Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of ___August___ 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:
Press Release dated August 5, 2005 of the Second Quarter Results
______________________________________________________________________________
Attention Business/Financial Editors:
TELUS Reports Second Quarter Results
Solid wireline and strong wireless performance
drives revenue and profit growth
VANCOUVER, Aug. 5 /CNW/ - TELUS Corporation (TSX: T and T.NV / NYSE: TU)
today reported strong financial results for the second quarter of 2005
reflecting excellent wireless performance at TELUS Mobility, good revenue
growth at TELUS Communications and a significant increase in consolidated
earnings. Consolidated operating revenues of $2.0 billion in the quarter
increased 8% from a year ago and operating income was up 24%. Earnings per
share for the second quarter were 53 cents, up 10% compared with 48 cents for
the same period a year ago. Earnings per share for the second quarter included
a one time three cent negative accrual arising from a legal proceeding related
to a 1997 debt transaction, and the second quarter of 2004 benefited from
13 cents in positive tax related adjustments.
FINANCIAL HIGHLIGHTS
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C$ in millions, except per share amounts 3 months ended
June 30
(unaudited) 2005 2004 % Change
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Operating revenues 2,018.5 1,865.6 8.2
EBITDA(1) 865.0 784.8 10.2
Operating income 465.9 377.2 23.5
Net income 189.5 172.3 10.0
Earnings per share (EPS), basic(2) 0.53 0.48 10.4
Capital expenditures 408.7 346.1 18.1
Cash provided by operating activities 687.7 489.0 40.6
Free cash flow(3) 207.8 229.5 (9.5)
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring and workforce reduction costs. See Section 11.1 of
Management's discussion and analysis.
(2) EPS includes favourable tax settlement impact of 13 cents for the
three month period in 2004.
(3) See Section 11.2 of Management's discussion and analysis.
Darren Entwistle, president and CEO, stated "TELUS second quarter results
were strong across the board with an eight per cent increase in revenue driven
by our consistent strategic focus on delivering wireless and data growth. Our
Company's EBITDA and bottom line EPS was up a reported 10 per cent. Indeed,
after adjusting for non-recurring items, EPS increased 60 per cent. As
highlighted last quarter, we are striving to bring the collective bargaining
process to a positive conclusion for all stakeholders. A major positive step
forward was taken in July as we commenced implementation of a new
comprehensive collective agreement for TWU bargaining unit employees. While
the recent strike action by the TWU presents a challenge for employees and
some customers, I am heartened by the support of management and bargaining
unit team members alike that have responded positively to the work stoppage in
support of TELUS and our customers. Approximately 70 per cent of our team
members continue to work to serve our customers. Our desire at the end of the
day is to have all unionized team members share in our ongoing financial
success, which our comprehensive offer ensures."
Robert McFarlane, executive vice president and CFO, commented that "we
generated record quarterly wireless revenue and EBITDA in addition to setting
a new second quarter record for cash flow and subscriber additions. We were
also pleased with our wireline revenue growth, led by strong data results
while local and long distance revenue were stable in the face of increased
competitive pressure and line losses. TELUS continues to produce significant
quarterly free cash flow of over $200 million. After repurchasing 6.5 million
shares during the quarter for an outlay of $272 million, TELUS still
maintained a significant cash balance of $1.1 billion at quarter end. We are
ready to distribute approximately $200 million of past period and lump sum
payments to TWU employees on ratification of their new collective agreement.
Reflecting positive year to date results and the successful implementation of
our emergency operations plan to address the labour disruption in Western
Canada, we are maintaining our existing 2005 guidance."
OPERATING HIGHLIGHTS
TELUS Mobility
Strong cash flow improvement of $44 million driven by 19% revenue growth
and significant margin expansion
- revenues increased by $125 million or 19% to $802 million in the
second quarter of 2005, when compared with the same period in 2004
- EBITDA increased by $80 million or 28% to $367 million
- EBITDA margin expanded by 3.5 points to 49% of network revenue, and by
3.4 points to 45% of total revenue
- ARPU (average revenue per subscriber unit) increased markedly by $2
to $61
- cost of acquisition ("COA") per gross subscriber improved to $342
from $381
- net subscriber additions of 131,100 in the quarter, improved 15% from
a year ago. Notably, higher revenue-generating postpaid subscriber net
additions of 103,900 represented 79% of total net additions
- blended monthly churn increased slightly to 1.37% from 1.32% when
compared to the same quarter a year ago. Post paid churn was 1.05%.
- cash flow (EBITDA less capital expenditures) increased by $44 million
or 21% to $252 million
TELUS Communications
Strong data growth with stable long distance revenues result in increased
operating revenues
- revenues increased by $28 million or 2% to $1,217 million in the
second quarter of 2005, when compared with the same period in 2004
representing a fourth consecutive quarter of year-over-year growth
- data revenue increased 10% driven by increased Internet and enhanced
data service revenues
- strong 19% increase in non-incumbent revenues in Ontario and Quebec to
$156 million creating a third consecutive quarter of profitability
- long-distance revenue was flat, reversing the trend of year-over-year
revenue declines
- EBITDA was flat in the quarter, compared to the same quarter a year
ago, due to 2% revenue growth offset by increased competitive
activity, restructuring and emergency operations planning costs
- high-speed Internet net additions were 17,100 in the second quarter,
bringing TELUS' total high-speed Internet subscriber base to 729,000,
a 17% increase from last year
- network access lines of 4.7 million, declined 86,000 or 1.8% from a
year ago due to competitive activity and wireless substitution
- cash flow (EBITDA less capital expenditures) decreased by $26 million
or 11% to $205 million in the second quarter, compared to the same
period a year ago, due to higher capital expenditures
CORPORATE DEVELOPMENTS
Move to resolve collective bargaining escalates into work action
After four and a half years without a collective agreement and with legal
blockages largely removed, TELUS escalated the collective bargaining process
towards resolution - a top corporate priority for 2005. More than 13,000 of
TELUS' 28,700 employees are represented by the Telecommunications
Communication Workers Union (TWU) bargaining unit.
A number of legal challenges and appeals were decided in the last quarter
by the Canada Industrial Relations Board (CIRB) and the courts, which in most
cases supported TELUS' actions and allowed events to move forward. In April,
the TWU lost appeals to the Federal Court of Appeal (FCA) and CIRB that
challenged the Company on its implementing of "soft" lockout measures, which
did not close operations. In July, the CIRB ruled that TELUS did not
contravene the Labour Code in distributing its comprehensive offer (Offer)
directly to employees and therefore rejected the remedy of returning the
parties to binding arbitration. Also in July, the FCA ruled against the TWU
appeal of the CIRB decision in February that put the parties back into
negotiations instead of binding arbitration. In June, the Supreme Court of
Canada denied the Company's application for leave to appeal the CIRB decision,
which put TELUS Mobility's non-unionized team members, predominantly located
in Ontario and Quebec, into the TWU bargaining unit without a representational
vote. In addition, the CIRB ruled in July that TELUS did not provide
information concerning these employees early enough to the TWU. These last two
rulings did not impede the escalation of events towards resolving collective
bargaining. Finally, in late July the Company won broad injunctions from the
courts in British Columbia and Alberta that prevents picket lines from
unlawfully impeding access to TELUS and customer locations.
Both the Company and the TWU have taken measures to escalate the pressure
on each other to reach settlement. The Company retabled its comprehensive
Offer to the TWU on April 13 and on April 18, declared negotiations to be at
an impasse and delivered a first notice of lockout to the TWU. The notice,
effective April 25, which did not include the closing of operations, included
a number of measures, such as the suspension of grievance and arbitration
processes, scheduling of accumulated time off, and the deferral of wage
progression increases and increases in vacation entitlements. The Company
communicated the terms and conditions of that offer to bargaining unit team
members on April 21. TELUS further escalated lockout measures during the
period May through July.
Similarly, the TWU escalated its strike measures by imposing an overtime
and relieving management ban and announcing a work-to-rule campaign. TELUS
tabled an addendum to the Offer with the TWU on June 14, which provided
clarifications and adjustments to the April 13 offer, to benefit employees and
to provide incentives for settlement prior to September 1. On June 22, the TWU
tabled its counter proposal to TELUS, which was reviewed and rejected on
June 24 because it failed in any meaningful fashion to address TELUS' need for
improved productivity and flexibility and widened the gap between the parties
with respect to some key aspects, such as contract duration and reduction of
extra days off. The TWU also began rotating strike activity in early July, in
the form of "study sessions," to which management usually responded by
imposing lockouts for those employees who participated in the activity.
On July 12, TELUS announced its intent to implement certain portions of
its Offer of settlement commencing July 22, 2005. The Offer includes at a
minimum annual two percent base wage increases generally, additional variable
performance pay of three, four and five percent over the next three years, and
wage harmonization between Alberta and BC. The Offer would make TELUS
bargaining unit members the best paid in Canada. Contracting out language is
typical of the pre-existing Alberta contract and other communication company
contracts in North America. The TWU responded by initiating full strike
activity on July 21. The TELUS Offer has never been presented by the TWU to
its membership for a ratification vote and, although not legally required
given TELUS' implementation of lockout measures, the last union strike vote
was conducted in January 2004. In response to the TWU's escalation of strike
activity, TELUS implemented its contingency plans designed to minimize the
impact on customers, and on July 22 commenced implementation of its Offer. The
implementation of the Offer does not include the lump sum and retroactive
payments, which total approximately $200 million, nor certain pension and
benefit proposals, which only become effective following ratification of the
Offer of settlement. There are a number of incentives in place, if the
collective agreement is ratified by September 1, 2005.
Significant and increasing numbers of employees in Alberta and currently
all employees East of Alberta are choosing to continue work, which provides
support to managers' efforts to maintain customer service.
Update on TELUS share repurchases
During the quarter, TELUS continued to purchase shares under its Normal
Course Issuer Bid. In the second quarter, a total of 6.5 million shares
(2,972,500 common and 3,540,200 non-voting) were purchased, for a total outlay
of $272.0 million.
TELUS commenced the program on December 20, 2004 with the intention to
purchase and cancel, from time to time over a 12-month period, up to
14 million of its outstanding common shares and up to 11.5 million of its
outstanding non-voting shares. This represents approximately seven per cent of
the issued and outstanding shares in each share class. Since the program
commenced, a total of 12.9 million shares (5,825,311 common and 7,027,700
non-voting) have been purchased, for a total outlay of $508.4 million,
representing 50% of the 25.5 million shares authorized under the program.
TELUS believes that such purchases are in the best interest of TELUS and
constitute an attractive investment opportunity and desirable use of TELUS'
funds that should enhance the value of the remaining shares.
TELUS redeems C$150 million of convertible debentures
On June 16, 2005, TELUS redeemed its publicly issued 6.75% Convertible
Unsecured Subordinated Debentures due June 15, 2010 at par plus accrued
interest. Each convertible debenture was convertible at the option of the
holder into TELUS non-voting shares at the conversion price of $39.73 per
share.
Given the recent increase in share price over the conversion price,
approximately 88% of holders elected to convert to non-voting shares and over
3.3 million non-voting shares were issued. The total cash outlay for the
remaining debentures not converted was $18 million.
TELUS receives credit rating enhancements
In June, Moody's Investors Services announced it had upgraded the Senior
Unsecured rating of TELUS Corporation to Baa2 from Baa3 with a stable outlook.
This rating increase brings Moody's rating of TELUS in line with the BBB-mid
investment grade ratings maintained by Standard & Poor's, Dominion Bond Rating
Services and Fitch Ratings. The rating upgrade reflects Moody's expectation
for the continued strength of TELUS' operating results.
Also in the second quarter, Fitch revised TELUS' credit rating outlook to
positive from stable. The positive rating outlook reflects Fitch's view that
TELUS will continue to improve its credit profile through growth in cash
flows, driven by wireless operations and expectations for further debt
reduction. Standard & Poor's and Fitch now maintain positive outlooks, while
Dominion Bond Rating Services maintains a stable trend.
TELUS and Telephony (at)Work launch CallCentreAnywhere
TELUS has an exclusive partnership with Telephony(at)Work, a worldwide
leader in adaptive IP contact centre technology for enterprises and service
providers, to launch Canada's first fully integrated on-demand hosted contact
centre service, CallCentreAnywhere. The service brings together TELUS' leading
data and IP technology and Telephony(at)Work's contact centre software to
streamline all methods of customer contact (phone, email, fax, online, or
voice mail) through a single IP-based system that eliminates the technical
complexity of managing the various means of customer communications.
TELUS' CallCentreAnywhere will be launching with seven new customers,
including Canada Post's InnovaPost and the Canadian Red Cross.
Innovapost, the technical division of Canada Post, is being trialed in
Calgary with its new service offering called fetch(TM). InnovaPost developed
the fetch technology after Canada Post recognized that many consumers want to
know more about products or services they have seen advertised, without
providing the advertisers with too much personal information. fetch provides
Canadians with the information they want, while screening their personal
details from advertisers.
CallCentreAnywhere is being adopted by the Red Cross' B.C. Disaster
Response Centre. TELUS is sponsoring the implementation of a $1.5 million call
centre capable of handling public enquiries from across Canada faster and more
effectively. Rather than having phones on folding tables in emergency
situations like the Tsunami in December, the new Red Cross Disaster call
centre will have banks of stations, complete with computers, where volunteers
can take information from a call, email or fax and route it into a single
Internet Protocol-based system. It should tremendously reduce the time spent
on each call, while increasing the accuracy and effectiveness of the
information being gathered.
Regulatory Developments
Regulatory framework for voice communication services using
Internet protocol
On May 12, 2005, the Canadian Radio-Television and Telecommunications
Commission (CRTC) released its decision regarding regulatory requirements for
the provision of voice communication services using Internet protocol, also
known as VoIP. This decision divides VoIP service providers into two groups:
incumbent local exchange carriers (ILECs) such as TELUS who are regulated in a
manner similar to existing local service regulation in regards to price
regulation and win-back restrictions; and others, including cable-TV
companies, who are not subject to those regulations. TELUS and other ILECs
have sought leave to appeal the regulation on win-backs with the Federal
Court, arguing that it infringes on the companies' constitutional rights to
commercial free speech.
On July 28, TELUS, along with BCE, SaskTel and Aliant, announced a joint
Federal Cabinet appeal of the VoIP decision.
Proceeding on local exchange services forbearance
The CRTC announced it will be examining issues in relation to forbearance
including: relevant markets, CRTC powers and duties that should be forborne,
and the post-forbearance criteria and conditions that might apply. The
proceeding will also consider the possibility of providing ILECs with more
regulatory flexibility prior to forbearance. A decision is expected in the
first quarter of 2006.
TELUS' position is that the CRTC must adopt a clear, simple test that
will allow ILEC's to gain automatic deregulation when certain measurable
benchmarks are reached. Under TELUS' proposal, the Company would simply file
evidence that a full facilities-based CLEC has achieved five per cent of the
local exchange service market for business or residential services in the
CLEC's service area. The CRTC would then have 30 days to issue a forbearance
order.
Proceeding to consider extending the price regulation regime
On May 13, 2005, the CRTC proposed to extend the current price cap regime
without any changes for two additional years beyond the currently anticipated
end date of May 31, 2006. In filing its comments, TELUS asked the CRTC to stop
the flow of funds into the deferral account and requested that incumbents be
allowed to reduce prices for residential services in non-high-cost areas and
for business services where customers have a choice of local telephone service
suppliers. TELUS committed that it would not increase rates in other service
areas in order to offset any rate reductions resulting from these changes.
TELUS Mobility
TELUS Mobility introduced several new phones in the second quarter
confirming its leadership in bringing cool and exclusive phones to the
Canadian wireless market. The new products included two new PCS Push To Talk
phones, four stylish and affordable PCS phones and a ruggedized Mike device.
Push To Talk expansion
With its Mike iDEN and Instant Talk CDMA services, TELUS Mobility
continues to dominate the Push To Talk (PTT) market in Canada. In the second
quarter, TELUS Mobility introduced two new Instant Talk phones: The LG 4750, a
clamshell design featuring an integrated speakerphone with exceptional sound
quality, and the KX440Y, a high-visibility yellow version of the Kyocera
KX440. With four different Instant Talk models, TELUS offers the broadest
selection of PCS PTT phones in Canada.
TELUS Mobility also expanded its selection of Mike phones with the
Motorola i355, a tough, multifunctional mobile communications tool for
field-service workers and other clients who need a rugged instant-contact
handset. Joining a roster of more than a dozen all-in-one Mike devices, the
Motorola i355 features Global Positioning System (GPS) capability and
Mike's Talk Around, which lets clients use their phones as walkie talkies,
even when outside network coverage areas.
New PCS phones and international roaming
TELUS Mobility rolled out several new exclusive and affordable PCS phones
from partners LG Electronics, Motorola, Samsung and UTStarcom (formerly
Audiovox):
- The LG 125 is an affordable clamshell phone available in vibrant
green/white and silver/white design that features an internal antenna,
a 32-tone polyphonic ringer, and a calendar, calculator and alarm.
- Two new PCS phones from Motorola, the V265 and the V262, feature fuse
advanced speech recognition capabilities with a variety of
personalization, entertainment and productivity tools. The Motorola
V265 integrates a camera with digital zoom, speakerphone and Personal
Information Manager into its clam shell design. Built for
personalization, the Motorola V262 offers changeable blue or silver
face plates, and an integrated speakerphone supporting its advance
speech recognition capability.
- The Samsung A570 is a compact black-and-silver flip phone featuring
both a full-sized colour screen and external LCD display, and
"do more" features such as downloadable ring tones, images and games.
- The UTStarcom 860 features a sleek red, black and silver exterior
"candy bar" design, digital camera, colour screen, voice activated
dialing, commands and memo features, a 32-chord polyphonic ringer and
downloadable ringtones, images and games.
TELUS Mobility announced that its PCS clients can now use their wireless
phones while travelling in mainland China, New Zealand and Taiwan. PCS clients
already use their phones while travelling in Bermuda, the Dominican Republic,
Guam, Hong Kong, Mexico, Puerto Rico, South Korea, the US Virgin Islands,
Venezuela and of course across the United States.
TELUS Mobility announces Mission Critical Data solution
In May, TELUS Mobility introduced its Multi-Network Data Access (MNDA)
solution, a reliable way for public safety and enterprise clients to access
mission critical data wirelessly and pass it between data networks without
losing connections. Built around IBM's WebSphere Everyplace Connection
Manager, MNDA optimizes bandwidth and allows clients to roam seamlessly across
different wireless data networks - including 1X data networks such as TELUS
Mobility PCS, iDEN networks such as Mike and Wi-Fi networks. It also greatly
reduces the start-up and operational costs associated with building similar
in-house solutions.
TELUS Mobility expands award-winning retail outlets
In June, TELUS Mobility opened two state-of-the-art corporate retail
locations in Quebec City, offering fashionable shopping environments that
reflect TELUS Mobility's unique future friendly retail approach. The new
store locations are part of TELUS Mobility's national network of more than
3,000 retail locations, including more than 100 corporate stores. In March,
TELUS Mobility won the prestigious National Association of Store Fixture
Manufacturers (NASFM) award for International Store of the Year.
20 years of wireless in Canada
July 1 marked the 20th anniversary of wireless communications in Canada.
From humble beginnings, the industry has grown to encompass 15 million
customers - almost 50 per cent of the total population - with digital coverage
available to 94 per cent of Canadians from sea to sea. Canada's wireless
carriers have made infrastructure investments of some $20 billion over the
last two decades, and the industry now accounts for more than 25,000 direct,
high-value jobs in Canada. The fast pace of growth continues. This year alone,
it's estimated 1.5 million Canadians will buy new wireless phones, as many as
joined the industry in its first 10 years.
July 1 also marked the introduction of inter-carrier Multimedia Messaging
Service (MMS), allowing customers to wirelessly send and receive picture,
video and sound files to and from MMS-capable phones, regardless of a
recipient's carrier. The initiative is similar to the inter-carrier text
messaging service launched by Canada's carriers in 2002, which has led to
growth in messaging traffic of at least 100 per cent every year since.
Canadians now send almost 40 million phone-to-phone text messages each month,
and are on track to send a total of 1.5 billion this year.
Brian Canfield recognized for contribution to TELUS
The Burnaby building, where more than 2,400 TELUS team members work, was
named in honour of Brian Canfield's outstanding contribution to the
advancement of Canada's telecommunications industry during his distinguished
49-year career with TELUS. The Brian Canfield Centre for Excellence in
Telecommunications building honours Mr. Canfield, the former president and CEO
and now chairman of the TELUS board of directors.
TELUS recognized for excellence
Based upon TELUS' continued excellent performance in customer service,
for the second time in a year, an industry study has concluded TELUS is the
top national directory assistance provider in Canada. The Paisley Group Ltd.,
a directory assistance/operator services consulting company, rated TELUS as
the highest rated provider in last September's survey. TELUS maintained that
position in the recently released spring Index, in which TELUS earned a
91 per cent passed calls mark. The Paisley Group describes passed calls as the
hallmark of directory assistance, measuring whether customers both received
correct information and were treated in an appropriate manner.
TELUS was also honoured for excellence in employee development with the
Program of the Year award at the recent SkillSoft conference. TELUS won the
award for two of its leadership and development programs: one, a blended
learning program for training frontline staff in TELUS' credit department, and
the other, a comprehensive leadership development program for all levels of
the organization. To be considered for the award, companies must demonstrate
successful measured results in terms of return on investment, increased usage,
a timeline for implementation, complexity, and a marketing strategy.
Creating future friendly communities
TELUS continues to make significant investments in the communities where
we live work and serve. We are committed to becoming Canada's premier
corporate citizen, and take a leadership role in supporting Canadians by
leveraging our funding, technology and expertise to help make a difference.
In the second quarter of 2005, TELUS supported numerous community
programs and organizations including:
- the Mazankowski Alberta Heart Institute with a $1 million contribution
to further its goal of world-class care and progressive research for
the prevention and treatment of heart disease.
- KidSport BC's TELUS Little Links Program with a $125,000 donation
raised during the TELUS Skins Game in Whistler. TELUS donated $2,000
for each birdie, $3,000 for each eagle and $1 per yard for every drive
off the tee of two designated holes by TELUS Skins golfers
Jack Nicklaus, Vijay Singh, John Daly and Stephen Ames. This
charitable donation funds registration fees and equipment costs for
kids who cannot afford to join leagues.
- TELUS Tour for the Cure, launched in Vancouver in September 2004,
visited 28 communities across British Columbia and ended in May 2005.
Through this program, more than 200,000 people learned about breast
cancer and screening mammograms.
- hosting a volunteer fair to help recruit for the Edmonton 2005
World Masters Games. As the volunteer program sponsor, TELUS team
members rose to the challenge and provided 600 of the 5,200 volunteers
needed.
TELUS is also committed to being an environmental leader and has launched
a pilot project introducing 10 gasoline-electric hybrid Toyota Prius sedans to
the company fleet in several major markets. The project will determine the
cost-effectiveness and environmental benefits of integrating hybrid vehicles
into the company's national fleet of more than 5,000 vehicles.
Dividend declaration
The Board of Directors declared a quarterly dividend of twenty cents
($0.20) per share on outstanding Common and Non-Voting Shares payable on
October 1, 2005 to shareholders of record on the close of business on
September 9, 2005.
For further information:
Media Relations: Nick Culo (780) 493-7236 nick.culo(at)telus.com
Investor Relations: John Wheeler (780) 493-7310 ir(at)telus.com
(T. T.NV. TU)
Forward-looking statements
=========================================================================
This document and the Management's discussion and analysis contain
statements about expected future events and financial and operating
results of TELUS Corporation ("TELUS" or the "Company") that are forward-
looking. By their nature, forward-looking statements require the Company
to make assumptions and are subject to inherent risks and uncertainties.
There is significant risk that predictions and other forward-looking
statements will not prove to be accurate. Readers are cautioned not to
place undue reliance on forward-looking statements as a number of factors
could cause actual future results, conditions, actions or events to
differ materially from the targets, 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 the
duration and impact of full-scale strike related activity); 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 and interim first quarter 2005 Management's
discussions and analysis, as well as updates included in Section 10 of
this second 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.
=========================================================================
Management's discussion and analysis - August 3, 2005
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the periods ended June 30, 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 August 2, 2005 and approved by
TELUS' Board of Directors on August 3, 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. 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, and reconciled with their nearest 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 consolidated results for the
second quarter and first six months of 2005
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2. Core business, vision 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
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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, credit
resources facilities, off-balance sheet arrangements
and other disclosures
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8. Critical accounting A description of accounting estimates, which
estimates and are critical to determining financial
accounting policy results, and changes to accounting policies
developments
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9. Revised guidance A discussion of revisions to its guidance for
2005
-------------------------------------------------------------------------
10. Risks and A update of risks and uncertainties facing
uncertainties TELUS
-------------------------------------------------------------------------
11. Reconciliation of A description, calculation and reconciliation
non-GAAP measures and of certain measures used by management
definition of key
operating indicators
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
($ millions except Quarters Six-month periods
margin and per- ended June 30 ended June 30
share amounts) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Operating revenues 2,018.5 1,865.6 8.2 % 3,993.2 3,669.4 8.8 %
EBITDA(1) 865.0 784.8 10.2 % 1,721.2 1,506.1 14.3 %
EBITDA margin (%)(2) 42.9 42.1 0.8 pts 43.1 41.0 2.1 pts
Operating income 465.9 377.2 23.5 % 919.9 688.1 33.7 %
Net income 189.5 172.3 10.0 % 431.7 273.6 57.8 %
Earnings per share,
basic 0.53 0.48 10.4 % 1.20 0.76 57.9 %
Earnings per share,
diluted 0.52 0.48 8.3 % 1.19 0.76 56.6 %
Cash dividends
declared per share 0.20 0.15 33.3 % 0.40 0.30 33.3 %
Cash provided by
operating activities 687.7 489.0 40.6 % 1,416.1 1,077.1 31.5 %
Cash used by investing
activities 410.0 341.6 20.0 % 716.2 640.2 11.9 %
Capital
expenditures 408.7 346.1 18.1 % 681.9 655.8 4.0 %
Cash used by
financing activities 383.9 63.2 n.m. 455.3 85.4 n.m.
Free cash flow(3) 207.8 229.5 (9.5)% 774.4 672.8 15.1 %
-------------------------------------------------------------------------
pts - percentage points
n.m. - not meaningful
(1) Earnings before interest, taxes, depreciation and amortization
("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.
(3) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash
flow.
-------------------------------------------------------------------------
Consolidated Operating revenues experienced strong growth in the second
quarter and first six months of 2005, when compared with the same periods in
2004, driven by more than 18% revenue growth at TELUS Mobility and revenue
growth of 2 to 3% in TELUS' Communications segment. Consolidated EBITDA and
EBITDA margins also increased as operations expense growth at TELUS Mobility
was contained to rates well below its revenue growth rates. Communications
segment second quarter 2005 EBITDA was flat despite increased competitive
activity and costs associated with emergency operations planning, when
compared with 2004. For the first six months of 2005, Communications segment
EBITDA improved by 4.6% and its EBITDA margin improved by 0.6 percentage
points, when compared to the same period in 2004, as discussed in Section 5.4
Communications segment results. For these reasons, and due to lower
amortization of intangible assets, consolidated operating income increased
significantly by $89 million and $232 million, respectively, in the second
quarter and first six months of 2005, when compared with the same periods in
2004.
Net income and earnings per share also increased significantly in the
second quarter and first six months of 2005, when compared to the same periods
in 2004 due to improved Operating income. Net interest expenses increased in
the second quarter and first six months 2005, when compared with the same
periods in 2004, due to a $17.5 million accrual for estimated damages for a
lawsuit (see Risks and uncertainties - Section 10.5 Litigation), and otherwise
decreased as a result of debt repayments in 2004.The favourable impact of the
change in tax estimates, other tax adjustments and related interest were
minimal in the second quarter of 2005 (approximately 15 cents per share in the
first six months of 2005). In comparison, favourable tax settlements increased
earnings per share by approximately 13 cents per share and 17 cents per share,
respectively, in the second quarter and first six months of 2004.
The increase in cash provided by operating activities was primarily due
to increased Operating income and changes in non-cash working capital. Despite
higher consolidated EBITDA and cash interest received, free cash flow
decreased in the second quarter of 2005 due to higher capital expenditures and
lower cash tax recoveries, when compared with the same period in 2004. Free
cash flow for the first six months of 2005 increased primarily due to growth
in EBITDA, lower cash interest paid and lower payments under restructuring
programs, partly offset by lower cash tax recoveries and higher capital
expenditures.
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
The acquisition of Ambergris in February and May of 2005 for a cumulative
ownership interest of 52.5%, combined with the acquisition of ADCOM, Inc. in
November 2004, provided aggregate incremental revenues of more than
$30 million and incremental EBITDA of less than $10 million for the first six
months of 2005. Full-time equivalent employees of approximately 2,640 for
these two companies were included in the Communications segment staff count at
June 30, 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 Enhancing Mobility's leadership position in wireless
TELUS Mobility leadership position in financial and operational
performance was evidenced by the continued trend of significant profitable
growth, which is fuelled by its commitment to exceptional client service and
value-added approach, supported by its strong brand and superior network
quality.
TELUS Mobility revenue growth of 18.7%, EBITDA growth of 31.8% and cash
flow growth (EBITDA less capital expenditures) of 30.6% in the first half of
2005 continues to exceed expectations set at the beginning of the year. Strong
wireless subscriber growth of 211,300 in the first six months of 2005 (up by
11.3% over the same period in 2004), continued scale efficiencies and
innovative value added offerings continue to drive these results.
3.2 Leveraging investments in high-speed Internet technology through
Future Friendly Home services in B.C., Alberta and Eastern Quebec
The trial of TELUS TV(R) services by employees continues in larger
centres in TELUS' Western incumbent region. The Company continues to evaluate
if and when to launch video entertainment services, considering four principal
factors for the service: (i) a positive return on investment, which leverages
past investments in high speed Internet; (ii) non-price differentiating
service attributes; (iii) technical soundness of technology; and (iv) a
positive service delivery experience. In July 2005, the Canadian Radio-
television and Telecommunications Commission ("CRTC") approved TELUS'
application for a broadcasting distribution undertaking licence to service
parts of Eastern Quebec. This licence provides a new market for TELUS TV
services, should TELUS decide to launch in the future.
3.3 Accelerating wireline performance in Ontario and Quebec business
markets
The results for non-incumbent local exchange carrier ("non-ILEC")
operations in Central Canada, which are part of TELUS' Communications segment,
demonstrate that the Company is on track to exceed its original annual targets
for non-ILEC revenue and EBITDA and achieve its current annual guidance of
$625 to $650 million for non-ILEC revenue and $15 to $20 million for non-ILEC
EBITDA. Non-ILEC revenue and EBITDA increased by $24.9 million and
$17.3 million, respectively, in the second quarter of 2005, when compared with
the same period in 2004. For the first half of 2005, non-incumbent operations
experienced revenue and EBITDA growth of $56.0 million and $34.3 million,
respectively, when compared with the first half of 2004. It is notable that
non-incumbent EBITDA has now been positive for three consecutive quarters,
continuing a long-term trend of non-ILEC EBITDA improvement.
3.4 Reaching a collective agreement
Reaching a collective agreement remains a priority for TELUS in 2005.
Both the Company and the Telecommunications Workers Union ("TWU") have taken
measures to increase pressure on each other to reach settlement. The current
status of labour negotiations with the TWU is reflected by the escalation of
these measures, culminating in TELUS' July 12, 2005 announcement of its intent
to implement its comprehensive offer of settlement commencing on July 22, 2005
and the TWU's initiation of full strike activity on July 21. Also on July 21,
the Canada Industrial Relations Board ("CIRB") rejected the TWU's unfair
labour practice complaint that sought binding arbitration. In response to
union strike activity, TELUS has implemented its contingency plans designed to
minimize the impact on customers. On July 22, TELUS did commence
implementation of its offer. The following is a summary of events during the
second quarter and subsequently.
Following the CIRB's February 2, 2005 decision which overturned its
January 2004 binding arbitration order, the parties resumed negotiations on
February 10, 2005 with the assistance of a federally appointed mediator. The
Company tabled a comprehensive offer to the TWU on April 13. The Company
communicated the terms and conditions of that offer to bargaining unit team
members on April 21. The Company further tabled an addendum to the offer with
the TWU on June 14, which provided clarifications and adjustments to the
April 13 offer, benefiting employees and extending the duration of the offer
from three to five years. The contract proposals have never been presented by
the TWU to its membership for a ratification vote.
On April 18, 2005, the Company declared negotiations to be at an impasse
and delivered first notice of lockout to the TWU. That notice, effective
April 25, which did not include the closing of operations, included a number
of measures, such as 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 TWU at the
Federal Court of Appeal and the CIRB for interim relief against this notice
were unsuccessful.
TELUS escalated lockout measures during May and June aimed at reaching a
settlement, including stopping collection and remittance of union dues. In
response, the TWU imposed an overtime and relieving management ban and
announced a work-to-rule campaign. On June 22, the TWU tabled its counter
proposal to TELUS. The Company reviewed the TWU proposal and rejected it on
June 24 because it did not in any meaningful fashion directly address TELUS'
need for improved productivity and flexibility. Moreover, the offer widened
the gap between the parties with respect to some key aspects such as the
contract duration and reduction of extra days off. The TWU also began rotating
strike activity in early July, in the form of "study sessions", to which
management usually responded by imposing three-hour or longer lockouts for
those employees who participated in the strike activity.
On July 12, TELUS informed the TWU that, effective July 22, it would
commence implementation of its comprehensive offer of settlement including
both the April 13, 2005 offer and the June 14, 2005 addendum. The
implementation will not include the past period and other lump sum payments
totalling approximately $200 million contained in the TELUS offer, or certain
pension and benefit proposals, which only become effective following
ratification of the comprehensive offer of settlement. In addition, variable
pay proposals for 2005 for B.C. based employees will only be earned for the
full year period if the collective agreement is ratified by September 1, 2005.
Given the escalation of job action by the union and its continuing refusal to
place TELUS' comprehensive offer of settlement before its membership for
ratification vote, management concluded that this significant step was
necessary to ensure that the TWU and bargaining unit team members address
TELUS' offer. In response, the TWU further escalated rotating strike activity
by increasing the number of locations and employees involved and the duration
of the "study sessions". On July 21, the TWU initiated full scale strike
activity and the Company implemented its contingency plans designed to
minimize impacts to customers.
The status of three matters that were outstanding before the courts and
Canada Industrial Relations Board ("CIRB") in early May follows:
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's application to the Supreme
Court of Canada for leave to appeal was denied in June 2005. The impact of
Decision 1088 and 278 for TELUS Mobility can not be determined until a
settlement is reached with the TWU.
Application to the CIRB by the TWU alleging unfair labour practices
In early May 2005, the TWU filed an amendment to a previous complaint
filed with the CIRB. It alleged the Company's communication of its
comprehensive offer directly to bargaining unit team members was improper, and
as remedy, the TWU requested that the CIRB impose binding arbitration to
settle the collective agreement. The CIRB heard the amended complaint in late
May 2005 and rejected the TWU request for remedy of binding arbitration, on
July 21, 2005. The CIRB ruled that TELUS' lockout measures were in accordance
with the Canada Labour Code, and that TELUS' communication of its offer to
bargaining unit employees also did not contravene the Code. However, the CIRB
did rule that TELUS did not provide information concerning employees of the
former Clearnet early enough. Immediately following this ruling, the TWU filed
four new complaints with the CIRB.
CIRB Decisions 1004 and 271
The CIRB issued a unanimous 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. This ban lifted
coincident with TELUS' first notice of intent to lockout on April 18.
Subsequently, the TWU filed an application in the Federal Court of Appeal,
heard on May 31 - June 1, 2005, and which sought to overturn the CIRB's
reconsideration decision and restore the order that placed the parties in
binding arbitration. On July 25, 2005, the Federal Court of Appeal dismissed
the Telecommunications Workers Union appeal application, declined the request
for an order returning the parties to binding arbitration, and in so doing,
confirmed the Canada Industrial Relations Board's decision of February 2, 2005
that collective bargaining is the preferred method of achieving settlement.
4. Capability to deliver results
4.1 Operational capabilities - TELUS Communications
The Company is presently developing a new billing system in the
Communications segment, which will include re-engineering processes for order
entry, pre-qualification, service fulfillment and assurance, customer care,
collections/credit, customer contract and information management. The expected
benefits of this project include streamlined and standardized processes and
the elimination over time of multiple legacy information systems. The Company
plans to implement this project in phases, beginning with a launch for
consumer mass market accounts in the first quarter of 2006. See Risks and
uncertainties - Section 10.3 Process risks.
Recent regulatory decisions have introduced further constraints on TELUS'
Communications segment operational capabilities. Telecom Decision CRTC 2005-
28, "Regulatory framework for voice communication services using Internet
protocol", constrains TELUS' freedom and flexibility to compete for wireline
and entertainment services in its incumbent territories, while competitors
have been provided with forbearance for these services. Decision 2005-28
subjects TELUS and other incumbent local exchange carriers ("ILECs") to price
regulation for their VoIP services in incumbent territories, while large
facilities-based cable companies, foreign-based competitors who have not
invested in Canadian telecommunications infrastructure, and others, are all
unconstrained by regulation for the provision of VoIP-based services.
In addition to imposing price regulation on incumbent telecommunications
companies' VoIP services, this decision also extended 'winback' restrictions
to benefit competitive VoIP service providers by limiting TELUS Communications
contact with consumers for one full year after they have been won-over by
competitors. For business customers in incumbent territories, contact is
restricted for three months. TELUS and other incumbent telecommunications
companies have sought leave to appeal the regulation on winbacks with the
Federal Court. See Risks and uncertainties - Section 10.2 Regulatory.
On the positive side, the CRTC has followed through with its promise to
expedite approval of tariff filings and has largely cleared the backlog of
outstanding regulatory issues affecting telecommunications. With faster
approval of tariff applications, the Company is able to implement pricing and
service changes in a timelier manner and avoid customer relations issues such
as those created when tariff applications were approved many months after
their effective dates with required retroactive application. However, an
exception is the more than three-year delay for the CRTC to determine how to
dispose of balances of revenue deferred under price cap regulation, which
currently the subject of a proceeding (see Section 10.2 Regulatory).
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 an ARPU (average revenue per subscriber unit per month) premium in the
face of new competitive pressures. Although the Company has been experiencing
continued ARPU growth fueled in part by the adoption and acceptance of data
offerings, the growth is expected to slow and moderate for the remainder of
the year. Future profitability and cash flow growth are expected to be
realized from continued subscriber growth and operating scale efficiencies
through a well managed client focused organization.
4.3 Liquidity and capital resources
TELUS had more than $1.1 billion of cash at June 30, 2005. With access to
undrawn credit facilities of $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, which
includes the June 2006 maturity of $1,578 million 7.5% TELUS Corporation
Notes. The Company is considering the early redemption of all or a portion of
these debentures in accordance with the terms of the indenture. As at June 30,
2005, the Company and its subsidiaries are in compliance with all of their
debt covenants.
5. Results from operations
5.1 General
The Company's reportable segments, which reflect TELUS' organizational
structure and are used to manage the business, are TELUS Communications
(discussed in Section 5.4 Communications segment results) and TELUS Mobility
(discussed in Section 5.5 Mobility segment results). The two segments are
differentiated based on management, products and services, distribution
channels, technology, and regulatory treatment. Intersegment sales are
recorded at the exchange value. Segmented information may also be found in
Note 17 of the interim consolidated financial statements.
5.2 Quarterly results summary
-------------------------------------------------------------------------
($ millions, except per
share amounts) 2005 Q2 2005 Q1 2004 Q4 2004 Q3
-------------------------------------------------------------------------
Segmented revenue (external)
Communications segment 1,216.5 1,222.2 1,209.3 1,199.9
Mobility segment 802.0 752.5 755.6 747.0
--------- --------- --------- ---------
Operating revenues (consolidated) 2,018.5 1,974.7 1,964.9 1,946.9
Net income 189.5 242.2 135.6 156.6
Per weighted average Common
Share and Non-Voting Share
outstanding
- basic 0.53 0.67 0.38 0.44
- diluted 0.52 0.66 0.37 0.43
Dividends declared per Common
Share and Non-Voting Share
outstanding 0.20 0.20 0.20 0.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ millions, except per
share amounts) 2004 Q2 2004 Q1 2003 Q4 2003 Q3
-------------------------------------------------------------------------
Segmented revenue (external)
Communications segment 1,189.0 1,171.1 1,182.4 1,186.3
Mobility segment 676.6 632.7 643.2 619.9
--------- --------- --------- ---------
Operating revenues (consolidated) 1,865.6 1,803.8 1,825.6 1,806.2
Net income 172.3 101.3 47.8 114.1
Per weighted average Common
Share and Non-Voting Share
outstanding
- basic 0.48 0.28 0.13 0.32
- diluted 0.48 0.28 0.13 0.32
Dividends declared per Common
Share and Non-Voting Share
outstanding 0.15 0.15 0.15 0.15
-------------------------------------------------------------------------
The trend in consolidated Operating revenues continues to reflect strong
wireless growth at TELUS Mobility. Wireless growth resulted from increases in
the subscriber base and ARPU. After taking into account that Communications
segment revenues in the first quarter of 2005 included a non-recurring
favourable regulatory adjustment of $6.4 million and seasonally high revenues
from ADCOM (acquired in November 2004), Communications segment revenues
increased slightly in the second quarter of 2005, when compared with first
quarter of 2005. Communications segment revenues continue to show growth on a
year-over-year basis in the second quarter of 2005 due to growing data
revenues, flat long distance revenues, even considering the inclusion of a
$10.2 million non-recurring favourable regulatory adjustment in the second
quarter of 2004. Communications segment revenues also include the impacts of
overall negative regulatory price cap decisions.
Net income and earnings per share continue to reflect the trends of
growing EBITDA and Operating income, combined with generally decreasing net
interest expense due to increasing cash balances and favourable tax
adjustments, except for an accrual for estimated damages for a lawsuit in the
current quarter, as described earlier.
5.3 Consolidated results from operations
-------------------------------------------------------------------------
($ millions except Quarters Six-month periods
EBITDA margin and ended June 30 ended June 30
employees) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Operating revenues 2,018.5 1,865.6 8.2 % 3,993.2 3,669.4 8.8 %
Operations expense 1,146.1 1,080.1 6.1 % 2,255.2 2,146.7 5.1 %
Restructuring and
workforce reduction
costs 7.4 0.7 n.m. 16.8 16.6 1.2 %
-------------------------------------------------------------------------
EBITDA(1) 865.0 784.8 10.2 % 1,721.2 1,506.1 14.3 %
-------------------------------------------------------------------------
EBITDA margin (%)(2) 42.9 42.1 0.8 pts 43.1 41.0 2.1 pts
Full time equivalent
employees, end of
period 27,789 24,521 13.3 %
-------------------------------------------------------------------------
(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.
-------------------------------------------------------------------------
Consolidated Operating revenues increased significantly in second quarter
and first six months of 2005, when compared with the same periods in 2004,
driven by strong revenue growth at TELUS Mobility and good revenue growth in
TELUS' Communications segment. Consolidated EBITDA and EBITDA margins also
increased as operations expense growth at TELUS Mobility was contained to
rates well below its revenue growth rates. Communications segment second
quarter 2005 EBITDA was flat and its EBITDA margin lower, when compared with
2004, while for the first six months of 2005, Communications segment EBITDA
and EBITDA margin improved when compared to the same period in 2004. TELUS
full time equivalent employees, measured at June 30, 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.
-------------------------------------------------------------------------
Depreciation and Quarters Six-month periods
amortization ended June 30 ended June 30
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Depreciation 330.9 320.7 3.2 % 660.8 642.4 2.9 %
Amortization of
intangible assets 68.2 86.9 (21.5)% 140.5 175.6 (20.0)%
-------------------------------------------------------------------------
399.1 407.6 (2.1)% 801.3 818.0 (2.0)%
-------------------------------------------------------------------------
Depreciation increased in the second quarter and first six months of
2005, when compared with the same periods in 2004, due primarily to growth in
shorter life data and wireless network assets and a reduction in service lives
for ADSL (high-speed Internet) equipment, partly offset lower depreciation
arising from full amortization of cell sites. Amortization of intangible
assets decreased in the second quarter and first six months of 2005, when
compared with the same periods in 2004, as a result of several software assets
becoming fully depreciated.
-------------------------------------------------------------------------
Quarters Six-month periods
Other expense, net ended June 30 ended June 30
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
0.5 2.0 (75.0)% 2.0 3.2 (37.5)%
-------------------------------------------------------------------------
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. An impairment in the value of
portfolio investments was recorded in the second quarter of 2005, partly
offset by recognition of a portion of gain deferred under sale and leaseback
arrangements for administrative properties sold in 2002, following the return
of some space to the respective landlords. The accounts receivable
securitization expense in the second quarter and first six months of 2005 was
not significantly changed from the prior year. See Section 7.6 Accounts
receivable sale.
-------------------------------------------------------------------------
Quarters Six-month periods
Financing costs ended June 30 ended June 30
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Interest on long-
term debt, short-
term obligations
and other 178.5 167.5 6.6 % 337.5 332.9 1.4 %
Foreign exchange
losses (gains) 0.6 (0.1) n.m. 3.1 (0.7) n.m.
Interest income (10.9) (10.5) (3.8)% (34.0) (30.3) (12.2)%
-------------------------------------------------------------------------
168.2 156.9 7.2 % 306.6 301.9 1.6 %
-------------------------------------------------------------------------
Interest on long-term debt, short-term debt and other for the second
quarter and first six months of 2005 included a $17.5 million accrual for
estimated damages stemming from a recent Ontario Appeal Court ruling on a bond
redemption matter dating back to 1997. See Risks and uncertainties - Section
10.5 Litigation. In addition, acceleration of financing costs associated with
the redemption of convertible debentures in June 2005 added $0.9 million
interest expense in the current period. Otherwise, interest on long-term and
short-term debt decreased in the second quarter and first six months of 2005
when compared with the same periods in 2004. The decrease was 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
$7,237.5 million at June 30, 2005, when compared with $7,580.9 million one
year earlier.
Interest income earned includes interest for the settlement of various
tax matters of $1.9 million and $17.5 million, respectively, in the second
quarter and first six months of 2005 (as compared to $8.3 million and
$26.0 million, respectively, in the same periods of 2004). The balance of
interest income, earned primarily from cash and temporary investments, was
significant at $9.0 million and $16.5 million, respectively, in the second
quarter and first six months of 2005, increases of $6.8 million and
$12.2 million, respectively, from the same periods in 2004.
-------------------------------------------------------------------------
Income taxes Quarters Six-month periods
($ in millions, ended June 30 ended June 30
except tax rates) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Blended federal
and provincial
statutory income
tax 102.5 75.8 35.2 % 211.2 132.9 58.9 %
Changes in estimates
of available
temporary differences
in prior years - - - (36.0) - n.m.
Tax rate differential
on, and consequential
adjustments from, the
reassessment of prior
year tax issues - (34.2) 100.0 % (11.3) (35.8) 68.4 %
Large corporations
tax and other 3.5 3.3 6.1 % 12.4 10.4 19.2 %
-------------------------------------------------------------------------
106.0 44.9 136.1 % 176.3 107.5 64.0 %
-------------------------------------------------------------------------
Blended federal and
provincial statutory
tax rates (%) 34.5 34.7 (0.2) 34.5 34.7 (0.2)
pts pts
Effective tax rates
(%) 35.7 20.6 15.1 28.8 28.1 0.7
pts pts
-------------------------------------------------------------------------
Blended federal and provincial statutory income tax increased due to
growth in income before taxes of 36.1% and 59.6%, respectively, for the second
quarter and first six months of 2005, when compared with the same periods in
2004. 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.
-------------------------------------------------------------------------
Non-controlling Quarters Six-month periods
interest ended June 30 ended June 30
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
1.7 1.1 54.5 % 3.3 1.9 73.7 %
-------------------------------------------------------------------------
Non-controlling interest represents minority shareholders' interests in
several small subsidiaries. The increase in the second quarter and first six
months of 2005, relative to the same periods in 2004, is primarily minority
shareholders' interest in TELUS' February 2005 acquisition of Ambergris.
-------------------------------------------------------------------------
Preference and Quarters Six-month periods
preferred dividends ended June 30 ended June 30
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
- 0.8 (100.0)% - 1.7 (100.0)%
-------------------------------------------------------------------------
Preference and preferred dividends ceased 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
-------------------------------------------------------------------------
Operating revenues - Quarters Six-month periods
Communications segment ended June 30 ended June 30
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Voice local 542.8 543.8 (0.2)% 1,095.6 1,072.7 2.1 %
Voice long distance 228.5 228.5 - % 454.9 458.1 (0.7)%
Data 379.8 345.7 9.9 % 757.4 685.5 10.5 %
Other 65.4 71.0 (7.9)% 130.8 143.8 (9.0)%
-------------------------------------------------------------------------
External operating
revenue 1,216.5 1,189.0 2.3 % 2,438.7 2,360.1 3.3 %
Intersegment revenue 21.2 22.1 (4.1)% 43.8 47.1 (7.0)%
-------------------------------------------------------------------------
Total operating
revenue 1,237.7 1,211.1 2.2 % 2,482.5 2,407.2 3.1 %
-------------------------------------------------------------------------
----------------------------------------------
Key operating indicators -
Communications segment
At June 30
(000s) 2005 2004 Change
----------------------------------------------
Residential network
access lines 2,993 3,053 (2.0)%
Business network
access lines 1,748 1,774 (1.5)%
-------- -------- -------
Total network access
lines(1) 4,741 4,827 (1.8)%
High-speed Internet
subscribers 729.0 624.3 16.8 %
Dial-up Internet
subscribers 260.5 300.7 (13.4)%
-------- -------- -------
Total Internet
subscribers(2) 989.5 925.0 7.0 %
---------------------------
Quarters ended Six-month periods
June 30 ended June 30
(000s) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Change in residential
network access lines (40) (22) (81.8)% (54) (33) (63.6)%
Change in business
network access lines (12) 1 n.m. (13) (10) (30.0)%
-------- -------- ------- -------- -------- -------
Change in total
network access lines (52) (21) (147.6)% (67) (43) (55.8)%
High-speed Internet
net additions 17.1 19.1 (10.5)% 39.3 62.7 (37.3)%
Dial-up Internet net
reductions (9.9) (8.4) (17.9)% (21.1) (19.1) (10.5)%
-------- -------- ------- -------- -------- -------
Total Internet
subscriber net
additions 7.2 10.7 (32.7)% 18.2 43.6 (58.3)%
-------------------------------------------------------------------------
(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.
-------------------------------------------------------------------------
Communications segment revenues increased by $26.6 million and
$75.3 million, respectively, in the second quarter and first six months of
2005, when compared with the same periods in 2004, as a result of growth in
enhanced and managed data services and new revenues from acquisitions. Also
affecting revenue growth were two non-recurring regulatory adjustments: voice
local revenues for the first six months of 2005 included a $6.4 million
positive adjustment recorded in the first quarter, while voice local revenues
in the second quarter of 2004 included a positive adjustment of $10.2 million.
- Voice local revenue decreased by $1.0 million in the second quarter
of 2005 and increased by $22.9 million for the first six months of
2005, when compared to the same periods in 2004. After normalizing
for a positive $10.2 million regulatory adjustment recognized in June
2004 (in respect of CRTC Decision 2004-42 pertaining to deferral
account recognition items), local revenue increased by $9.2 million
in the second quarter and $33.1 million for the first six months. The
increases were due primarily to 2005 regulatory adjustments and the
effect of business rate increases implemented mid-2004 and June 1,
2005, partly offset by the effect of continued line losses.
Regulatory adjustments in 2005 included the non-recurring positive
adjustment of $6.4 million for CRTC Decision 2005 4 (pertaining to
subsidy requirements for high cost areas in TELUS Quebec ILEC
territory for 2003 to 2005), recorded in the first quarter of 2005.
In addition, because TELUS used the liability method for recording
price cap deferrals, local revenue for the second quarter and first
six months of 2005 included favourable adjustments of approximately
$10 million and $28 million, respectively, drawn from the price cap
deferral account to offset mandated additional discounts for
competitive digital network services (basic data services) pursuant
to CRTC Decision 2005-6. See the discussion below for data revenues,
which contains the equal and offsetting negative revenue impact for
Decision 2005-6.
The 18,000 increase in residential line losses in the second quarter
of 2005, when compared with the second quarter of 2004, was due to
increased competition from resellers, VoIP competitors (including the
introduction of cable telephony in Calgary and Edmonton), and
technological substitution to wireless services. Business lines
decreased in the second quarter of 2005, due to the loss of a
business customer and removal of temporary lines following the B.C.
provincial election. It is expected that the trend of declining
residential network access lines in the future may worsen due to
increased competition facilitated by technology changes.
- Voice long distance revenues were unchanged in the second quarter of
2005 despite industry-wide trend of long distance erosion. For the
first six months of 2005, long distance revenue decreased at a lower
rate of 0.7%, when compared with the same period in 2004. Increased
minute volumes (including growth in non-incumbent volumes) and
increases in the monthly long distance administration fee in certain
long distance plans were offset by lower average per-minute prices.
- Communications segment data revenues increased by $34.1 million and
$71.9 million, respectively, in the second quarter and first six
months of 2005, when compared with the same periods in 2004. This
included revenues from two recent acquisitions of more than
$10 million and $30 million, respectively, for the second quarter and
first six months of 2005. The increase in data revenues due to
acquisitions offset the additional discounts of approximately
$10 million and $28 million, respectively, for the second quarter and
first six months of 2005 for competitive digital network services
mandated by CRTC Decision 2005-6, as described under voice local
revenues above.
The remaining growth in data revenues not attributed to acquisitions
was primarily due to: (i) increased Internet and enhanced data
service revenues of $19.5 million and $47.5 million, respectively, 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 and
migration to enhanced data services.
The rate of growth in high-speed Internet subscribers has slowed, as
expected, 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, the Company experienced high net additions in the first
quarter last year due to a very attractive introductory marketing
promotion.
- Other revenue decreased due mainly to lower voice equipment sales.
- 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 $155.5 million and $315.0 million, respectively, for the second
quarter and first six months of 2005. This represents increases of
$24.9 million (19.1%) and $56.0 million (21.6%), respectively, when compared
with the same periods in 2004. The increase was a result of growing revenues
from the purchase of ADCOM, increased data equipment sales and as well as
other data and voice service revenues, particularly from recently implemented
contracts.
-------------------------------------------------------------------------
Operations expense -
Communications segment Quarters Six-month periods
($ millions, except ended June 30 ended June 30
employees) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Salaries, benefits
and other employee-
related costs 422.5 414.5 1.9 % 836.6 807.5 3.6 %
Other operations
expenses 309.3 297.3 4.0 % 611.8 611.0 0.1 %
-------------------------------------------------------------------------
Total operations
expense 731.8 711.8 2.8 % 1,448.4 1,418.5 2.1 %
-------------------------------------------------------------------------
Full-time equivalent
employees, end of
period 21,777 19,036 14.4 %
-------------------------------------------------------------------------
Operations expenses increased in the second quarter and first six months
of 2005, when compared with the same periods in 2004, due primarily to
emergency operations planning costs in the second quarter of 2005, increased
expenses caused by the addition of two operations in late 2004 (B.C. payroll
services and the acquisition of ADCOM), and a new investment in Ambergris in
February 2005. In aggregate, the three new operations added approximately
2,800 full-time equivalent employees at June 30, and increased total
operations expenses by less than $20 million and $40 million, respectively,
for the second quarter and first six months of 2005. Excluding employees from
new operations, full-time equivalent staff at June 30, 2005 decreased slightly
from one year earlier.
- Salaries, benefits and employee-related costs prior to acquisitions
and the B.C. payroll contract described above were flat in the second
quarter of 2005 and increased by less than 2% for the first six
months of 2005. The increase was due primarily to increased
compensation and increased full-time equivalent staff. Pension
expense for defined benefit and defined contribution plans was
$10.1 million and $22.1 million, respectively, in the second quarter
and first six months of 2005, representing decreases of $5.8 million
and $9.6 million, respectively, from the same periods in 2004.
- Other operations expenses prior to acquisitions and the B.C. payroll
contract increased by approximately 1% in the second quarter of 2005
due primarily to emergency operations planning costs. For the first
six months of 2005, other operations expense prior to acquisitions
and the B.C. payroll contract decreased by approximately 3%. Changes
to operations expense in second quarter and first six months of 2005
included: (i) reduced facilities, transit and termination costs of
$2.9 million and $13.2 million, respectively, due to the movement of
traffic on-net and to a lesser extent, price cap discounts from
competitor ILECs arising from CRTC Decision 2005-6; (ii) nominal
payments to Verizon under renegotiated Software and Related
Technology and Service Agreements, compared with $8.8 million and
$17.4 million, respectively, in the same periods in 2004; (iii)
reduced expenses for increased labour capitalization of $8.8 million
and $17.2 million resulting from a higher labour component in capital
expenditures in 2005; and (iv) lower bad debt expense of $2.2 million
and $6.1 million, respectively. These decreases were partly offset by
increased cost of goods sold associated with data equipment sales,
increased advertising and promotions and other general increases.
Included in the total segment expenses discussed above are non-ILEC
operations expenses of $152.0 million and $292.7 million, respectively, in the
second quarter and first six months of 2005. This represents increases of
$7.6 million (5.3%) and $10.8 million (3.8%), respectively, when compared with
the same periods in 2004. The increase in operations expense supported growth
in non-ILEC revenues observed for the same periods.
-------------------------------------------------------------------------
Restructuring
and workforce
reduction costs - Quarters Six-month periods
Communications segment ended June 30 ended June 30
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
7.4 0.7 n.m. 16.8 16.6 1.2 %
-------------------------------------------------------------------------
In the first half 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 currently expects that restructuring charges will not exceed
$100 million for the full year of 2005.
-------------------------------------------------------------------------
EBITDA and EBITDA
margin - Quarters Six-month periods
Communications ended June 30 ended June 30
segment 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 498.5 498.6 - % 1,017.3 972.1 4.6 %
EBITDA margin (%) 40.3 41.2 (0.9) 41.0 40.4 0.6
pts pts
-------------------------------------------------------------------------
Despite increased competitive activity in the second quarter of 2005,
Communications segment EBITDA was flat when compared with the same period in
2004, as increased emergency operations planning costs and higher
restructuring charges were offset by revenue growth. Communications segment
EBITDA and EBITDA margin improved in the first six months of 2005, when
compared with the same period in 2004, due to the revenue growth exceeding the
growth rate in operations expenses. Included in these results were non-ILEC
EBITDA of $3.5 million and $11.4 million, respectively, for the second quarter
and first six months of 2005, compared with EBITDA losses of $13.8 million and
$22.9 million, respectively, in the same periods of 2004.
Communications segment capital expenditures are discussed in Section 7.2
Cash used by investing activities.
5.5 Mobility segment results
-------------------------------------------------------------------------
Operating revenues - Quarters Six-month periods
Mobility segment ended June 30 ended June 30
($ millions) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Network revenue 743.4 625.5 18.8 % 1,438.9 1,217.9 18.1 %
Equipment revenue 58.6 51.1 14.7 % 115.6 91.4 26.5 %
-------------------------------------------------------------------------
External operating
revenue 802.0 676.6 18.5 % 1,554.5 1,309.3 18.7 %
Intersegment revenue 5.7 5.6 1.8 % 11.5 10.2 12.7 %
-------------------------------------------------------------------------
Total operating
revenue 807.7 682.2 18.4 % 1,566.0 1,319.5 18.7 %
-------------------------------------------------------------------------
----------------------------------------------
Key operating indicators
- Mobility segment
(000s) At June 30
2005 2004 Change
----------------------------------------------
Subscribers -
postpaid 3,419.0 2,980.1 14.7 %
Subscribers -
prepaid 728.7 633.7 15.0 %
-------- -------- -------
Subscribers -
total(1) 4,147.7 3,613.8 14.8 %
Digital POPs(2)
covered including
roaming/resale
(millions)(3) 30.2 29.7 1.7 %
---------------------------
Quarters Six-month periods
ended June 30 ended June 30
(000s) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Subscriber net
additions -
postpaid 103.9 103.6 0.3 % 178.7 168.3 6.2 %
Subscriber net
additions - prepaid 27.2 10.1 169.3 % 32.6 21.5 51.6 %
-------- -------- ------- -------- -------- -------
Subscriber net
additions - total 131.1 113.7 15.3 % 211.3 189.8 11.3 %
Churn, per month
(%)(4) 1.37 1.32 0.05 1.41 1.40 0.01
pts pts
COA(5) per gross
subscriber addition
($)(4) 342 381 (10.2)% 348 382 (8.9)%
ARPU ($)(4) 61 59 3.4 % 60 58 3.4 %
Average minutes of
use per subscriber
per month ("MOU") 405 390 3.8 % 388 376 3.2 %
EBITDA to network
revenue (%) 49.3 45.8 3.5 48.9 43.8 5.1
pts pts
Retention spend to
network revenue
(%)(4) 5.7 4.9 0.8 5.6 4.9 0.7
pts pts
EBITDA ($ millions) 366.5 286.2 28.1 % 703.9 534.0 31.8 %
EBITDA excluding COA
($ millions)(4) 468.6 383.2 22.3 % 895.8 719.3 24.5 %
-------------------------------------------------------------------------
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 June 30, 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 $117.9 million for the
second quarter of 2005 and $221.0 million for the first six months of
2005 as compared with the same periods last year. This growth was a
result of the continued expansion of the subscriber base combined
with increased average revenue per subscriber unit per month
("ARPU"). As a result of an overall increase in average minutes of
use per subscriber per month ("MOU"), continued pricing discipline,
and increased usage of data and Internet based products, including
picture and text messaging, ARPU increased by approximately $2 in the
second quarter and first six months of 2005, when compared with the
same periods in 2004.
Average minutes of use per subscriber per month increased by 3.8% in
the second quarter and 3.2% in first six months of 2005, when
compared with the same periods in 2004. At June 30, 2005, postpaid
subscribers represented 82.4% of the total cumulative subscriber
base, remaining stable from one-year earlier, and contributing to the
significant ARPU premium TELUS Mobility enjoys over its competitors.
Despite the commercial launch by a new competitor in the prepaid
market, TELUS Mobility achieved significant growth in year over year
prepaid subscriber net additions. Consequently, total subscriber net
additions of 131,100 represented a record for all previously reported
second quarters for TELUS Mobility.
Blended postpaid and prepaid monthly churn rates remained favourable,
increasing slightly in the second quarter and first six months of
2005 as compared with the same periods last year due to continued
competitive pricing pressures. Deactivations were 167,500 and
340,500, respectively, for the second quarter and first six months of
2005, as compared with 140,800 and 295,000 for the same periods last
year. Notably, the monthly churn rate achieved during the second
quarter of 2005 improved over the first quarter of 2005 and the
fourth quarter of 2004, despite a slight increase year over year.
This is a significant achievement, in face of pressures from new
competition and from other aggressive Push To Talk offerings. The
excellent churn 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 second
quarter and first six months of 2005 when compared to the
corresponding periods 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 298,600 for the second quarter and
551,800 for the first six months of 2005 as compared with 254,500 and
484,800 for the same periods 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 Six-month periods
($ millions, except ended June 30 ended June 30
employees) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Equipment sales
expenses 109.7 99.2 10.6 % 214.2 188.4 13.7 %
Network operating
expenses 98.7 94.4 4.6 % 197.2 196.9 0.2 %
Marketing expenses 87.4 73.4 19.1 % 161.7 134.8 20.0 %
General and
administration
expenses 145.4 129.0 12.7 % 289.0 265.4 8.9 %
-------------------------------------------------------------------------
Total operations
expense 441.2 396.0 11.4 % 862.1 785.5 9.8 %
-------------------------------------------------------------------------
Full-time equivalent
employees, end of
period 6,012 5,485 9.6 %
-------------------------------------------------------------------------
TELUS Mobility operations expense increased in the second quarter and
first six months of 2005, when compared with the same periods in 2004, to
support growth in the subscriber base. TELUS Mobility continued to achieve
economies of scale as second quarter total operations expenses increased by
only 11.4%, while the corresponding Network revenue growth was 18.8% and year-
over-year subscriber growth was 14.8%.
- Expenses related to equipment sales increased in the second quarter
and first six months of 2005 when compared with the same periods 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 increased by $4.3 million for the second
quarter of 2005, as compared with the same period last year.
Transmission and site-related expenses increased during the second
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 June 30, 2005, as
a result of continued activation of digital roaming regions and
network expansion. The increases in 2005 Network operating expenses
were offset by other initiatives such as continued efforts to improve
roaming rates and reduced leased line costs through Microwave build,
as well as scale efficiencies and the competitive digital network
services discounts arising from CRTC Decision 2005-6.
- 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 10.2% in the
second quarter to $342 as compared with the same period last year due
to higher gross subscriber additions and lower handset costs.
Similarly, COA per gross subscriber addition improved by 8.9% to $348
for the first six months of 2005, when compared with the same period
in 2004. With the higher ARPU, COA per gross subscriber addition over
the lifetime revenue of the subscriber improved in the second quarter
and first six months of 2005 as compared with the same periods in
2004.
- General and administration expenses increased by 12.7% in the second
quarter and 8.9% for the first six months of 2005, when compared to
the same periods in 2004. TELUS Mobility increased full-time
equivalent employees to support the significant growth in the
subscriber base and continued expansion of the client care team and
company-owned retail stores.
-------------------------------------------------------------------------
EBITDA and EBITDA Quarters Six-month periods
margin - ended June 30 ended June 30
Mobility segment 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 366.5 286.2 28.1 % 703.9 534.0 31.8 %
EBITDA margin (%) 45.4 42.0 3.4 44.9 40.5 4.4
pts pts
-------------------------------------------------------------------------
Improvement 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, excellent monthly churn
rates, and successful cost containment efforts. The EBITDA margin, when
calculated as a percentage of Network revenue, improved to a record 49.3% for
the second quarter of 2005, and to 48.9% for the first six months of 2005.
This compares with 45.8% and 43.8% for the same periods in 2004, representing
positive increases of 3.5 and 5.1 percentage points, respectively.
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 June 30, 2005.
-------------------------------------------------------------------------
June 30, Dec. 31, % Explanation
($ millions) 2005 2004 Change Change
-------------------------------------------------------------------------
Current Assets
Cash and 1,141.1 896.5 244.6 27.3 % See Section 7.
temporary Liquidity and
investments, capital resources
net
-------------------------------------------------------------------------
Accounts 846.3 863.5 (17.2) (2.0)% Primarily a
receivable seasonal decrease
in dealer accounts
receivable, partly
offset by
increased billings
and accruals
-------------------------------------------------------------------------
Income and 146.0 132.5 13.5 10.2 % Changes in
other taxes estimates of
receivable available
temporary
differences,
reassessments and
interest for prior
years net of
refunds received
-------------------------------------------------------------------------
Inventories 129.0 133.3 (4.3) (3.2)% Primarily a
reduction by TELUS
Mobility from the
peak selling
season in the
fourth quarter,
partly offset by
new handset
launches
-------------------------------------------------------------------------
Prepaid 259.4 183.4 76.0 41.4 % Prepayment of
expenses property taxes,
and other Mobility licence
fees, federal
Canada Pension
Plan contributions
and Employment
Insurance premiums
and maintenance
contracts
-------------------------------------------------------------------------
Current 398.1 438.4 (40.3) (9.2)% Decrease in
portion of available tax loss
future income pools for the
taxes upcoming 12 months
and temporary
differences in
short-term assets
and liabilities
-------------------------------------------------------------------------
Current
Liabilities
Accounts 1,458.5 1,362.6 95.9 7.0 % Increases in
payable and capital
accrued expenditures,
liabilities payroll and other
liabilities, and
an accrual for
estimated damages
for a lawsuit
-------------------------------------------------------------------------
Restructuring 57.4 70.7 (13.3) (18.8)% Payments under
and workforce previous programs
reduction exceeded new
accounts obligations
payable and
accrued
liabilities
-------------------------------------------------------------------------
Advance 546.4 531.5 14.9 2.8 % Primarily an
billings and increase in price
customer cap deferred
deposits revenues
-------------------------------------------------------------------------
Current 1,581.0 4.3 1,576.7 n.m. Reclassification
maturities to current of
of long- $1,575.7 million
term debt TELUS Corporation
7.5% Notes due
June 2006
-------------------------------------------------------------------------
Working (723.4) 678.5 (1,401.9) n.m. Primarily reflects
capital(1) debt maturing in
June 2006 net of
cash accumulation
-------------------------------------------------------------------------
Capital 11,117.2 11,221.0 (103.8) (0.9)% See Sections 5.3
Assets, Net Consolidated
results of
operations -
Depreciation and
amortization and
7.2 Cash used by
investing
activities
-------------------------------------------------------------------------
Other Assets
Deferred 775.4 704.4 71.0 10.1 % Primarily pension
charges plan contributions
in excess of
charges to income
-------------------------------------------------------------------------
Future - 99.8 (99.8) (100.0)% Reflects use of
income taxes loss carry forward
amounts and
temporary
differences on
long-term assets
and liabilities
reversed to long-
term future tax
liability
-------------------------------------------------------------------------
Investments 31.3 38.4 (7.1) (18.5)% Includes a write
down in 2005 Q2
-------------------------------------------------------------------------
Goodwill 3,150.1 3,126.8 23.3 0.7 % Goodwill added for
consolidation of
Ambergris, net of
foreign exchange
changes since the
acquisition of
Ambergris
-------------------------------------------------------------------------
Long-Term Debt 4,691.1 6,332.2 (1,641.1) (25.9)% $1,575.7 million
TELUS Corporation
7.5% Notes became
current, the
$141.6 million
Dec. 31 balance of
Convertible
debentures was
converted to
equity or
redeemed, while
the Canadian
dollar value of
U.S. dollar
denominated notes
increased by
$72.3 million,
because of a
slight weakening
of the Canadian
dollar
-------------------------------------------------------------------------
Other Long- 1,439.3 1,506.1 (66.8) (4.4)% Primarily a
Term reduction in the
Liabilities deferred hedging
liability for U.S.
dollar denominated
notes, resulting
from a slight
weakening of the
Canadian dollar
-------------------------------------------------------------------------
Future Income 1,052.0 991.9 60.1 6.1 % A 2005 acquisition
Taxes plus tax
deductions exceed
accounting
expenses for long-
term assets and
liabilities such
as pension amounts
and fixed assets
-------------------------------------------------------------------------
Non-Controlling 13.5 13.1 0.4 3.1 % The increase was
Interest from minority
partners' share of
earnings in
several small
subsidiaries,
including an
acquisition in
2005
-------------------------------------------------------------------------
Shareholders'
Equity
Convertible - 8.8 (8.8) (100.0)% Approximately
debentures $7.8 million was
transferred to
share capital when
shareholders
exercised their
conversion option
in 2005. The
balance was
transferred to
contributed
surplus (in Common
equity) with the
redemption of the
remaining
debentures on
June 15, 2005
-------------------------------------------------------------------------
Common equity 7,154.7 7,016.8 137.9 2.0 % The increase is
comprised of year-
to-date 2005
Net income of
$431.7 million,
share options
exercised of
$159.6 million,
conversion of
$131.7 million of
Convertible
debentures into
3.3 million Non-
voting shares,
less dividends of
$143.9 million,
normal course
issuer bid costs
of $430.3 million
and other of
$26.7 million
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
-------------------------------------------------------------------------
7. Liquidity and capital resources
7.1 Cash provided by operating activities
-------------------------------------------------------------------------
($ millions) Quarters Six-month periods
ended June 30 ended June 30
2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
687.7 489.0 40.6 % 1,416.1 1,077.1 31.5 %
-------------------------------------------------------------------------
Cash provided by operating activities increased in the second quarter and
first six months of 2005, when compared with the same periods in 2004, due to
the following:
- EBITDA increased by $80.2 million and $215.1 million, respectively
- Restructuring and workforce reduction payments decreased by
$1.3 million and $48.0 million, respectively
- Interest paid was flat and decreased by $9.7 million, respectively
- Interest received increased by $11.8 million and $3.9 million,
respectively
- Employer contributions to employee defined benefit plans decreased by
$35.6 million and $26.8 million, respectively, due primarily to net
acceleration of discretionary funding in the second quarter of 2004,
partly offset by a change in timing of funding
- Reduced repayments of securitized accounts receivable (no repayments
in 2005 or the second quarter of 2004; $150 million repayments in the
first six months 2004), and
- Other changes in non-cash working capital in the respective periods
of each year.
Partly offsetting the above, income tax recoveries net of installment
payments decreased by $60.6 million and $166.3 million, respectively, in the
second quarter and first six months of 2005, when compared with the same
periods in 2004.
7.2 Cash used by investing activities
-------------------------------------------------------------------------
($ millions) Quarters Six-month periods
ended June 30 ended June 30
2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
410.0 341.6 20.0 % 716.2 640.2 11.9 %
-------------------------------------------------------------------------
Cash used by investing activities increased in the second quarter and
first six months of 2005, when compared with the same periods in 2004, due
primarily to increased capital expenditures and lower proceeds from the sale
of non-strategic properties. Investing activity in the second quarter and
first six months of 2005 included investments of $1.9 million and
$29.4 million, respectively, in Ambergris.
-------------------------------------------------------------------------
Capital expenditures
by segment
($ millions, except Quarters Six-month periods
capital expenditure ended June 30 ended June 30
intensity) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Communications
segment 293.9 267.7 9.8 % 507.5 527.1 (3.7)%
Mobility segment 114.8 78.4 46.4 % 174.4 128.7 35.5 %
-------------------------------------------------------------------------
TELUS consolidated 408.7 346.1 18.1 % 681.9 655.8 4.0 %
-------------------------------------------------------------------------
Capital expenditure
intensity(1)(%) 20.2 18.6 1.6 17.1 17.9 (0.8)
pts 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 increased by 15.2%
to $257.6 million in the second quarter of 2005, and increased by
2.1% to $449.8 million for the first six months of 2005, when
compared with the same periods in 2004. The increases primarily
reflect investment in internal systems and processes and were partly
offset for the six month period by lower expenditure on network
infrastructure and high-speed Internet. Expenditures for high-speed
Internet were $30.2 million and $46.6 million, respectively, for the
second quarter and first six months of 2005.
Non-ILEC capital expenditures decreased by 17.7% to $36.3 million in
the second quarter of 2005 and decreased by 33.2% to $57.7 million in
the first six months of 2005, when compared with the same periods in
2004. While the decrease in spending was primarily due to up-front
expenditures in the same period last year that related to the costs
to support certain major new customers, this trend is not expected to
continue for the remainder of 2005.
The Communications segment capital expenditure intensity ratios were
23.7% and 20.4%, respectively, in the second quarter and first six
months of 2005, compared with approximately 22% for the same periods
in 2004. Cash flow (EBITDA less capital expenditures) for the second
quarter of 2005, decreased by 11.4% to $204.6 million, when compared
with the same period in 2004, due to increased capital expenditures.
Strong EBITDA growth and reduced capital expenditures for the first
six months of 2005 resulted in cash flow increasing by 14.6% to
$509.8 million in the first six months of 2005, when compared with
the same period in 2004.
- Mobility segment capital expenditures increased significantly in the
second quarter and first six months of 2005, when compared with the
same periods in 2004. The higher capital spending was attributed to
its strategic investment in next-generation EVDO capable wireless
network technology and continued enhancement of digital wireless
coverage.
Capital expenditure intensity for TELUS Mobility increased to 14.2%
in the second quarter of 2005 from 11.5% in the second quarter of
2004 due to a significant increase in capital expenditures.
Similarly, capital expenditure intensity for the first six months of
2005 was 11.1% as compared with 9.8% for the same period in 2004.
TELUS Mobility expects to achieve capital expenditure intensity of
approximately 12-13% for the full year. As a result of continued
strong growth in EBITDA, Mobility generated cash flows (EBITDA less
capital expenditures) of $251.7 million in the second quarter and
$529.5 million for the first six months of 2005 as compared with
$207.8 million and $405.3 million for the same periods in 2004,
representing increases of 21.1% and 30.6%, respectively.
Consolidated cash flows (EBITDA less capital expenditures) were
$456.3 million and $1,039.3 million, respectively, for the second quarter and
first six months of 2005. This represented increases of 4.0% and 22.2%,
respectively, for the second quarter and first six months of 2005, when
compared with the same periods in 2004.
7.3 Cash used by financing activities
-------------------------------------------------------------------------
($ millions) Quarters Six-month periods
ended June 30 ended June 30
2005 2004 Change 2005 2004 Chang
-------------------------------------------------------------------------
383.9 63.2 n.m. 455.3 85.4 n.m.
-------------------------------------------------------------------------
Cash used by financing activities increased in the second quarter and
first six months of 2005, when compared with the same periods in 2004, due
primarily to repurchases of shares on the market under a normal course issuer
bid. Financing activities included the following:
- Proceeds from Common Shares and Non-Voting Shares issued were
$56.1 million and $144.0 million, respectively, in the second quarter
and six-month period ended June 30, 2005, increases of $39.3 million
and $100.2 million, respectively, when compared with the same periods
in 2004. The increases were mainly due to the exercise of options,
and to a lesser extent, warrants, in 2005, partly offset by lower
proceeds from share purchases for employee share plans, as TELUS now
purchases these shares in the market, rather than issuing shares from
treasury.
In addition, during the second quarter of 2005, convertible
debentures with a principal value of $131.7 million were converted
into approximately 3.3 million Non-Voting Shares. Due to the non-cash
nature of these transactions, the conversions are shown as balance
sheet adjustments and are not included in the financing activities of
the cash flow statements.
- Cash dividends paid to shareholders were $143.9 million in both the
second quarter and first six months of 2005; as remittance of the
first quarter dividend occurred on April 1 and remittance of the
second quarter dividend (declared on May 3) occurred on June 30.
Dividends paid for the first six months of 2005 increased by
$53.3 million or 58.8%, when compared with the same period in 2004,
due to the increase in dividend rate to 20 cents per quarter
effective in the fourth quarter of 2004, the purchase of dividend
reinvestment plan shares in the market rather than issuing shares
from treasury, and an increase in the average number of shares
outstanding.
- Under the Normal Course Issuer Bid program, TELUS purchased for
cancellation approximately three million Common Shares and
approximately 3.5 million Non-Voting Shares for a total outlay of
$272.1 million in the second quarter of 2005. This total outlay was
comprised of a reduction to share capital of $110.7 million
representing the book value of shares repurchased, and a reduction to
retained earnings of $161.4 million representing the amount in excess
of book value. The following tables enumerate the shares repurchased
and cost under this program since inception.
Normal Course Issuer Bid to June 30, 2005 - shares repurchased
-------------------------------------------------------------------------
Purchased Purchased for Cumulative
in December Purchased for cancellation shares
(Number of 2004, and cancellation in the first purchased for
shares) cancelled in 2005 Q2 half of 2005 cancellation
-------------------------------------------------------------------------
Common Shares 755,711 2,972,500 5,069,600 5,825,311
Non-Voting Shares 1,451,400 3,540,200 5,576,300 7,027,700
-------------------------------------------------------------------------
2,207,111 6,512,700 10,645,900 12,853,011
-------------------------------------------------------------------------
--------------------------------------------
Maximum
shares Percentage
permitted for of maximum
repurchase permitted
(Number of under shares
shares) the program repurchased
--------------------------------------------
Common Shares 14,000,000 41.6 %
Non-Voting Shares 11,500,000 61.1 %
--------------------------------------------
25,500,000 50.4 %
--------------------------------------------
Normal Course Issuer Bid to June 30, 2005 - cost
-------------------------------------------------------------------------
2005
December year-to-
2004 2005 Q2 date Cumulative
($ millions) outlay outlay outlay outlay
-------------------------------------------------------------------------
Reduction to
share capital 39.4 110.7 179.1 218.5
Reduction to
retained earnings 38.6 161.4 251.3 289.9
-------------------------------------------------------------------------
78.0 272.1 430.4 508.4
-------------------------------------------------------------------------
- Long-term debt issued of $4.4 million for the second quarter and
first six months of 2005 represents capital leases.
- Redemptions and repayments of long-term debt were $19.3 million and
$20.3 million, respectively, in the second quarter first six months
of 2005 (2004 - $2.8 million and $37.0 million, respectively). The
June 16, 2005 redemption of convertible debentures, which were not
previously converted into Non-voting shares, was $17.9 million. Other
redemptions in 2005 were primarily capital leases.
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
June 30, June 30,
Periods ended 2005 2004 Change
-------------------------------------------------------------------------
Components of debt and coverage ratios(1)
--------------------------------------
Net debt ($ millions) 6,096.4 7,223.2 (1,126.8)
Total capitalization - book value
($ millions) 13,264.6 13,920.2 (655.6)
EBITDA (excluding restructuring)
($ millions) 3,358.5 2,976.2 382.3
Net interest cost ($ millions) 618.0 604.9 13.1
Debt ratios
-----------
Fixed rate debt as a proportion of
total indebtedness (%) 93.1 93.4 (0.3) pts
Average term to maturity of debt (years) 4.9 5.7 (0.8)
Net debt to total capitalization (%)(1) 46.0 51.9 (5.9) pts
Net debt to EBITDA(1) 1.8 2.4 (0.6)
Coverage ratios(1)
---------------
Interest coverage on long-term debt 2.6 2.0 0.6
EBITDA interest coverage 5.4 4.9 0.5
Other measures
--------------
Free cash flow ($ millions) -
12-month trailing(2) 1,398.9 1,184.6 214.3
Dividend payout ratio (%)(1) 40 50 (10) 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 second quarter of 2005, when
compared to one year earlier, as a result of an increase in cash and temporary
investments of $783.4 million (netted against debt for the purposes of this
calculation), conversion and redemption of convertible debentures in 2005 and
debt reduction in the third quarter of 2004. Total capitalization also
decreased for these reasons; partly offset by a $477.0 million increase in
common equity over this 12-month period. The net debt to EBITDA ratio measured
at June 30, 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).
Interest coverage on long-term debt improved because of increased income
before interest and taxes. The EBITDA interest coverage ratio improved by 0.6
as a result of higher EBITDA (excluding restructuring), offset by a decrease
of 0.1 due to recording an accrual for estimated damages for a lawsuit in net
interest costs. Free cash flow measure for the 12-month period ended June 30,
2005 increased, when compared with one year earlier, primarily because of
improved EBITDA, lower payments under restructuring programs, lower capital
expenditures and lower interest payments, partly offset by lower cash tax
recoveries and 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 40% for the second 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 first quarter 2005, non-recurring 15 cents per share
favourable impact of tax adjustments, the dividend payout ratio was 43%.
7.5 Credit facilities
TELUS arranged for new credit facilities in May 2005 to replace
$1.6 billion of prior 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.
Including cash in excess of $1.1 billion and the credit facilities
described in the table below, TELUS had unutilized available liquidity in
excess of $2.7 billion at June 30, 2005.
-------------------------------------------------------------------------
Outstanding
Credit Facilities undrawn
At June 30, 2005 letters of
($ in millions) Expiry Size Drawn credit
-------------------------------------------------------------------------
Five-year revolving
facility(1) May 4, 2010 800.0 - -
Three-year revolving
facility(1) May 7, 2008 800.0 - 100.6
Other bank facilities - 74.0 - 4.5
-------------------------------------------------------------------------
Total - 1,674.0 - 105.1
-------------------------------------------------------------------------
(1) Canadian dollars or U.S. dollar equivalent.
-------------------------------------------------------------------------
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 1.8:1 at June 30,
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 June 30, 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.
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 August 3, 2005. The proceeds of securitized receivables were
$150 million at June 30, 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
The credit ratings for TELUS and TCI remain investment grade, and
received one outlook upgrade and one rating upgrade during the second quarter
of 2005. On May 27, Fitch Ratings revised the outlook to 'positive' from
'stable' for its TELUS and TCI long-term 'BBB' ratings, and on June 27,
Moody's Investors Services Inc. increased its investment grade rating for
TELUS Notes from Baa3 with a positive outlook to 'Baa2' with a stable outlook.
As of August 3, 2005, the ratings and outlook from Dominion Bond Rating
Service and Standard and Poors were unchanged from those 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 the future.
7.8 Off-balance sheet arrangements, contractual liabilities and
commitments
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 June 30, 2005, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rate on U.S.
$25.5 million of fiscal 2005 purchase commitments; hedge accounting has been
applied to these foreign currency forward contracts, all of which relate to
the Mobility segment.
The fair values of the Company's long-term debt are estimated based on
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same maturity as well as the use of
discounted future cash flows using current rates for similar financial
instruments subject to similar risks and maturities. The fair values of the
Company's derivative financial instruments used to manage exposure to interest
rate and currency risks are estimated similarly. The carrying amount and fair
value of long-term debt are as follows:
-------------------------------------------------------------------------
As at June 30, As at December 31,
2005 2004
-------------------------------------------------------------------------
Carrying Fair Carrying Fair
($ millions) amount value amount value
-------------------------------------------------------------------------
Long-term debt
Principal 6,272.1 7,223.6 6,345.3 7,342.3
Derivative financial
instruments used to manage
interest rate and currency
risks associated with U.S.
dollar denominated debt
(Hedging item maximum
maturity date: June 2011) 960.9 1,314.5 1,032.6 1,299.5
Derivative financial
instruments used to manage
interest rate risk
associated with Canadian
dollar denominated debt
(Hedging item maximum
maturity date: June 2006) - 0.4 - 1.3
-------------------------------------------------------------------------
7,233.0 8,538.5 7,377.9 8,643.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingent liabilities (Note 14 of the interim
consolidated financial statements)
At June 30, 2005, the Company had $45.7 million in outstanding
commitments for restructuring programs prior to 2005 and $11.7 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 June 30,
2005, had balance of $143.8 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 competitive digital network services, is
not expected to affect the Company's consolidated revenues.
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
June 30, 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 June 30, 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 June 30, 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 June 30, 2005 and at July 22, 2005. In addition, for July 22, 2005,
the total number of outstanding and issuable shares is presented, assuming
full conversion of options and warrants.
-------------------------------------------------------------------------
Class of equity security Common Non-Voting Total
Shares Shares Shares
(millions of shares) outstanding outstanding outstanding
-------------------------------------------------------------------------
At June 30, 2005
Common equity - Common Shares
outstanding 188.2 - 188.2
Common equity - Non-Voting
Shares outstanding - 169.2 169.2
------------- ------------ ------------
188.2 169.2 357.4(1)
------------- ------------ ------------
At July 22, 2005
Common equity - Common Shares
outstanding 188.2 - 188.2
Common equity - Non-Voting
Shares outstanding - 169.5 169.5
------------- ------------ ------------
188.2 169.5 357.7
------------- ------------ ------------
Outstanding and issuable shares(2)
at July 22, 2005
Common Shares and Non-Voting
Shares outstanding 188.2 169.5 357.7
Options(3) 2.2 23.9 26.1
Warrants - 0.3 0.3
------------- ------------ ------------
190.4 193.7 384.1
------------- ------------ ------------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share for the
second quarter of 2005, the number of shares was 362.4 million.
(2) Assuming full conversion and ignoring exercise prices.
(3) Not reduced by any options that may be forfeited or cancelled during
the period July 1, 2005 to July 22, 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
The Company has a practice of reaffirming or adjusting annual guidance on
a quarterly basis. The Company has increased its annual guidance for TELUS
Mobility net subscriber additions.
-------------------------------------------------------------------------
Updated guidance May 4, 2005
for 2005 guidance Change
-------------------------------------------------------------------------
Consolidated
Revenues no change $7.95 to no change
$8.05 billion
-------------------------------------------------------------------------
EBITDA(1) no change $3.25 to no change
$3.325 billion
-------------------------------------------------------------------------
Earnings per share
- basic no change $1.85 to $2.05 no change
-------------------------------------------------------------------------
Capital expenditures no change Approx. no change
$1.4 billion
-------------------------------------------------------------------------
Free cash flow(2) no change $1.25 to
$1.35 billion no change
-------------------------------------------------------------------------
Communications segment
Revenue (external) no change $4.75 to no change
$4.8 billion
-------------------------------------------------------------------------
Non-ILEC revenue no change $625 to no change
$650 million
-------------------------------------------------------------------------
EBITDA no change $1.875 to no change
$1.925 billion
-------------------------------------------------------------------------
Non-ILEC EBITDA no change $15 to no change
$20 million
-------------------------------------------------------------------------
Capital expenditures no change Approx. no change
$1.0 billion
-------------------------------------------------------------------------
High-speed Internet Approx.
net additions no change 100,000 no change
-------------------------------------------------------------------------
Mobility segment
Revenue (external) no change $3.2 to no change
$3.25 billion
-------------------------------------------------------------------------
EBITDA no change $1.375 to no change
$1.4 billion
-------------------------------------------------------------------------
Capital expenditures no change Approx. no change
$400 million
-------------------------------------------------------------------------
Wireless subscriber
net additions Greater than 475,000 -
525,000 to 525,000
-------------------------------------------------------------------------
(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 first quarter 2005 Management's
discussions and analysis, which are filed on SEDAR (www.sedar.com) and EDGAR
(www.sec.gov).
10.1 Human Resources
The outcome of outstanding labour relations issues, such as the duration
and impact of full-scale strike related activity and the implications of TELUS
Mobility and TELUS Communications Inc. being a single employer for labour
relations purposes, may result in further unanticipated increased costs and/or
reduced productivity. There can be no assurance that, with the eventual
outcome 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.
10.2 Regulatory
Regulatory framework for voice communication services using Internet
protocol - Telecom Decision CRTC 2005-28
On May 12, 2005, the CRTC released its decision regarding regulatory
requirements for the provision of voice communication services using Internet
protocol, also known as VoIP. The decision generally confirmed the CRTC's
preliminary views announced in April 2004, which were determined prior to
seeking public input through proceedings under Telecom Public Notice CRTC
2004-2.
Decision 2005-28 divides VoIP service providers into two groups: ILECs
who are regulated in a manner similar to existing local service regulation;
and others, including cable-TV companies, who are not be subject to price
regulation and who have been afforded a regulated head-start in the provision
of VoIP-based services. TELUS is constrained by price regulation and extended
winback restrictions for VoIP services in its ILEC territories in British
Columbia, Alberta and Eastern Quebec, but not in the rest of Canada.
In Decision 2005-28, the CRTC also clarified regulations in several
areas. VoIP-based services are included in the measurement to determine
contributions to the national high-cost service area fund, and access
independent VoIP providers must pay contribution once a $10 million revenue
threshold is met. Cable companies were also determined by the CRTC to be
competitive local exchange carriers ("CLECs"). Other rules with respect to
access to numbers, number portability, directory listings, equal access, the
winback rules, rules on promotions, bundling and price floors remain the same
and are extended to VoIP services.
TELUS and other incumbent local exchange carriers ("ILECs") have sought
leave to appeal the regulation on winbacks with the Federal Court, arguing
that it is an illegal restriction on the companies' constitutional rights to
commercial free speech. Should the appeal be successful, the Company will no
longer be constrained from contacting consumer customers for twelve months,
and business customers for three months, after the customer has moved one or
more of their services to competitors for the purpose of offering to the
customers discounts, free services or other inducements in order to convince
those customers not to change service providers or to revert back to their
original service provider. In addition, TELUS and other ILECs jointly
petitioned the Federal Cabinet to take rapid action and overturn Decision 2005-
28. TELUS and the other ILECs believe that the decision to only regulate
marketing and pricing of VoIP services offered by established
telecommunications companies will result in higher prices and less choice for
Canadian consumers. There can be no assurance that the appeals to the Federal
Court and Federal Cabinet will be successful or that constraints imposed by
regulation will not accelerate network access line losses, lead to slower
growth in Internet subscribers, and otherwise hinder revenue growth.
Proceeding on local exchange services forbearance (Telecom Public Notice
CRTC 2005-2)
The CRTC initiated 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. TELUS intends to
fully participate in the oral consultation scheduled for September 26-29,
2005. The proceeding is scheduled to be completed in early October 2005, with
a decision expected by the end of the first quarter of 2006.
TELUS' position is that the CRTC must adopt a clear, simple test that
will allow incumbents to gain automatic forbearance when certain measurable
benchmarks are reached. TELUS has proposed a 'two-facilities bright-line
test', whereby local exchange services would be forborne or deregulated in a
geographic area as soon as two conditions are met: (a) there is one other
facilities-based competitor offering local exchange services; and (b) that
competitor has five per cent of the local exchange service market. Under
TELUS' proposal, the Company would simply file evidence that a full facilities-
based CLEC has achieved five per cent of the local exchange service market for
business or residential services in the CLEC's service area. The CRTC would
then have 30 days to issue a forbearance order.
TELUS' proposed process relies upon monthly reporting of network access
lines and their equivalents by participants in the local exchange service
market, allowing the CRTC to verify TELUS' estimates. Incumbents are currently
required to file network access line reports with the CRTC on a monthly basis,
and TELUS has requested an interim order by the CRTC to extend the requirement
immediately to all facilities-based local service providers. To address the
CRTC's request for comments on transitional measures to provide ILECs with
more regulatory flexibility, TELUS has requested that all restrictions on win
backs and promotions be removed. There can be no assurance that the local
exchange services forbearance rules and processes eventually adopted by the
CRTC will be clear and simple as TELUS proposed, or that transitional relief
on win backs and promotions will be granted.
Review and disposition of deferral accounts for the second price cap
period (Telecom Public Notice CRTC 2004-1)
TELUS filed its reply comments in this proceeding in June 2005. TELUS'
position is that the CRTC has no scope to order consumer rebates, to take
funds from ILECs' deferral accounts and confer these funds upon competitors,
or to transfer deferral account funds between ILECs' serving territories.
TELUS also requested that the CRTC approve the allocation to two key TELUS
initiatives of an estimated $123 million deferral account balance at the end
of the second price cap period on May 31, 2006 (subject to possible extension
under CRTC 2005-3 as discussed below). These initiatives would contribute to
the extension of broadband service within B.C. and improve the quality of
service in rural and remote areas of B.C. and Alberta. There can be no
assurance that TELUS' proposals for the disposition of the deferral account
will be adopted by the CRTC.
Proceeding to consider extending the price regulation regime - Telecom
Public Notices CRTC 2005-3 and 2005-4
On May 13, 2005, the CRTC proposed to extend the current price cap regime
without any changes for two additional years beyond the anticipated end date
of May 31, 2006 (July 31, 2006 for TELUS' ILEC operations in Quebec). In
filing its comments, TELUS indicated it supported a two-year extension,
provided that two important changes were made to the price cap regime. First,
TELUS asked the CRTC to stop the flow of funds into the deferral account.
Second, TELUS requested that incumbents be allowed to reduce prices for
residential services in non-high-cost areas and for business services where
customers have a choice of local telephone service suppliers. TELUS committed
that it would not increase rates in other service areas in order to offset any
rate reductions resulting from these changes. There can be no assurance that
TELUS' proposed changes to the price cap regime will be adopted by the CRTC.
Framework for forbearance from regulation of high-speed intra-exchange
digital services - Telecom Public Notice CRTC 2005-8
On June 30, 2005, the CRTC initiated a proceeding and invited comments on
a framework for forbearance of high-speed intra-exchange digital services,
including the definition of such services, the relevant market, the
appropriate qualitative and quantitative criteria for determining market
power, the appropriate scope of the CRTC's forbearance from its powers and
duties, the forbearance application process, and post-forbearance conditions
and safeguards that would result in either automatic de-forbearance or a
review of ongoing forbearance. The comment and reply submission periods will
continue into the fourth quarter of 2005, and a decision from the CRTC is
expected by mid-2006. This proceeding follows Decision 2005-6 "Competitive
Digital Network Services", in February 2005, which the CRTC classified certain
access and intra-exchange competitive digital network services as Category II
Competitor Services, or services that are not considered essential or near-
essential. Once the framework for forbearance of high-speed intra-exchange
digital services is determined, the Commission will be in a position to
entertain applications from the ILECs for forbearance from regulation of these
services.
10.3 Process risks
The Company is presently developing a new billing system in the
Communications segment, which will include re-engineering processes for order
entry, pre-qualification, service fulfillment and assurance, customer care,
collections/credit, customer contract and information management. This
customer-focused project requires extensive system development and in itself
presents implementation risks due to the complexity of the implementation task
and resource constraints. The Company plans to implement this project in
phases, beginning with the implementation of consumer accounts in Alberta in
the first quarter of 2006, followed by implementation of consumer customer
accounts in B.C. at a later date. There can be no assurance that this
undertaking will not negatively impact TELUS' customer service levels,
competitive position and financial results.
10.4 Manmade and natural threats
A number of vandalism incidents have occurred since April 2005 that have
been referred to the appropriate police authorities. These incidents disrupted
service to one or more customers for a number of hours, including one
disruption to vital 911 service in the B.C. cities of Burnaby, New Westminster
and Port Coquitlam. Resulting from on-going security reviews the Company has
implemented new security measures. There can be no assurance that specific
events in the future will not impact TELUS operations.
10.5 Litigation
In June 2005, the Ontario Court of Appeal unanimously overturned a 2003
trial court decision and ruled that when TELUS' predecessor BC TEL redeemed
$125 million of Series AL Bonds in December 1997, it was in breach of a
covenant contained in the deed of trust and mortgage under which the Bonds
were issued. The Ontario Court of Appeal returned the case to the trial courts
to determine damages and TELUS has accrued an estimate of damages in financing
costs for the second quarter of 2005. Should the assessed damages be
significantly different than management's expectations, a material adjustment
could be recorded in the Company's Statements of income. The Company expects
to seek leave to appeal to the Supreme Court of Canada. This ruling relates to
a matter prior to the 1999 merger of BC Telecom and TELUS Corporation
(Alberta), and does not impact TELUS' current debt instruments.
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 Six-month periods
June 30 ended June 30
($ millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Net income 189.5 172.3 431.7 273.6
Other expense 0.5 2.0 2.0 3.2
Financing costs 168.2 156.9 306.6 301.9
Income taxes 106.0 44.9 176.3 107.5
Non-controlling interest 1.7 1.1 3.3 1.9
-------------------------------------------------------------------------
Operating income 465.9 377.2 919.9 688.1
Depreciation 330.9 320.7 660.8 642.4
Amortization of intangible
assets 68.2 86.9 140.5 175.6
-------------------------------------------------------------------------
EBITDA 865.0 784.8 1,721.2 1,506.1
-------------------------------------------------------------------------
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 Six-month periods
June 30 ended June 30
($ millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
EBITDA 865.0 784.8 1,721.2 1,506.1
Restructuring and workforce
reduction costs, net of
cash payments (1.0) (9.0) (13.3) (61.5)
Share-based compensation 7.1 5.6 10.9 10.3
Cash interest paid (293.8) (293.8) (306.9) (316.6)
Cash interest received 18.8 7.0 25.1 21.2
Income taxes received (paid) 20.4 81.0 19.3 185.6
Capital expenditures (capex) (408.7) (346.1) (681.9) (655.8)
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 207.8 229.5 774.4 672.8
-------------------------------------------------------------------------
The following reconciles free cash flow with Cash provided by operating
activities less Cash used by investing activities:
-------------------------------------------------------------------------
Quarters ended Six-month periods
June 30 ended June 30
($ millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Cash provided by operating
activities 687.7 489.0 1,416.1 1,077.1
Cash (used) by investing
activities (410.0) (341.6) (716.2) (640.2)
-------------------------------------------------------------------------
277.7 147.4 699.9 436.9
Net employee defined benefit
plans expense 0.4 (4.9) (1.1) (9.8)
Employer contributions to employee
defined benefit plans 22.3 57.9 59.7 86.5
Other net operating activities (4.1) (11.5) 0.3 (17.6)
Reduction in securitized accounts
receivable - - - 150.0
Non-cash working capital changes
except changes in taxes,
interest and securitized
accounts receivable (89.8) 45.1 (18.7) 42.4
Acquisition 1.9 - 29.4 -
Proceeds from the sale of
property and other assets (2.7) (4.3) (3.4) (16.4)
Other investing activities 2.1 (0.2) 8.3 0.8
-------------------------------------------------------------------------
Free cash flow 207.8 229.5 774.4 672.8
-------------------------------------------------------------------------
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
$965.4 million at June 30, 2005 (compared with a deferred hedge liability of
$630.6 million at June 30, 2004). Net debt is unaffected by foreign exchange
fluctuations because it adds (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 $52.8 million and
$35.1 million, respectively, for the 12-month periods ended June 30, 2005 and
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.
Interest coverage on long-term debt
-----------------------------------
Calculated on a 12-month trailing basis as Net income before interest
expense on long-term debt and income tax expense, divided by interest expense
on long-term 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' 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 statements of income
Periods ended June 30 Three months Six months
(unaudited) (millions
except per share amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
OPERATING REVENUES $ 2,018.5 $ 1,865.6 $ 3,993.2 $ 3,669.4
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,146.1 1,080.1 2,255.2 2,146.7
Restructuring and
workforce reduction costs 7.4 0.7 16.8 16.6
Depreciation 330.9 320.7 660.8 642.4
Amortization of
intangible assets 68.2 86.9 140.5 175.6
-------------------------------------------------------------------------
1,552.6 1,488.4 3,073.3 2,981.3
-------------------------------------------------------------------------
OPERATING INCOME 465.9 377.2 919.9 688.1
Other expense, net 0.5 2.0 2.0 3.2
Financing costs 168.2 156.9 306.6 301.9
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES
AND NON-CONTROLLING
INTEREST 297.2 218.3 611.3 383.0
Income taxes 106.0 44.9 176.3 107.5
Non-controlling interest 1.7 1.1 3.3 1.9
-------------------------------------------------------------------------
NET INCOME 189.5 172.3 431.7 273.6
Preference and preferred
share dividends - 0.8 - 1.7
-------------------------------------------------------------------------
COMMON SHARE AND NON-VOTING
SHARE INCOME $ 189.5 $ 171.5 $ 431.7 $ 271.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INCOME PER COMMON SHARE
AND NON-VOTING SHARE
- Basic $ 0.53 $ 0.48 $ 1.20 $ 0.76
- Diluted $ 0.52 $ 0.48 $ 1.19 $ 0.76
DIVIDENDS DECLARED PER
COMMON SHARE AND
NON-VOTING SHARE $ 0.20 $ 0.15 $ 0.40 $ 0.30
TOTAL WEIGHTED AVERAGE
COMMON SHARES AND
NON-VOTING SHARES
OUTSTANDING
- Basic 358.1 354.3 359.1 353.7
- Diluted 362.4 360.1 362.9 356.0
TELUS Corporation
consolidated balance sheets
As at As at
June 30, December 31,
(unaudited) (millions) 2005 2004
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ 1,141.1 $ 896.5
Accounts receivable 846.3 863.5
Income and other taxes receivable 146.0 132.5
Inventories 129.0 133.3
Prepaid expenses and other 259.4 183.4
Current portion of future income taxes 398.1 438.4
-------------------------------------------------------------------------
2,919.9 2,647.6
-------------------------------------------------------------------------
Capital Assets, Net
Property, plant, equipment and other 7,480.1 7,528.2
Intangible assets subject to amortization 672.5 737.0
Intangible assets with indefinite lives 2,964.6 2,955.8
-------------------------------------------------------------------------
11,117.2 11,221.0
-------------------------------------------------------------------------
Other Assets
Deferred charges 775.4 704.4
Future income taxes - 99.8
Investments 31.3 38.4
Goodwill 3,150.1 3,126.8
-------------------------------------------------------------------------
3,956.8 3,969.4
-------------------------------------------------------------------------
$ 17,993.9 $ 17,838.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 1,458.5 $ 1,362.6
Restructuring and workforce reduction
accounts payable and accrued liabilities 57.4 70.7
Advance billings and customer deposits 546.4 531.5
Current maturities of long-term debt 1,581.0 4.3
-------------------------------------------------------------------------
3,643.3 1,969.1
-------------------------------------------------------------------------
Long-Term Debt 4,691.1 6,332.2
-------------------------------------------------------------------------
Other Long-Term Liabilities 1,439.3 1,506.1
-------------------------------------------------------------------------
Future Income Taxes 1,052.0 991.9
-------------------------------------------------------------------------
Non-Controlling Interest 13.5 13.1
-------------------------------------------------------------------------
Shareholders' Equity
Convertible debentures conversion option - 8.8
Common equity 7,154.7 7,016.8
-------------------------------------------------------------------------
7,154.7 7,025.6
-------------------------------------------------------------------------
$ 17,993.9 $ 17,838.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
consolidated statements of cash flows
Three months Six months
Periods ended June 30
(unaudited) (millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 189.5 $ 172.3 $ 431.7 $ 273.6
Adjustments to reconcile
net income to cash
provided by operating
activities:
Depreciation and
amortization 399.1 407.6 801.3 818.0
Future income taxes 103.3 98.7 195.0 190.5
Share-based compensation 7.1 5.9 10.9 10.6
Net employee defined
benefit plans expense (0.4) 4.9 1.1 9.8
Employer contributions
to employee defined
benefit plans (22.3) (57.9) (59.7) (86.5)
Restructuring and
workforce reduction
costs, net of cash
payments (1.0) (9.0) (13.3) (61.5)
Other, net 4.1 11.5 (0.3) 17.6
Net change in non-cash
working capital 8.3 (145.0) 49.4 (95.0)
-------------------------------------------------------------------------
Cash provided by operating
activities 687.7 489.0 1,416.1 1,077.1
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (408.7) (346.1) (681.9) (655.8)
Acquisition (1.9) - (29.4) -
Proceeds from the sale of
property and other assets 2.7 4.3 3.4 16.4
Other (2.1) 0.2 (8.3) (0.8)
-------------------------------------------------------------------------
Cash used by investing
activities (410.0) (341.6) (716.2) (640.2)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-
Voting Shares issued 56.1 16.8 144.0 43.8
Dividends to shareholders (143.9) (48.3) (143.9) (90.6)
Purchase of Common Shares
and Non-Voting Shares
for cancellation (272.1) - (430.4) -
Long-term debt issued 4.4 10.5 4.4 37.8
Redemptions and repayment
of long-term debt (19.3) (2.8) (20.3) (37.0)
Payment for redemption
of preference and
preferred shares - (35.8) - (35.8)
Dividends paid by a
subsidiary to non-
controlling interests (7.9) - (7.9) -
Other (1.2) (3.6) (1.2) (3.6)
-------------------------------------------------------------------------
Cash used by financing
activities (383.9) (63.2) (455.3) (85.4)
-------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in
cash and temporary
investments, net (106.2) 84.2 244.6 351.5
Cash and temporary
investments, net,
beginning of period 1,247.3 273.5 896.5 6.2
-------------------------------------------------------------------------
Cash and temporary
investments, net,
end of period $ 1,141.1 $ 357.7 $ 1,141.1 $ 357.7
-------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS
Interest (paid) $ (293.8) $ (293.8) $ (306.9) $ (316.6)
-------------------------------------------------------------------------
Interest received $ 18.8 $ 7.0 $ 25.1 $ 21.2
-------------------------------------------------------------------------
Income taxes (inclusive of
Investment Tax Credits
received, net) $ 20.4 $ 81.0 $ 19.3 $ 185.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
Segmented Information
Three-month periods
ended June 30 Communications Mobility
(millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
External revenue $ 1,216.5 $ 1,189.0 $ 802.0 $ 676.6
Intersegment revenue 21.2 22.1 5.7 5.6
-------------------------------------------------------------------------
Total operating revenue 1,237.7 1,211.1 807.7 682.2
Operations expense 731.8 711.8 441.2 396.0
Restructuring and work-
force reduction costs 7.4 0.7 - -
-------------------------------------------------------------------------
EBITDA(1) $ 498.5 $ 498.6 $ 366.5 $ 286.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 293.9 $ 267.7 $ 114.8 $ 78.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 204.6 $ 230.9 $ 251.7 $ 207.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six-month periods
ended June 30 Communications Mobility
(millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
External revenue $ 2,438.7 $ 2,360.1 $ 1,554.5 $ 1,309.3
Intersegment revenue 43.8 47.1 11.5 10.2
-------------------------------------------------------------------------
Total operating revenue 2,482.5 2,407.2 1,566.0 1,319.5
Operations expense 1,448.4 1,418.5 862.1 785.5
Restructuring and work-
force reduction costs 16.8 16.6 - -
-------------------------------------------------------------------------
EBITDA(1) $ 1,017.3 $ 972.1 $ 703.9 $ 534.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 507.5 $ 527.1 $ 174.4 $ 128.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 509.8 $ 445.0 $ 529.5 $ 405.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three-month periods
ended June 30 Eliminations Consolidated
(millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
External revenue $ - $ - $ 2,018.5 $ 1,865.6
Intersegment revenue (26.9) (27.7) - -
-------------------------------------------------------------------------
Total operating revenue (26.9) (27.7) 2,018.5 1,865.6
Operations expense (26.9) (27.7) 1,146.1 1,080.1
Restructuring and work-
force reduction costs - - 7.4 0.7
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 865.0 $ 784.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 408.7 $ 346.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 456.3 $ 438.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six-month periods
ended June 30 Eliminations Consolidated
(millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
External revenue $ - $ - $ 3,993.2 $ 3,669.4
Intersegment revenue (55.3) (57.3) - -
-------------------------------------------------------------------------
Total operating revenue (55.3) (57.3) 3,993.2 3,669.4
Operations expense (55.3) (57.3) 2,255.2 2,146.7
Restructuring and work-
force reduction costs - - 16.8 16.6
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 1,721.2 $ 1,506.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 681.9 $ 655.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 1,039.3 $ 850.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is a non-GAAP measure and 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").
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 5, 2005
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary