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 executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F:
Form 20-F [ ] Form 40-F |X|
Indicate by check mark whether by furnishing the information contained in this
Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2 (b) under the Securities Exchange Act of
1934:
Yes [ ] No |X|
This Form 6-K consists of the following:
TELUS Corporation Second Quarter Management's Discussion and Analysis and
Consolidated Financial Statements
TELUS Corporation - Management's discussion and analysis - 2005 Q2
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 and Recent examples of TELUS' activities
strategy in 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 results An update on TELUS' capability to
deliver 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 resources A discussion of cash flow, liquidity,
credit facilities, off-balance sheet
arrangements and other disclosures
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8. Critical accounting estimates and A description of accounting estimates,
accounting policy developments which are critical to determining
financial results, and changes to
accounting policies
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9. Revised guidance A discussion of revisions to its
guidance for 2005
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10. Risks and uncertainties A update of risks and uncertainties
facing TELUS
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11. Reconciliation of non-GAAP A description, calculation and
measures and definition of reconciliation of certain measures
key operating indicators used by management
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1. Overall performance
1.1 Materiality for disclosures
Management determines whether or not information is "material" based on
whether it believes a reasonable investor's decision to buy, sell or hold
securities in the Company would likely be influenced or changed if the
information were omitted or misstated.
1.2 Consolidated highlights
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($ millions except margin and per-share amounts) Quarters ended June 30 Six-month periods ended June 30
2005 2004 Change 2005 2004 Change
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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 0.8pts 43.1 41.0 2.1pts
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 $1,578 million 7.5% TELUS Corporation
Notes. The Company is considering the early redemption of all or a portion of
these debentures in accordance with the terms of the indenture. As at June 30,
2005, the Company and its subsidiaries are in compliance with all of their
debt covenants.
5. Results from operations
5.1 General
The Company's reportable segments, which reflect TELUS' organizational
structure and are used to manage the business, are TELUS Communications
(discussed in Section 5.4 Communications segment results) and TELUS Mobility
(discussed in Section 5.5 Mobility segment results). The two segments are
differentiated based on management, products and services, distribution
channels, technology, and regulatory treatment. Intersegment sales are
recorded at the exchange value. Segmented information may also be found in
Note 17 of the interim consolidated financial statements.
5.2 Quarterly results summary
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($ millions, except per share amounts) 2005 Q2 2005 Q1 2004 Q4 2004 Q3 2004 Q2 2004 Q1 2003 Q4 2003 Q3
--------------------------------------------------------------------------------------------------------------------------------
Segmented revenue (external)
Communications segment 1,216.5 1,222.2 1,209.3 1,199.9 1,189.0 1,171.1 1,182.4 1,186.3
Mobility segment 802.0 752.5 755.6 747.0 676.6 632.7 643.2 619.9
--------- --------- --------- --------- --------- --------- --------- ----------
Operating revenues (consolidated) 2,018.5 1,974.7 1,964.9 1,946.9 1,865.6 1,803.8 1,825.6 1,806.2
Net income 189.5 242.2 135.6 156.6 172.3 101.3 47.8 114.1
Per weighted average Common Share
and Non-Voting Share outstanding
- basic 0.53 0.67 0.38 0.44 0.48 0.28 0.13 0.32
- diluted 0.52 0.66 0.37 0.43 0.48 0.28 0.13 0.32
Dividends declared per Common Share
and Non-Voting Share outstanding 0.20 0.20 0.20 0.15 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
$10.2 million non-recurring favourable regulatory adjustment in the second
quarter of 2004. Communications segment revenues also include the impacts of
overall negative regulatory price cap decisions.
Net income and earnings per share continue to reflect the trends of growing
EBITDA and Operating income, combined with generally decreasing net interest
expense due to increasing cash balances and favourable tax adjustments, except
for an accrual for estimated damages for a lawsuit in the current quarter, as
described earlier.
5.3 Consolidated results from operations
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($ millions except EBITDA margin and Quarters ended June 30 Six-month periods ended June 30
employees)
2005 2004 Change 2005 2004 Change
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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 0.8pts 43.1 41.0 2.1pts
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.
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Depreciation and amortization Quarters ended June 30 Six-month periods 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.
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Other expense, net Quarters ended June 30 Six-month periods 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.
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Financing costs Quarters ended June 30 Six-month periods 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 $12.2 million, respectively,
from the same periods in 2004.
-----------------------------------------------------------------------------------------------------------------------------
Income taxes Quarters ended June 30 Six-month periods ended June 30
($ in millions, 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) pts 34.5 34.7 (0.2) pts
Effective tax rates (%) 35.7 20.6 15.1 pts 28.8 28.1 0.7 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 interest Quarters ended June 30 Six-month periods 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 preferred dividends Quarters ended June 30 Six-month periods 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 - Communications segment Quarters ended June 30 Six-month periods 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 June 30 Six-month periods 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.
o 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.
o 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.
o 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.
o Other revenue decreased due mainly to lower voice equipment sales.
o 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 $56.0 million (21.6%), respectively, when compared with the same periods
in 2004. The increase was a result of growing revenues from the purchase of
ADCOM, increased data equipment sales and as well as other data and voice
service revenues, particularly from recently implemented contracts.
----------------------------------------------------------------------------------------------------------------------
Operations expense - Communications segment Quarters ended June 30 Six-month periods ended June 30
($ millions, except 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.
o 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.
o 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 $10.8 million (3.8%), respectively, when compared with the
same periods in 2004. The increase in operations expense supported growth in
non-ILEC revenues observed for the same periods.
----------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction costs - Quarters ended June 30 Six-month periods ended June 30
Communications segment
($ 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 $100
million for the full year of 2005.
--------------------------------------------------------------------------------------------------------------------------
EBITDA and EBITDA margin - Communications Quarters ended June 30 Six-month periods ended June 30
segment
2005 2004 Change 2005 2004 Change
--------------------------------------------------------------------------------------------------------------------------
EBITDA ($ millions) 498.5 498.6 --% 1,017.3 972.1 4.6%
EBITDA margin (%) 40.3 41.2 (0.9) pts 41.0 40.4 0.6pts
--------------------------------------------------------------------------------------------------------------------------
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
$22.9 million, respectively, in the same periods of 2004.
Communications segment capital expenditures are discussed in Section 7.2 Cash
used by investing activities.
5.5 Mobility segment results
----------------------------------------------------------------------------------------------------------------------------
Operating revenues - Mobility segment Quarters ended June 30 Six-month periods ended June 30
($ 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 ended June 30 Six-month periods 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 pts 1.41 1.40 0.01pts
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 pts 48.9 43.8 5.1pts
Retention spend to network revenue (4) (%) 5.7 4.9 0.8 pts 5.6 4.9 0.7pts
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.
----------------------------------------------------------------------------------------------------------------------------
o 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.
o 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.
o Intersegment revenues represent services provided by the Mobility segment
to the Communications segment and are eliminated upon consolidation along
with the associated expense in TELUS Communications.
----------------------------------------------------------------------------------------------------------------------------
Operations expense - Mobility segment Quarters ended June 30 Six-month periods ended June 30
($ millions, except 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%.
o 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.
o 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.
o 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 $348 for the first six months of 2005, when
compared with the same period in 2004. With the higher ARPU, COA per
gross subscriber addition over the lifetime revenue of the subscriber
improved in the second quarter and first six months of 2005 as compared
with the same periods in 2004.
o General and administration expenses increased by 12.7% in the second
quarter and 8.9% for the first six months of 2005, when compared to the
same periods in 2004. TELUS Mobility increased full-time equivalent
employees to support the significant growth in the subscriber base and
continued expansion of the client care team and company-owned retail
stores.
----------------------------------------------------------------------------------------------------------------------------
EBITDA and EBITDA margin - Quarters ended June 30 Six-month periods ended June 30
Mobility segment
2005 2004 Change 2005 2004 Change
----------------------------------------------------------------------------------------------------------------------------
EBITDA ($ millions) 366.5 286.2 28.1 % 703.9 534.0 31.8 %
EBITDA margin (%) 45.4 42.0 3.4 pts 44.9 40.5 4.4 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, Change % Change Explanation
($ millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and temporary 1,141.1 896.5 244.6 27.3 % See Section 7. Liquidity and capital
investments, net resources
----------------------------------------------------------------------------------------------------------------------------
Accounts receivable 846.3 863.5 (17.2) (2.0)% Primarily a seasonal decrease in dealer
accounts receivable, partly offset by
increased billings and accruals
----------------------------------------------------------------------------------------------------------------------------
Changes in estimates of available
Income and other taxes temporary differences, reassessments and
receivable 146.0 132.5 13.5 10.2 % interest for prior years net of refunds
received
----------------------------------------------------------------------------------------------------------------------------
Primarily a reduction by TELUS Mobility
from the peak selling season in the
Inventories 129.0 133.3 (4.3) (3.2)% fourth quarter, partly offset by new
handset launches
----------------------------------------------------------------------------------------------------------------------------
Prepayment of property taxes, Mobility
licence fees, federal Canada Pension Plan
Prepaid expenses and other 259.4 183.4 76.0 41.4 % contributions and Employment Insurance
premiums and maintenance contracts
----------------------------------------------------------------------------------------------------------------------------
Current portion of future Decrease in available tax loss pools for
income taxes 398.1 438.4 (40.3) (9.2)% the upcoming 12 months and temporary
differences in short-term assets and
liabilities
----------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Increases in capital expenditures,
Accounts payable and accrued payroll and other liabilities, and an
liabilities 1,458.5 1,362.6 95.9 7.0 % accrual for estimated damages for a
lawsuit
----------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce Payments under previous programs exceeded
reduction accounts payable 57.4 70.7 (13.3) (18.8)% new obligations
and accrued liabilities
----------------------------------------------------------------------------------------------------------------------------
Advance billings and customer Primarily an increase in price cap
deposits 546.4 531.5 14.9 2.8 % deferred revenues
----------------------------------------------------------------------------------------------------------------------------
Current maturities of Reclassification to current of
long-term debt 1,581.0 4.3 1,576.7 n. m. $1,575.7 million TELUS Corporation 7.5%
Notes due June 2006
----------------------------------------------------------------------------------------------------------------------------
Working capital (1) (723.4) 678.5 (1,401.9) n. m. Primarily reflects debt maturing in
June 2006 net of cash accumulation
----------------------------------------------------------------------------------------------------------------------------
See Sections 5.3 Consolidated results of
operations - Depreciation and
Capital Assets, Net 11,117.2 11,221.0 (103.8) (0.9)% amortization and 7.2 Cash used by
investing activities
----------------------------------------------------------------------------------------------------------------------------
Other Assets
Deferred charges 775.4 704.4 71.0 10.1 % Primarily pension plan contributions in
excess of charges to income
----------------------------------------------------------------------------------------------------------------------------
Future income taxes -- 99.8 (99.8) (100.0)% Reflects use of 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
$72.3 million, because of a slight
weakening of the Canadian dollar
----------------------------------------------------------------------------------------------------------------------------
Primarily a reduction in the deferred
hedging liability for U.S. dollar
Other Long-Term Liabilities 1,439.3 1,506.1 (66.8) (4.4)% denominated notes, resulting from a
slight weakening of the Canadian dollar
----------------------------------------------------------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the ability to finance current operations and meet
obligations as they fall due.
----------------------------------------------------------------------------------------------------------------------------
Table continues on the following page.
Table continued from the previous page.
----------------------------------------------------------------------------------------------------------------------------
June 30, Dec. 31, Change Change Explanation
($ millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
A 2005 acquisition plus tax deductions
exceed accounting expenses for long-term
Future Income Taxes 1,052.0 991.9 60.1 6.1% assets and liabilities such as pension
amounts and fixed assets
----------------------------------------------------------------------------------------------------------------------------
The increase was from minority partners'
share of earnings in several small
Non-Controlling Interest 13.5 13.1 0.4 3.1% subsidiaries, including an acquisition in
2005
----------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Approximately $7.8 million was
transferred to share capital when
shareholders exercised their conversion
Convertible debentures -- 8.8 (8.8) (100.0)% 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 $26.7 million
----------------------------------------------------------------------------------------------------------------------------
7. Liquidity and capital resources
7.1 Cash provided by operating activities
---------------------------------------------------------------------------------------------------------------------------
($ millions) Quarters ended June 30 Six-month periods 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:
o EBITDA increased by $80.2 million and $215.1 million, respectively
o Restructuring and workforce reduction payments decreased by $1.3 million
and $48.0 million, respectively
o Interest paid was flat and decreased by $9.7 million, respectively
o Interest received increased by $11.8 million and $3.9 million,
respectively
o 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
o 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
o 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 ended June 30 Six-month periods 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 $29.4 million,
respectively, in Ambergris.
------------------------------------------------------------------------------------------------------------------------
Capital expenditures by segment Quarters ended June 30 Six-month periods ended June 30
($ millions, except capital expenditure 2005 2004 Change 2005 2004 Change
intensity)
------------------------------------------------------------------------------------------------------------------------
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 pts 17.1 17.9 (0.8)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.
------------------------------------------------------------------------------------------------------------------------
o 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.
o 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 ended June 30 Six-month periods ended June 30
2005 2004 Change 2005 2004 Change
----------------------------------------------------------------------------------------------------------------------------
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:
o 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.
o 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.
o 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 $161.4 million
representing the amount in excess of book value. The following tables
enumerate the shares repurchased and cost under this program since
inception.
Normal Course Issuer Bid to June 30, 2005 - shares repurchased
---------------------------------------------------------------------------------------------------------------------------
(Number of shares) Purchased in Purchased for Purchased for Cumulative Maximum shares Percentage of
December 2004, cancellation cancellation shares permitted for maximum
and cancelled in 2005 Q2 in the first purchased for repurchase permitted
half of 2005 cancellation under the shares
program repurchased
---------------------------------------------------------------------------------------------------------------------------
Common Shares 755,711 2,972,500 5,069,600 5,825,311 14,000,000 41.6%
Non-Voting Shares 1,451,400 3,540,200 5,576,300 7,027,700 11,500,000 61.1%
---------------------------------------------------------------------------------------------------------------------------
2,207,111 6,512,700 10,645,900 12,853,011 25,500,000 50.4%
---------------------------------------------------------------------------------------------------------------------------
Normal Course Issuer Bid to June 30, 2005 - cost
-----------------------------------------------------------------------------------------
($ millions) December 2004 2005 Q2 outlay 2005 Cumulative
outlay year-to-date 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
-----------------------------------------------------------------------------------------
o Long-term debt issued of $4.4 million for the second quarter and first
six months of 2005 represents capital leases.
o 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 $17.9 million. Other redemptions in 2005 were
primarily capital leases.
7.4 Liquidity and capital resource measures
---------------------------------------------------------------------------------------------------------------
Periods ended June 30, June 30,
2005 2004 Change
---------------------------------------------------------------------------------------------------------------
Components of debt and coverage ratios (1)
------------------------------------------
Net debt ($ 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 $2.7
billion at June 30, 2005.
--------------------------------------------------------------------------------------------------------------
Credit Facilities Expiry Size Drawn Outstanding
At June 30, 2005 undrawn letters
($ in millions) of 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. $25.5
million of fiscal 2005 purchase commitments; hedge accounting has been applied
to these foreign currency forward contracts, all of which relate to the
Mobility segment.
The fair values of the Company's long-term debt are estimated based on quoted
market prices for the same or similar issues or on the current rates offered
to the Company for debt of the same maturity as well as the use of discounted
future cash flows using current rates for similar financial instruments
subject to similar risks and maturities. The fair values of the Company's
derivative financial instruments used to manage exposure to interest rate and
currency risks are estimated similarly. The carrying amount and fair value of
long-term debt are as follows:
As at June 30, 2005 As at December 31, 2004
-----------------------------------------------------------------------------------------------------------
($ millions) Carrying Fair value Carrying Fair value
amount amount
-----------------------------------------------------------------------------------------------------------
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 guidance Change
for 2005
-------------------------------------------------------------------------------------------------------------------------
Consolidated
Revenues no change $7.95 to $8.05 billion no change
-------------------------------------------------------------------------------------------------------------------------
EBITDA(1) no change $3.25 to $3.325 billion no change
-------------------------------------------------------------------------------------------------------------------------
Earnings per share - basic no change $1.85 to $2.05 no change
-------------------------------------------------------------------------------------------------------------------------
Capital expenditures no change Approx. $1.4 billion no change
-------------------------------------------------------------------------------------------------------------------------
Free cash flow(2) no change $1.25 to $1.35 billion no change
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Communications segment
Revenue (external) no change $4.75 to $4.8 billion no change
-------------------------------------------------------------------------------------------------------------------------
Non-ILEC revenue no change $625 to $650 million no change
-------------------------------------------------------------------------------------------------------------------------
EBITDA no change $1.875 to $1.925 billion no change
-------------------------------------------------------------------------------------------------------------------------
Non-ILEC EBITDA no change $15 to $20 million no change
-------------------------------------------------------------------------------------------------------------------------
Capital expenditures no change Approx. $1.0 billion no change
-------------------------------------------------------------------------------------------------------------------------
High-speed Internet net additions no change Approx. 100,000 no change
-------------------------------------------------------------------------------------------------------------------------
Mobility segment
Revenue (external) no change $3.2 to $3.25 billion no change
-------------------------------------------------------------------------------------------------------------------------
EBITDA no change $1.375 to $1.4 billion no change
-------------------------------------------------------------------------------------------------------------------------
Capital expenditures no change Approx. $400 million no change
-------------------------------------------------------------------------------------------------------------------------
Wireless subscriber net additions Greater than 525,000 475,000 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 discussion
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:
-----------------------------------------------------------------------------------------------------
Six-month periods ended
Quarters ended June 30 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.
-----------------------------------------------------------------------------------------------------------
Six-month periods ended
Quarters ended June 30 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:
-----------------------------------------------------------------------------------------------------------
Six-month periods ended
Quarters ended June 30 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 CONFIDENTIAL
--------------------------------------------------------------------------------
TELUS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
consolidated statements of income
--------------------------------------------------------------------------------------------------------------------------------
Three months Six months
Periods ended June 30 (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(Note 4) 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 (Note 5) 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 (Note 6) 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(Note 7)
- 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
------------------------------------------------------ --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these interim consolidated financial statements
--------------------------------------------------------------------------------------------------------------------------------
consolidated statements of retained earnings
--------------------------------------------------------------------------------------------------------------------------------
Six months
Periods ended June 30 (unaudited) (millions) 2005 2004
--------------------------------------------------------------------------------------------- --------------- ---------------
BALANCE AT BEGINNING OF PERIOD $ 1,008.1 $ 741.7
Transitional amount for share-based compensation arising from share options -- (25.1)
--------------------------------------------------------------------------------------------- --------------- ---------------
Adjusted opening balance 1,008.1 716.6
Net income 431.7 273.6
--------------------------------------------------------------------------------------------- --------------- ---------------
1,439.8 990.2
Less: Common Share and Non-Voting Share dividends paid, or payable, in cash 143.9 93.1
Common Share and Non-Voting Share dividends reinvested, or to be
reinvested, in shares issued from Treasury -- 13.3
Cost of purchase of Common Shares and Non-Voting Shares in excess of
stated capital (Note 13(g)) 251.3 --
Preference and preferred share dividends -- 1.7
Redemption premium on preference and preferred shares in excess of amount
chargeable to contributed surplus -- 2.3
--------------------------------------------------------------------------------------------- --------------- ---------------
BALANCE AT END OF PERIOD (Note 13) $ 1,044.6 $ 879.8
--------------------------------------------------------------------------------------------- --------------- ---------------
The accompanying notes are an integral part of these interim consolidated financial statements
--------------------------------------------------------------------------------------------------------------------------------
consolidated balance sheets
--------------------------------------------------------------------------------------------------------------------------------
As at As at
June 30, December 31,
(unaudited) (millions) 2005 2004
--------------------------------------------------------------------------------------------- --------------- ---------------
ASSETS
Current Assets
Cash and temporary investments, net $ 1,141.1 $ 896.5
Accounts receivable (Notes 9, 15(b)) 846.3 863.5
Income and other taxes receivable 146.0 132.5
Inventories 129.0 133.3
Prepaid expenses and other (Note 15(b)) 259.4 183.4
Current portion of future income taxes 398.1 438.4
--------------------------------------------------------------------------------------------- --------------- ---------------
2,919.9 2,647.6
--------------------------------------------------------------------------------------------- --------------- ---------------
Capital Assets, Net (Note 10)
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 (Note 15(b)) 775.4 704.4
Future income taxes -- 99.8
Investments 31.3 38.4
Goodwill (Note 11) 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 (Note 15(b)) $ 1,458.5 $ 1,362.6
Restructuring and workforce reduction accounts payable and accrued liabilities (Note 4) 57.4 70.7
Advance billings and customer deposits (Note 15(b)) 546.4 531.5
Current maturities of long-term debt (Note 12) 1,581.0 4.3
--------------------------------------------------------------------------------------------- --------------- ---------------
3,643.3 1,969.1
--------------------------------------------------------------------------------------------- --------------- ---------------
Long-Term Debt (Note 12) 4,691.1 6,332.2
--------------------------------------------------------------------------------------------- --------------- ---------------
Other Long-Term Liabilities (Note 15(b)) 1,439.3 1,506.1
--------------------------------------------------------------------------------------------- --------------- ---------------
Future Income Taxes 1,052.0 991.9
--------------------------------------------------------------------------------------------- --------------- ---------------
Non-Controlling Interest 13.5 13.1
--------------------------------------------------------------------------------------------- --------------- ---------------
Shareholders' Equity (Note 13)
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
============================================================================================= =============== ===============
Commitments and Contingent Liabilities (Note 14)
The accompanying notes are an integral part of these interim consolidated financial statements
--------------------------------------------------------------------------------------------------------------------------------
consolidated statements of cash flows
--------------------------------------------------------------------------------------------------------------------------------
Three months 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 (Note 4) (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
(Note 15(c)) 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 (Note 10) (408.7) (346.1) (681.9) (655.8)
Acquisition (Note 11) (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 (Note 13(g)) (272.1) -- (430.4) --
Long-term debt issued (Note 12) 4.4 10.5 4.4 37.8
Redemptions and repayment of long-term debt (Note 12) (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
(Note 6)) received, net $ 20.4 $ 81.0 $ 19.3 $ 185.6
====================================================== =============== =============== =============== ===============
The accompanying notes are an integral part of these interim consolidated financial statements
-------------------------------------------------------------------------------
notes to interim consolidated financial statements
-------------------------------------------------------------------------------
JUNE 30, 2005 (unaudited)
TELUS Corporation is one of Canada's largest telecommunications companies,
providing a full range of telecommunications products and services. The Company
is the largest incumbent telecommunications service provider in Western Canada
and provides data, Internet Protocol, voice and wireless services to Central
and Eastern Canada.
1. Interim Financial Statements
The notes presented in these interim consolidated financial statements
include only significant events and transactions and are not fully
inclusive of all matters normally disclosed in TELUS Corporation's annual
audited financial statements. As a result, these interim consolidated
financial statements should be read in conjunction with the TELUS
Corporation audited consolidated financial statements for the year ended
December 31, 2004. These interim consolidated financial statements follow
the same accounting policies and methods of their application as set out
in the TELUS Corporation consolidated financial statements for the year
ended December 31, 2004, including that certain of the comparative amounts
have been reclassified to conform with the presentation adopted currently.
The term "Company" is used to mean TELUS Corporation and, where the
context of the narrative permits or requires, its subsidiaries.
These interim consolidated financial statements reflect subsequent events
up to and including August 4, 2005, such date hereinafter referred to as
the date of these interim consolidated financial statements.
2. Accounting Policy Developments
(a) Earnings per Share
Possibly commencing in the Company's 2005 fiscal year, proposed amendments
to the recommendations of the Canadian Institute of Chartered Accountants
("CICA") for the calculation and disclosure of earnings per share (CICA
Handbook Section 3500) may apply to the Company. These proposed
amendments, in the Company's specific instance, may result in the diluted
earnings per share denominator being adjusted, using the reverse treasury
stock method, for the theoretical issuance of shares from treasury to
settle obligations arising from the issuance of restricted stock units
that have the possibility of equity settlement (see Note 8(c)); for
purposes of the calculation the Company will be required to assume that
shares will be necessary to settle the obligation, and that the shares
will be issued from treasury. The restricted stock units issued by the
Company that do not have the possibility of equity settlement will not be
affected by these proposed amendments. The Company does not expect to be
materially affected by the proposed amendments to the recommendations.
(b) Non-Monetary Transactions
Commencing with the Company's 2006 fiscal year, the amended
recommendations of the CICA for measurement of non-monetary transactions
(CICA Handbook Section 3830) will apply to the Company. The amended
recommendations will result in non-monetary transactions normally being
measured at their fair values, unless certain criteria are met. The
Company's current operations are not materially affected by the amended
recommendations.
(c) Subsequent Events
Commencing in the Company's 2006 fiscal year, the proposed amended
recommendations of the CICA for subsequent events (CICA Handbook Section
3820) will apply to the Company. The proposed amended recommendations will
result in closer harmony with the corresponding requirements of U.S. GAAP.
The Company does not expect to be materially affected by the proposed
amended recommendations.
(d) Comprehensive Income
Commencing with the Company's 2007 fiscal year, the new recommendations of
the CICA for accounting for comprehensive income (CICA Handbook Section
1530), for the recognition and measurement of financial instruments (CICA
Handbook Section 3855) and for hedges (CICA Handbook Section 3865) will
apply to the Company. In the Company's specific instance, the transitional
rules for these sections require implementation at the beginning of a
fiscal year; the Company will not be implementing these recommendations in
its 2005 fiscal year. The concept of comprehensive income for purposes of
Canadian GAAP will be to include changes in shareholders' equity arising
from unrealized changes in the values of financial instruments.
Comprehensive income as prescribed by U.S. GAAP, and which is disclosed in
Note 18(i), is largely aligned with comprehensive income as prescribed by
Canadian GAAP. In the Company's specific instance, however, there is a
difference in other comprehensive income in that U.S. GAAP includes the
concept of minimum pension liabilities and Canadian GAAP does not.
3. Financial Instruments
During the first quarter of 2005, the Company entered into a hedging
relationship that fixes the Company's compensation cost arising from a
specific grant of restricted stock units (see Note 8(c)); 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.
Fair value: The carrying value of cash and temporary investments,
accounts receivable, accounts payable, restructuring and workforce
reduction accounts payable, dividends payable and short-term obligations
approximates their fair values due to the immediate or short-term maturity
of these financial instruments. The carrying values of the Company's
investments accounted for using the cost method would not exceed their
fair values.
The fair values of the Company's long-term debt are estimated based on
quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same maturity as well as the
use of discounted future cash flows using current rates for similar
financial instruments subject to similar risks and maturities. The fair
values of the Company's derivative financial instruments used to manage
exposure to interest rate and currency risks are estimated similarly.
As at June 30, 2005 As at December 31, 2004
---------------------------------------------------------------------------------------------------------------------------
Hedging item
maximum Carrying Carrying
(millions) maturity date amount Fair value amount Fair value
---------------------------------------------------------------------------------------------------------------------------
Assets
Derivatives(2)(3) used to
manage changes in
compensation costs
arising from restricted
stock units (Note 8(c)) November 2007 $ 6.1 $ 12.8 $ 2.1 $ 6.3
---------------------------------------------------------------------------------------------------------------------------
Derivatives(2)(3) used to
manage currency risks
arising from U.S. dollar
denominated purchases to
which hedge accounting
is applied September 2005 $ -- $ 0.6 $ -- $ --
---------------------------------------------------------------------------------------------------------------------------
Derivatives(2)(3) used to
manage currency risks
arising from U.S. dollar
denominated temporary
investments February 2005 $ -- $ -- $ 3.4 $ 3.4
============================================================================================================================
As at June 30, 2005 As at December 31, 2004
---------------------------------------------------------------------------------------------------------------------------
Hedging item
maximum Carrying Carrying
(millions) maturity date amount Fair value amount Fair value
---------------------------------------------------------------------------------------------------------------------------
Liabilities
Long-term debt
Principal(1) (Note 12) $ 6,272.1 $ 7,223.6 $ 6,345.3 $ 7,342.3
Derivatives(2)(3) used to
manage interest rate
and currency risks
associated with U.S.
dollar denominated debt
(Note 15(b)) June 2011 960.9 1,314.5 1,032.6 1,299.5
Derivatives(2)(4) used to
manage interest rate
risk associated with
Canadian dollar
denominated debt June 2006 -- 0.4 -- 1.3
---------------------------------------------------------------------------------------------------------------------------
$ 7,233.0 $ 8,538.5 $ 7,377.9 $ 8,643.1
---------------------------------------------------------------------------------------------------------------------------
Derivatives(2)(3) used to
manage currency risks
arising from U.S. dollar
denominated purchases
- To which hedge
accounting is applied June 2005 $ -- $ -- $ -- $ 2.6
- To which hedge
accounting is not applied October 2005 $ -- $ 0.5 $ -- $ 2.0
============================================================================================================================
(1) The December 31, 2004, carrying amount of long-term debt, for purposes
of this table, includes the carrying amount of the convertible debenture conversion option.
(2) Notional amount of all derivative financial instruments outstanding is $5,392.7 (December 31, 2004 - $5,559.2).
(3) Designated as cash flow hedging items.
(4) Designated as fair value hedging items.
4. Restructuring and Workforce Reduction Costs
(a) Overview
Three-month periods ended June 30
(millions) 2005 2004
----------------------------------------------------------------------------- -----------------------------------------
Programs Operational
Programs initiated Programs Efficiency
initiated prior to initiated Program
in 2005 2005 Total in 2004 (2001-2003) Total
---------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce
reduction costs
Workforce reduction
Voluntary $ 0.3 $ -- $ 0.3 $ -- $ -- $ --
Involuntary 8.4 -- 8.4 0.2 -- 0.2
Lease termination (1.5) -- (1.5) -- -- --
Other 0.1 0.1 0.2 0.3 0.2 0.5
---------------------------------------------------------------------------------------------------------------------------
7.3 0.1 7.4 0.5 0.2 0.7
---------------------------------------------------------------------------------------------------------------------------
Disbursements
Workforce reduction
Voluntary (Early Retirement
Incentive Plan, Voluntary
Departure Incentive Plan and
other) -- -- -- -- 0.1 0.1
Involuntary and other 3.2 5.1 8.3 3.7 4.6 8.3
Lease termination 2.7 0.3 3.0 -- 1.1 1.1
Other 0.1 0.1 0.2 -- 0.2 0.2
---------------------------------------------------------------------------------------------------------------------------
6.0 5.5 11.5 3.7 6.0 9.7
---------------------------------------------------------------------------------------------------------------------------
Expenses greater than (less than)
disbursements 1.3 (5.4) (4.1) (3.2) (5.8) (9.0)
Other 3.1 -- 3.1 -- -- --
---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in restructuring
and workforce reduction accounts
payable and accrued liabilities 4.4 (5.4) (1.0) (3.2) (5.8) (9.0)
Restructuring and workforce reduction
accounts payable and accrued
liabilities, beginning of period 7.3 51.1 58.4 14.4 74.1 88.5
---------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction
accounts payable and accrued
liabilities, end of period $ 11.7 $ 45.7 $ 57.4 $ 11.2 $ 68.3 $ 79.5
===========================================================================================================================
Six-month periods ended June 30
(millions) 2005 2004
----------------------------------------------------------------------------- -----------------------------------------
Programs Operational
Programs initiated Programs Efficiency
initiated prior to initiated Program
in 2005 2005 Total in 2004 (2001-2003) Total
---------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction
costs
Workforce reduction
Voluntary $ 0.3 $ -- $ 0.3 $ -- $ -- $ --
Involuntary 13.3 0.9 14.2 15.9 -- 15.9
Lease termination 1.5 -- 1.5 -- -- --
Other 0.1 0.7 0.8 0.3 0.4 0.7
---------------------------------------------------------------------------------------------------------------------------
15.2 1.6 16.8 16.2 0.4 16.6
---------------------------------------------------------------------------------------------------------------------------
Disbursements
Workforce reduction
Voluntary (Early Retirement
Incentive Plan, Voluntary
Departure Incentive Plan
and other) -- 1.9 1.9 -- 46.6 46.6
Involuntary and other 3.7 23.3 27.0 5.0 23.3 28.3
Lease termination 2.8 0.7 3.5 -- 2.2 2.2
Other 0.1 0.7 0.8 -- 1.0 1.0
---------------------------------------------------------------------------------------------------------------------------
6.6 26.6 33.2 5.0 73.1 78.1
---------------------------------------------------------------------------------------------------------------------------
Expenses greater than (less than)
disbursements 8.6 (25.0) (16.4) 11.2 (72.7) (61.5)
Other 3.1 -- 3.1 -- -- --
---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in restructuring
and workforce reduction accounts
payable and accrued liabilities 11.7 (25.0) (13.3) 11.2 (72.7) (61.5)
Restructuring and workforce reduction
accounts payable and accrued
liabilities, beginning of period -- 70.7 70.7 -- 141.0 141.0
---------------------------------------------------------------------------------------------------------------------------
Restructuring and workforce reduction
accounts payable and accrued
liabilities, end of period $ 11.7 $ 45.7 $ 57.4 $ 11.2 $ 68.3 $ 79.5
===========================================================================================================================
(b) Programs Initiated in 2005
In the first two quarters of 2005, the Company undertook a number of
smaller initiatives, such as operational consolidation, rationalization
and integrations. These initiatives are aimed to improve the Company's
operating and capital productivity.
The Company's estimate of restructuring and workforce reduction costs in
2005 is not expected to exceed $100 million.
(c) Programs Initiated Prior to 2005
Programs initiated in 2004: In the first quarter of 2004, a departmental
reorganization was initiated, primarily in the Communications segment
information technology resources area, consolidating from 15 locations to
two primary locations. This reorganization, which had an implementation
cost in 2004 of approximately $12 million, is expected to enable greater
efficiencies of scale and effectiveness of program delivery.
In the third quarter of 2004, a departmental reorganization was initiated
in the Communications segment with the merging of two customer-facing
business units. The resulting integration and consolidation aimed to
improve the Company's competitiveness as well as its operating and capital
productivity. This reorganization had an implementation cost in 2004 of
approximately $24 million.
In addition to the foregoing initiatives, the Company had undertaken
additional activities in 2004 aimed at improving its operating and capital
productivity and competitiveness. These additional activities had a cost
in 2004 of approximately $16 million.
As at June 30, 2005, no future expenses remain to be accrued or recorded
under the programs initiated in 2004, but variances from estimates
currently recorded may be recorded in subsequent periods.
Operational Efficiency Program (2001-2003): In 2001, the Company initiated
the phased Operational Efficiency Program aimed at improving the Company's
operating and capital productivity and competitiveness. The first phase of the
Operational Efficiency Program was to complete merger-related restructuring
activities in TELUS Mobility and the reorganization for TELUS Communications.
The second phase of the Operational Efficiency Program, which commenced at the
beginning of 2002, continued to focus on reducing staff, but also entailed a
comprehensive review of enterprise-wide processes to identify capital and
operational efficiency opportunities. The third phase of the Operational
Efficiency Program, which commenced in the third quarter of 2002, was focused on
operationalizing the initiatives identified during the second phase review and
included: streamlining of business processes; reducing the TELUS product
portfolio and processes that support them; optimizing the use of real estate,
networks and other assets; improving customer order management; reducing the
scope of corporate support functions; consolidating operational and
administrative functions; and consolidating customer contact centres.
As at June 30, 2005, no future expenses remain to be accrued or recorded
under the Operational Efficiency Program (2001-2003), but variances from
estimates currently recorded may be recorded in subsequent periods.
5. Financing Costs
Three months Six months
Periods ended June 30 (millions) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt $ 175.9 $ 162.9 $ 333.7 $ 326.5
Interest on short-term obligations and other 2.6 4.6 3.8 6.4
Foreign exchange(1) 0.6 (0.1) 3.1 (0.7)
----------------------------------------------------------------------------------------------------------------------------
179.1 167.4 340.6 332.2
Interest income
Interest on tax refunds (1.9) (8.3) (17.5) (26.0)
Other interest income (9.0) (2.2) (16.5) (4.3)
----------------------------------------------------------------------------------------------------------------------------
(10.9) (10.5) (34.0) (30.3)
----------------------------------------------------------------------------------------------------------------------------
$ 168.2 $ 156.9 $ 306.6 $ 301.9
============================================================================================================================
(1) For the three-month and six-month periods ended June 30, 2005, these amounts include losses of $0.1
(2004 - $0.4) and $0.1 (2004 - $0.7), respectively, in respect of cash flow hedge ineffectiveness;
no gains or losses were experienced arising from fair value hedge ineffectiveness.
6. Income Taxes
Three months Six months
Periods ended June 30 (millions) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Current $ 2.7 $ (53.8) $ (18.7) $ (83.0)
Future 103.3 98.7 195.0 190.5
----------------------------------------------------------------------------------------------------------------------------
$ 106.0 $ 44.9 $ 176.3 $ 107.5
============================================================================================================================
The Company's income tax expense differs from that calculated by applying statutory rates for the following reasons:
Three-month periods ended June 30 ($ in
millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 102.5 34.5% $ 75.8 34.7%
Tax rate differential on, and consequential
adjustments from, reassessment of prior year
tax issues -- (34.2)
Share option compensation 0.8 1.5
Revaluation of future tax assets and
liabilities for changes in statutory income
tax rates -- (1.2)
Other (1.2) (0.8)
----------------------------------------------------------------------------------------------------------------------------
102.1 34.4% 41.1 18.8%
Large corporations tax 3.9 3.8
----------------------------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated Statements
of Income $ 106.0 35.7% $ 44.9 20.6%
============================================================================================================================<
Six-month periods ended June 30 ($ in millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 211.2 34.5% $ 132.9 34.7%
Change in estimates of available deductible
differences in prior years (36.0) --
Tax rate differential on, and consequential
adjustments from, reassessment of prior year
tax issues (11.3) (35.8)
Share option compensation 2.1 3.4
Revaluation of future tax assets and
liabilities for changes in statutory income
tax rates -- (2.5)
Other 1.2 0.4
----------------------------------------------------------------------------------------------------------------------------
167.2 27.4% 98.4 25.7%
Large corporations tax 9.1 9.1
----------------------------------------------------------------------------------------------------------------------------
Income tax expense per Consolidated Statements
of Income $ 176.3 28.8% $ 107.5 28.1%
============================================================================================================================
7. Per Share Amounts
Basic income per Common Share and Non-Voting Share is calculated by
dividing Common Share and Non-Voting Share income by the total weighted
average Common Shares and Non-Voting Shares outstanding during the period.
Diluted income per Common Share and Non-Voting Share is calculated to give
effect to share options and warrants and shares issuable on conversion of
debentures.
The following tables present the reconciliations of the numerators and
denominators of the basic and diluted per share computations.
Three months Six months
Periods ended June 30 (millions) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Net income $ 189.5 $ 172.3 $ 431.7 $ 273.6
Deduct:
Preference and preferred share dividends -- 0.8 -- 1.7
Redemption premium on preference and preferred
shares in excess of amount chargeable to
contributed surplus -- -- -- 2.3
----------------------------------------------------------------------------------------------------------------------------
Basic Common Share and Non-Voting Share income 189.5 171.5 431.7 269.6
Add: Interest charges applicable to convertible
debentures, net of income tax effects -- 1.8 -- --
----------------------------------------------------------------------------------------------------------------------------
Diluted Common Share and Non-Voting Share income $ 189.5 $ 173.3 $ 431.7 $ 269.6
============================================================================================================================
Three months Six months
Periods ended June 30 (millions) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Basic total weighted average Common Shares and
Non-Voting Shares outstanding 358.1 354.3 359.1 353.7
Effect of dilutive securities
Exercise of share options and warrants 4.3 2.0 3.8 2.3
Exercise of convertible debentures
conversion option -- 3.8 -- --
----------------------------------------------------------------------------------------------------------------------------
Diluted total weighted average Common Shares
and Non-Voting Shares outstanding 362.4 360.1 362.9 356.0
============================================================================================================================
For the three-month and six-month periods ended June 30, 2005, certain
outstanding share options, in the amount of 0.2 million (2004 - 18.9
million) and 0.8 million (2004 - 18.6 million), respectively, were not
included in the computation of diluted income per Common Share and
Non-Voting Share because the share options' exercise prices were greater
than the average market price of the Common Shares and Non-Voting Shares
during the reported periods. Convertible debentures, which were
convertible into 3.8 million shares, were not included in the computation
of diluted income per Common Share and Non-Voting Share for the six-month
period ended June 30, 2004, as they were antidilutive (see Note 12(b)).
8. Share-Based Compensation
(a) Details of Share-Based Compensation Expense
Reflected in the Consolidated Statements of Income as "Operations expense"
are the following share-based compensation amounts:
Three months Six months
Periods ended June 30 (millions) 2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------
Share options $ 2.1 $ 4.4 $ 6.3 $ 9.8
Other share-based compensation 5.0 1.5 8.7 2.6
--------------------------------------------------------------------------------------------------------------
$ 7.1 $ 5.9 $ 15.0 $ 12.4
==============================================================================================================
(b) Share Options
Effective January 1, 2004, for purposes of Canadian generally accepted
accounting principles, the Company applies the fair value based method of
accounting for share-based compensation awards granted to employees. As
only share options granted after 2001 are included, the compensation
expense arising from share options is not likely to be representative of
the effects on reported net income for future years. Share options
typically vest over a three-year period and the vesting method of options,
which is determined at the date of grant, may be either cliff or graded.
The weighted average fair value of options granted, and the weighted
average assumptions used in the fair value estimation at the time of
grant, using the Black-Scholes model, are as follows:
Three months Six months
Periods ended June 30 2005 2004 2005 2004
---------------------------------------------------------------------------------------------------------------
Share option fair value (per share option) $ 12.00 $ 6.77 $ 11.29 $ 7.74
Risk free interest rate 3.7% 3.9% 3.7% 3.8%
Expected lives (years) 4.5 4.5 4.5 4.5
Expected volatility 40.0% 40.0% 40.0% 40.0%
Dividend yield 2.1% 2.7% 2.3% 2.4%
---------------------------------------------------------------------------------------------------------------
(c) Other Share-Based Compensation
The Company uses restricted stock units as a form of incentive
compensation. Each restricted stock unit is equal in value to one
Non-Voting Share and the dividends that would have arisen thereon had it
been an issued and outstanding Non-Voting Share are recorded as additional
restricted stock units during the life of the restricted stock unit. The
restricted stock units become payable as they vest over their lives
(typically the vesting period is 33 months and the vesting method, which
is determined at the date of grant, may be either cliff or graded). The
following table presents a summary of the activity related to the
Company's restricted stock units.
Periods ended June 30, 2005 Three months Six months
------------------------------------------------------------------------------------------------------
Number of Number of
restricted Weighted restricted Weighted
stock units average price stock units average price
------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 1,612,385 998,487
Issued
Initial allocation 15,380 $36.80 777,512 $ 36.01
In lieu of dividends 7,756 42.44 16,307 39.80
Settled (3,063) 38.80 (124,069) 34.19
Forfeited and cancelled (12,579) 41.79 (48,358) 41.79
------------------------------------------------------------------------------------------------------
Outstanding, end of period 1,619,879 1,619,879
======================================================================================================
With respect to restricted stock units issued in the first quarter of
2005, and which cliff vest in the fourth quarter of 2007, the Company
entered into a cash-settled equity forward agreement that fixes the cost
to the Company at $40.91 per restricted stock unit in respect of 600,000
restricted stock units. Similarly, in 2004, with respect to restricted
stock units issued in the first quarter of 2004, and which cliff vest in
the fourth quarter of 2006, the Company entered into a cash-settled equity
forward agreement that fixes the cost to the Company at $26.61 per
restricted stock unit in respect of 652,550 restricted stock units.
9. Accounts Receivable
On July 26, 2002, TELUS Communications Inc., a wholly-owned subsidiary of
TELUS, entered into an agreement, which was amended September 30, 2002,
with an arm's-length securitization trust under which TELUS Communications
Inc. is able to sell an interest in certain of its trade receivables up to
a maximum of $650 million. As a result of selling the interest in certain
of the trade receivables on a fully-serviced basis, a servicing liability
is recognized on the date of sale and is, in turn, amortized to earnings
over the expected life of the trade receivables. This "revolving-period"
securitization agreement has an initial term ending July 18, 2007. TELUS
Communications Inc. is required to maintain at least a BBB (low) credit
rating by Dominion Bond Rating Service or the securitization trust may
require the sale program to be wound down prior to the end of the initial
term; at June 30, 2005, the rating was BBB (high).
As at As at
June 30, December 31,
(millions) 2005 2004
-----------------------------------------------------------------------------
Total managed portfolio $ 1,002.6 $ 1,021.7
Securitized receivables (180.6) (181.3)
Retained interest in receivables sold 24.3 23.1
-----------------------------------------------------------------------------
Receivables held $ 846.3 $ 863.5
=============================================================================
For the three-month and six-month periods ended June 30, 2005, the Company
recognized losses of $0.3 million (2004 - $0.4 million) and $0.7 million
(2004 - $0.2 million), respectively, on the sale of receivables arising
from the securitization.
Cash flows from the securitization are as follows:
Three months Six months
Periods ended June 30 (millions) 2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization,
beginning of period $ 150.0 $ 150.0 $ 150.0 $ 300.0
Securitization reduction payments -- -- -- (150.0)
-------------------------------------------------------------------------------------------------------------------
Cumulative proceeds from securitization,
end of period $ 150.0 $ 150.0 $ 150.0 $ 150.0
-------------------------------------------------------------------------------------------------------------------
Proceeds from collections reinvested in
revolving period securitizations $ 361.9 $ 372.5 $ 714.6 $ 1,055.0
-------------------------------------------------------------------------------------------------------------------
Proceeds from collections pertaining to retained
interest $ 58.4 $ 68.2 $ 112.9 $ 200.5
===================================================================================================================
10. Capital Assets
(a) Capital Assets, Net
Accumulated
Depreciation and
Cost Amortization Net Book Value
----------------------------------------------------------------------------------------------------------------------------
(millions) As at As at
June 30, December 31,
2005 2004
----------------------------------------------------------------------------------------------------------------------------
Property, plant, equipment and other
Telecommunications assets $ 17,260.8 $ 11,631.6 $ 5,629.2 $ 5,814.3
Assets leased to customers 523.6 438.6 85.0 106.5
Buildings and leasehold improvements 1,700.4 874.2 826.2 852.6
Office equipment and furniture 993.1 727.0 266.1 253.8
Assets under capital lease 18.7 5.0 13.7 11.7
Other 322.3 235.4 86.9 91.1
Land 46.7 - 46.7 46.8
Assets under construction 503.6 - 503.6 329.6
Materials and supplies 22.7 - 22.7 21.8
----------------------------------------------------------------------------------------------------------------------------
21,391.9 13,911.8 7,480.1 7,528.2
----------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscriber base 362.9 105.5 257.4 268.2
Software 1,137.0 798.9 338.1 388.4
Access to rights-of-way and other 124.8 47.8 77.0 80.4
----------------------------------------------------------------------------------------------------------------------------
1,624.7 952.2 672.5 737.0
----------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 3,983.1 1,018.5 2,964.6 2,955.8
----------------------------------------------------------------------------------------------------------------------------
$ 26,999.7 $ 15,882.5 $ 11,117.2 $ 11,221.0
============================================================================================================================
(1) Accumulated amortization of spectrum licences is amortization recorded prior to 2002 and the transitional impairment amount.
Included in capital expenditures for the three-month and six-month periods
ended June 30, 2005, were additions of intangible assets subject to
amortization of $48.0 million (2004 - $56.1 million) and $86.0 million
(2004 - $89.0 million), respectively, and intangible assets with
indefinite lives of NIL (2004 - NIL) and $8.8 million (2004 - NIL),
respectively.
(b) Intangible Assets Subject to Amortization
Estimated aggregate amortization expense for intangible assets subject to
amortization, calculated upon such assets held as at June 30, 2005, for
each of the next five fiscal years is as follows:
Years ending December 31 (millions)
------------------------------------------------------------------------------------------------------
2005 (balance of year) $ 129.7
2006 177.4
2007 90.9
2008 23.7
2009 9.7
11. Goodwill
Periods ended June 30, 2005 (millions) Three months Six months
------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 3,147.5 $ 3,126.8
Goodwill arising from acquisitions 1.5 24.5
Foreign exchange on goodwill of self-sustaining foreign operations 1.1 (1.2)
------------------------------------------------------------------------------------------------------
Balance, end of period $ 3,150.1 $ 3,150.1
=======================================================================================================
Ambergris Solutions Inc.: The goodwill addition in the six-month period
ended June 30, 2005, none of which is expected to be deductible for tax
purposes, arose from the cash acquisition of an effective 52.5% economic
interest in Ambergris Solutions Inc., a business process outsourcing
company. The acquisition was effected in two steps: one on February 15,
2005, for an effective 49% economic interest and one on May 13, 2005, for
an effective 3.5% economic interest. The initial effective 49% economic
interest resulted in the Company controlling Ambergris Solutions Inc. as
the Company controlled, but did not wholly-own, an intermediate holding
company which, in turn, controlled, but did not wholly-own, Ambergris
Solutions Inc. This investment was made with a view to enhancing the
Company's competitiveness in contact centre offerings. The primary factor
that contributed to a purchase price that resulted in the recognition of
goodwill is the low degree of net tangible assets in the industry relative
to the market value of established Asian operations. Effective February
15, 2005, Ambergris Solutions Inc.'s results are included in the Company's
Consolidated Statements of Income and are included in the Company's
Communications segment.
The following is a summarized balance sheet disclosing the preliminary
fair values assigned to each major asset and liability class as at the
date of acquisition:
Operational and
foreign exchange
February 15, adjustments arising
2005 May 13, between purchase
(millions) purchase 2005 purchase dates Total
----------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets $ 9.2 $ 0.3 $ (1.1) $ 8.4
----------------------------------------------------------------------------------------------------------------------------
Capital Assets, Net 10.3 0.5 2.5 13.3
----------------------------------------------------------------------------------------------------------------------------
Other Assets
Other 0.5 - - 0.5
Goodwill 23.0 1.5 - 24.5
----------------------------------------------------------------------------------------------------------------------------
23.5 1.5 - 25.0
----------------------------------------------------------------------------------------------------------------------------
$ 43.0 $ 2.3 $ 1.4 $ 46.7
----------------------------------------------------------------------------------------------------------------------------
Liabilities
Current Liabilities $ 5.5 $ 0.2 $ 1.2 $ 6.9
Future Income Taxes 5.3 0.2 (0.1) 5.4
----------------------------------------------------------------------------------------------------------------------------
10.8 0.4 1.1 12.3
----------------------------------------------------------------------------------------------------------------------------
Non-Controlling Interest 4.7 - 0.3 5.0
----------------------------------------------------------------------------------------------------------------------------
Purchase Price 27.5 1.9 - 29.4
----------------------------------------------------------------------------------------------------------------------------
$ 43.0 $ 2.3 $ 1.4 $ 46.7
============================================================================================================================
The following pro forma supplemental information represents certain results of operations as if the business acquisitions
had been completed as at the beginning of the periods presented.
Three-month periods ended June 30 ($ in millions
except per share amounts) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
As reported Pro forma(1) As reported Pro forma(2)
Operating revenues $ 2,018.5 $ 2,018.5 $ 1,865.6 $ 1,876.7
Net income $ 189.5 $ 189.5 $ 172.3 $ 172.7
Income per Common Share and Non-Voting Share
- Basic $ 0.53 $ 0.53 $ 0.48 $ 0.49
- Diluted $ 0.52 $ 0.52 $ 0.48 $ 0.48
----------------------------------------------------------------------------------------------------------------------------
Six-month periods ended June 30 ($ in millions
except per share amounts) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
As reported Pro forma(1) As reported Pro forma(2)
Operating revenues $ 3,993.2 $ 3,998.0 $ 3,669.4 $ 3,697.3
Net income $ 431.7 $ 432.2 $ 273.6 $ 276.2
Income per Common Share and Non-Voting Share
- Basic $ 1.20 $ 1.20 $ 0.76 $ 0.77
- Diluted $ 1.19 $ 1.19 $ 0.76 $ 0.76
----------------------------------------------------------------------------------------------------------------------------
(1) Pro forma amounts for 2005 reflect Ambergris Solutions Inc.
(2) Pro forma amounts for 2004 reflect Ambergris Solutions Inc. and ADCOM,
Inc. ADCOM, Inc. was purchased effective November 15, 2004, and its
results have been included in the Company's Consolidated Statements of
Income effective the same date.
12. Long-Term Debt
(a) Details of Long-Term Debt
As at As at
($ in millions) June 30, December 31,
Series Rate of interest Maturity 2005 2004
----------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Notes
CA 7.5%(1) June 2006 $ 1,575.7 $ 1,574.6
U.S. (2) 7.5%(1) June 2007 1,426.6 1,398.6
U.S. (3) 8.0%(1) June 2011 2,349.8 2,303.9
----------------------------------------------------------------------------------------------------------------------------
5,352.1 5,277.1
----------------------------------------------------------------------------------------------------------------------------
TELUS Corporation Convertible Debentures
6.75%(1) June 2010 -- 141.6
----------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Debentures
1 12.00%(1) May 2010 50.0 50.0
2 11.90%(1) November 2015 125.0 125.0
3 10.65%(1) June 2021 175.0 175.0
5 9.65%(1) April 2022 249.0 249.0
B 8.80%(1) September 2025 200.0 200.0
----------------------------------------------------------------------------------------------------------------------------
799.0 799.0
----------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. First Mortgage Bonds
U 11.50%(1) July 2010 30.0 30.0
----------------------------------------------------------------------------------------------------------------------------
TELUS Communications Inc. Medium Term Notes
1 7.10%(1) February 2007 70.0 70.0
----------------------------------------------------------------------------------------------------------------------------
Capital leases issued at varying rates of interest from 4.1% to 18.7% and maturing
on various dates up to 2013 13.5 10.7
----------------------------------------------------------------------------------------------------------------------------
Other 7.5 8.1
----------------------------------------------------------------------------------------------------------------------------
Total debt 6,272.1 6,336.5
Less - current maturities 1,581.0 4.3
----------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 4,691.1 $ 6,332.2
============================================================================================================================
(1) Interest is payable semi-annually.
(2) Principal face value of notes is U.S.$1,166.5 million (December 31, 2004 - U.S.$1,166.5 million).
(3) Principal face value of notes is U.S.$1,925.0 million (December 31, 2004 - U.S.$1,925.0 million).
(b) TELUS Corporation Convertible Debentures
The 6.75% convertible debentures were unsecured, subordinated obligations
of the Company that were to mature on June 15, 2010, and were convertible
at the holders' option into Non-Voting Shares of the Company at a rate
reflecting a share price of $39.73. The convertible debentures were not
redeemable prior to June 15, 2003. Redemption in the period from June 15,
2003, through June 15, 2005, was allowed if the average trading price of
the Non-Voting Shares for a defined period exceeds 125% of the conversion
price.
The holder's embedded conversion option was valued using the residual
value approach and was presented as a component of shareholders' equity
(see Note 13(a)).
On May 9, 2005, the Company provided notice of redemption for its
convertible debentures at par, plus accrued and unpaid interest, for
redemption on June 16, 2005.
During the three-month and six-month periods ended June 30, 2005,
convertible debenture holders exercised conversion options resulting in
$131.7 million of convertible debenture principal being converted into
3,315,218 Non-Voting Shares and $131.7 million of convertible debenture
principal being converted into 3,316,047 Non-Voting Shares, respectively
(see Note 13(b)). The conversion options in respect of $17.9 million of
convertible debenture principal were not exercised and this principal
amount was redeemed on June 16, 2005.
(c) TELUS Corporation Credit Facilities
On May 4, 2005, TELUS Corporation entered into a new $1.6 billion bank
credit facility with a syndicate of financial institutions. The new credit
facilities consist of: i) an $800 million (or U.S. Dollar equivalent)
revolving credit facility expiring on May 7, 2008, to be used for general
corporate purposes, and ii) an $800 million (or U.S. Dollar equivalent)
revolving credit facility expiring on May 4, 2010, to be used for general
corporate purposes. These new facilities replaced the Company's existing
committed credit facilities prior to the availability termination dates of
such facilities.
TELUS Corporation's new credit facilities are unsecured and bear interest
at prime rate, U.S. Dollar Base Rate, a bankers' acceptance rate or London
interbank offered rate ("LIBOR") (all such terms as used or defined in the
credit facilities), plus applicable margins. The credit facilities contain
customary representations, warranties and covenants including two
financial quarter end financial ratio tests. The financial ratio tests are
that the Company may not permit its long-term debt to operating cash flow
ratio to exceed 4.0:1 and may not permit its operating cash flow to
interest expense ratio to be less than 2.0:1, each as defined under the
credit facilities.
Continued access to TELUS Corporation's credit facilities is not
contingent on the maintenance by TELUS Corporation of a specific credit
rating.
No amounts were drawn under the Company's credit facilities as at June 30,
2005, and December 31, 2004.
(d) Debt Covenants
As at June 30, 2005, the Company and its subsidiaries are in compliance
with all of their debt covenants.
(e) Long-Term Debt Maturities
Anticipated requirements to meet long-term debt repayments during each of
the five years ending December 31 are as follows:
(millions) Total(1)
---------------------------------------------------------------------------
2005 (balance of year) $ 2.9
2006 1,587.6
2007 1,871.2
2008 3.2
2009 2.0
(1) Where applicable, repayments reflect hedged foreign exchange rates
13. Shareholders' Equity
(a) Details of Shareholders' Equity
As at As at
June 30, December 31,
($ in millions except per share amounts) 2005 2004
-----------------------------------------------------------------------------
Convertible debentures conversion option
(Note 12(b)) $ -- $ 8.8
-----------------------------------------------------------------------------
Preferred equity
Authorized Amount
First Preferred Shares 1,000,000,000
Second Preferred Shares 1,000,000,000
Common equity
Share capital
Shares
Authorized Amount
Common Shares 1,000,000,000
Non-Voting Shares 1,000,000,000
Issued
Common Shares (b) 2,360.8 2,407.5
Non-Voting Shares (b) 3,595.9 3,426.7
-----------------------------------------------------------------------------
5,956.7 5,834.2
-----------------------------------------------------------------------------
Other
Options and warrants (c) 12.8 26.9
Accrual for shares issuable
under channel stock incentive plan (d) -- 0.8
-----------------------------------------------------------------------------
12.8 27.7
-----------------------------------------------------------------------------
Cumulative foreign currency translation adjustment (4.1) (2.2)
Retained earnings 1,044.6 1,008.1
Contributed surplus (e) 144.7 149.0
-----------------------------------------------------------------------------
7,154.7 7,016.8
-----------------------------------------------------------------------------
Total Shareholders' Equity $ 7,154.7 $ 7,025.6
=============================================================================
(b) Changes in Common Shares and Non-Voting Shares
Periods ended June 30, 2005 Three months Six months
----------------------------------------------------------------------------------------------------------------------------
Number of Amount Number of Amount
shares (millions) shares (millions)
----------------------------------------------------------------------------------------------------------------------------
Common Shares
Beginning of period 190,891,999 $ 2,389.0 192,748,738 $ 2,407.5
Exercise of share options (f) 267,887 9.0 588,890 17.7
Purchase of shares for cancellation pursuant
to normal course issuer bid (g) (2,972,500) (37.2) (5,069,600) (63.4)
Expiration of predecessor share exchange
privilege (h) -- -- (80,642) (1.0)
----------------------------------------------------------------------------------------------------------------------------
End of period 188,187,386 $ 2,360.8 188,187,386 $ 2,360.8
----------------------------------------------------------------------------------------------------------------------------
Non-Voting Shares
Beginning of period 167,491,890 $ 3,477.3 165,803,123 $ 3,426.7
Exercise of warrants (c) 276,434 10.2 278,458 10.3
Exercise of convertible debenture conversion
option 3,315,218 132.9 3,316,047 132.9
Channel stock incentive plan (d) -- -- 12,225 0.4
Exercise of share options (f) 1,701,022 49.0 5,437,138 141.9
Purchase of shares for cancellation pursuant
to normal course issuer bid (g) (3,540,200) (73.5) (5,576,300) (115.7)
Expiration of predecessor share exchange
privilege (h) -- -- (26,327) (0.6)
----------------------------------------------------------------------------------------------------------------------------
End of period 169,244,364 $ 3,595.9 169,244,364 $ 3,595.9
============================================================================================================================
(c) Options and Warrants
Upon its acquisition of Clearnet Communications Inc. ("Clearnet") in 2000,
the Company was required to record the intrinsic value of Clearnet options
and warrants outstanding at that time. As these options and warrants are
exercised, the corresponding intrinsic values are reclassified to share
capital. As these options and warrants are forfeited or as they expire, the
corresponding intrinsic values are reclassified to contributed surplus.
Proceeds arising from the exercise of these options and warrants are credited
to share capital.
Under the terms of the arrangement to acquire Clearnet, effective January 18,
2001, TELUS Corporation exchanged the warrants held by former Clearnet
warrant holders. Each warrant entitles the holder to purchase a Non-Voting
Share at a price of U.S.$10.00 per share until September 15, 2005.
(d) Channel Stock Incentive Plan
The Company initiated the Plan to increase sales of various products and
services by providing additional performance-based compensation in the form
of Non-Voting Shares. During the first half of 2005, terms of the Plan were
amended such that the Non-Voting Shares earned were no longer to be issued
from Treasury and, as a result, as at June 30, 2005, Non-Voting Shares earned
are no longer accrued as a component of Common Equity.
(e) Contributed Surplus
The following table presents a summary of the activity related to the
Company's contributed surplus for the three-month and six-month periods ended
June 30, 2005:
Periods ended June 30, 2005 (millions) Three months Six months
---------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 143.7 $ 149.0
Share option expense recognized in period (Note 8(a)) 2.1 6.3
Share option expense reclassified to Non-Voting Share capital
account upon exercise of share options (2.3) (11.8)
Unexercised, expired convertible debenture conversion option 1.2 1.2
---------------------------------------------------------------------------------------------------------------
Balance, end of period $ 144.7 $ 144.7
==============================================================================================================
(f) Share Option Plans
The Company has a number of share option plans under which directors,
officers and other employees receive options to purchase Common Shares and/or
Non-Voting Shares at a price equal to the fair market value at the time of
grant. Options granted under the plans may be exercised over specific periods
not to exceed ten years from the time of grant.
The following table presents a summary of the activity related to the
Company's share options plans for the periods ended June 30.
Periods ended June 30, 2005 Three months Six months
--------------------------------------------------------------------------------------------------------------
Number of Weighted Number of Weighted
share average share share average share
options option price options option price
--------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 18,180,201 $ 27.51 21,914,760 $ 26.07
Granted 34,450 37.52 1,160,315 35.60
Exercised (1,968,909) 26.76 (6,026,028) 23.32
Forfeited (65,197) 29.79 (727,647) 26.48
Expired and cancelled -- -- (140,855) 41.63
--------------------------------------------------------------------------------------------------------------
Outstanding, end of period 16,180,545 27.62 16,180,545 27.62
==============================================================================================================
(g) Purchase of Shares for Cancellation Pursuant to Normal Course Issuer Bid
The Company purchased, for cancellation, Common Shares and Non-Voting Shares
pursuant to a normal course issuer bid that runs for a twelve-month period
ending December 19, 2005, for up to 14.0 million Common Shares and 11.5
million Non-Voting Shares. The excess of the purchase price over the average
stated value of shares purchased for cancellation was charged to retained
earnings. The Company ceases to consider shares outstanding on the date of
the Company's purchase of its shares although the actual cancellation of the
shares by the transfer agent and registrar occurs on a timely basis on a date
shortly thereafter. As at June 30, 2005, 223,000 Common Shares and 392,900
Non-Voting Shares had been purchased and had not yet been cancelled.
Period ended June 30, 2005 ($ in millions) Three months
------------------------------------------------------------------------------------------------------------------
Purchase price
------------------------------------------------
Charged to
Number of Charged to retained
shares Paid share capital earnings
------------------------------------------------------------------------------------------------------------------
Common Shares purchased for cancellation
Prior to beginning of period 2,852,811 $ 108.9 $ 35.6 $ 73.3
During period 2,972,500 126.9 37.2 89.7
------------------------------------------------------------------------------------------------------------------
Cumulative total 5,825,311 $ 235.8 $ 72.8 $ 163.0
------------------------------------------------------------------------------------------------------------------
Non-Voting Shares purchased for cancellation
Prior to beginning of period 3,487,500 $ 127.4 $ 72.2 $ 55.2
During period 3,540,200 145.2 73.5 71.7
------------------------------------------------------------------------------------------------------------------
Cumulative total 7,027,700 $ 272.6 $ 145.7 $ 126.9
------------------------------------------------------------------------------------------------------------------
Common Shares and Non-Voting Shares purchased
for cancellation
Prior to beginning of period 6,340,311 $ 236.3 $ 107.8 $ 128.5
During period 6,512,700 272.1 110.7 161.4
-----------------------------------------------------------------------------------------------------------------
Cumulative total 12,853,011 $ 508.4 $ 218.5 $ 289.9
=================================================================================================================
Period ended June 30, 2005 ($ in millions) Six months
------------------------------------------------------------------------------------------------------------------
Purchase price
------------------------------------------------
Charged to
Number of Charged to retained
shares Paid share capital earnings
------------------------------------------------------------------------------------------------------------------
Common Shares purchased for cancellation
Prior to beginning of period 755,711 $ 27.3 $ 9.4 $ 17.9
During period 5,069,600 208.5 63.4 145.1
------------------------------------------------------------------------------------------------------------------
Cumulative total 5,825,311 $ 235.8 $ 72.8 $ 163.0
------------------------------------------------------------------------------------------------------------------
Non-Voting Shares purchased for cancellation
Prior to beginning of period 1,451,400 $ 50.7 $ 30.0 $ 20.7
During period 5,576,300 221.9 115.7 106.2
------------------------------------------------------------------------------------------------------------------
Cumulative total 7,027,700 $ 272.6 $ 145.7 $ 126.9
------------------------------------------------------------------------------------------------------------------
Common Shares and Non-Voting Shares purchased
for cancellation
Prior to beginning of period 2,207,111 $ 78.0 $ 39.4 $ 38.6
During period 10,645,900 430.4 179.1 251.3
------------------------------------------------------------------------------------------------------------------
Cumulative total 12,853,011 $ 508.4 $ 218.5 $ 289.9
==================================================================================================================
(h) Expiration of Predecessor Share Exchange Privilege
As set out in the Joint Management Proxy Circular of December 8, 1998,
holders of BC TELECOM Inc. Common Shares and holders of Alberta-based TELUS
Corporation Common Shares had six years to exchange their shares for shares
that have become what are now the Company's Common Shares and Non-Voting
Shares; such period elapsed on January 31, 2005. The amounts corresponding
with the unexchanged shares have been removed from the equity accounts.
(i) Employee Share Purchase Plan
The Company has an employee share purchase plan under which eligible
employees can purchase Common Shares through regular payroll deductions by
contributing between 1% and 10% of their pay. The Company contributes 45%,
for the employee population up to a certain job classification, for every
dollar contributed by an employee, to a maximum of 6% of employee pay; for
more highly compensated job classifications, the Company contributes 40%. The
Company records its contributions as a component of operating expenses.
Three months Six months
Periods ended June 30 (millions) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------
Employee contributions $ 13.9 $ 14.2 $ 32.7 $ 29.4
Company contributions 5.9 5.7 14.0 11.8
----------------------------------------------------------------------------------------------------
$ 19.8 $ 19.9 $ 46.7 $ 41.2
----------------------------------------------------------------------------------------------------
Source of Common Shares purchased
Market purchase $ 19.8 5.4 46.7 9.1
Treasury issuance -- 14.5 -- 32.1
----------------------------------------------------------------------------------------------------
$ 19.8 $ 19.9 $ 46.7 $ 41.2
----------------------------------------------------------------------------------------------------
Under this plan, the Company has the option of offering shares from Treasury
or having the trustee acquire shares in the stock market. Prior to February
2001 and subsequent to November 1, 2004, all Common Shares issued to
employees under the plan were purchased on the market at normal trading
prices; in the intervening period, shares were also issued from Treasury.
(j) Dividend Reinvestment and Share Purchase Plan
The Company has a Dividend Reinvestment and Share Purchase Plan under which
eligible shareholders may acquire Non-Voting Shares through the reinvestment
of dividends and additional optional cash payments. Excluding Non-Voting
Shares purchased by way of additional optional cash payments, the Company, at
its discretion, may offer the Non-Voting Shares at up to a 5% discount from
the market price. During the six-month period ended June 30, 2005, the
Company did not offer Non-Voting Shares at a discount. Shares purchased
through optional cash payments are subject to a minimum investment of $100
per transaction and a maximum investment of $20,000 per calendar year.
Under this Plan, the Company has the option of offering shares from Treasury
or having the trustee acquire shares in the stock market. Prior to July 1,
2001, when the acquisition of shares from Treasury commenced, all Non-Voting
Shares were acquired in the market at normal trading prices; acquisition in
the market at normal trading prices recommenced on January 1, 2005.
In respect of Common Share and Non-Voting Share dividends declared during the
three-month and six-month periods ended June 30, 2005, $2.1 million (2004 -
$7.6 million) and $4.0 million (2004 - $13.3 million), respectively, was to
be reinvested in Non-Voting Shares.
(k) Shares Reserved for Issuance
(millions) As at June 30, 2005
---------------------------------------------------------------------------
Common Non-Voting
Shares Shares
---------------------------------------------------------------------------
For exercise of:
Share options 2.2 24.2
Warrants -- 0.3
---------------------------------------------------------------------------
2.2 24.5
===========================================================================
14. Commitments and Contingent Liabilities
(a) CRTC Decisions 2002-34 and 2002-43 Deferral Accounts
On May 30, 2002, and on July 31, 2002, the Canadian Radio-television and
Telecommunications Commission ("CRTC") issued Decisions 2002-34 and
2002-43, respectively, and introduced the concept of a deferral account.
The Company must make significant estimates and assumptions in respect of
the deferral accounts given the complexity and interpretation required of
Decisions 2002-34 and 2002-43. Accordingly, the Company estimates, and
records, a liability (see Note 15(b)) to the extent that activities it has
undertaken, other qualifying events and realized rate reductions for
Competitor Services do not extinguish it. Management is required to make
estimates and assumptions in respect of the offsetting nature of these
items. If the CRTC, upon its annual review of the Company's deferral
account, disagrees with management's estimates and assumptions, the CRTC
may adjust the deferral account balance and such adjustment may be
material.
On March 24, 2004, the CRTC issued Telecom Public Notice CRTC 2004-1
"Review and disposition of the deferral accounts for the second price cap
period" which initiated a public proceeding inviting proposals on the
disposition of the amounts accumulated in the incumbent local exchange
carriers' deferral accounts during the first two years of the second price
cap period. The Company is uncertain when the CRTC will make its
determination on this proceeding.
Due to the Company's use of the liability method of accounting for the
deferral account, the CRTC Decision 2005-6, as it relates to the Company's
provision of Competitor Digital Network services, is not expected to affect
the Company's revenues. To the extent that the CRTC Decision 2005-6
requires the Company to provide discounts on Competitor Digital Network
services, both for current and prior periods, the Company draws down the
deferral account by an offsetting amount. For the three-month and six-month
periods ended June 30, 2005, the Company drew down the deferral account by
$11.4 million and $29.8 million, respectively, in respect of discounts on
Competitor Digital Network services.
(b) Labour Negotiations
Collective bargaining with the Telecommunications Workers Union: In 2000,
TELUS commenced collective bargaining with the Telecommunications Workers
Union for a new collective agreement replacing the multiple legacy
agreements from BC TELECOM and Alberta-based TELUS. This is the first round
of collective bargaining since the merger of BC TELECOM and TELUS Alberta
and the Company's aim is to replace the legacy collective agreements with a
single collective agreement for the new bargaining unit.
During the fourth quarter of 2002, the Company's application to the Federal
Minister of Labour, as provided for under the Canada Labour Code,
requesting the appointment of a federal conciliator was granted. In the
first quarter of 2004, the extended conciliation process, that included a
global review of all outstanding issues, concluded and the outstanding
issues were not resolved. On January 15, 2004, the Federal Minister of
Labour appointed the two conciliators as mediators to continue to work with
the Company and the Telecommunications Workers Union towards a possible
resolution.
On January 28, 2004, the Canada Industrial Relations Board ruled, in
response to an unfair labour practice complaint filed by the
Telecommunications Workers Union, that the Company must make an offer of
binding arbitration to the Telecommunications Workers Union to settle the
collective agreement between the parties. The Company made the offer of
binding arbitration on January 29, 2004, and on January 30, 2004, the
Telecommunications Workers Union accepted the offer. The Company filed an
application for reconsideration and on February 2, 2005, the Canada
Industrial Relations Board reversed the decision that placed the parties in
binding arbitration. Subsequently, the Telecommunications Workers Union
filed an application in the Federal Court of Appeal, which was heard on May
31 - June 1, 2005, seeking to overturn the Canada Industrial Relations
Board's reconsideration decision and restore the order that placed the
parties in binding arbitration. On 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.
On April 18, 2005, the Company delivered first notice of lockout to the
Telecommunications Workers Union. That notice, effective April 25, 2005,
included the following measures: the suspension of grievance and
arbitration processes, joint Union management committees, scheduling of
accumulated time off, payment for the first day of sickness absence and the
deferral of wage progression increases and increases in vacation
entitlements. Attempts by the Telecommunications Workers Union at the
Federal Court of Appeal and the Canada Industrial Relations Board for
interim relief against this notice were unsuccessful.
The Company was notified by the Canada Industrial Relations Board, on May
4, 2005, of an additional application by the Telecommunications Workers
Union. The Telecommunications Workers Union's application, which attempted
to amend an earlier complaint, alleged the Company's April 25, 2005,
lockout notice and measures and subsequent communications to bargaining
unit team members are not compliant with the Canada Labour Code. The
complaint sought an order to return the Company and the Telecommunications
Workers Union to binding arbitration to settle the collective agreement. On
July 21, 2005, the Canada Industrial Relations Board issued a decision on
the Telecommunications Workers Union's application which confirmed that the
Company's lockout notice and measures as well as the direct communications
of the terms of the comprehensive offer of settlement to bargaining unit
team members was compliant with the Canada Labour Code and rejected the
request for binding arbitration.
On April 13, 2005, the Company tabled a comprehensive offer to the
Telecommunications Workers Union to settle the collective agreement, which
was updated with an addendum on June 14, 2005. The Telecommunications
Workers Union responded with a counter proposal, which was rejected by the
Company on June 24, 2005. On July 12, 2005, the Company announced an
implementation strategy of the comprehensive offer of settlement with
certain terms coming into effect on July 22, 2005. The Telecommunications
Workers Union then commenced a general strike throughout British Columbia
and Alberta on July 21, 2005.
There can be no assurance that as of the date of these interim consolidated
financial statements, compensation increases will be as planned or that
reduced productivity will not occur as a result of the strike commenced by
the Telecommunications Workers Union. Should the ultimate operational and
financial impacts differ from management's assessments and assumptions, a
material adjustment to the Company's financial position and the results of
its operations could result. The operational and financial impacts of the
outcome of the appeal process on the Company are not practicably
determinable currently.
Canada Industrial Relations Board Letter Decision 1088 and Decision 278:
On May 21, 2004, the Canada Industrial Relations Board declared
TELE-MOBILE COMPANY and TELUS Communications Inc. a single employer for
labour relations purposes. The Canada Industrial Relations Board also
determined that the Mobility segment's non-unionized team members,
predominantly located in Ontario and Quebec, performing work similar to
their unionized Mobility segment counterparts in British Columbia and
Alberta, should be included in the Telecommunications Workers Union
bargaining unit without a representational vote. TELE MOBILE COMPANY and
TELUS Communications Inc. sought judicial review of this decision, which
was dismissed by the Federal Court of Appeal on December 16, 2004. A
subsequent application to the Supreme Court of Canada seeking leave to
appeal was denied on June 30, 2005.
Should the ultimate operational and financial impacts of Decision 278 and
Letter Decision 1088 differ from management's assessments and assumptions,
a material adjustment to the Company's financial position and the results
of its operations could result.
(c) Guarantees
Canadian generally accepted accounting principles require the disclosure
of certain types of guarantees and their maximum, undiscounted amounts.
The maximum potential payments represent a "worst-case scenario" and do
not necessarily reflect results expected by the Company. Guarantees
requiring disclosure are those obligations that require payments
contingent on specified types of future events. In the normal course of
its operations, the Company enters into obligations that GAAP may
consider to be guarantees. As defined by Canadian GAAP, guarantees
subject to these disclosure guidelines do not include guarantees that
relate to the future performance of the Company.
Performance guarantees: Performance guarantees contingently require a
guarantor to make payments to a guaranteed party based on a third party's
failure to perform under an obligating agreement. TELUS provides sales
price guarantees in respect of employees' principal residences as part of
its employee relocation policies. In the event that the Company is
required to honour such guarantees, it purchases (for immediate resale)
the property from the employee.
The Company has guaranteed third parties' financial obligations as part
of a facility naming rights agreement. The guarantees, in total, run
through to August 31, 2008, on a declining-balance basis and are of
limited recourse.
As at June 30, 2005, the Company has no liability recorded in respect of
the aforementioned performance guarantees.
Financial guarantees: In conjunction with its 2001 exit from the
equipment leasing business, the Company provided a guarantee to a third
party with respect to certain specified telecommunication asset and
vehicle leases. If the lessee were to default, the Company would be
required to make a payment to the extent that the realized value of the
underlying asset is insufficient to pay out the lease; in some instances,
the Company could be required to pay out the lease on a gross basis and
realize the underlying value of the leased asset itself. As at June 30,
2005, the Company has a liability of $1.0 million (December 31, 2004 -
$1.0 million) recorded in respect of these lease guarantees.
The following table quantifies the maximum undiscounted guarantee amounts
as at June 30, 2005, without regard for the likelihood of having to make
such payment.
(millions)
Performance Financial
guarantees(1) guarantees(1) Total
----------------------------------------------------------------------------
2005 (balance of year) $ 4.1 $ 2.0 $ 6.1
2006 1.5 1.7 3.2
2007 1.0 0.9 1.9
2008 0.5 0.3 0.8
2009 -- -- --
(1) Annual amounts for performance guarantees and financial guarantees
include the maximum guarantee amounts during any year of the term of the
guarantee.
Indemnification obligations: In the normal course of operations, the
Company may provide indemnification in conjunction with certain
transactions. The term of these indemnification obligations range in
duration and often are not explicitly defined. Where appropriate, an
indemnification obligation is recorded as a liability. In many cases,
there is no maximum limit on these indemnification obligations and the
overall maximum amount of the obligations under such indemnification
obligations cannot be reasonably estimated. Other than obligations
recorded as liabilities at the time of the transaction, historically the
Company has not made significant payments under these indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the
Company agreed to bear a proportionate share of the new owner's increased
directory publication costs if the increased costs were to arise from a
change in the applicable CRTC regulatory requirements. The Company's
proportionate share would be 80% through May 2006, declining to 40% in
the next five-year period and then to 15% in the final five years. As
well, should the CRTC take any action which would result in the owner
being prevented from carrying on the directory business as specified in
the agreement, TELUS would indemnify the owner in respect of any losses
that the owner incurred.
As at June 30, 2005, the Company has no liability recorded in respect of
indemnification obligations.
(d) Claims and Lawsuits
General: A number of claims and lawsuits seeking damages and other relief
are pending against the Company. It is impossible at this time for the
Company to predict with any certainty the outcome of such litigation.
However, management is of the opinion, based upon legal assessment and
information presently available, that it is unlikely that any liability,
to the extent not provided for through insurance or otherwise, would be
material in relation to the Company's consolidated financial position,
excepting the items enumerated following.
Pay equity: On December 16, 1994, the Telecommunications Workers Union
filed a complaint against BC TEL, a predecessor of TELUS Communications
Inc., with the Canadian Human Rights Commission, alleging that wage
differences between unionized male and female employees in British
Columbia were contrary to the equal pay for work of equal value
provisions in the Canadian Human Rights Act. In December 1998, the
Canadian Human Rights Commission advised that it would commence an
investigation of the Telecommunications Workers Union complaint. In
February 2003, the Canadian Human Rights Commission offered to mediate a
settlement of the complaint, but the Company declined the offer. The
Canadian Human Rights Commission referred the complaint to conciliation
under the Canadian Human Rights Act and appointed a conciliator to assist
in settling the complaint. The complaint was not resolved through
conciliation and it was referred back to the Canadian Human Rights
Commission in December 2004. The Canadian Human Rights Commission has
since decided to resume its investigation of the complaint. The Company
believes that it has good defences to the Telecommunications Workers
Union's complaint and has taken the position that it should be dismissed.
Should the ultimate resolution of the pay equity complaint differ from
management's assessment and assumptions, a material adjustment to the
Company's financial position and the results of its operations could
result.
TELUS Corporation Pension Plan and TELUS Edmonton Pension Plan: In
January 2002, the Company became aware of two statements of claim filed
in the Alberta Court of Queen's Bench on December 31, 2001, and January
2, 2002, by plaintiffs alleging to be either members or business agents
of the Telecommunications Workers Union. In one action, the three
plaintiffs alleged to be suing on behalf of all current or future
beneficiaries of the TELUS Corporation Pension Plan and in the other
action, the two plaintiffs allege to be suing on behalf of all current or
future beneficiaries of the TELUS Edmonton Pension Plan. The statement of
claim in the TELUS Corporation Pension Plan related action named the
Company, certain of its affiliates and certain present and former
trustees of the TELUS Corporation Pension Plan as defendants, and claims
damages in the sum of $445 million. The statement of claim in the TELUS
Edmonton Pension Plan related action named the Company, certain of its
affiliates and certain individuals who are alleged to be trustees of the
TELUS Edmonton Pension Plan and claims damages in the sum of $15.5
million. On February 19, 2002, the Company filed statements of defence to
both actions and also filed notices of motion for certain relief,
including an order striking out the actions as representative or class
actions. On May 17, 2002, the statements of claim were amended by the
plaintiffs and include allegations, inter alia, that benefits provided
under the TELUS Corporation Pension Plan and the TELUS Edmonton Pension
Plan are less advantageous than the benefits provided under the
respective former pension plans, contrary to applicable legislation, that
insufficient contributions were made to the plans and contribution
holidays were taken and that the defendants wrongfully used the diverted
funds, and that administration fees and expenses were improperly
deducted. The Company filed statements of defence to the amended
statements of claim on June 3, 2002. The Company believes that it has
good defences to the actions. Should the ultimate resolution of these
actions differ from management's assessment and assumptions, a material
adjustment to the Company's financial position and the results of its
operations could result.
Uncertified class action: A class action was brought August 9, 2004,
under the Class Actions Act (Saskatchewan), against a number of past and
present wireless service providers including the Company. The claim
alleges that each of the carriers is in breach of contract and has
violated competition, trade practices and consumer protection legislation
across Canada in connection with the collection of system access fees,
and seeks to recover direct and punitive damages in an unspecified
amount. The class has not been certified. The Company believes that it
has good defences to the action.
Similar proceedings have been filed by or on behalf of plaintiffs'
counsel in other provincial jurisdictions, but plaintiffs' counsel has
formally undertaken not to advance them until the Saskatchewan action has
been decided.
Should the ultimate resolution of this action differ from management's
assessments and assumptions, a material adjustment to the Company's
financial position and the results of its operations could result.
15. Additional Financial Information
(a) Income Statement
Three months Six months
Periods ended June 30 (millions) 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------------
Operations expense(1):
Cost of sales and service $ 617.6 $ 593.0 $ 1,234.1 $ 1,177.8
Selling, general and administrative 528.5 487.1 1,021.1 968.9
------------------------------------------------------------------------------------------------------------------------
$ 1,146.1 $ 1,080.1 $ 2,255.2 $ 2,146.7
------------------------------------------------------------------------------------------------------------------------
Advertising expense $ 43.3 $ 35.3 $ 80.3 $ 67.3
------------------------------------------------------------------------------------------------------------------------
(1) Cost of sales and service include cost of goods sold and costs to
operate and maintain access to and usage of the Company's
telecommunication infrastructure. Selling, general and administrative
costs include sales and marketing costs (including commissions),
customer care, bad debt expense, real estate costs and corporate
overhead costs such as information technology, finance (including
billing services, credit and collection), legal, human resources and
external affairs.
Employee salaries, benefits and related costs are included in one of the
two components of operations expense to the extent that the costs are
related to the component functions.
(b) Balance Sheet
As at As at
June 30, December 31,
(millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Accounts receivable
Customer accounts receivable $ 671.9 $ 727.0
Accrued receivables - customer 133.4 114.1
Allowance for doubtful accounts (67.5) (69.3)
----------------------------------------------------------------------------------------------------------------------------
737.8 771.8
Accrued receivables - other 99.8 81.7
Other 8.7 10.0
----------------------------------------------------------------------------------------------------------------------------
$ 846.3 $ 863.5
----------------------------------------------------------------------------------------------------------------------------
Prepaid expense and other
Prepaid expenses $ 161.5 $ 101.4
Deferred customer activation and installation costs 62.3 76.2
Other 35.6 5.8
----------------------------------------------------------------------------------------------------------------------------
$ 259.4 $ 183.4
----------------------------------------------------------------------------------------------------------------------------
Deferred charges
Recognized transitional pension assets and pension plan
contributions in excess of charges to income $ 622.5 $ 556.7
Deferred customer activation and installation costs 98.9 94.4
Cost of issuing debt securities, less amortization 28.5 32.1
Other 25.5 21.2
----------------------------------------------------------------------------------------------------------------------------
$ 775.4 $ 704.4
----------------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities
Accrued liabilities $ 478.8 $ 409.1
Payroll and other employee-related liabilities 561.8 535.4
Asset retirement obligations 3.1 3.1
----------------------------------------------------------------------------------------------------------------------------
1,043.7 947.6
Trade accounts payable 302.8 313.0
Interest payable 63.6 65.0
Other 48.4 37.0
----------------------------------------------------------------------------------------------------------------------------
$ 1,458.5 $ 1,362.6
----------------------------------------------------------------------------------------------------------------------------
Advance billings and customer deposits
Advance billings $ 313.1 $ 294.4
CRTC Decisions 2002-34 and 2002-43 deferral accounts (Note 14(a)) 143.8 128.7
Deferred customer activation and installation fees 67.6 79.6
Customer deposits 21.9 28.8
----------------------------------------------------------------------------------------------------------------------------
$ 546.4 $ 531.5
----------------------------------------------------------------------------------------------------------------------------
As at As at
June 30, December 31,
(millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities
Deferred hedging liability $ 960.9 $ 1,032.6
Pension and other post-retirement liabilities 180.1 172.8
Deferred gain on sale-leaseback of buildings 85.9 98.7
Deferred customer activation and installation fees 98.9 94.4
Asset retirement obligations 19.2 19.2
Other 94.3 88.4
----------------------------------------------------------------------------------------------------------------------------
$ 1,439.3 $ 1,506.1
----------------------------------------------------------------------------------------------------------------------------
(c) Supplementary Cash Flow Information
Three months Six months
Periods ended June 30 (millions) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Net change in non-cash working capital
Accounts receivable $ 28.9 $ (37.5) $ 26.7 $ (76.4)
Income and other taxes receivable 26.7 22.6 (13.5) 92.5
Inventories (18.0) 21.1 4.3 26.8
Prepaid expenses and other (13.6) (54.0) (76.0) (89.6)
Accounts payable and accrued liabilities (29.9) (110.1) 93.0 (71.1)
Advance billings and customer deposits 14.2 12.9 14.9 22.8
----------------------------------------------------------------------------------------------------------------------------
$ 8.3 $ (145.0) $ 49.4 $ (95.0)
============================================================================================================================
16. Employee Future Benefits
(a) Defined Benefit Plans
The Company's net defined benefit plan costs were as follows:
Three-month periods ended June 30
(millions) 2005 2004
------------------------------------------------------------------------------- ------------------------------------------
Incurred Matching Recognized Incurred Matching Recognized
in period adjustments(1) in period in period adjustments(1) in period
----------------------------------------------------------------------------------------------------------------------------
Pension benefit plans
Current service cost $ 17.1 $ -- $ 17.1 $ 17.6 $ -- $ 17.6
Interest cost 79.9 -- 79.9 78.1 -- 78.1
Return on plan assets (185.2) 87.2 (98.0) (43.5) (49.7) (93.2)
Past service costs -- 0.1 0.1 -- 0.2 0.2
Actuarial loss (gain) 5.1 -- 5.1 6.2 -- 6.2
Valuation allowance provided
against accrued benefit asset -- 6.3 6.3 -- 6.3 6.3
Amortization of transitional
obligation (asset) -- (11.2) (11.2) -- (11.2) (11.2)
----------------------------------------------------------------------------------------------------------------------------
$ (83.1) $ 82.4 $ (0.7) $ 58.4 $ (54.4) $ 4.0
============================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to recognize the long-term nature of employee
future benefits.
Six-month periods ended June 30
(millions) 2005 2004
------------------------------------------------------------------------------- ------------------------------------------
Incurred Matching Recognized Incurred Matching Recognized
in period adjustments(1) in period in period adjustments(1) in period
----------------------------------------------------------------------------------------------------------------------------
Pension benefit plans
Current service cost $ 34.2 $ -- $ 34.2 $ 35.2 $ -- $ 35.2
Interest cost 159.7 -- 159.7 156.2 -- 156.2
Return on plan assets (308.1) 112.0 (196.1) (207.7) 21.2 (186.5)
Past service costs -- 0.3 0.3 -- 0.4 0.4
Actuarial loss (gain) 10.1 -- 10.1 12.3 -- 12.3
Valuation allowance provided
against accrued benefit asset -- 12.7 12.7 -- 12.7 12.7
Amortization of transitional
obligation (asset) -- (22.4) (22.4) -- (22.4) (22.4)
----------------------------------------------------------------------------------------------------------------------------
$ (104.1) $ 102.6 $ (1.5) $ (4.0) $ 11.9 $ 7.9
============================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to recognize the long-term nature of employee
future benefits.
Three-month periods ended June 30
(millions) 2005 2004
------------------------------------------------------------------------------- ------------------------------------------
Incurred Matching Recognized Incurred Matching Recognized
in period adjustments(1) in period in period adjustments(1) in period
----------------------------------------------------------------------------------------------------------------------------
Other benefit plans
Current service cost $ 0.9 $ -- $ 0.9 $ 1.2 $ -- $ 1.2
Interest cost 0.4 -- 0.4 0.9 -- 0.9
Return on plan assets (0.6) (0.1) (0.7) (0.6) -- (0.6)
Actuarial loss (gain) (0.4) -- (0.4) (0.5) -- (0.5)
Amortization of transitional
obligation (asset) -- 0.2 0.2 -- 0.2 0.2
----------------------------------------------------------------------------------------------------------------------------
$ 0.3 $ 0.1 $ 0.4 $ 1.0 $ 0.2 $ 1.2
============================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
Six-month periods ended June 30
(millions) 2005 2004
------------------------------------------------------------------------------- ------------------------------------------
Incurred Matching Recognized Incurred Matching Recognized
in period adjustments(1) in period in period adjustments(1) in period
----------------------------------------------------------------------------------------------------------------------------
Other benefit plans
Current service cost $ 3.7 $ -- $ 3.7 $ 2.4 $ -- $ 2.4
Interest cost 0.9 -- 0.9 1.7 -- 1.7
Return on plan assets (1.2) (0.1) (1.3) (1.3) -- (1.3)
Actuarial loss (gain) (1.1) -- (1.1) (0.8) -- (0.8)
Amortization of transitional
obligation (asset) -- 0.4 0.4 -- 0.4 0.4
----------------------------------------------------------------------------------------------------------------------------
$ 2.3 $ 0.3 $ 2.6 $ 2.0 $ 0.4 $ 2.4
============================================================================================================================
(1) Accounting adjustments to allocate costs to different periods so as
to recognize the long-term nature of employee future benefits.
(b) Employer Contributions
The best estimate of fiscal 2005 employer contributions to the Company's
defined benefit pension plan has been revised to approximately $116
million (the best estimate at December 31, 2004, was $105.9 million);
these estimates do not include any provision for contributions that may
arise from settlement of labour negotiations (see Note 14(b)).
(c) Defined Contribution Plans
The Company's total defined contribution pension plan costs recognized were as follows:
Three months Six months
Periods ended June 30 (millions) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Union pension plan and public service pension
plan contributions $ 9.0 $ 10.0 $ 19.7 $ 19.3
Other defined contribution pension plans 3.4 1.8 7.1 8.1
----------------------------------------------------------------------------------------------------------------------------
$ 12.4 $ 11.8 $ 26.8 $ 27.4
============================================================================================================================
17. Segmented Information
The Company's reportable segments, which are used to manage the business,
are Communications and Mobility. The Communications segment includes voice
local, voice long distance, data and other telecommunication services
excluding wireless. The Mobility segment includes digital personal
communications services and wireless Internet services. Segmentation is
based on similarities in technology, the technical expertise required to
deliver the products and services, and the distribution channels used.
Intersegment sales are recorded at the exchange value, which is the amount
agreed to by the parties.
Three-month periods
ended June 30 Communications Mobility Eliminations Consolidated
(millions) 2005 2004 2005 2004 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------
External revenue $1,216.5 $1,189.0 $ 802.0 $ 676.6 $ -- $ -- $2,018.5 $1,865.6
Intersegment revenue 21.2 22.1 5.7 5.6 (26.9) (27.7) -- --
----------------------------------------------------------------------------------------------------------------------------
Total operating revenue 1,237.7 1,211.1 807.7 682.2 (26.9) (27.7) 2,018.5 1,865.6
Operations expense 731.8 711.8 441.2 396.0 (26.9) (27.7) 1,146.1 1,080.1
Restructuring and
work-force reduction
costs 7.4 0.7 -- -- -- -- 7.4 0.7
----------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $ 498.5 $ 498.6 $ 366.5 $ 286.2 $ -- $ -- $ 865.0 $ 784.8
============================================================================================================================
CAPEX(2) $ 293.9 $ 267.7 $ 114.8 $ 78.4 $ -- $ -- $ 408.7 $ 346.1
============================================================================================================================
EBITDA less CAPEX $ 204.6 $ 230.9 $ 251.7 $ 207.8 $ -- $ -- $ 456.3 $ 438.7
============================================================================================================================
Six-month periods
ended June 30 Communications Mobility Eliminations Consolidated
(millions) 2005 2004 2005 2004 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------
External revenue $2,438.7 $2,360.1 $1,554.5 $1,309.3 $ -- $ -- $3,993.2 $3,669.4
Intersegment revenue 43.8 47.1 11.5 10.2 (55.3) (57.3) -- --
----------------------------------------------------------------------------------------------------------------------------
Total operating revenue 2,482.5 2,407.2 1,566.0 1,319.5 (55.3) (57.3) 3,993.2 3,669.4
Operations expense 1,448.4 1,418.5 862.1 785.5 (55.3) (57.3) 2,255.2 2,146.7
Restructuring and
work-force reduction
costs 16.8 16.6 -- -- -- -- 16.8 16.6
----------------------------------------------------------------------------------------------------------------------------
EBITDA(1) $1,017.3 $ 972.1 $ 703.9 $ 534.0 $ -- $ -- $1,721.2 $1,506.1
============================================================================================================================
CAPEX(2) $ 507.5 $ 527.1 $ 174.4 $ 128.7 $ -- $ -- $ 681.9 $ 655.8
============================================================================================================================
EBITDA less CAPEX $ 509.8 $ 445.0 $ 529.5 $ 405.3 $ -- $ -- $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").
18 . Differences between Canadian and United States Generally Accepted
Accounting Principles
The consolidated financial statements have been prepared in accordance
with Canadian GAAP. The principles adopted in these financial statements
conform in all material respects to those generally accepted in the
United States except as summarized below. Significant differences between
Canadian GAAP and U.S. GAAP would have the following effect on reported
net income of the Company:
Three months Six months
Periods ended June 30 (millions except per share
amounts) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Net income in accordance with Canadian GAAP $ 189.5 $ 172.3 $ 431.7 $ 273.6
Adjustments:
Operating expenses
Operations (b) (2.2) 0.1 (2.2) 1.3
Depreciation (c) -- -- -- 6.5
Amortization of intangible assets (d) (20.4) (20.4) (40.9) (40.9)
Financing costs (f) 3.6 2.2 4.5 4.1
Accounting for derivatives (g) 1.3 0.2 4.7 0.2
Taxes on the above adjustments (h) 7.9 7.9 15.0 13.3
----------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP 179.7 162.3 412.8 258.1
Other comprehensive income (loss) (i)
Foreign currency translation adjustment 1.2 1.2 (1.9) 1.6
Change in unrealized fair value of
derivatives designated as cash flow hedges (2.8) 6.9 (111.2) (15.1)
Change in minimum pension liability (0.6) (0.6) (1.3) (1.1)
----------------------------------------------------------------------------------------------------------------------------
(2.2) 7.5 (114.4) (14.6)
----------------------------------------------------------------------------------------------------------------------------
Comprehensive income in accordance with U.S. GAAP $ 177.5 $ 169.8 $ 298.4 $ 243.5
----------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP per
Common Share and Non-Voting
- Basic $ 0.50 $ 0.46 $ 1.15 $ 0.72
- Diluted $ 0.50 $ 0.45 $ 1.14 $ 0.71
The following is an analysis of retained earnings (deficit) reflecting the application of U.S. GAAP:
Six months
Periods ended June 30 (millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Retained Earnings under Canadian GAAP $ 1,044.6 $ 879.8
Adjustments:
Purchase versus Pooling Accounting (1,659.9) (1,604.0)
Amortization of additional goodwill on Clearnet purchase (7.9) (7.9)
Share-based compensation 50.5 34.9
Accounting for derivatives 0.1 --
----------------------------------------------------------------------------------------------------------------------------
(1,617.2) (1,577.0)
----------------------------------------------------------------------------------------------------------------------------
Retained Earnings under U.S. GAAP $ (572.6) $ (697.2)
----------------------------------------------------------------------------------------------------------------------------
Schedule of Retained Earnings under U.S. GAAP
Balance at beginning of period $ (590.2) $ (844.7)
Net income in accordance with U.S. GAAP 412.8 258.1
----------------------------------------------------------------------------------------------------------------------------
(177.4) (586.6)
Less: Common Share and Non-Voting Share dividends paid, or payable, in cash 143.9 93.1
Common Share and Non-Voting Share dividends reinvested, or to be
reinvested, in shares issued from Treasury -- 13.3
Cost of purchase of Common Shares and Non-Voting Shares in excess of
stated capital (Note 13(g)) 251.3 --
Preference and preferred share dividends -- 1.7
Redemption premium on preference and preferred shares in excess of amount
chargeable to contributed surplus -- 2.5
----------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ (572.6) $ (697.2)
============================================================================================================================
The following is an analysis of major balance sheet categories reflecting the application of U.S. GAAP:
As at As at
June 30, December 31,
(millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Current Assets $ 2,919.9 $ 2,647.6
Capital Assets
Property, plant, equipment and other 7,480.1 7,528.2
Intangible assets subject to amortization 2,371.1 2,476.5
Intangible assets with indefinite lives 2,964.6 2,955.8
Goodwill 3,568.7 3,545.4
Deferred Income Taxes 120.2 218.8
Other Assets 685.9 658.5
----------------------------------------------------------------------------------------------------------------------------
$ 20,110.5 $ 20,030.8
----------------------------------------------------------------------------------------------------------------------------
Current Liabilities $ 3,643.3 $ 1,969.1
Long-Term Debt 4,691.7 6,341.1
Other Long-Term Liabilities 1,834.8 1,763.8
Deferred Income Taxes 1,581.1 1,593.7
Non-Controlling Interest 13.5 13.1
Shareholders' Equity 8,346.1 8,350.0
----------------------------------------------------------------------------------------------------------------------------
$ 20,110.5 $ 20,030.8
============================================================================================================================
The following is a reconciliation of shareholders' equity incorporating the differences between Canadian and U.S. GAAP:
As at As at
June 30, December 31,
(millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under Canadian GAAP $ 7,154.7 $ 7,025.6
Adjustments:
Purchase versus Pooling Accounting (a), (c) - (f) 1,427.3 1,458.9
Additional goodwill on Clearnet purchase (e) 123.5 123.5
Convertible debentures (including conversion option) (f) -- (8.0)
Accounting for derivatives (g) 0.1 (3.0)
Accumulated other comprehensive income (loss) (i), excluding cumulative
foreign currency translation adjustment (359.5) (247.0)
----------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity under U.S. GAAP $ 8,346.1 $ 8,350.0
----------------------------------------------------------------------------------------------------------------------------
Composition of Shareholders' Equity under U.S. GAAP
Common equity
Common Shares $ 4,294.3 $ 4,341.0
Non-Voting Shares 4,855.3 4,700.8
Options and warrants (Note 13(c)) 12.8 26.9
Accrual for shares issuable under channel stock incentive plan -- 0.8
Retained earnings (deficit) (572.6) (590.2)
Accumulated other comprehensive income (loss) (i) (363.6) (249.2)
Contributed surplus 119.9 119.9
----------------------------------------------------------------------------------------------------------------------------
$ 8,346.1 $ 8,350.0
============================================================================================================================
(a) Merger of BC TELECOM and TELUS
The business combination between BC TELECOM and TELUS Corporation (renamed
TELUS Holdings Inc. which was wound up June 1, 2001) was accounted for
using the pooling of interests method under Canadian GAAP. Under Canadian
GAAP, the application of the pooling of interests method of accounting for
the merger of BC TELECOM and TELUS Holdings Inc. resulted in a restatement
of prior periods as if the two companies had always been combined. Under
U.S. GAAP, the merger is accounted for using the purchase method. Use of
the purchase method results in TELUS (TELUS Holdings Inc.) being acquired
by BC TELECOM for $4,662.4 million (including merger related costs of $51.9
million) effective January 31, 1999.
(b) Operating Expenses - Operations
Three months Six months
Periods ended June 30 (millions) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Future employee benefits $ (4.3) $ (4.3) $ (8.5) $ (8.5)
Share-based compensation 2.1 4.4 6.3 9.8
----------------------------------------------------------------------------------------------------------------------------
$ (2.2) $ 0.1 $ (2.2) $ 1.3
============================================================================================================================
Future employee benefits: Under U.S. GAAP, TELUS' future employee
benefit assets and obligations have been recorded at their fair values on
acquisition. Accounting for future employee benefits under Canadian GAAP
changed to become more consistent with U.S. GAAP effective January 1, 2000.
Canadian GAAP provides that the transitional balances can be accounted for
prospectively. Therefore, to conform to U.S. GAAP, the amortization of the
transitional amount needs to be removed from the future employee benefit
expense.
Share-based compensation: Effective January 1, 2004, Canadian GAAP
required the adoption of the fair value method of accounting for share-based
compensation for awards made after 2001 (see Note 8(b)). U.S. GAAP requires
disclosure of the impact on net income and net income per Common Share and
Non-Voting Share as if the fair value based method of accounting had been
applied for awards made after 1994; the Company continues to use the
intrinsic value method for purposes of U.S. GAAP. The fair values of the
Company's options granted in 2004 and 2003, and the weighted average
assumptions used in estimating the fair values, are set out in Note 8(b).
Such impact, using the fair values set out in Note 8(b), would approximate
the pro forma amounts in the following table.
Three months Six months
Periods ended June 30 (millions except per
share amounts) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP
As reported $ 179.7 $ 162.3 $ 412.8 $ 258.1
Deduct: Share-based compensation arising from
share options determined under fair value
based method for all awards (2.1) (4.6) (6.3) (11.4)
----------------------------------------------------------------------------------------------------------------------------
Pro forma $ 177.6 $ 157.7 $ 406.5 $ 246.7
----------------------------------------------------------------------------------------------------------------------------
Net income in accordance with U.S. GAAP per
Common Share and Non-Voting Share
Basic
As reported (using intrinsic value method) $ 0.50 $ 0.46 $ 1.15 $ 0.72
Pro forma (using fair value method) $ 0.50 $ 0.44 $ 1.13 $ 0.69
Diluted
As reported (using intrinsic value method) $ 0.50 $ 0.45 $ 1.14 $ 0.71
Pro forma (using fair value method) $ 0.49 $ 0.44 $ 1.12 $ 0.68
(c) Operating Expenses - Depreciation
Merger of BC TELECOM and TELUS: Under the purchase method, TELUS'
capital assets on acquisition have been recorded at fair value rather than
at their underlying cost (book values) to TELUS. Therefore, depreciation of
such assets based on fair values at the date of acquisition under U.S. GAAP
will be different than TELUS' depreciation based on underlying cost (book
values). As of March 31, 2004, the amortization of this difference had been
completed.
(d) Operating Expenses - Amortization of Intangible Assets
As TELUS' intangible assets on acquisition have been recorded at their fair
value (see (a)), amortization of such assets, other than for those with
indefinite lives, needs to be included under U.S. GAAP; consistent with
prior years, amortization is calculated using the straight-line method.
The incremental amounts recorded as intangible assets arising from the TELUS acquisition above are as follows:
Accumulated
Cost Amortization Net Book Value
----------------------------------------------------------------------------------------------------------------------------
As at As at
June 30, December 31,
(millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization
Subscribers - wireline $ 1,950.0 $ 276.6 $ 1,673.4 $ 1,692.6
Subscribers - wireless 250.0 224.8 25.2 46.9
----------------------------------------------------------------------------------------------------------------------------
2,200.0 501.4 1,698.6 1,739.5
----------------------------------------------------------------------------------------------------------------------------
Intangible assets with indefinite lives
Spectrum licences(1) 1,833.3 1,833.3 -- --
----------------------------------------------------------------------------------------------------------------------------
$ 4,033.3 $ 2,334.7 $ 1,698.6 $ 1,739.5
============================================================================================================================
(1) Accumulated amortization of spectrum licences is amortization recorded prior to 2002 and the transitional impairment amount.
Estimated aggregate amortization expense for intangible assets subject to amortization, calculated upon
such assets held as at June 30, 2005, for each of the next five fiscal years is as follows:
Years ending December 31 (millions)
----------------------------------------------------------------------------------------------------------------------------
2005 (balance of year) $ 170.6
2006 219.3
2007 129.3
2008 62.1
2009 48.1
(e) Goodwill
Merger of BC TELECOM and TELUS: Under the purchase method of accounting,
TELUS' assets and liabilities at acquisition (see (a)) have been recorded at
their fair values with the excess purchase price being allocated to goodwill
in the amount of $403.1 million. Commencing January 1, 2002, rather than
being systematically amortized, the carrying value of goodwill is
periodically tested for impairment.
Additional goodwill on Clearnet purchase: Under U.S. GAAP, shares
issued by the acquirer to effect an acquisition are measured at the date
the acquisition was announced; however, under Canadian GAAP, at the time
the transaction took place, shares issued to effect an acquisition were
measured at the transaction date. This results in the purchase price
under U.S. GAAP being $131.4 million higher than under Canadian GAAP. The
resulting difference is assigned to goodwill. Commencing January 1, 2002,
rather than being systematically amortized, the carrying value of
goodwill is periodically tested for impairment.
(f) Financing Costs
Merger of BC TELECOM and TELUS: Under the purchase method, TELUS'
long-term debt on acquisition has been recorded at its fair value rather
than at its underlying cost (book value) to TELUS. Therefore, interest
expense calculated on the debt based on fair values at the date of
acquisition under U.S. GAAP will be different from TELUS' interest expense
based on underlying cost (book value).
Convertible debentures: Under Canadian GAAP, the conversion option
embedded in the convertible debentures was presented separately as a
component of shareholders' equity. Under U.S. GAAP, the embedded conversion
option was not subject to bifurcation and was thus presented as a liability
along with the balance of the convertible debentures. The principal
accretion occurring under Canadian GAAP was not required under U.S. GAAP and
the adjustment was included in the interest expense adjustment in the
reconciliation.
(g) Accounting for Derivatives
On January 1, 2001, the Company adopted, for U.S. GAAP purposes, the
provisions of Statement of Financial Accounting Standards No. 133,
"Accounting For Derivative Instruments and Hedging Activities." This
standard requires that all derivatives be recognized as either assets or
liabilities and measured at fair value. This is different from the Canadian
GAAP treatment for financial instruments. Under U.S. GAAP, derivatives which
are fair value hedges, together with the financial instrument being hedged,
will be marked to market with adjustments reflected in income and
derivatives which are cash flow hedges will be marked to market with
adjustments reflected in comprehensive income (see (i)).
(h) Income Taxes
Three months Six months
Periods ended June 30 (millions) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Current $ 2.7 $ (53.8) $ (18.7) $ (83.0)
Deferred 95.4 90.8 180.0 177.2
----------------------------------------------------------------------------------------------------------------------------
98.1 37.0 161.3 94.2
Investment Tax Credits -- -- -- (0.5)
----------------------------------------------------------------------------------------------------------------------------
$ 98.1 $ 37.0 $ 161.3 $ 93.7
============================================================================================================================
The Company's income tax expense (recovery), for U.S. GAAP purposes, differs from that calculated by applying
statutory rates for the following reasons:
Three-month periods ended June 30 2005 2004
($ in millions)
---------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 96.4 34.5% $ 69.3 34.7%
Tax rate differential on, and consequential
adjustments from, reassessment of prior year
tax issues -- (34.2)
Revaluation of deferred tax assets and
liabilities for changes in statutory income
tax rates (1.2) --
Other (1.0) (1.9)
---------------------------------------------------------------------------------------------------------------------------
94.2 33.1% 33.2 16.6%
Large corporations tax 3.9 3.8
---------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 98.1 34.5% $ 37.0 18.5%
============================================================================================================================
Six-month periods ended June 30 ($ in millions) 2005 2004
--------------------------------------------------------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates $ 199.5 34.5% $ 122.5 34.7%
Change in estimates of available deductible
differences in prior years (36.0) --
Tax rate differential on, and consequential
adjustments from, reassessment of prior year
tax issues (11.3) (35.8)
Revaluation of deferred tax assets and
liabilities for changes in statutory income tax
rates (1.2) --
Investment Tax Credits -- (0.3)
Other 1.2 (1.8)
---------------------------------------------------------------------------------------------------------------------------
152.2 26.2% 84.6 24.0%
Large corporations tax 9.1 9.1
---------------------------------------------------------------------------------------------------------------------------
U.S. GAAP income tax expense (recovery) $ 161.3 27.7% $ 93.7 26.5%
===========================================================================================================================
(i) Additional Disclosures Required Under U.S. GAAP - Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", requires that a statement of comprehensive income
be displayed with the same prominence as other financial statements.
Comprehensive income, which incorporates net income, includes all changes
in equity during a period except those resulting from investments by and
distributions to owners. There is no requirement to disclose
comprehensive income under Canadian GAAP prior to fiscal periods
beginning on or after January 1, 2007.
Three-month periods ended
June 30 (millions) 2005 2004
---------------------------------------------------------------------------- ----------------------------------------------
Cumulativen Unrealized Cumulativen Unrealized
foreign fair value of foreign fair value of
currency derivative Minimum currency derivative Minimum
translation cash flow pension translation cash flow pension
adjustment hedges liability Total adjustment hedges liability Total
----------------------------------------------------------------------------------------------------------------------------
Amount arising $ 1.2 $ (4.2) $ (1.0) $ (4.0) $ 1.2 $ 10.7 $ (0.9) $ 11.0
Income tax expense
(recovery) -- (1.4) (0.4) (1.8) -- 3.8 (0.3) 3.5
----------------------------------------------------------------------------------------------------------------------------
Net 1.2 (2.8) (0.6) (2.2) 1.2 6.9 (0.6) 7.5
Accumulated other
comprehensive income
(loss), beginning of
period (5.3) (229.5) (126.6) (361.4) (2.3) (95.6) (110.9) (208.8)
----------------------------------------------------------------------------------------------------------------------------
Accumulated other
comprehensive income
(loss), end of period $ (4.1) $(232.3) $(127.2) $(363.6) $ (1.1) $ (88.7) $ (111.5) $(201.3)
----------------------------------------------------------------------------------------------------------------------------
Six-month periods ended
June 30 (millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Cumulativen Unrealized Cumulativen Unrealized
foreign fair value of foreign fair value of
currency derivative Minimum currency derivative Minimum
translation cash flow pension translation cash flow pension
adjustment hedges liability Total adjustment hedges liability Total
------------------------------------------------------------------------------------------------------------------------------
Amount arising $ (1.9) $(169.5) $ (1.9) $(173.3) $ 1.6 $ (23.0) $ (1.8) $ (23.2)
Income tax expense
(recovery) -- (58.3) (0.6) (58.9) -- (7.9) (0.7) (8.6)
------------------------------------------------------------------------------------------------------------------------------
Net (1.9) (111.2) (1.3) (114.4) 1.6 (15.1) (1.1) (14.6)
Accumulated other
comprehensive income
(loss), beginning of
period (2.2) (121.1) (125.9) (249.2) (2.7) (73.6) (110.4) (186.7)
------------------------------------------------------------------------------------------------------------------------------
Accumulated other
comprehensive income
(loss), end of period $ (4.1) $(232.3) $(127.2) $(363.6) $ (1.1) $ (88.7) $ (111.5) $ (201.3)
==============================================================================================================================
(j) Recently Issued Accounting Standards Not Yet Implemented
Equity-based compensation. Under U.S. GAAP, effective for its 2006
fiscal year, the Company will be required to apply the fair value method
of accounting for share-based compensation awards granted to employees,
as prescribed by SFAS 123(R). As compared with the information that has
been previously and currently disclosed for U.S. GAAP purposes, the
adoption of this standard will result in a reclassification between share
capital, contributed surplus and retained earnings. The Company expects
that it will use the modified prospective transition method. The Company
is in the process of estimating the impact on the U.S. GAAP
reconciliation disclosures, but has not yet finalized the amounts; such
amount would be in excess of the $176.9 million in share option expense
reported in the U.S. GAAP reconciliation disclosures for the fiscal years
ended December 31, 2004-1999, inclusive, due to the initial effective
date of SFAS 123.
Other. As would affect the Company, there are no other U.S. accounting
standards currently issued and not yet implemented that would differ from
Canadian accounting standards currently issued and not yet implemented.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 5, 2005
TELUS CORPORATION
By: /s/ Audrey Ho
-----------------------------
Name: Audrey Ho
Title: Vice President, Legal
Services and General
Counsel and Corporate
Secretary