - 3.8 3.8
Options(3) 2.5 19.4 21.9
Warrants - 0.6 0.6
---------- ---------- ----------
193.4 191.4 384.8
---------- ---------- ----------
---------- ---------- ----------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share for the
first quarter of 2005, the number of shares was 367.9 million.
(2) Assuming full conversion and ignoring exercise prices.
(3) Not reduced by any options that may be forfeited or cancelled during
the period April 1, 2005 to April 21, 2005.
-------------------------------------------------------------------------
8. Critical accounting estimates and accounting policy developments
8.1 Critical accounting estimates
TELUS' significant accounting policies are described in Note 1 of its
annual 2004 consolidated financial statements. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
8.2 Accounting policy developments (Note 2 of the interim consolidated
financial statements)
Accounting policies are consistent with those described in TELUS' annual
2004 consolidated financial statements. Possibly, commencing with the
Company's 2005 fiscal year, proposed amendments to the recommendations of the
Canadian Institute of Chartered Accountants ("CICA") for the calculation and
disclosure of earnings per share (CICA Handbook Section 3500) may apply to the
Company. The proposed amendments are not expected to materially impact the
Company.
9. Revised guidance
Targets for 2005 were announced publicly on December 17, 2004 and the
Company has a practice of reaffirming or adjusting guidance on a quarterly
basis. Accordingly the following updates to guidance were made to reflect
positive developments in the first quarter including: the acquisition of
Ambergris, above expectations non-ILEC profitability, higher expectations for
wireless net additions and positive settlement of tax matters. The original
targets and updated guidance do not consider the impact of a possible work
stoppage resulting from the collective bargaining process.
-------------------------------------------------------------------------
Updated guidance Original targets
for 2005 for 2005 Change
-------------------------------------------------------------------------
Consolidated $7.95 to $7.9 to
Revenues $8.05 billion $8.0 billion $50 million
-------------------------------------------------------------------------
EBITDA(1) $3.25 to $3.2 to $25 to
$3.325 billion $3.3 billion $50 million
-------------------------------------------------------------------------
Earnings per
share - basic $1.85 to $2.05 $1.65 to $1.85 20 cents
-------------------------------------------------------------------------
Capital expenditures Approx. $1.3 to $0 to
$1.4 billion $1.4 billion $100 million
-------------------------------------------------------------------------
Free cash flow(2) $1.25 to $1.2 to
$1.35 billion $1.3 billion $50 million
-------------------------------------------------------------------------
Communications segment
Revenue (external) $4.75 to $4.7 to
$4.8 billion $4.75 billion $50 million
-------------------------------------------------------------------------
Non-ILEC revenue $625 to $600 to $0 to
$650 million $650 million $25 million
-------------------------------------------------------------------------
EBITDA $1.875 to $1.85 to
$1.925 billion $1.9 billion $25 million
-------------------------------------------------------------------------
Non-ILEC EBITDA $15 to $0 to $10 to
$20 million $10 million $15 million
-------------------------------------------------------------------------
Capital expenditures Approx. $950 million $0 to
$1.0 billion to $1.0 billion $50 million
-------------------------------------------------------------------------
High-speed Internet
net additions No change Approx. 100,000 -
-------------------------------------------------------------------------
Mobility segment
Revenue (external) No change $3.2 to -
$3.25 billion
-------------------------------------------------------------------------
EBITDA $1.375 to $1.35 to $0 to
$1.4 billion $1.40 billion $25 million
-------------------------------------------------------------------------
Capital expenditures Approx. $350 to $0 to
$400 million $400 million $50 million
-------------------------------------------------------------------------
Wireless subscriber 475,000 to 425,000 to
net additions 525,000 475,000 50,000
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest, taxes, depreciation and
amortization (EBITDA) for the definition of EBITDA.
(2) See Section 11.2 Free cash flow for the definition of Free cash flow.
-------------------------------------------------------------------------
10. Risks and uncertainties
The following are significant updates to the risks and uncertainties
described in TELUS' 2004 Annual Report and filings on SEDAR (www.sedar.com)
and filings on EDGAR (www.sec.gov).
10.1 Regulatory
Voice over Internet protocol ("VoIP")
The CRTC is expected to announce the rules for regulation of Internet
telephony services in May 2005. TELUS already provides business VoIP services
nationally and expects to align future residential offers within the terms of
this ruling.
Pricing safeguard review
In Decision 2005-27 (Review of price floor safeguards for retail tariffed
services and related issues), the CRTC made a series of incremental changes to
existing price floor rules. The decision does not represent a fundamental
change to the conceptual framework governing price floors for rate-regulated
services. While the effect of this decision is still under review, it is not
expected to materially impact the Company's 2005 projected financial forecast.
Proceeding on local exchange services forbearance (Telecom Public
Notice CRTC 2005-2)
The CRTC announced a proceeding to examine a range of issues including:
the relevant markets for forbearance, which CRTC powers and duties should be
forborne, and the post-forbearance criteria and conditions that might apply.
The proceeding will also consider a transitional regime that could provide
ILECs with more regulatory flexibility prior to forbearance. The proceeding is
scheduled to be completed in early October 2005, with a decision expected by
the end of the first quarter of 2006.
Other CRTC decisions
In Decision 2005-4, the CRTC finalized the subsidy requirement for
high-cost areas in the TELUS Quebec incumbent local exchange carrier ("ILEC")
territory for 2003 to 2005. The total positive impact on TELUS Communications'
local revenues in 2005, including the retroactive adjustment and finalization
of the 2003 and 2004 subsidy requirements, are expected to be approximately
$10 million.
In Decision 2005-6, regarding the scope of competitive digital network
service discounts and eligibility, the CRTC finalized interim 2002 to 2004
discount rates and clarified, on a prospective basis, the additional services
available for discounts and made those discounts available to registered
competitive local exchange carriers ("CLECs"), inter-exchange carriers
("IXCs") and wireless service providers. Given the past conservative
accounting treatment adopted by the Company, there will be no material impact
to TELUS Communications ILEC EBITDA in 2005. To the extent that additional
discounts are available in TELUS' non-ILEC operating territory, the Company
anticipates that this will otherwise materially improve these operating
results in 2005. The net favourable impact for the Communications segment is
expected to be approximately $18 million for the full year. To the extent that
additional discounts are available to TELUS Mobility, the benefit expected is
approximately $7 million for the full year.
In Decision 2005-17, Retail Quality of Service Adjustment Plan, the CRTC
finalized the quality of service regime for telephone companies and determined
the conditions that will trigger credits for customers when service falls
below standards set by the CRTC. The CRTC also finalized the quality of
service rate plan for competitors in Decision 2005-20. TELUS believes that the
finalization of retail and wholesale quality of service indicators and
resulting penalties will likely not have a significant impact on TELUS' 2005
financial results.
Wireless number portability
TELUS Mobility is a member of the Canadian Wireless Telecommunications
Association ("CWTA"), which announced on April 21, 2005 that its members have
agreed to implement wireless number portability in Canada. Number portability
will enable wireless customers to keep the same phone number when changing
service providers within the same local serving area. Consistent with the
Government of Canada's definition of wireless number portability, customers
will also be able keep the same phone number when transferring their landline
phone service to wireless service and vice versa.
The CWTA and its members have begun planning efforts that are required to
achieve this result. The plan is expected to be completed in September 2005,
and upon approval of the plan and a common start date, it is the intention of
the CWTA and its members to implement the plan. There is no assurance that
TELUS will be able to implement required changes without incurring significant
additional implementation costs and/or ongoing administration, or that
implementation will not lead to increased subscriber monthly churn, or
additional customer retention costs for TELUS.
11. Reconciliation of non-GAAP measures and definition of key operating
indicators
11.1 Earnings before interest, taxes, depreciation and amortization
(EBITDA)
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, and as a valuation metric. 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 interim 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.
The following is a reconciliation of EBITDA with Net income and Operating
income:
-------------------------------------------------------------------------
Quarters ended Mar. 31
($ millions) 2005 2004
-------------------------------------------------------------------------
Net income 242.2 101.3
Other expense 1.5 1.2
Financing costs 138.4 145.0
Income taxes 70.3 62.6
Non-controlling interest 1.6 0.8
-------------------------------------------------------------------------
Operating income 454.0 310.9
Depreciation 329.9 321.7
Amortization of intangible assets 72.3 88.7
-------------------------------------------------------------------------
EBITDA 856.2 721.3
-------------------------------------------------------------------------
11.2 Free cash flow
The Company has issued guidance on and reports free cash flow because it
is a key measure used by management to evaluate performance of the
consolidated operations. Free cash flow excludes certain working capital
changes, and other sources and uses of cash, which are disclosed in the
interim 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 the interim 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 less Cash used by investing activities, Free cash flow is relevant
because it provides an indication of how much cash generated by operations is
available after capital expenditures, but before proceeds from divested assets
and changes in certain working capital items (such as trade receivables, which
can be significantly distorted by securitization changes that do not reflect
operating results, and trade payables).
The following shows management's calculation of free cash flow.
-------------------------------------------------------------------------
Quarters ended Mar. 31
($ millions) 2005 2004
-------------------------------------------------------------------------
EBITDA 856.2 721.3
Restructuring and workforce reduction costs,
net of cash payments (12.3) (52.5)
Share-based compensation 3.8 4.7
Cash interest paid (13.1) (22.8)
Cash interest received 6.3 14.2
Income taxes received (paid) (1.1) 104.6
Capital expenditures (capex) (273.2) (309.7)
Investment tax credits received
(reported in current or prior EBITDA or capex,
and in Income taxes received (paid)), and other - (16.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Free cash flow 566.6 443.3
-------------------------------------------------------------------------
The following reconciles free cash flow with Cash provided by operating
activities less Cash used by investing activities:
-------------------------------------------------------------------------
Quarters ended Mar. 31
($ millions) 2005 2004
-------------------------------------------------------------------------
Cash provided by operating activities 728.4 588.1
Cash (used) by investing activities (306.2) (298.6)
-------------------------------------------------------------------------
422.2 289.5
Net employee defined benefit plans expense (1.5) (4.9)
Employer contributions to employee defined benefit plans 37.4 28.6
Other net operating activities 4.6 (6.1)
Reduction in securitized accounts receivable - 150.0
Non-cash working capital changes except changes in taxes,
interest and securitized accounts receivable 70.9 (2.7)
Acquisitions 27.5 -
Proceeds from the sale of property and other assets - (12.1)
Other investing activities 5.5 1.0
-------------------------------------------------------------------------
Free cash flow 566.6 443.3
-------------------------------------------------------------------------
11.3 Definition of key operating indicators
These measures are industry metrics and are useful in assessing the
operating performance of a wireless company.
Churn, per month
----------------
Calculated as the number of subscriber units disconnected during a
given period, divided by the average number of subscriber units on
the network during the period, expressed as a rate per month. A
prepaid subscriber is deactivated when the subscriber has no usage
for 90 days following expiry of the prepaid card.
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).
COA per gross subscriber addition
---------------------------------
COA divided by gross subscriber activations during the period.
Average revenue per subscriber unit, or ARPU
--------------------------------------------
Calculated as Network revenue divided by the average number of
subscriber units on the network during the period, expressed as a
rate per month.
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.
EBITDA excluding COA
--------------------
A measure of operational profitability, normalized for the period
costs of adding new customers.
11.4 Definition of liquidity and capital resource measures
Net debt
--------
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, reflecting the U.S.
$1,166.5 million debenture maturing June 1, 2007 and the U.S.
$1,925.0 million debenture maturing June 1, 2011, was
$1,014.2 million at March 31, 2005 (compared with deferred hedge
liabilities of $700.0 million at March 31, 2004). Net debt is
unaffected by foreign exchange fluctuations because it includes
(deducts) the net deferred hedging liability (asset).
Total capitalization
--------------------
Defined as Net debt plus Non-controlling interest and Shareholders'
equity.
Net debt to total capitalization
--------------------------------
Provides a measure of the proportion of debt used in the Company's
capital structure. The long-term target ratio for Net debt to total
capitalization is 45 to 50%.
EBITDA (excluding restructuring)
--------------------------------
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. Restructuring and workforce reduction costs were
$46.1 million and $37.7 million, respectively, for the 12-month
periods ended March 31, 2005 and March 31, 2004.
Net debt to EBITDA
------------------
Defined as Net debt as at the end of the period divided by the
12-month trailing EBITDA (excluding restructuring). This measure is
substantially the same as the Leverage Ratio covenant in TELUS'
credit facilities. TELUS' target for Net debt to EBITDA is 2.2 times
or less.
Net interest cost
-----------------
Defined as Financing costs before gains on redemption and repayment
of debt, calculated on a 12-month trailing basis. No gains on
redemption and repayment of debt were recorded in the respective
periods.
Earnings coverage ratio
-----------------------
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.
EBITDA interest coverage
------------------------
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.
Dividend payout ratio
---------------------
Defined as the current quarterly Dividend declared per share
multiplied by four and divided by basic Earnings per share for the
12-month trailing period. The target guideline for the annual
dividend payout ratio is 45 to 55% of net earnings.
______________________________________________________________________________
TELUS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2005
______________________________________________________________________________
consolidated statements of income
Three months
Periods ended March 31 (unaudited) (millions except per share amounts) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 1,974.7 $ 1,803.8
---------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,109.1 1,066.6
Restructuring and workforce reduction costs (Note 4) 9.4 15.9
Depreciation 329.9 321.7
Amortization of intangible assets 72.3 88.7
---------------------------------------------------------------------------------------------------------------------------------
1,520.7 1,492.9
---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 454.0 310.9
Other expense, net 1.5 1.2
Financing costs (Note 5) 138.4 145.0
---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 314.1 164.7
Income taxes (Note 6) 70.3 62.6
Non-controlling interest 1.6 0.8
--------------------------------------------------------------------------------------------------------------------------------
NET INCOME 242.2 101.3
Preference and preferred share dividends - 0.9
---------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE AND NON-VOTING SHARE INCOME $ 242.2 $ 100.4
=================================================================================================================================
INCOME PER COMMON SHARE AND NON-VOTING SHARE (Note 7)
- Basic $ 0.67 $ 0.28
- Diluted $ 0.66 $ 0.28
DIVIDENDS DECLARED PER COMMON SHARE AND NON-VOTING SHARE $ 0.20 $ 0.15
TOTAL WEIGHTED AVERAGE COMMON SHARES AND NON-VOTING SHARES OUTSTANDING
- Basic 360.2 353.1
- Diluted 367.9 355.6
The accompanying notes are an integral part of these interim consolidated financial statements
consolidated statements of retained earnings
Three months
Periods ended March 31 (unaudited) (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF PERIOD $ 1,008.1 $ 741.7
Transitional amount for share-based compensation arising from share options - (25.1)
---------------------------------------------------------------------------------------------------------------------------------
Adjusted opening balance 1,008.1 716.6
Net income 242.2 101.3
---------------------------------------------------------------------------------------------------------------------------------
1,250.3 817.9
Less: Common Share and Non-Voting Share dividends paid, or payable, in cash 72.3 47.3
Common Share and Non-Voting Share dividends reinvested, or to be reinvested, in
shares issued from Treasury - 5.7
Cost of purchase of Common Shares and Non-Voting Shares in excess of stated
capital (Note 13(g)) 89.9 -
Preference and preferred share dividends - 0.9
Redemption premium on preference and preferred shares in excess of amount
chargeable to contributed surplus - 2.3
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD (Note 13) $ 1,088.1 $ 761.7
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements
consolidated balance sheets
As at As at
March 31, December 31,
(unaudited) (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ 1,247.3 $ 896.5
Accounts receivable (Notes 9, 15(b)) 874.9 863.5
Income and other taxes receivable 172.7 132.5
Inventories 111.0 133.3
Prepaid expenses and other (Note 15(b)) 245.8 183.4
Current portion of future income taxes 372.0 438.4
---------------------------------------------------------------------------------------------------------------------------------
3,023.7 2,647.6
---------------------------------------------------------------------------------------------------------------------------------
Capital Assets, Net (Note 10)
Property, plant, equipment and other 7,447.3 7,528.2
Intangible assets subject to amortization 695.6 737.0
Intangible assets with indefinite lives 2,964.6 2,955.8
---------------------------------------------------------------------------------------------------------------------------------
11,107.5 11,221.0
---------------------------------------------------------------------------------------------------------------------------------
Other Assets
Deferred charges (Note 15(b)) 746.4 704.4
Future income taxes 72.7 99.8
Investments 38.7 38.4
Goodwill (Note 11) 3,147.5 3,126.8
---------------------------------------------------------------------------------------------------------------------------------
4,005.3 3,969.4
---------------------------------------------------------------------------------------------------------------------------------
$18,136.5 $17,838.0
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities (Note 15(b)) $ 1,486.9 $ 1,362.6
Restructuring and workforce reduction accounts payable and accrued liabilities (Note 4) 58.4 70.7
Dividends payable 72.3 -
Advance billings and customer deposits (Note 15(b)) 532.2 531.5
Current maturities of long-term debt (Note 12) 4.4 4.3
---------------------------------------------------------------------------------------------------------------------------------
2,154.2 1,969.1
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (Note 12) 6,356.3 6,332.2
---------------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities (Note 15(b)) 1,486.6 1,506.1
---------------------------------------------------------------------------------------------------------------------------------
Future Income Taxes 995.3 991.9
---------------------------------------------------------------------------------------------------------------------------------
Non-Controlling Interest 18.9 13.1
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Note 13)
Convertible debentures conversion option 8.8 8.8
Common equity 7,116.4 7,016.8
---------------------------------------------------------------------------------------------------------------------------------
7,125.2 7,025.6
---------------------------------------------------------------------------------------------------------------------------------
$18,136.5 $17,838.0
=================================================================================================================================
Commitments and Contingent Liabilities (Note 14)
The accompanying notes are an integral part of these interim consolidated financial statements
consolidated statements of cash flows
Three months
Periods ended March 31 (unaudited) (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 242.2 $ 101.3
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 402.2 410.4
Future income taxes 91.7 91.8
Share-based compensation 3.8 4.7
Net employee defined benefit plans expense 1.5 4.9
Employer contributions to employee defined benefit plans (37.4) (28.6)
Restructuring and workforce reduction costs, net of cash payments (Note 4) (12.3) (52.5)
Other, net (4.4) 6.1
Net change in non-cash working capital (Note 15(c)) 41.1 50.0
---------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 728.4 588.1
---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (Note 10) (273.2) (309.7)
Acquisition (Note 11) (27.5) -
Proceeds from the sale of property and other assets - 12.1
Other (5.5) (1.0)
---------------------------------------------------------------------------------------------------------------------------------
Cash used by investing activities (306.2) (298.6)
---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 87.9 27.0
Dividends to shareholders - (42.3)
Purchase of Common Shares and Non-Voting Shares for cancellation (Note 13(g)) (158.3) -
Long-term debt issued (Note 12) - 27.3
Redemptions and repayments of long-term debt (Note 12) (1.0) (34.2)
---------------------------------------------------------------------------------------------------------------------------------
Cash used by financing activities (71.4) (22.2)
---------------------------------------------------------------------------------------------------------------------------------
CASH POSITION
Increase in cash and temporary investments, net 350.8 267.3
Cash and temporary investments, net, beginning of period 896.5 6.2
---------------------------------------------------------------------------------------------------------------------------------
Cash and temporary investments, net, end of period $ 1,247.3 $ 273.5
=================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Interest (paid) $ (13.1) $ (22.8)
=================================================================================================================================
Interest received $ 6.3 $ 14.2
=================================================================================================================================
Income taxes (inclusive of Investment Tax Credits (Note 6)) (paid) received, net $ (1.1) $ 104.6
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated financial statements
notes to interim consolidated financial statements
MARCH 31, 2005 (unaudited)
TELUS Corporation is one of Canada's largest telecommunications companies,
providing a full range of telecommunications products and services. The Company
is the largest incumbent telecommunications service provider in Western Canada
and provides data, Internet Protocol, voice and wireless services to Central
and Eastern Canada.
1. Interim Financial Statements
The notes presented in these interim consolidated financial statements include
only significant events and transactions and are not fully inclusive of all
matters normally disclosed in TELUS Corporation's annual audited financial
statements. As a result, these interim consolidated financial statements should
be read in conjunction with the TELUS Corporation audited consolidated
financial statements for the year ended December 31, 2004. These interim
consolidated financial statements follow the same accounting policies and
methods of their application as set out in the TELUS Corporation consolidated
financial statements for the year ended December 31, 2004, including that
certain of the comparative amounts have been reclassified to conform with the
presentation adopted currently.
The term"Company" is used to mean TELUS Corporation and, where the context of
the narrative permits or requires, its subsidiaries.
2. Accounting Policy Developments
(a) Earnings per Share
Possibly commencing with the Company's 2005 fiscal year, proposed amendments to
the recommendations of the Canadian Institute of Chartered Accountants ("CICA")
for the calculation and disclosure of earnings per share (CICA Handbook
Section 3500) may apply to the Company. These proposed amendments, in the
Company's specific instance, may result in the diluted earnings per share
denominator being adjusted, using the reverse treasury stock method, for the
theoretical issuance of shares from treasury to settle obligations arising from
the issuance of restricted stock units (see Note 8(b)); for purposes of the
calculation the Company will be required to assume that shares will be
necessary to settle the obligation, and that the shares will be issued from
treasury. The Company would not be materially affected by the proposed
amendments to the recommendations.
(b) Non-Monetary Transactions
Commencing in the Company's 2006 fiscal year, the proposed amended
recommendations of the CICA for measurement of non-monetary transactions (CICA
Handbook Section 3830) will apply to the Company. The proposed amended
recommendations will result in non-monetary transactions normally being
measured at their fair values, unless certain criteria are met. The Company's
current operations are not materially affected by the proposed amended
recommendations.
(c) Subsequent Events
Commencing in the Company's 2006 fiscal year, the proposed amended
recommendations of the CICA for subsequent events (CICA Handbook Section 3820)
will apply to the Company. The proposed amended recommendations will result in
closer harmony with the corresponding requirements of U.S. GAAP. The Company
will not be materially affected by the proposed amended recommendations.
(d) Comprehensive Income
Commencing with the Company's 2007 fiscal year, the new recommendations of the
CICA for accounting for comprehensive income (CICA Handbook Section 1530), for
the recognition and measurement of financial instruments (CICA Handbook
Section 3855) and for hedges (CICA Handbook Section 3865) will apply to the
Company. In the Company's specific instance, the transitional rules for these
sections require implementation at the beginning of a fiscal year; the Company
will not be implementing these recommendations in its 2005 fiscal year. The
concept of comprehensive income for purposes of Canadian GAAP will be to
include changes in shareholders' equity arising from unrealized changes in the
values of financial instruments. Comprehensive income as prescribed by
U.S. GAAP, and which is disclosed in Note 18(i), is largely aligned with
Canadian GAAP. In the Company's specific instance, however, there is a
difference in other comprehensive income in that U.S. GAAP includes the concept
of minimum pension liabilities and Canadian GAAP does not.
3. Financial Instruments
During the first quarter of 2005, the Company entered into a hedging
relationship that fixes the Company's compensation cost arising from a specific
grant of restricted stock units (see Note 8(b)); hedge accounting has been
applied to this relationship.
As at March 31, 2005, the Company had entered into foreign currency forward
contracts that have the effect of fixing the exchange rate on U.S.$55 million
of fiscal 2005 purchase commitments; hedge accounting has been applied to these
foreign currency forward contracts, all of which relate to the Mobility
segment.
Fair value: The carrying value of cash and temporary investments, accounts
receivable, accounts payable, restructuring and workforce reduction accounts
payable, dividends payable and short-term obligations approximates their fair
values due to the immediate or short-term maturity of these financial
instruments. The carrying values of the Company's investments accounted for
using the cost method would not exceed their fair values.
The fair values of the Company's long-term debt and convertible debentures are
estimated based on quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same maturity as well
as the use of discounted future cash flows using current rates for similar
financial instruments subject to similar risks and maturities. The fair values
of the Company's derivative financial instruments used to manage exposure to
interest rate and currency risks are estimated similarly.
As at March 31, 2005 As at December 31, 2004
---------------------------------------------------------------------------------------------------------------------------------
(millions) Carrying Carrying
amount Fair value amount Fair value
---------------------------------------------------------------------------------------------------------------------------------
Assets
Derivative financial instruments(2) used to manage
changes in compensation costs arising from
restricted stock units (Note 8(b)) $ 3.5 $ 7.8 $ 2.1 $ 6.3
=================================================================================================================================
Derivative financial instruments(2) used to manage
currency risks arising from U.S. dollar
denominated temporary investments $ - $ - $ 3.4 $ 3.4
=================================================================================================================================
Liabilities
Long-term debt
Principal(1) (Note 12) $ 6,369.5 $ 7,258.5 $ 6,345.3 $ 7,342.3
Derivative financial instruments(2) used to
manage interest rate and currency risks
associated with U.S. dollar denominated debt
(Note 15(b)) 1,009.5 1,369.4 1,032.6 1,299.5
Derivative financial instruments(2) used to
manage interest rate risk associated with
Canadian dollar denominated debt - 2.4 - 1.3
---------------------------------------------------------------------------------------------------------------------------------
$ 7,379.0 $ 8,630.3 $ 7,377.9 $ 8,643.1
=================================================================================================================================
Derivative financial instruments(2) used to manage
currency risks arising from U.S. dollar
denominated purchases
- To which hedge accounting is applied $ - $ 0.9 $ - $ 2.6
- To which hedge accounting is not applied $ - $ 0.3 $ - $ 2.0
=================================================================================================================================
(1) Carrying amount of long-term debt, for purposes of this table, includes
the carrying amount of the convertible debenture conversion option.
(2) Notional amount of all derivative financial instruments outstanding is
$5,398.7 (December 31, 2004 - $5,559.2).
4. Restructuring and Workforce Reduction Costs
(a) Overview
Three-month periods ended March 31 2005 2004
(millions)
---------------------------------------------------------------------------- -----------------------------------------
Operational
Programs Programs Programs Efficiency
initiated in initiated prior initiated in Program
2005 to 2005 Total 2004 (2001-2003) Total
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce
reduction costs
Workforce reduction
Voluntary $ - $ - $ - $ - $ - $ -
Involuntary 4.9 0.9 5.8 15.7 - 15.7
Lease termination 3.0 - 3.0 - - -
Other - 0.6 0.6 - 0.2 0.2
---------------------------------------------------------------------------------------------------------------------------------
7.9 1.5 9.4 15.7 0.2 15.9
---------------------------------------------------------------------------------------------------------------------------------
Disbursements
Workforce reduction
Voluntary (Early Retirement
Incentive Plan, Voluntary
Departure Incentive Plan
and other) - 1.9 1.9 - 46.5 46.5
Involuntary and other 0.5 18.2 18.7 1.3 18.7 20.0
Lease termination 0.1 0.4 0.5 - 1.1 1.1
Other - 0.6 0.6 - 0.8 0.8
---------------------------------------------------------------------------------------------------------------------------------
0.6 21.1 21.7 1.3 67.1 68.4
---------------------------------------------------------------------------------------------------------------------------------
Expenses greater than
(less than) disbursements 7.3 (19.6) (12.3) 14.4 (66.9) (52.5)
Restructuring and workforce reduction
accounts payable and accrued
liabilities, beginning of period - 70.7 70.7 - 141.0 141.0
---------------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction
accounts payable and accrued
liabilities, end of period $ 7.3 $51.1 $58.4 $14.4 $74.1 $88.5
=================================================================================================================================
(b) Programs Initiated in 2005
In the first quarter of 2005, the Company undertook a number of smaller
initiatives, such as operational consolidation, rationalization and
integrations. These initiatives are aimed to improve the Company's operating
and capital productivity.
The Company's estimate of restructuring and workforce reduction costs in 2005
is $100 million.
(c) Programs Initiated Prior to 2005
Programs initiated in 2004: In the first quarter of 2004, a departmental
reorganization was initiated, primarily in the Communications segment
information technology resources area, consolidating from 15 locations to two
primary locations. This reorganization, which had an implementation cost in
2004 of approximately $12 million, is expected to enable greater efficiencies
of scale and effectiveness of program delivery.
In the third quarter of 2004, a departmental reorganization was initiated in
the Communications segment 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 had an implementation cost in 2004 of approximately
$24 million.
In addition to the foregoing initiatives, the Company had undertaken additional
activities in 2004 aimed at improving its operating and capital productivity
and competitiveness. These additional activities had a cost in 2004 of
approximately $16 million.
As at March 31, 2005, no future expenses remain to be accrued or recorded under
the programs initiated in 2004, but variances from estimates currently recorded
may be recorded in subsequent periods.
Operational Efficiency Program (2001-2003): In 2001, the Company initiated the
phased Operational Efficiency Program aimed at improving the Company's
operating and capital productivity and competitiveness. The first phase of the
Operational Efficiency Program was to complete merger-related restructuring
activities in TELUS Mobility and the reorganization for TELUS Communications.
The second phase of the Operational Efficiency Program, which commenced at the
beginning of 2002, continued to focus on reducing staff, but also entailed a
comprehensive review of enterprise-wide processes to identify capital and
operational efficiency opportunities. The third phase of the Operational
Efficiency Program, which commenced in the third quarter of 2002, was focused
on operationalizing the initiatives identified during the second phase review
and included: streamlining of business processes; reducing the TELUS product
portfolio and processes that support them; optimizing the use of real estate,
networks and other assets; improving customer order management; reducing the
scope of corporate support functions; consolidating operational and
administrative functions; and consolidating customer contact centres.
As at March 31, 2005, no future expenses remain to be accrued or recorded under
the Operational Efficiency Program (2001-2003), but variances from estimates
currently recorded may be recorded in subsequent periods.
5. Financing Costs
Three months
Periods ended March 31 (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt $ 157.8 $ 163.6
Interest on short-term obligations and other 1.2 1.8
Foreign exchange(1) 2.5 (0.6)
---------------------------------------------------------------------------------------------------------------------------------
161.5 164.8
Interest income
Interest on tax refunds (15.6) (17.7)
Other interest income (7.5) (2.1)
---------------------------------------------------------------------------------------------------------------------------------
(23.1) (19.8)
---------------------------------------------------------------------------------------------------------------------------------
$ 138.4 $ 145.0
=================================================================================================================================
(1) For the three-month period ended March 31, 2005, these amounts include
gains (losses) of $NIL (2004 - $(0.3)) in respect of cash flow hedge
ineffectiveness; no gains or losses were experienced arising from fair
value hedge ineffectiveness.
6. Income Taxes
Three months
Periods ended March 31 (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Current $ (21.4) $ (29.2)
Future 91.7 91.8
---------------------------------------------------------------------------------------------------------------------------------
$ 70.3 $ 62.6
=================================================================================================================================
The Company's income tax expense differs from that calculated by applying
statutory rates for the following reasons:
Three-month periods ended March 31 ($ in millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax
at statutory income tax rates $ 108.7 34.6% $ 57.1 34.7%
Change in estimates of available temporary
differences in prior years (36.0) -
Tax rate differential on, and consequential
adjustments from, reassessment of prior
year tax issues (11.3) (1.6)
Share option compensation 1.3 1.9
Revaluation of future tax assets and
liabilities for changes in statutory
income tax rates - (1.3)
Other 2.4 1.2
---------------------------------------------------------------------------------------------------------------------------------
65.1 20.7% 57.3 34.8%
Large corporations tax 5.2 5.3
---------------------------------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated Statements
of Income $ 70.3 22.4% $ 62.6 38.0%
=================================================================================================================================
7. Per Share Amounts
Basic income per Common Share and Non-Voting Share is calculated by dividing
Common Share and Non-Voting Share income by the total weighted average Common
Shares and Non-Voting Shares outstanding during the period. Diluted income per
Common Share and Non-Voting Share is calculated to give effect to share options
and warrants and shares issuable on conversion of debentures.
The following tables present the reconciliations of the numerators and
denominators of the basic and diluted per share computations.
Three months
Periods ended March 31 (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Net income $ 242.2 $ 101.3
Deduct:
Preference and preferred share dividends - 0.9
Redemption premium on preference and preferred shares in excess
of amount chargeable to contributed surplus - 2.3
---------------------------------------------------------------------------------------------------------------------------------
Basic Common Share and Non-Voting Share income 242.2 98.1
Add: Interest charges applicable to convertible debentures,
net of income tax effects 1.6 -
---------------------------------------------------------------------------------------------------------------------------------
Diluted Common Share and Non-Voting Share income $ 243.8 $ 98.1
=================================================================================================================================
Three months
Periods ended March 31 (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Basic total weighted average Common Shares and Non-Voting Shares outstanding 360.2 353.1
Effect of dilutive securities
Exercise of share options and warrants 3.9 2.5
Exercise of convertible debentures conversion option 3.8 -
---------------------------------------------------------------------------------------------------------------------------------
Diluted total weighted average Common Shares and Non-Voting Shares outstanding 367.9 355.6
=================================================================================================================================
For the three-month period ended March 31, 2005, certain outstanding share
options, in the amount of 2.1 million (2004 - 18.1 million) were not included
in the computation of diluted income per Common Share and Non-Voting Share
because the share options' exercise prices were greater than the average market
price of the Common Shares and Non-Voting Shares during the reported periods.
Convertible debentures, which were convertible into 3.8 million shares, were
not included in the computation of diluted income per Common Share and
Non-Voting Share for the three-month period ended March 31, 2004, as they were
antidilutive.
8. Share-Based Compensation
(a) Share Options
Effective January 1, 2004, for purposes of Canadian generally accepted
accounting principles, the Company applies the fair value based method of
accounting for share-based compensation awards granted to employees. Reflected
in the Consolidated Statements of Income as"Operations expense" for the
three-month period ended March 31, 2005, is compensation expense arising from
share options of $4.2 million (2004 - $5.4 million).
As only share options granted after 2001 are included, the compensation expense
arising from share options is not likely to be representative of the effects on
reported net income for future years. The compensation expense arising from
share options reflect weighted average fair values of $11.26 (2004 - $7.78) for
options granted in the three-month period ended March 31, 2005. Share options
typically vest over a three-year period and the vesting method of options,
which is determined at the date of grant, may be either cliff or graded. The
fair value of each option granted is estimated at the time of grant using the
Black-Scholes model with weighted average assumptions for grants as follows:
Three months
Periods ended March 31 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Risk free interest rate 3.7% 3.8%
Expected lives (years) 4.5 4.5
Expected volatility 40.0% 40.0%
Dividend yield 2.3% 2.4%
---------------------------------------------------------------------------------------------------------------------------------
(b) Other Share-Based Compensation
The Company uses restricted stock units as a form of incentive compensation.
Each restricted stock unit is equal in value to one Non-Voting Share and the
dividends that would have arisen thereon had it been an issued and outstanding
Non-Voting Share are recorded as additional restricted stock units during the
life of the restricted stock unit. The restricted stock units become payable as
they vest over their lives (typically the vesting period is 33 months and the
vesting method, which is determined at the date of grant, may be either cliff
or graded). Reflected in the Consolidated Statements of Income as"Operations
expense" for the three-month period ended March 31, 2005, is compensation
expense arising from restricted stock units of $3.7 million (2004 -
$1.1 million).
The following table presents a summary of the activity related to the Company's
restricted stock units.
Period ended March 31, 2005 Three months
---------------------------------------------------------------------------------------------------------------------------------
Number of
restricted Weighted
stock units average price
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 998,487
Issued
Initial allocation 762,132 $ 35.99
In lieu of dividends 8,551 37.40
Settled (121,006) 34.07
Forfeited and cancelled (35,779) 37.23
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 1,612,385
=================================================================================================================================
With respect to restricted stock units issued in the first quarter of 2005, and
which cliff vest in the fourth quarter of 2007, the Company entered into a
cash-settled equity forward agreement that fixes the cost to the Company at
$40.91 per restricted stock unit in respect of 600,000 restricted stock units.
Similarly, in 2004, with respect to restricted stock units issued in the first
quarter of 2004, and which cliff vest in the fourth quarter of 2006, the
Company entered into a cash-settled equity forward agreement that fixes the
cost to the Company at $26.61 per restricted stock unit in respect of 652,550
restricted stock units.
9. Accounts Receivable
On July 26, 2002, TELUS Communications Inc., a wholly-owned subsidiary of
TELUS, entered into an agreement, which was amended September 30, 2002, with an
arm's-length securitization trust under which TELUS Communications Inc. is able
to sell an interest in certain of its trade receivables up to a maximum of
$650 million. As a result of selling the interest in certain of the trade
receivables on a fully-serviced basis, a servicing liability is recognized on
the date of sale and is, in turn, amortized to earnings over the expected life
of the trade receivables. This"revolving-period" securitization agreement has
an initial term ending July 18, 2007. TELUS Communications Inc. is required to
maintain at least a BBB (low) credit rating by Dominion Bond Rating Service or
the securitization trust may require the sale program to be wound down prior to
the end of the initial term; at March 31, 2005, the rating was BBB (high).
(millions) As at As at
March 31, 2005 December 31, 2004
---------------------------------------------------------------------------------------------------------------------------------
Total managed portfolio $ 1,031.6 $ 1,021.7
Securitized receivables (180.6) (181.3)
Retained interest in receivables sold 23.9 23.1
---------------------------------------------------------------------------------------------------------------------------------
Receivables held $ 874.9 $ 863.5
=================================================================================================================================
For the three-month period ended March 31, 2005, the Company recognized losses
(recoveries) of $0.4 million (2004 - $(0.2) million) on the sale of receivables
arising from the securitization.
Cash flows from the securitization are as follows:
Three months
Periods ended March 31 (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, beginning of period $ 150.0 $ 300.0
Securitization reduction payments - (150.0)
---------------------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization, end of period $ 150.0 $ 150.0
=================================================================================================================================
Proceeds from collections reinvested in revolving period securitizations $ 352.7 $ 682.5
=================================================================================================================================
Proceeds from collections pertaining to retained interest $ 54.5 $ 132.3
=================================================================================================================================
10. Capital Assets
(a) Capital Assets, Net
Accumulated
Depreciation and
Cost Amortization Net Book Value
---------------------------------------------------------------------------------------------------------------------------------
As at As at
March 31, December 31,
(millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Property, plant, equipment and other
Telecommunications assets $ 17,164.5 $ 11,455.7 $ 5,708.8 $ 5,814.3
Assets leased to customers 529.4 440.4 89.0 106.5
Buildings and leasehold improvements 1,685.3 847.1 838.2 852.6
Office equipment and furniture 1,011.1 747.7 263.4 253.8
Assets under capital lease 13.5 3.7 9.8 11.7
Other 327.0 239.9 87.1 91.1
Land 46.8 - 46.8 46.8
Plant under construction 381.2 - 381.2 329.6
Materials and supplies 23.0 - 23.0 21.8
---------------------------------------------------------------------------------------------------------------------------------
21,181.8 13,734.5 7,447.3 7,528.2
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscriber base 362.9 100.1 262.8 268.2
Software 1,112.7 758.8 353.9 388.4
Access to rights-of-way and other 124.4 45.5 78.9 80.4
---------------------------------------------------------------------------------------------------------------------------------
1,600.0 904.4 695.6 737.0
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 3,983.1 1,018.5 2,964.6 2,955.8
---------------------------------------------------------------------------------------------------------------------------------
$ 26,764.9 $ 15,657.4 $ 11,107.5 $11,221.0
=================================================================================================================================
(1) Accumulated amortization of spectrum licences is amortization recorded
prior to 2002 and the transitional impairment amount.
Included in capital expenditures for the three-month period ended March 31,
2005, were additions of intangible assets subject to amortization of
$38.0 million (2004 - $32.9 million) and intangible assets with indefinite
lives of $8.8 million (2004 - NIL).
(b) Intangible Assets Subject to Amortization
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at March 31, 2005, for each
of the next five fiscal years is as follows:
Years ending December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2005 (balance of year) $ 186.1
2006 161.3
2007 75.9
2008 18.7
2009 9.2
11. Goodwill
Period ended March 31,2005(millions) Three months
---------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 3,126.8
Goodwill arising from acquisitions 23.0
Foreign exchange on goodwill of self-sustaining foreign operations (2.3)
---------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 3,147.5
=================================================================================================================================
The goodwill addition in the three-month period ended March 31, 2005, none of
which is expected to be deductible for tax purposes, arose from the February
15, 2005, cash acquisition of an effective 49% economic interest in Ambergris
Solutions Inc., a business process outsourcing company. The effective 49%
economic interest results in the Company controlling Ambergris Solutions Inc.
as the Company controls, but does not wholly-own, an intermediate holding
company which, in turn, controls, but does not wholly-own, Ambergris Solutions
Inc. The Company has an option to purchase an additional effective 3.5%
economic interest in Ambergris Solutions Inc. for a 90-day period ending May
16, 2005. This investment was made with a view to enhancing the Company's
competitiveness in contact centre offerings. The primary factor that
contributed to a purchase price that resulted in the recognition of goodwill is
the low degree of net tangible assets in the industry relative to the market
value of established Asian operations. Effective the same date, Ambergris
Solutions Inc.'s results are included in the Company's Consolidated Statements
of Income and are included in the Company's Communications segment.
The following is a summarized balance sheet disclosing the preliminary fair
values assigned to each major asset and liability class as at the date of
acquisition:
(millions)
---------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets $ 9.2
---------------------------------------------------------------------------------------------------------------------------------
Capital Assets, Net 10.3
---------------------------------------------------------------------------------------------------------------------------------
Other Assets
Other 0.5
Goodwill 23.0
---------------------------------------------------------------------------------------------------------------------------------
23.5
---------------------------------------------------------------------------------------------------------------------------------
$ 43.0
=================================================================================================================================
Liabilities
Current Liabilities $ 5.5
Future Income Taxes 5.3
---------------------------------------------------------------------------------------------------------------------------------
10.8
---------------------------------------------------------------------------------------------------------------------------------
Non-Controlling Interest 4.7
---------------------------------------------------------------------------------------------------------------------------------
Purchase Price 27.5
---------------------------------------------------------------------------------------------------------------------------------
$ 43.0
=================================================================================================================================
The following pro forma supplemental information represents certain results of
operations as if the business acquisitions had been completed as at the
beginning of the periods presented.
Three-month periods ended March 31
($ in millions except per share amounts) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
As reported Pro forma(1) As reported Pro forma(2)
Operating revenues $ 1,974.7 $ 1,979.5 $ 1,803.8 $ 1,820.6
Net income $ 242.2 $ 242.7 $ 101.3 $ 103.5
Income per Common Share and Non-Voting Share
- Basic $ 0.67 $ 0.67 $ 0.28 $ 0.28
- Diluted $ 0.66 $ 0.66 $ 0.28 $ 0.28
---------------------------------------------------------------------------------------------------------------------------------
(1) Pro forma amounts for 2005 reflect Ambergris Solutions Inc.
(2 Pro forma amounts for 2004 reflect Ambergris Solutions Inc. and ADCOM, Inc.
ADCOM, Inc. was purchased effective November 15, 2004, and its results have
been included in the Company's Consolidated Statements of Income effective
the same date.
12. Long-Term Debt
(a) Details of Long-Term Debt
As at As at
($ in millions) March 31, December 31,
Series Rate of interest Maturity 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Notes
CA 7.5%(1) June 2006 $ 1,575.1 $ 1,574.6
U.S. (2) 7.5%(1) June 2007 1,407.8 1,398.6
U.S. (3) 8.0%(1) June 2011 2,319.1 2,303.9
---------------------------------------------------------------------------------------------------------------------------------
5,302.0 5,277.1
---------------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Convertible Debentures
6.75%(1) June 2010 141.9 141.6
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Debentures
1 12.00%(1) May 2010 50.0 50.0
2 11.90%(1) November 2015 125.0 125.0
3 10.65%(1) June 2021 175.0 175.0
5 9.65%(1) April 2022 249.0 249.0
B 8.80%(1) September 2025 200.0 200.0
---------------------------------------------------------------------------------------------------------------------------------
799.0 799.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. First Mortgage Bonds
U 11.50%(1) July 2010 30.0 30.0
---------------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Medium Term Notes
1 7.10%(1) February 2007 70.0 70.0
---------------------------------------------------------------------------------------------------------------------------------
Capital leases issued at varying rates of interest from 4.1% to 8.5% and maturing
on various dates up to 2011 10.2 10.7
---------------------------------------------------------------------------------------------------------------------------------
Other 7.6 8.1
---------------------------------------------------------------------------------------------------------------------------------
Total debt 6,360.7 6,336.5
Less - current maturities 4.4 4.3
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 6,356.3 $ 6,332.2
=================================================================================================================================
(1) Interest is payable semi-annually.
(2) Principal face value of notes is U.S.$1,166.5 million (December 31, 2004
- U.S.$1,166.5 million).
(3) Principal face value of notes is U.S.$1,925.0 million (December 31, 2004
- U.S.$1,925.0 million).
(b) TELUS Corporation Convertible Debentures
The 6.75% convertible debentures are unsecured, subordinated obligations of the
Company which mature on June 15, 2010, and are convertible at the holders'
option into Non-Voting Shares of the Company at a rate reflecting a share price
of $39.73. The convertible debentures were not redeemable prior to June 15,
2003. Redemption in the period from June 15, 2003, through June 15, 2005, is
allowed provided that the average trading price of the Non-Voting Shares for a
defined period exceeds 125% of the conversion price.
The holder's embedded conversion option is valued using the residual value
approach and continues to be presented as a component of shareholders' equity
(see Note 13(a)).
On February 16, 2005, the Company announced its intention to redeem its
convertible debentures at par, plus accrued and unpaid interest, on June 16,
2005.
During the three-month period ended March 31, 2005, convertible debenture
holders exercised conversion options resulting in less than $0.1 million of
convertible debenture principal being converted into 829 Non-Voting Shares (see
Note 13(b)).
(c) TELUS Corporation Credit Facilities
Subsequent to March 31, 2005, TELUS Corporation entered into a new $1.6 billion
bank credit facility with a syndicate of financial institutions. The new credit
facilities consist of: i) an $800 million (or U.S. Dollar equivalent) revolving
credit facility expiring on May 7, 2008, to be used for general corporate
purposes, and ii) an $800 million (or U.S. Dollar equivalent) revolving credit
facility expiring on May 4, 2010, to be used for general corporate purposes.
These new facilities replaced the Company's existing committed credit
facilities prior to the availability termination dates of such facilities.
TELUS Corporation's new credit facilities are unsecured and bear interest at
prime rate, U.S. Dollar Base Rate, a bankers' acceptance rate or London
interbank offered rate ("LIBOR") (all such terms as used or defined in the
credit facilities), plus applicable margins. The credit facilities contain
customary representations, warranties and covenants including two financial
quarter end financial ratio tests. The financial ratio tests are that the
Company may not permit its long-term debt to operating cash flow ratio to
exceed 4.0:1 and may not permit its operating cash flow to interest expense
ratio to be less than 2.0:1, each as defined under the credit facilities.
Continued access to TELUS Corporation's credit facilities is not contingent on
the maintenance by TELUS Corporation of a specific credit rating.
No amounts were drawn under the Company's credit facilities as at March 31,
2005, and December 31, 2004.
(d) Debt Covenants
As at March 31, 2005, the Company and its subsidiaries are in compliance with
all of their debt covenants.
(e) Long-Term Debt Maturities
Anticipated requirements to meet long-term debt repayments during each of the
five years ending December 31 are as follows:
(millions) Total(1)
---------------------------------------------------------------------------------------------------------------------------------
2005 (balance of year) $ 3.6
2006 1,586.3
2007 1,870.4
2008 2.8
2009 0.9
(1) Where applicable, repayments reflect hedged foreign exchange rates
13. Shareholders' Equity
(a) Details of Shareholders' Equity
As at As at
March 31, December 31,
($ in millions except per share amounts) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Convertible debentures conversion option (Note 12(b)) $ 8.8 $ 8.8
---------------------------------------------------------------------------------------------------------------------------------
Preferred equity
Authorized Amount
First Preferred Shares 1,000,000,000
Second Preferred Shares 1,000,000,000
Common equity
Shares
Authorized Amount
Common Shares 1,000,000,000
Non-Voting Shares 1,000,000,000
Issued
Common Shares (b) 2,389.0 2,407.5
Non-Voting Shares (b) 3,477.3 3,426.7
Options and warrants (c) 22.6 26.9
Accrual for shares issuable under channel stock incentive plan (d) 1.0 0.8
Cumulative foreign currency translation adjustment (5.3) (2.2)
Retained earnings 1,088.1 1,008.1
Contributed surplus (e) 143.7 149.0
---------------------------------------------------------------------------------------------------------------------------------
7,116.4 7,016.8
---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 7,125.2 $ 7,025.6
=================================================================================================================================
(b) Changes in Common Shares and Non-Voting Shares
Period ended March 31, 2005 Three months
---------------------------------------------------------------------------------------------------------------------------------
Number of Amount
shares (millions)
---------------------------------------------------------------------------------------------------------------------------------
Common Shares
Beginning of period 192,748,738 $ 2,407.5
Exercise of share options (f) 321,003 8.7
Purchase of shares for cancellation pursuant to normal course issuer bid (g) (2,097,100) (26.2)
Expiration of predecessor share exchange privilege (h) (80,642) (1.0)
---------------------------------------------------------------------------------------------------------------------------------
End of period 190,891,999 $ 2,389.0
=================================================================================================================================
Non-Voting Shares
Beginning of period 165,803,123 $ 3,426.7
Exercise of warrants (c) 2,024 0.1
Exercise of convertible debenture conversion option 829 -
Channel stock incentive plan (d) 12,225 0.4
Exercise of share options (f) 3,736,116 92.9
Purchase of shares for cancellation pursuant to normal course issuer bid (g) (2,036,100) (42.2)
Expiration of predecessor share exchange privilege (h) (26,327) (0.6)
---------------------------------------------------------------------------------------------------------------------------------
End of period 167,491,890 $ 3,477.3
=================================================================================================================================
(c) Options and Warrants
Upon its acquisition of Clearnet Communications Inc. ("Clearnet") in 2000, the
Company was required to record the intrinsic value of Clearnet options and
warrants outstanding at that time. As these options and warrants are exercised,
the corresponding intrinsic values are reclassified to share capital. As these
options and warrants are forfeited or expire, the corresponding intrinsic
values are reclassified to contributed surplus. Proceeds arising from the
exercise of these options and warrants are credited to share capital.
Under the terms of the arrangement to acquire Clearnet, effective January 18,
2001, TELUS Corporation exchanged the warrants held by former Clearnet warrant
holders. Each warrant entitles the holder to purchase a Non-Voting Share at a
price of U.S.$10.00 per share until September 15, 2005.
(d) Channel Stock Incentive Plan
The Company initiated the Plan to increase sales of various products and
services by providing additional performance-based compensation in the form of
Non-Voting Shares. As at March 31, 2005, shares earned, but not yet issued, are
accrued as a component of Common Equity.
(e) Contributed Surplus
The following table presents a summary of the activity related to the Company's
contributed surplus for the three-month period ended March 31:
Period ended March 31, 2005 (millions) Three months
---------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 149.0
Share option expense recognized in period (Note 8(a)) 4.2
Share option expense reclassified to Non-Voting Share capital account upon exercise of share options (9.5)
---------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 143.7
=================================================================================================================================
(f) Share Option Plans
The Company has a number of share option plans under which directors, officers
and other employees receive options to purchase Common Shares and/or Non-Voting
Shares at a price equal to the fair market value at the time of grant. Options
granted under the plans may be exercised over specific periods not to exceed 10
years from the time of grant.
The following table presents a summary of the activity related to the Company's
share options plans for the periods ended March 31.
Period ended March 31, 2005 Three months
---------------------------------------------------------------------------------------------------------------------------------
Weighted
Number of average option
shares price
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 21,914,760 $ 26.07
Granted 1,125,865 35.55
Exercised (4,057,119) 21.66
Forfeited (662,450) 26.15
Expired and cancelled (140,855) 41.63
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 18,180,201 27.51
=================================================================================================================================
(g) Purchase of Shares for Cancellation Pursuant to Normal Course Issuer Bid
The Company purchased, for cancellation, Common Shares and Non-Voting Shares
pursuant to a normal course issuer bid that runs for a twelve-month period
ending December 19, 2005, for up to 14.0 million Common Shares and 11.5 million
Non-Voting Shares. The excess of the purchase price over the average stated
value of shares purchased for cancellation was charged to retained earnings.
The Company ceases to consider shares outstanding on the date of the Company's
purchase of its shares although the actual cancellation of the shares by the
transfer agent and registrar occurs on a timely basis on a date shortly
thereafter. As at March 31, 2005, 346,200 Common Shares and 265,300 Non-Voting
Shares had been purchased and had not yet been cancelled.
Period ended March 31, 2005 ($ in millions) Three months
---------------------------------------------------------------------------------------------------------------------------------
Purchase price
----------------------------------------------------------------
Charged to
Number of Charged to retained
shares Paid share capital earnings
---------------------------------------------------------------------------------------------------------------------------------
Common Shares purchased for cancellation
Prior to beginning of period 755,711 $ 27.3 $ 9.4 $ 17.9
During period 2,097,100 81.6 26.2 55.4
---------------------------------------------------------------------------------------------------------------------------------
Cumulative total 2,852,811 $ 108.9 $ 35.6 $ 73.3
=================================================================================================================================
Non-Voting Shares purchased for cancellation
Prior to beginning of period 1,451,400 $ 50.7 $ 30.0 $ 20.7
During period 2,036,100 76.7 42.2 34.5
---------------------------------------------------------------------------------------------------------------------------------
Cumulative total 3,487,500 $ 127.4 $ 72.2 $ 55.2
=================================================================================================================================
Common Shares and Non-Voting Shares purchased
for cancellation
Prior to beginning of period 2,207,111 $ 78.0 $ 39.4 $ 38.6
During period 4,133,200 158.3 68.4 89.9
---------------------------------------------------------------------------------------------------------------------------------
Cumulative total 6,340,311 $ 236.3 $ 107.8 $ 128.5
=================================================================================================================================
(h) Expiration of Predecessor Share Exchange Privilege
As set out in the Joint Management Proxy Circular of December 8, 1998, holders
of BC TELECOM Inc. Common Shares and holders of Alberta-based TELUS Corporation
Common Shares had six years to exchange their shares for shares that have
become what are now the Company's Common Shares and Non-Voting Shares; such
period elapsed on January 31, 2005. The amounts corresponding with the
unexchanged shares have been removed from the equity accounts.
(i) Employee Share Purchase Plan
The Company has an employee share purchase plan under which eligible employees
can purchase Common Shares through regular payroll deductions by contributing
between 1% and 10% of their pay. The Company contributes 40% (45% for the
employee population up to a certain job classification) for every dollar
contributed by an employee, to a maximum of 6% of employee pay. The Company
records its contributions as a component of operating expenses. For the
three-month period ended March 31, 2005, the employees and the Company
contributed $18.8 million (2004 - $15.2 million) and $8.1 million (2004 - $6.1
million), respectively, to this plan.
Under this plan, the Company has the option of offering shares from Treasury or
having the trustee acquire shares in the stock market. Prior to February 2001
and subsequent to November 1, 2004, all Common Shares issued to employees under
the plan were purchased on the market at normal trading prices; in the
intervening period, shares were also issued from Treasury.
(j) Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase Plan under which
eligible shareholders may acquire Non-Voting Shares through the reinvestment of
dividends and additional optional cash payments. Excluding Non-Voting Shares
purchased by way of additional optional cash payments, the Company, at its
discretion, may offer the Non-Voting Shares at up to a 5% discount from the
market price. During the three-month period ended March 31, 2005, the Company
did not offer Non-Voting Shares at a discount. Shares purchased through
optional cash payments are subject to a minimum investment of $100 per
transaction and a maximum investment of $20,000 per calendar year.
Under this Plan, the Company has the option of offering shares from Treasury or
having the trustee acquire shares in the stock market. Prior to July 1, 2001,
when the acquisition of shares from Treasury commenced, all Non-Voting Shares
were acquired in the market at normal trading prices; acquisition in the market
at normal trading prices recommenced on January 1, 2005.
In respect of Common Share and Non-Voting Share dividends declared during the
three-month period ended March 31, 2005, $1.9 million (2004 - $5.7 million) was
to be reinvested in Non-Voting Shares.
(k) Shares Reserved for Issuance
(millions) As at March 31, 2005
---------------------------------------------------------------------------------------------------------------------------------
Common Non-Voting
Shares Shares
---------------------------------------------------------------------------------------------------------------------------------
For exercise of:
Convertible debentures conversion option - 3.8
Share options 2.5 19.8
Warrants - 0.6
---------------------------------------------------------------------------------------------------------------------------------
2.5 24.2
=================================================================================================================================
14. Commitments and Contingent Liabilities
(a) CRTC Decisions 2002-34 and 2002-43 Deferral Accounts
On May 30, 2002, and on July 31, 2002, the Canadian Radio-television and
Telecommunications Commission ("CRTC") issued Decisions 2002-34 and 2002-43,
respectively, and introduced the concept of a deferral account. The Company
must make significant estimates and assumptions in respect of the deferral
accounts given the complexity and interpretation required of Decisions 2002-34
and 2002-43. Accordingly, the Company estimates, and records, a liability (see
Note 15(b)) to the extent that activities it has undertaken, other qualifying
events and realized rate reductions for Competitor Services do not extinguish
it. Management is required to make estimates and assumptions in respect of the
offsetting nature of these items. If the CRTC, upon its annual review of the
Company's deferral account, disagrees with management's estimates and
assumptions, the CRTC may adjust the deferral account balance and such
adjustment may be material.
On March 24, 2004, the CRTC issued Telecom Public Notice CRTC 2004-1 "Review
and disposition of the deferral accounts for the second price cap period" which
initiated a public proceeding inviting proposals on the disposition of the
amounts accumulated in the incumbent local exchange carriers' deferral accounts
during the first two years of the second price cap period. The Company is
uncertain when the CRTC will make its determination on this proceeding.
Due to the Company's use of the liability method of accounting for the deferral
account, the CRTC Decision 2005-6, as it relates to the Company's provision of
Competitor Digital Network services, is not expected to affect the Company's
revenues. To the extent that the CRTC Decision 2005-6 requires the Company to
provide discounts on Competitor Digital Network services, both for current and
prior periods, the Company draws down the deferral account by an offsetting
amount. For the three-month period ended March 31, 2005, the Company drew down
the deferral account by $18.4 million in respect of discounts on Competitor
Digital Network services.
(b) Labour Negotiations
Collective bargaining with the Telecommunications Workers Union: In 2000, TELUS
commenced collective bargaining with the Telecommunications Workers Union for a
new collective agreement replacing the multiple legacy agreements from BC
TELECOM and Alberta-based TELUS. This is the first round of collective
bargaining since the merger of BC TELECOM and TELUS Alberta and the Company's
aim is to replace the legacy collective agreements with a single collective
agreement for the new bargaining unit.
During the fourth quarter of 2002, the Company's application to the Federal
Minister of Labour, as provided for under the Canada Labour Code, requesting
the appointment of a federal conciliator was granted. In the first quarter of
2004, the extended conciliation process, that included a global review of all
outstanding issues, concluded and the outstanding issues were not resolved. On
January 15, 2004, the Federal Minister of Labour appointed the two conciliators
as mediators to continue to work with the Company and the Telecommunications
Workers Union towards a possible resolution.
On January 28, 2004, the Canada Industrial Relations Board ruled, in response
to an unfair labour practice complaint filed by the Telecommunications Workers
Union, that the Company must make an offer of binding arbitration to the
Telecommunications Workers Union to settle the collective agreement between the
parties. The Company made the offer of binding arbitration on January 29, 2004,
and on January 30, 2004, the Telecommunications Workers Union accepted the
offer. The Company filed an application for reconsideration and on February 2,
2005, the Canada Industrial Relations Board reversed the decision that placed
the parties in binding arbitration. Subsequently, the Telecommunications
Workers Union filed an application in the Federal Court of Appeal, scheduled to
be heard on May 31 - June 1, 2005, seeking to overturn the Canada Industrial
Relations Board's reconsideration decision and restore the order that placed
the parties in binding arbitration.
On April 18, 2005, the Company delivered first notice of lockout to the
Telecommunications Workers Union. That notice, effective April 25, 2005,
included the following measures: the suspension of grievance and arbitration
processes, joint Union management committees, scheduling of accumulated time
off, payment for the first day of sickness absence and the deferral of wage
progression increases and increases in vacation entitlements. Attempts by the
Telecommunications Workers Union at the Federal Court of Appeal and the Canada
Industrial Relations Board for interim relief against this notice were
unsuccessful.
The Company was notified by the Canada Industrial Relations Board, on May 4,
2005, of an additional application by the Telecommunications Workers Union.
The Telecommunications Workers Union's application, which attempts to amend
an earlier complaint, alleges the Company's lockout notice and measures and
communications to bargaining unit team members are not compliant with the
Canada Labour Code. The complaint seeks an order that the Company offer the
Telecommunications Workers Union binding arbitration to settle the collective
agreement.
Notwithstanding the Telecommunications Workers Union's application to the
Federal Court of Appeal and most recent application to the Canada Industrial
Relations Board, collective bargaining with the Telecommunications Workers
Union resumed on February 10, 2005, and the parties continue to meet with the
assistance of a federally appointed mediator.
There can be no assurance that, with the resumption of collective bargaining,
compensation increases will be as planned or that reduced productivity will not
occur as a result of a labour disruption. Should the ultimate operational and
financial impacts differ from management's assessments and assumptions, a
material adjustment to the Company's financial position and the results of its
operations could result. The operational and financial impacts of the outcome
of the appeal process on the Company are not practicably determinable
currently.
Canada Industrial Relations Board Letter Decision 1088 and Decision 278: On May
21, 2004, the Canada Industrial Relations Board declared TELE-MOBILE COMPANY
and TELUS Communications Inc. a single employer for labour relations purposes.
The Canada Industrial Relations Board also determined that the Mobility
segment's non-unionized team members, predominantly located in Ontario and
Quebec, performing work similar to their unionized Mobility segment
counterparts in British Columbia and Alberta, should be included in the
Telecommunications Workers Union bargaining unit without a representational
vote.
On June 23, 2004, both TELE-MOBILE COMPANY and TELUS Communications Inc. filed
an application to the Federal Court of Appeal for a judicial review of the
Canada Industrial Relations Board Letter Decision 1088 and the subsequent
Decision 278. The judicial review was heard on October 4-5, 2004, and
subsequently, on December 16, 2004, the Federal Court of Appeal released its
decision dismissing the appeal of Decision 278 by TELE-MOBILE COMPANY and TELUS
Communications Inc.
On February 14, 2005, TELE-MOBILE COMPANY and TELUS Communications Inc. applied
to the Supreme Court of Canada for leave to appeal the Federal Court of
Appeal's December 16, 2004, decision. As of the date of these interim
consolidated financial statements, no decision has yet been rendered on the
application for leave to appeal.
Should the ultimate operational and financial impacts of Decision 278 and
Letter Decision 1088 differ from management's assessments and assumptions, a
material adjustment to the Company's financial position and the results of its
operations could result.
(c) Guarantees
Canadian generally accepted accounting principles require the disclosure of
certain types of guarantees and their maximum, undiscounted amounts. The
maximum potential payments represent a"worst-case scenario" and do not
necessarily reflect results expected by the Company. Guarantees requiring
disclosure are those obligations that require payments contingent on specified
types of future events; in the normal course of its operations, the Company
enters into obligations which GAAP may consider to be guarantees. As defined by
Canadian GAAP, guarantees subject to these disclosure guidelines do not include
guarantees that relate to the future performance of the Company.
Performance guarantees: Performance guarantees contingently require a guarantor
to make payments to a guaranteed party based on a third party's failure to
perform under an obligating agreement. TELUS provides sales price guarantees in
respect of employees' principal residences as part of its employee relocation
policies. In the event that the Company is required to honour such guarantees,
it purchases (for immediate resale) the property from the employee.
The Company has guaranteed third parties' financial obligations as part of a
facility naming rights agreement. The guarantees, in total, run through to
August 31, 2008, on a declining-balance basis and are of limited recourse.
As at March 31, 2005, the Company has no liability recorded in respect of the
aforementioned performance guarantees.
Financial guarantees: In conjunction with its 2001 exit from the equipment
leasing business, the Company provided a guarantee to a third party with
respect to certain specified telecommunication asset and vehicle leases. If the
lessee were to default, the Company would be required to make a payment to the
extent that the realized value of the underlying asset is insufficient to pay
out the lease; in some instances, the Company could be required to pay out the
lease on a gross basis and realize the underlying value of the leased asset
itself. As at March 31, 2005, the Company has a liability of $1.0 million
(December 31, 2004 - $1.0 million) recorded in respect of these lease
guarantees.
The following table quantifies the maximum undiscounted guarantee amounts as at
March 31, 2005, without regard for the likelihood of having to make such
payment.
Performance Financial
(millions) guarantees(1) guarantees(1) Total
---------------------------------------------------------------------------------------------------------------------------------
2005 (balance of year) $ 2.3 $ 2.4 $ 4.7
2006 1.5 1.9 3.4
2007 1.0 1.0 2.0
2008 0.5 0.3 0.8
2009 - - -
(1) Annual amounts for performance guarantees and financial guarantees
include the maximum guarantee amounts during any year of the term of the
guarantee.
Indemnification obligations: In the normal course of operations, the Company
may provide indemnification in conjunction with certain transactions. The term
of these indemnification obligations range in duration and often are not
explicitly defined. Where appropriate, an indemnification obligation is
recorded as a liability. In many cases, there is no maximum limit on these
indemnification obligations and the overall maximum amount of the obligations
under such indemnification obligations cannot be reasonably estimated. Other
than obligations recorded as liabilities at the time of the transaction,
historically the Company has not made significant payments under these
indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the
Company agreed to bear a proportionate share of the new owner'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 owner being prevented from carrying on the
directory business as specified in the agreement, TELUS would indemnify the
owner in respect of any losses that the owner incurred.
As at March 31, 2005, the Company has no liability recorded in respect of
indemnification obligations.
(d) Claims and Lawsuits
General: A number of claims and lawsuits seeking damages and other relief are
pending against the Company. It is impossible at this time for the Company to
predict with any certainty the outcome of such litigation. However, management
is of the opinion, based upon legal assessment and information presently
available, that it is unlikely that any liability, to the extent not provided
for through insurance or otherwise, would be material in relation to the
Company's consolidated financial position, excepting the items enumerated
following.
Pay equity: On December 16, 1994, the Telecommunications Workers Union filed a
complaint against BC TEL, a predecessor of TELUS Communications Inc., with the
Canadian Human Rights Commission, alleging that wage differences between
unionized male and female employees in British Columbia were contrary to the
equal pay for work of equal value provisions in the Canadian Human Rights Act.
In December 1998, the Canadian Human Rights Commission advised that it would
commence an investigation of the Telecommunications Workers Union complaint. In
February 2003, the Canadian Human Rights Commission offered to mediate a
settlement of the complaint, but the Company declined the offer. The Canadian
Human Rights Commission referred the complaint to conciliation under the
Canadian Human Rights Act and appointed a conciliator to assist in settling the
complaint. The complaint was not resolved through conciliation and it was
referred back to the Canadian Human Rights Commission in December 2004. Under
the terms of referral back to the Canadian Human Rights Commission, the
complaint may be dismissed, subjected to further investigation or placed before
a tribunal for adjudication. The Company believes that it has good defences to
the Telecommunications Workers Union's complaint and has taken the position
that it should be dismissed. Should the ultimate resolution of the pay equity
complaint differ from management's assessment and assumptions, a material
adjustment to the Company's financial position and the results of its
operations could result.
TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan: In January
2002, the Company became aware of two statements of claim filed in the Alberta
Court of Queen's Bench on December 31, 2001, and January 2, 2002, by plaintiffs
alleging to be either members or business agents of the Telecommunications
Workers Union. In one action, the three plaintiffs alleged to be suing on
behalf of all current or future beneficiaries of the TELUS Corporation Pension
Plan and in the other action, the two plaintiffs allege to be suing on behalf
of all current or future beneficiaries of the TELUS Edmonton Pension Plan. The
statement of claim in the TELUS Corporation Pension Plan related action named
the Company, certain of its affiliates and certain present and former trustees
of the TELUS Corporation Pension Plan as defendants, and claims damages in the
sum of $445 million. The statement of claim in the TELUS Edmonton Pension Plan
related action named the Company, certain of its affiliates and certain
individuals who are alleged to be trustees of the TELUS Edmonton Pension Plan
and claims damages in the sum of $15.5 million. On February 19, 2002, the
Company filed statements of defence to both actions and also filed notices of
motion for certain relief, including an order striking out the actions as
representative or class actions. On May 17, 2002, the statements of claim were
amended by the plaintiffs and include allegations, inter alia, that benefits
provided under the TELUS Corporation Pension Plan and the TELUS Edmonton
Pension Plan are less advantageous than the benefits provided under the
respective former pension plans, contrary to applicable legislation, that
insufficient contributions were made to the plans and contribution holidays
were taken and that the defendants wrongfully used the diverted funds, and that
administration fees and expenses were improperly deducted. The Company filed
statements of defence to the amended statements of claim on June 3, 2002. The
Company believes that it has good defences to the actions. Should the ultimate
resolution of these actions differ from management's assessment and
assumptions, a material adjustment to the Company's financial position and the
results of its operations could result.
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. The Company
believes that it has good defences to the action.
Similar proceedings have been filed by or on behalf of plaintiffs' counsel in
other provincial jurisdictions, but plaintiffs' counsel has formally undertaken
not to advance them until the Saskatchewan action has been decided.
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.
15. Additional Financial Information
(a) Income Statement
Three months
Periods ended March 31 (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Operations expense(1):
Cost of sales and service $ 616.5 $ 584.8
Selling, general and administrative 492.6 481.8
---------------------------------------------------------------------------------------------------------------------------------
$ 1,109.1 $ 1,066.6
=================================================================================================================================
Advertising expense $ 37.0 $ 32.0
=================================================================================================================================
(1) Cost of sales and service include cost of goods sold and costs to
operate and maintain access to and usage of the Company's
telecommunication infrastructure. Selling, general and administrative
costs include sales and marketing costs (including commissions),
customer care, bad debt expense, real estate costs and corporate
overhead costs such as information technology, finance (including
billing services, credit and collection), legal, human resources and
external affairs.
Employee salaries, benefits and related costs are included in one of the
two components of operations expense to the extent that the costs are
related to the component functions.
(b) Balance Sheet
As at As at
March 31, December 31,
(millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Accounts receivable
Customer accounts receivable $ 704.2 $ 727.0
Accrued receivables - customer 113.0 114.1
Allowance for doubtful accounts (66.2) (69.3)
---------------------------------------------------------------------------------------------------------------------------------
751.0 771.8
Accrued receivables - other 115.6 81.7
Other 8.3 10.0
---------------------------------------------------------------------------------------------------------------------------------
$ 874.9 $ 863.5
=================================================================================================================================
Prepaid expense and other
Prepaid expenses $ 144.0 $ 101.4
Deferred customer activation and installation costs 66.2 76.2
Other 35.6 5.8
---------------------------------------------------------------------------------------------------------------------------------
$ 245.8 $ 183.4
=================================================================================================================================
Deferred charges
Recognized transitional pension assets and pension plan contributions in
excess of charges to income $ 597.2 $ 556.7
Deferred customer activation and installation costs 95.4 94.4
Cost of issuing debt securities, less amortization 29.8 32.1
Other 24.0 21.2
---------------------------------------------------------------------------------------------------------------------------------
$ 746.4 $ 704.4
=================================================================================================================================
Accounts payable and accrued liabilities
Accrued liabilities $ 467.3 $ 409.1
Payroll and other employee-related liabilities 490.1 535.4
Asset retirement obligations 3.1 3.1
---------------------------------------------------------------------------------------------------------------------------------
960.5 947.6
Trade accounts payable 278.6 313.0
Interest payable 204.6 65.0
Other 43.2 37.0
---------------------------------------------------------------------------------------------------------------------------------
$ 1,486.9 $ 1,362.6
=================================================================================================================================
Advance billings and customer deposits
Advance billings $ 311.3 $ 294.4
CRTC Decisions 2002-34 and 2002-43 deferral accounts (Note 14(a)) 127.1 128.7
Deferred customer activation and installation fees 66.2 79.6
Customer deposits 27.6 28.8
---------------------------------------------------------------------------------------------------------------------------------
$ 532.2 $ 531.5
=================================================================================================================================
Other Long-Term Liabilities
Deferred hedging liability $ 1,009.5 $ 1,032.6
Pension and other post-retirement liabilities 177.4 172.8
Deferred gain on sale-leaseback of buildings 96.1 98.7
Deferred customer activation and installation fees 95.4 94.4
Asset retirement obligations 19.2 19.2
Other 89.0 88.4
---------------------------------------------------------------------------------------------------------------------------------
$ 1,486.6 $ 1,506.1
=================================================================================================================================
(c) Supplementary Cash Flow Information
Three months
Periods ended March 31 (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Net change in non-cash working capital
Accounts receivable $ (2.2) $ (38.9)
Income and other taxes receivable (40.2) 69.9
Inventories 22.3 5.7
Prepaid expenses and other (62.4) (35.6)
Accounts payable and accrued liabilities 122.9 39.0
Advance billings and customer deposits 0.7 9.9
---------------------------------------------------------------------------------------------------------------------------------
$ 41.1 $ 50.0
=================================================================================================================================
16. Employee Future Benefits
(a) Defined Benefit Plans
The Company's net defined benefit plan costs were as follows:
Three-month periods ended March 31
(millions) 2005 2004
--------------------------------------------------------------------------------- --------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
period adjustments(1) period period adjustments(1) period
---------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFIT PLANS
Current service cost $ 17.1 $ - $ 17.1 $ 17.6 $ - $ 17.6
Interest cost 79.8 - 79.8 78.1 - 78.1
Return on plan assets (122.9) 24.8 (98.1) (164.2) 70.9 (93.3)
Past service costs - 0.2 0.2 - 0.2 0.2
Actuarial loss (gain) 5.0 - 5.0 6.1 - 6.1
Valuation allowance provided
against accrued benefit asset - 6.4 6.4 - 6.4 6.4
Amortization of transitional
obligation (asset) - (11.2) (11.2) - (11.2) (11.2)
---------------------------------------------------------------------------------------------------------------------------------
$ (21.0) $ 20.2 $ (0.8) $ (62.4) $ 66.3 $ 3.9
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so
as to recognize the long-term nature of employee future benefits.
Three-month periods ended March 31
(millions) 2005 2004
--------------------------------------------------------------------------------- --------------------------------------------
Incurred in Matching Recognized in Incurred in Matching Recognized in
period adjustments(1) period period adjustments(1) period
---------------------------------------------------------------------------------------------------------------------------------
OTHER BENEFIT PLANS
Current service cost $ 2.8 $ - $ 2.8 $ 1.2 $ - $ 1.2
Interest cost 0.5 - 0.5 0.8 - 0.8
Return on plan assets (0.6) - (0.6) (0.7) - (0.7)
Actuarial loss (gain) (0.7) - (0.7) (0.3) - (0.3)
Amortization of transitional
obligation (asset) - 0.2 0.2 - 0.2 0.2
---------------------------------------------------------------------------------------------------------------------------------
$ 2.0 $ 0.2 $ 2.2 $ 1.0 $ 0.2 $ 1.2
=================================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as
to recognize the long-term nature of employee future benefits.
(b) Employer Contributions
The best estimate of fiscal 2005 employer contributions to the Company's
defined benefit pension plans has been revised to approximately $116 million
(the best estimate at December 31, 2004, was $105.9 million).
(c) Defined Contribution Plans
The Company's total defined contribution pension plan costs recognized were as
follows:
Three months
Periods ended March 31 (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Union pension plan and public service pension plan contributions $ 10.7 $ 9.3
Other defined contribution pension plans 3.7 6.3
---------------------------------------------------------------------------------------------------------------------------------
$ 14.4 $ 15.6
=================================================================================================================================
17. Segmented Information
The Company's reportable segments, which are used to manage the business, are
Communications and Mobility. The Communications segment includes voice local,
voice long distance, data and other telecommunication services excluding
wireless. The Mobility segment includes digital personal communications
services and wireless Internet services. Segmentation is based on similarities
in technology, the technical expertise required to deliver the products and
services, and the distribution channels used. Intersegment sales are recorded
at the exchange value, which is the amount agreed to by the parties.
Three-month Periods
ended March 31 Communications Mobility Eliminations Consolidated
(millions) 2005 2004 2005 2004 2005 2004 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
External revenue $ 1,222.2 $ 1,171.1 $ 752.5 $ 632.7 $ - $ - $ 1,974.7 $ 1,803.8
Intersegment
revenue 22.6 25.0 5.8 4.6 (28.4) (29.6) - -
---------------------------------------------------------------------------------------------------------------------------------
Total operating
revenue 1,244.8 1,196.1 758.3 637.3 (28.4) (29.6) 1,974.7 1,803.8
Operations expense 716.6 706.7 420.9 389.5 (28.4) (29.6) 1,109.1 1,066.6
Restructuring and
work-force
reduction costs 9.4 15.9 - - - - 9.4 15.9
---------------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $ 518.8 $ 473.5 $ 337.4 $ 247.8 $ - $ - $ 856.2 $ 721.3
=================================================================================================================================
CAPEX(2) $ 213.6 $ 259.4 $ 59.6 $ 50.3 $ - $ - $ 273.2 $ 309.7
=================================================================================================================================
EBITDA less CAPEX $ 305.2 $ 214.1 $ 277.8 $ 197.5 $ - $ - $ 583.0 $ 411.6
=================================================================================================================================
(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").
18. Differences Between Canadian and United States Generally Accepted
Accounting Principles
The consolidated financial statements have been prepared in accordance with
Canadian GAAP. The principles adopted in these financial statements conform in
all material respects to those generally accepted in the United States except
as summarized below. Significant differences between Canadian GAAP and U.S.
GAAP would have the following effect on reported net income of the Company:
Three months
Periods ended March 31 (millions except per share amounts) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with Canadian GAAP $ 242.2 $ 101.3
Adjustments:
Operating expenses
Operations (b) - 1.2
Depreciation (c) - 6.5
Amortization of intangible assets (d) (20.5) (20.5)
Financing costs (f) 0.9 1.9
Accounting for derivatives (g) 3.4 -
Taxes on the above adjustments (h) 7.1 5.4
---------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP 233.1 95.8
Other comprehensive income (loss) (i) (112.2) (22.1)
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income in accordance with U.S. GAAP $ 120.9 $ 73.7
=================================================================================================================================
Net income in accordance with U.S. GAAP per Common Share and Non-Voting
- Basic $ 0.65 $ 0.26
- Diluted $ 0.64 $ 0.26
The following is an analysis of retained earnings (deficit) reflecting
the application of U.S. GAAP:
Three months
Periods ended March 31 (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ (590.2) $ (844.7)
Net income in accordance with U.S. GAAP 233.1 95.8
---------------------------------------------------------------------------------------------------------------------------------
Less: Common Share and Non-Voting Share dividends paid, or payable, in cash 72.3 47.3
Common Share and Non-Voting Share dividends reinvested, or to be reinvested,
in shares issued from Treasury - 5.7
Cost of purchase of Common Shares and Non-Voting Shares in excess of stated
capital (Note 13(g)) 89.9 -
Preference and preferred share dividends - 0.9
Redemption premium on preference and preferred shares in excess of amount
chargeable to contributed surplus - 2.5
---------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ (519.3) $ (805.3)
=================================================================================================================================
The following is an analysis of major balance sheet categories reflecting the
application of U.S. GAAP:
As at As at
March 31, December 31,
(millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Current Assets $ 3,023.7 $ 2,647.6
Capital Assets
Property, plant, equipment and other 7,447.3 7,528.2
Intangible assets subject to amortization 2,414.6 2,476.5
Intangible assets with indefinite lives 2,964.6 2,955.8
Goodwill 3,566.1 3,545.4
Deferred Income Taxes 248.9 218.8
Other Assets 680.3 658.5
---------------------------------------------------------------------------------------------------------------------------------
$20,345.5 $20,030.8
=================================================================================================================================
Current Liabilities $ 2,154.2 $ 1,969.1
Long-Term Debt 6,368.0 6,341.1
Other Long-Term Liabilities 1,887.1 1,763.8
Deferred Income Taxes 1,590.1 1,593.7
Non-Controlling Interest 18.9 13.1
Shareholders' Equity 8,327.2 8,350.0
---------------------------------------------------------------------------------------------------------------------------------
$20,345.5 $20,030.8
=================================================================================================================================
The following is a reconciliation of shareholders' equity incorporating the
differences between Canadian and U.S. GAAP:
As at As at
March 31, December 31,
(millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under Canadian GAAP $ 7,125.2 $ 7,025.6
Adjustments:
Purchase versus Pooling Accounting (a), (c) - (f) 1,443.1 1,458.9
Additional goodwill on Clearnet purchase (e) 123.5 123.5
Convertible debentures (including conversion option) (f) (7.7) (8.0)
Accounting for derivatives (g) (0.8) (3.0)
Accumulated other comprehensive income (loss) (i), excluding cumulative foreign
currency translation adjustment (356.1) (247.0)
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under U.S. GAAP $ 8,327.2 $ 8,350.0
=================================================================================================================================
Composition of Shareholders' Equity under U.S. GAAP
Common equity
Common Shares $ 4,322.5 $ 4,341.0
Non-Voting Shares 4,741.9 4,700.8
Options and warrants (Note 13(c)) 22.6 26.9
Accrual for shares issuable under channel stock incentive plan 1.0 0.8
Retained earnings (deficit) (519.3) (590.2)
Accumulated other comprehensive income (loss) (i) (361.4) (249.2)
Contributed surplus 119.9 119.9
---------------------------------------------------------------------------------------------------------------------------------
$ 8,327.2 $ 8,350.0
=================================================================================================================================
(a) Merger of BC TELECOM and TELUS
The business combination between BC TELECOM and TELUS Corporation (renamed
TELUS Holdings Inc. which was wound up June 1, 2001) was accounted for using
the pooling of interests method under Canadian GAAP. Under Canadian GAAP, the
application of the pooling of interests method of accounting for the merger of
BC TELECOM and TELUS Holdings Inc. resulted in a restatement of prior periods
as if the two companies had always been combined. Under U.S. GAAP, the merger
is accounted for using the purchase method. Use of the purchase method results
in TELUS (TELUS Holdings Inc.) being acquired by BC TELECOM for $4,662.4
million (including merger related costs of $51.9 million) effective January 31,
1999.
(b) Operating Expenses - Operations
Three months
Periods ended March 31 (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Future employee benefits $ (4.2) $ (4.2)
Share-based compensation 4.2 5.4
---------------------------------------------------------------------------------------------------------------------------------
$ - $ 1.2
=================================================================================================================================
Future employee benefits: Under U.S. GAAP, TELUS' future employee benefit
assets and obligations have been recorded at their fair values on acquisition.
Accounting for future employee benefits under Canadian GAAP changed to become
more consistent with U.S. GAAP effective January 1, 2000. Canadian GAAP
provides that the transitional balances can be accounted for prospectively.
Therefore, to conform to U.S. GAAP, the amortization of the transitional amount
needs to be removed from the future employee benefit expense.
Share-based compensation: Effective January 1, 2004, Canadian GAAP required the
adoption of the fair value method of accounting for share-based compensation
for awards made after 2001 (see Note 8(a)). U.S. GAAP requires disclosure of
the impact on net income and net income per Common Share and Non-Voting Share
as if the fair value based method of accounting had been applied for awards
made after 1994; the Company continues to use the intrinsic value method for
purposes of U.S. GAAP. The fair values of the Company's options granted in 2004
and 2003, and the weighted average assumptions used in estimating the fair
values, are set out in Note 8(a). Such impact, using the fair values set out in
Note 8(a), would approximate the pro forma amounts in the following table.
Three months
Periods ended March 31 (millions except per share amounts) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP
As reported $ 233.1 $ 95.8
Deduct: Share-based compensation arising from share options determined
under fair value based method for all awards (4.2) (6.8)
---------------------------------------------------------------------------------------------------------------------------------
Pro forma $ 228.9 $ 89.0
=================================================================================================================================
Net income in accordance with U.S. GAAP per Common Share and Non-Voting Share
Basic
As reported (using intrinsic value method) $ 0.65 $ 0.26
Pro forma (using fair value method) $ 0.64 $ 0.24
Diluted
As reported (using intrinsic value method) $ 0.64 $ 0.26
Pro forma (using fair value method) $ 0.62 $ 0.24
(c) Operating Expenses - Depreciation
Merger of BC TELECOM and TELUS: Under the purchase method, TELUS' capital
assets on acquisition have been recorded at fair value rather than at their
underlying cost (book values) to TELUS. Therefore, depreciation of such assets
based on fair values at the date of acquisition under U.S. GAAP will be
different than TELUS' depreciation based on underlying cost (book values). As
of March 31, 2004, the amortization of this difference had been completed.
(d) Operating Expenses - Amortization of Intangible Assets
As TELUS' intangible assets on acquisition have been recorded at their fair
value (see (a)), amortization of such assets, other than for those with
indefinite lives, needs to be included under U.S. GAAP; consistent with prior
years, amortization is calculated using the straight-line method.
The incremental amounts recorded as intangible assets arising from the TELUS
acquisition above are as follows:
Accumulated
Cost Amortization Net Book Value
---------------------------------------------------------------------------------------------------------------------------------
As at As at
March 31, December 31,
(millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscribers - wireline $ 1,950.0 $ 267.0 $ 1,683.0 $ 1,692.6
Subscribers - wireless 250.0 214.0 36.0 46.9
---------------------------------------------------------------------------------------------------------------------------------
2,200.0 481.0 1,719.0 1,739.5
---------------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 1,833.3 1,833.3 - -
---------------------------------------------------------------------------------------------------------------------------------
$ 4,033.3 $ 2,314.3 $ 1,719.0 $ 1,739.5
=================================================================================================================================
(1) Accumulated amortization of spectrum licences is amortization
recorded prior to 2002 and the transitional impairment amount.
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at March 31, 2005, for each
of the next five fiscal years is as follows:
Years ending December 31 (millions)
---------------------------------------------------------------------------------------------------------------------------------
2005 (balance of year) $ 247.5
2006 203.2
2007 114.3
2008 57.1
2009 47.6
(e) Goodwill
Merger of BC TELECOM and TELUS: Under the purchase method of accounting, TELUS'
assets and liabilities at acquisition (see (a)) have been recorded at their
fair values with the excess purchase price being allocated to goodwill in the
amount of $403.1 million. Commencing January 1, 2002, rather than being
systematically amortized, the carrying value of goodwill is periodically tested
for impairment.
Additional goodwill on Clearnet purchase: Under U.S. GAAP, shares issued by the
acquirer to effect an acquisition are measured at the date the acquisition was
announced; however, under Canadian GAAP, at the time the transaction took
place, shares issued to effect an acquisition were measured at the transaction
date. This results in the purchase price under U.S. GAAP being $131.4 million
higher than under Canadian GAAP. The resulting difference is assigned to
goodwill. Commencing January 1, 2002, rather than being systematically
amortized, the carrying value of goodwill is periodically tested for
impairment.
(f) Financing Costs
Merger of BC TELECOM and TELUS: Under the purchase method, TELUS' long-term
debt on acquisition has been recorded at its fair value rather than at its
underlying cost (book value) to TELUS. Therefore, interest expense calculated
on the debt based on fair values at the date of acquisition under U.S. GAAP
will be different from TELUS' interest expense based on underlying cost (book
value).
Convertible debentures: Under Canadian GAAP, the conversion option embedded in
the convertible debentures is presented separately as a component of
shareholders' equity. Under U.S. GAAP, the embedded conversion option is not
subject to bifurcation and is thus presented as a liability along with the
balance of the convertible debentures. The principal accretion occurring under
Canadian GAAP is not required under U.S. GAAP and the adjustment is included in
the interest expense adjustment in the reconciliation.
(g) Accounting for Derivatives
On January 1, 2001, the Company adopted, for U.S. GAAP purposes, the provisions
of Statement of Financial Accounting Standards No. 133, "Accounting For
Derivative Instruments and Hedging Activities." This standard requires that all
derivatives be recognized as either assets or liabilities and measured at fair
value. This is different from the Canadian GAAP treatment for financial
instruments. Under U.S. GAAP, derivatives which are fair value hedges, together
with the financial instrument being hedged, will be marked to market with
adjustments reflected in income and derivatives which are cash flow hedges will
be marked to market with adjustments reflected in comprehensive income (see
(i)).
(h) Income Taxes
Three months
Periods ended March 31 (millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Current $ (21.4) $ (29.2)
Deferred 84.6 86.4
---------------------------------------------------------------------------------------------------------------------------------
63.2 57.2
Investment Tax Credits - (0.5)
---------------------------------------------------------------------------------------------------------------------------------
$ 63.2 $ 56.7
=================================================================================================================================
The Company's income tax expense (recovery), for U.S. GAAP purposes, differs
from that calculated by applying statutory rates for the following reasons:
Three-month periods
ended March 31 ($ in millions) 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 103.1 34.6% $ 53.2 34.7%
Change in estimates of available temporary
differences in prior years (36.0) -
Tax rate differential on, and consequential
adjustments from, reassessment of prior year
tax issues (11.3) (1.6)
Revaluation of deferred tax assets and liabilities
for changes in statutory income tax rates - (0.8)
Investment Tax Credits - (0.3)
Other 2.2 0.9
---------------------------------------------------------------------------------------------------------------------------------
58.0 19.5% 51.4 33.5%
Large corporations tax 5.2 5.3
---------------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense $ 63.2 21.2% $ 56.7 37.0%
=================================================================================================================================
(i) Additional Disclosures Required Under U.S. GAAP - Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", requires that a statement of comprehensive income be displayed with
the same prominence as other financial statements. Comprehensive income, which
incorporates net income, includes all changes in equity during a period except
those resulting from investments by and distributions to owners. There is
currently no requirement to disclose comprehensive income under Canadian GAAP.
Periods ended March 31
(millions) 2005 2004
-------------------------------------------------------------------- --------------------------------------------------------
Unrealized Cumulative Unrealized Cumulative
fair value of foreign fair value of foreign
derivative Minimum currency derivative Minimum currency
cash flow pension translation cash flow pension translation
hedges liability adjustment Total hedges liability adjustment Total
---------------------------------------------------------------------------------------------------------------------------------
Amount arising $ (165.3) $ (0.9) $ (3.1) $ (169.3) $ (33.7) $ (0.9) $ 0.4 $ (34.2)
Income tax
expense (recovery) (56.9) (0.2) - (57.1) (11.7) (0.4) - (12.1)
---------------------------------------------------------------------------------------------------------------------------------
Net (108.4) (0.7) (3.1) (112.2) (22.0) (0.5) 0.4 (22.1)
Accumulated other
comprehensive
income (loss),
beginning of
period (121.1) (125.9) (2.2) (249.2) (73.6) (110.4) (2.7) (186.7)
---------------------------------------------------------------------------------------------------------------------------------
Accumulated other
comprehensive
income (loss),
end of period $ (229.5) $ (126.6) $ (5.3) $ (361.4) $ (95.6) $ (110.9) $ (2.3) $ (208.8)
=================================================================================================================================
(j) Recently Issued Accounting Standards Not Yet Implemented
Equity-based compensation. Under U.S. GAAP, effective for its 2006
fiscal year, the Company will be required to apply the fair value method
of accounting for share-based compensation awards granted to employees,
as prescribed by SFAS 123(R). As compared with the information that has
been previously and currently disclosed for U.S. GAAP purposes, the
adoption of this standard will result in a reclassification between
share capital, contributed surplus and retained earnings. The Company
expects that it will use the modified prospective transition method. The
Company is in the process of estimating the impact on the U.S. GAAP
reconciliation disclosures, but has not yet finalized the amounts; such
amount would be in excess of the $176.9 million in share option expense
reported in the U.S. GAAP reconciliation disclosures for the fiscal
years ended December 31, 2004-1999, inclusive, due to the initial
effective date of SFAS 123.
Other. As would affect the Company, there are no other U.S. accounting
standards currently issued and not yet implemented that would differ
from Canadian accounting standards currently issued and not yet
implemented.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 4, 2005
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary