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 ____September ____ 2003
(Commission File No. 000-24876)
TELUS Corporation
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal registered offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
X
Form 20-F _____ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
X
Yes _____ No _____
This Form 6-K consists of the following:
Press Release dated October 31, 2003 of Third Quarter Results
TELUS Reports Third Quarter Results
Strong wireless performance and wireline efficiency drive earnings and
cash flow growth
VANCOUVER, Oct. 31 /CNW/ - TELUS Corporation (TSX: T and T.A/NYSE: TU)
today reported for the third quarter of 2003 strong growth in earnings and
cash flow. Operating earnings (EBITDA) were up 14% due to strong performance
at TELUS Mobility and continued cost structure improvements from the
Operational Efficiency Program at TELUS Communications. Earnings per share
(EPS) for the quarter and nine months ended September were 32 cents and 79
cents, compared to negative 35 cents and negative 32 cents, respectively, a
year ago. Interest on a favourable tax settlement contributed five cents of
EPS in the third quarter. Free cash flow was up 74% to $ 417 million this
quarter (up $177 million from a year ago), and $862 million year-to-date (up
$783 million from a year ago).
FINANCIAL HIGHLIGHTS
Rounded to nearest C$ Millions, except per share amounts
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3 months ended
September 30
(unaudited) 2003 2002 Change
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Operating revenues 1,806.2 1,766.3 2.3%
EBITDA(1) 754.5 663.1 13.8%
Restructuring and workforce reduction costs 2.3 313.3 (99.3)%
Net income 115.9 (107.4) -
Common share & Non-Voting share income (loss) 113.2 (110.0) -
Earnings (loss) per share (EPS) 0.32 (0.35) -
Capital expenditures 304.0 327.2 (7.1)%
Free cash flow(2) 417.1 239.9 73.8%
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(1) Earnings Before Interest, Taxes, Depreciation and Amortization is
defined as Operating revenues less Operations expense and, as
defined, excludes Restructuring and workforce reduction costs
(2) Defined as EBITDA less Capital expenditures, cash interest, cash
taxes and cash dividends, which excludes Restructuring and workforce
reduction costs
Darren Entwistle, president and CEO, stated, "I am pleased that we are
again exceeding expectations with our third quarter results and demonstrating
the benefits of continued and consistent execution on TELUS' focused national
strategy and 2003 corporate priorities. TELUS Mobility's strong network
revenue growth of 17% and EBITDA increase of 49%, combined with TELUS
Communications' operational efficiency program, have contributed to
significant margin and bottom line profit expansion and strong free cash flow
generation. Therefore, TELUS is once again raising 2003 full year guidance in
several key areas, including earnings, free cash flow and wireless and high-
speed Internet subscriber growth. We are on track to achieve our year-end
operational efficiency improvement goals. Moreover, TELUS is firm in its
commitment to provide uniformly superior service levels to our pre-operational
efficiency program performance and are confident of reaching this goal by the
end of 2003."
Robert McFarlane, executive vice president and CFO, commented, "TELUS has
shown remarkable financial performance this quarter with $417 million of free
cash flow, which is reflected in our ahead of plan progress to delever our
Balance Sheet. TELUS' Net Debt at $7.5 billion is down $810 million from a
year ago, and $516 million in the third quarter alone. I am pleased to
announce today increased 2003 guidance for EPS of 85 to 95 cents, up five
cents; EBITDA and free cash flow increased to the high end of last July's
guidance ranges; and once again this quarter improved guidance for the Net
Debt to EBITDA ratio, which today is revised to 2.7 times or less by December
2003 - our original target a year ago for the end of 2004. Clearly TELUS is
delivering on our commitments well ahead of plan for the benefit of both debt
and equity investors."
OPERATING HIGHLIGHTS
TELUS Communications
Cash flow improvement of $32 million driven by lower capex and
Operational Efficiency Program savings
- Total revenue of $1.2 billion in the third quarter declined by 4% or
$48 million due largely to lower access revenue as a result of price
cap regulation, lower long distance revenues, and reduced voice
equipment sales
- OEP-related incremental cost savings of $80 million in the third
quarter resulted in a $58 million or 8% decrease in Operations expense
- EBITDA of $509 million, up $11 million or 2% from the same quarter a
year ago
- EBITDA margin 42% up 2 points from a year ago
- Capital expenditures reduced to $209 million from $230 million, down
9% from a year ago
- Cash flow (EBITDA less capital expenditures) increased to $300 million
this quarter, up $32 million or 12% from last year
- Non-incumbent operations in Central Canada generated revenues of
$138 million up 2% from the same quarter a year ago while negative
EBITDA of $6 million improved 74%
- Strongest quarter this year for high-speed Internet subscriber net
additions with 47,200. High-speed Internet subscriber base of 516,000,
a 41% increase from year-ago period
- Network access lines were 4.9 million, a 0.8% decline compared to a
year ago
TELUS Mobility
Cash flow improvement of $83 million driven by EBITDA growth of 49%
- Network service revenue of $577 million, up 17% from same quarter a
year ago
- Strong EBITDA growth of 49% to $246 million in the quarter, due to
double-digit revenue and subscriber growth, cost containment and
enhanced operating efficiencies
- EBITDA margin of 43%, based on network revenue, representing a 9 point
year-over-year margin expansion
- Net subscriber additions of 100,600 bringing total subscribers to
3.3 million, a 14% year-over-year increase. Higher-revenue generating
net postpaid subscriber additions increased by 14% over the third
quarter a year ago
- World class churn rate of 1.4%, a significant improvement from 1.7% a
year ago
- Canadian industry leading average revenue per unit (ARPU) of $60 per
month, compared to $56 in the second quarter and up $2 from a year ago
- Capital expenditures of $95 million, down 2% from a year ago. Capital
expenditures as a percentage of revenue decreased to 15% from 18% a
year ago
- Cash flow (EBITDA less capital expenditures) of $150 million this
quarter, an $83 million improvement compared to $68 million in the
same quarter a year ago
CORPORATE DEVELOPMENTS
TELUS operationalizes Next Generation Network
TELUS has made the transition from traditional circuit-based switching to
leading edge Internet Protocol (IP) technology with the launch of our Next
Generation Network (NGN). NGN reduces TELUS network costs and provides the
infrastructure required to bring a variety of enhanced capabilities and
services to customers. Eventually it will eliminate the need for separate
networks for voice, data and entertainment services.
TELUS has been investing in these capabilities for over two years now,
with approximately $35 million invested. This summer, TELUS achieved another
milestone in the execution of our national growth strategy by completing the
evolution of the TELUS' core network to a single ubiquitous IP network
designed to carry high-quality voice, data and video applications.
In the third quarter, TELUS began the process of transparently migrating
customer long distance voice traffic onto its IP based NGN network in parts of
Alberta. The migration of traffic is continuing this quarter nationally with
customers continuing to receive high quality and reliable service. There are
very few places in the world where commercial long distance traffic is
traveling over an IP network designed to deliver carrier class voice quality
and reliability, which makes TELUS one of the first incumbent telcos world-
wide to do so.
TELUS Communication winning new Data and IP business
TELUS wins major managed data solutions sub-contract with IBM Canada
for TD Bank
TELUS has made a significant stride in executing its national expansion
by recently winning a seven-year sub-contract from IBM Canada worth
approximately $160 million. TELUS will provide TD Bank Financial Group a fully
Managed IP Network Services solution including use of TELUS' next generation
network (NGN) platform with secure IP Virtual Private Network (VPN)
connectivity.
This integrated solution sets a new benchmark for Managed IP Network
Services and will be capable of providing enhanced customer services that
combine voice, data and video for over 1,200 TD Canada Trust branch offices
across Canada.
Calgary Health Region links with TELUS
On September 16, TELUS and the Calgary Health Region announced the
creation of TELUS Sourcing Solutions Inc. (TSS), a new business process
outsourcing company that will deliver end-to-end human resources (HR)
solutions to healthcare and other organizations. TSS will initially provide
compensation, benefits, pension, HR systems, recruitment and workforce
analysis, occupational health and safety, and payroll services to the Calgary
Health Region.
TSS will manage these critical services, enabling organizations such as
the Calgary Health Region to focus on their core business of delivering health
services to the community. TSS, with over 150 new employees being outsourced
into TELUS beginning in the fourth quarter of 2003, plans to offer creative
technology and business process solutions, rather than simply providing
infrastructure. The new company plans to offer these services to other health
regions across the country and explore opportunities in other market sectors.
The Calgary Health Region is TSS' foundation client.
New high-speed Internet introductory service offer a success
TELUS launched a new introductory high-speed Internet offer in August of
$16.95 per month for first six months and then the regular monthly price for
our long distance customers of $34.95 with purchase of a QuickConnect(TM) kit
or $39.95 with a TELUS technician installation. This new consumer offer is
successfully stimulating demand as we added over 47,000 new subscribers this
quarter, the most since early 2002. Interestingly this introductory offer
generates 4% more annual revenue than the former offer of $24.95 for the first
12 months. The service now includes the popular value added features of
Freedom Anti-Virus and Ad Block pop-up ads protection.
TELUS humanitarian effort responds to BC and Alberta forest fires
In response to forest fires in Alberta and British Columbia this summer,
members of the TELUS Emergency Operations Centre and TELUS team members worked
hard to restore service. For example, almost all of the 5,000 telephone lines
put out of service in Kamloops were restored within 72 hours.
In addition, an army of TELUS Community Connections volunteers worked
tirelessly to provide humanitarian aid to evacuated families, firefighters,
volunteers and relief centre workers. TELUS collected and distributed 200
TELUS cell phones to firefighters to help them coordinate the fire containment
efforts. The Company set up phone lines for emergency centres, Red Cross and
relief centres. We distributed 3,000 "comfort kits" containing towels,
brushes, combs, toothpaste, soap, shampoo, razors, shaving cream, comfort
bears, t-shirts, toys, and videos to evacuation centres throughout the Kelowna
area. Finally, the Company established a toll-free assistance line for TELUS
team members who were hosting some of the 30,000 evacuees.
TELUS responds to customer service performance
One of TELUS' six corporate priorities for 2003 is to improve customer
service levels. Many initiatives have been taken to accomplish this during the
year and are planned going forward. For example, a new interactive voice
recognition system is reducing misdirected calls and a new self-serve Web site
is fully functioning.
During the third quarter a combination of external and internal events
resulted in unexpected volumes and unacceptably long wait times for customers
trying to access our business office or to have service provided. External
causes included: the BC and Alberta fires, power outages and computer virus
attacks. Internal causes included: challenges in implementing new systems;
delays in having sufficient new staff hired, trained and fully functioning to
replace employees taking the originally planned voluntary departure program;
and the success of our latest high-speed Internet offer. These service issues
are temporary in nature and TELUS is publicly committed to realizing better
than pre-operational efficiency program levels of service by December 2003 at
the latest.
Janet Yale appointed executive vice president government and regulatory
affairs
On September 24, TELUS announced the appointment of Janet Yale, former
president and CEO of the Canadian Cable Television Association, to executive
vice president government and regulatory affairs. Janet, located in Ottawa,
will lead a team responsible for TELUS' interaction with all levels of
government, regulatory and public bodies.
Yale brings extensive experience in government and regulatory affairs to
the TELUS team. Her strong background in the telecommunications industry and
specifically in regulatory affairs will be invaluable to TELUS in contributing
to the company's national business strategy.
TELUS receives broadcasting distribution and Video-on-Demand licence
approvals
On August 20, TELUS received approval from the Canadian Radio-television
and Telecommunications Commission (CRTC) for a broadcasting distribution
licence that allows the company to offer digital television service in select
communities across Alberta and British Columbia.
On September 9, TELUS received an additional licence from the CRTC to
offer commercial Video-on-Demand (VOD) services. Video-on-Demand is a service
that allows customers to order programming such as feature films and other
entertainment from a central video server. Whereas Pay-per-View (PPV) service
offers a set suite of movies or events starting at fixed times, VOD allows
customers to choose when to watch a program, and to control their own
experience by stopping, rewinding or fast forwarding.
TELUS is taking a careful measured approach to the entertainment market.
Our next steps in the process are to fully understand the economics and
technology and we are undertaking extensive network and systems testing,
including an employee trial in Edmonton. No decision has been taken on any
commercial launch.
CRTC approves revised service improvement plan of $21.4 million for TELUS
On September 25, the CRTC approved a revised service improvement plan
(SIP) of $21.4 million for TELUS to be completed by 2006. The decision is
positive for customers and TELUS. Many customers living in rural and remote
areas, who were previously unable to qualify for extension of service, will
now be able to receive service as the program is implemented. A large portion
of the costs of this program will be recovered through the deferral account
established by the CRTC in the 2002 Price Cap decision.
TELUS Quebec confirms job creation program with Quebec government
On October 10, TELUS and the Quebec government jointly announced a job
creation program that, based on ongoing capital investments, would result in
approximately $90 million of job creation tax exemptions for TELUS over a 10-
year period. This relates to various government job creation programs for up
to 800 jobs split between Montreal and Rimouski. Over 200 new jobs are to be
created with the opening of a new Montreal Call Centre in late 2003. This
assists TELUS Quebec in continuing to develop our network and offering state-
of-the-art services to our customers while developing business potential in
the major urban centers of Quebec.
New camera phones from TELUS Mobility
In October, TELUS Mobility announced both an exclusive new camera phone
and a unique picture messaging service that allows clients to instantly share
or store their pictures. TELUS Mobility's unique multimedia picture messaging
service allows clients to share their photos, with attached sound and text
files, by sending them directly to other camera phones or to any e-mail
address worldwide, or store them in their own secure online photo album on
TELUS Mobility's Web site. TELUS Mobility's camera phone, the LG 5450, is both
a fully functional tri-mode digital wireless phone and a 300,000 pixel digital
camera with high-resolution colour screen, self-timer and the ability to store
up to 30 pictures. This is the first in a series of exclusive camera phones
from TELUS Mobility, which will be marketing both camera phones and its
picture messaging service throughout the fourth-quarter holiday sales season
with a national advertising campaign.
Mike Network enhancements
In October, TELUS Mobility announced significant enhancements to its all-
in-one Mike wireless network, including the expansion of its Direct Connect
walkie-talkie service across Canada and the introduction of four powerful new
phone models from Motorola.
Based on Motorola's iDEN (integrated digital enhanced network)
technology, Mike is the only wireless service able to combine digital PCS
phone, push-to-talk Direct Connect radio, text messaging and Internet access
in a single compact handset.
Mike users can now push-to-talk with any other Mike user in Canada,
allowing for instant communication that's far faster and more economical than
a regular wireless telephone call. Mike's network service area now stretches
almost 5,000 kilometres, from Vancouver Island to eastern Quebec, offering
national enterprises a powerful means to stay in instant touch.
Motorola announced four powerful new phones that will be part of TELUS
Mobility's Mike roster this fall. Featuring Global Positioning System (GPS)
capability that offers support for new location-based services such as Mobile
Fleet Management, the new phones are aimed at markets ranging from white-
collar office users to mobile fleets and rugged work environments.
TELUS Mobility Wi-Fi
In August, Canada's national wireless carriers including TELUS Mobility,
announced an agreement to establish common standards for roaming and
interoperability among their public Wi-Fi hotspots and from their next
generation wireless networks, such as 1X, to those hotspots. Common standards
will help eliminate the development of redundant authentication and billing
methods, mean simplified access for customers and stimulate overall adoption
of Wi-Fi. The carriers aim to have definitive standards and agreements in
place by the end of 2003, with implementation in 2004.
In October, Vancouver International Airport Authority and TELUS Mobility
announced the most comprehensive Wi-Fi Hotspot initiative within a Canadian
airport, offering travelers at Vancouver International Airport (YVR) fast and
secure wireless Internet access throughout the facility's terminals, from
check-in right through to departure gate. The service also includes access to
online passenger services through the Airport Authority's Web site, including
up-to-the-minute flight arrival and departure information, terminal maps and a
complete listing of restaurants, shops and other services.
TELUS Mobility Wi-Fi Hotspots are public Internet access zones offering
high-speed mobile access to the Internet and other data networks. TELUS
Mobility and its partner Spotnik Mobile have begun an aggressive national
rollout of public Wi-Fi Hotspots, and have already acquired the rights to
provide public Wi-Fi access in more than 450 sites, including transportation
facilities, hotels, office complexes, food-service establishments and other
high-traffic locations.
TELUS Mobility alliance with Spotwave to offer coverage enhancements
In September, TELUS Mobility partnered with Spotwave Wireless Inc. to
distribute the Ottawa-based engineering company's SpotCell in-building
repeaters across Canada. Spotcell repeaters enhance in-building wireless
coverage and extend it into hard-to-reach areas such as parking garages,
basements and remote locations. TELUS Mobility is offering these easy-to-
install coverage enhancements through its national sales channels to clients
who require specialized coverage beyond that provided by carrier-funded public
networks.
TELUS Mobility Competes Vigorously in the Wireless Sector
In October, a wireless competitor introduced a well-publicized, flat-rate
unlimited local calling plan in Vancouver. TELUS Mobility continually monitors
competitive developments and takes appropriate action to address competitor
initiatives and to seek out new revenue opportunities. In response to this
offering, TELUS Mobility is offering, for a limited time, the Ontario and
Quebec customers of that competitor a phone at no charge and the opportunity
to match their existing rate plan, in order to gain access to TELUS Mobility's
superior digital network coverage. This move is consistent with TELUS
Mobility's emphasis on rational pricing of wireless services.
TELUS' annual report garners world recognition
TELUS' 2002 annual report is featured in the Annual Report on Annual
Reports, the only global ranking of corporate reports. Produced by Corporate
Essentials, the Annual Report on Annual Reports ranked TELUS 18th out of 1,000
selected international companies. In its judging, the awards panel evaluated
five areas: financial reporting; review of operations and business issues;
executive statements, strategy and governance; share information and investor
communication; and visuals, design and layout.
Judges also presented awards on 15 attributes it considers key in
corporate reporting. The TELUS annual report was named the best in the world
on financial objectives - outlook, receiving the 'O' Award. It also received
honourable mentions in the executive statement, business at a glance,
financial highlights, risk factors and management categories.
The award clearly reflects TELUS' commitment to public disclosure and
corporate governance, and continues to build TELUS' credibility with investors
for providing excellent information needed for their decision-making.
TELUS is Canada's most environmentally friendly company
In October, TELUS received powerful confirmation of our leadership in
corporate social responsibility by being named Canada's most environmentally
friendly company by Corporate Knights, in its 2003 ranking of "green
machines". Joining TELUS in the top five listing of environmentally friendly
companies were Suncor Energy, Alcan, Dofasco and Royal Bank of Canada.
The Corporate Knights ranking was determined by three leading corporate
social performance research firms which evaluated the Toronto Stock Exchange's
100 largest companies, on a wide range of indicators, including land
reclamation, energy efficiency, recycling and stakeholder relations. Some of
the activities that make TELUS a "green machine" include: a program to reduce
paper consumption, reduction of our halon inventory and reclamation of
contaminated sites.
The aim of Corporate Knights is to be a resource for citizens and
corporations on the topic of responsible business. Their specific areas of
coverage include socially responsible investing and corporate social
responsibility. For more detailed information on Corporate Knights or to view
the rankings list, please visit: www.corporateknights.ca
Dividend declaration
The Board of Directors declared a quarterly dividend of fifteen cents
($0.15) per share on outstanding Common and Non-Voting Shares payable on
January 1, 2004 to shareholders of record on the close of business on December
11, 2003.
Forward-Looking Statements
==============================================================================
This document and the management 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 and
subject to risks and uncertainties. TELUS' actual results, performance or
achievement could differ materially from those expressed or implied by such
statements. Such statements are qualified in their entirety by the inherent
risks and uncertainties surrounding future expectations and may not reflect
the potential impact of any future acquisitions, mergers or divestitures.
Factors that could cause actual results to differ materially include but are
not limited to: general business and economic conditions in TELUS' service
territories across Canada and future demand for services; competition in
wireline and wireless services, including voice, data and Internet services
and within the Canadian telecommunications industry generally; re-emergence
from receivership of newly restructured competitors; levels of capital
expenditures; corporate restructurings; success of operational and capital
efficiency programs including maintenance of customer service levels; success
of integrating acquisitions; network upgrades, billing system conversions, and
reliance on legacy systems; implementation of new customer relationship
management software; development and introduction of new products and
services; supplier/vendor reliability and viability; realization of tax
savings; the impact of credit rating changes; availability and cost of capital
including renewal of credit facilities; financial condition and credit risk of
customers affecting collectibility of receivables; ability to maintain an
accounts receivable securitization program; legal and regulatory compliance of
employees and key stakeholders; adverse regulatory action; attraction and
retention of key personnel; collective labour agreement negotiations and
outcome of conciliation efforts; future costs of retirement and pension
obligations and returns on invested pension assets; technological advances;
the final outcome of pending or future litigation; the effect of
environmental, health and safety concerns; man-made and natural disasters; and
other risk factors discussed herein and listed from time to time in TELUS'
reports, comprehensive public disclosure documents, including the Annual
Information Form, and in other filings with securities commissions in Canada
and the U.S.
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
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month and nine-month
periods ended September 30, 2003 and 2002. This discussion contains forward-
looking information that is qualified by reference to, and should be read
together with, the Company's discussion regarding forward-looking statements
(see "Forward-Looking Statements" above). TELUS' most significant accounting
policies are discussed in the annual and interim financial statements of
TELUS. These policies and disclosures are important to the understanding of
the following discussion. The following should also be read together with the
interim and annual consolidated financial statements of TELUS. The interim
consolidated financial statements have been prepared in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP"), which differ in
certain respects from U.S. GAAP. See Note 20 to the interim consolidated
financial statements for a summary of the principal differences between
Canadian and U.S. GAAP as they relate to TELUS.
Management's discussion and analysis is comprised of the following:
1. Vision, Core Business and Strategy
2. Capability to Deliver Results
3. Results and Key Performance Indicators
4. Risks and Uncertainties
1. Vision, Core Business and Strategy
TELUS will continue to be guided by its six strategic imperatives
established in 2000. TELUS is focusing and moving forward on the following
priorities in 2003:
Continuing to deliver on our efficiency improvement objectives
- Communications segment operating costs were significantly reduced and
fifteen customer contact centres were closed and consolidated in the
first nine months of 2003. Net staff levels decreased by 835 since the
beginning of the year and an additional net 500 reduction is expected
during the fourth quarter of 2003 to meet the planned Operational
Efficiency Program cumulative staff reduction target of 7,300. During
the third quarter of 2003, staff reductions under the Operational
Efficiency Program were offset by planned hiring to accommodate an
anticipated seasonal volume increase. Additional temporary staff were
also hired and planned departures were deferred in response to
unprecedented emergency situations.
Improving customer service
Service levels in most areas have improved in 2003 compared with 2002,
with 15 of 19 retail Canadian Radio-telephone and Telecommunications
Commission ("CRTC") quality of service measures meeting or exceeding targets
at September 30, 2003. Three of the four remaining retail service quality
measures showed steady improvement until July 2003. Recent process and system
changes that are having a positive impact, include:
- Launch and roll-out of an interactive voice recognition tool that
directs callers to the appropriate destination for four contact centre
numbers (ADSL, Customer Care, Business billing and Credit). The number
of misdirected calls has been reduced substantially and productivity
and quality of service measures have improved significantly in recent
weeks;
- Integration of the Internet support and online billing information
Web site, TELUS.net, with the Company's portal myTELUS.com, providing
a more seamless look and feel. The integrated Web site provides
customers with 24 hours per day, 7 days per week access to support,
information and self-serve tools via a single, common access at
myTELUS.com. The benefits to TELUS of an integrated Web site include
more efficient Web management and customer support data analysis.
However, at the end of the third quarter of 2003, TELUS was below minimum
standards for 4 of 19 retail CRTC quality of service measures, namely: "Access
to Repair Bureau", "Out of Service Cleared in 24 Hours", "Repair Appointments
Met", and "Access to the Business Office". Access to the business office was
of particular concern, with too many customers experiencing long wait times.
Service levels were affected by a number of concurrent factors, including:
- Unprecedented emergency situations (discussed in "2. Capability to
Deliver Results") and heavy seasonal volumes challenged the Company's
goal to improve customer service levels.
- TELUS hired temporary and regular staff to replace a portion of
Operational Efficiency Program departures to remedy customer care
staff levels in order to improve service delivery; however an
inability to backfill Operational Efficiency Program departures as
quickly as planned occurred in certain customer contact centres as a
result of introducing more rigorous hiring and training criteria.
- The Company had implemented a new trouble management system in July
that integrated eight formerly separate systems in order to cut down
customer wait times, and resolve issues the first time they are
reported. Performance and stability problems were experienced with
this system, reducing employee productivity and creating delays in
processing customer work orders. Many of these problems are being
remediated and we are seeing consistent weekly improvement. Additional
actions taken to meet repair demands included re-allocating resources
geographically and across departments and the use of overtime.
Improvements in response times are being made and the Company expects
the four quality of service metrics to improve by the end of 2003.
Enhancing our leadership position in the North American wireless
industry
- TELUS Mobility continued to build on its industry-leading performance
from the first half of 2003. Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) increased by 49% and 54% for
the third quarter and first nine months of 2003, respectively, when
compared with the same periods a year ago. As a result of continued
EBITDA growth and reduced capital expenditures, Mobility generated
substantially improved cash flow (EBITDA less capital expenditures) of
$150.4 million and $397.9 million for the third quarter and first nine
months of 2003, respectively, as compared with $67.8 million and $71.7
million for the same periods in 2002.
- Mobility EBITDA margin expanded by 9 percentage points to a record
42.5% of Network revenue.
- TELUS Mobility continues to lead the industry with average revenue per
subscriber unit per month ("ARPU") of $60 and $57 for the third
quarter and first nine months of 2003, respectively, while maintaining
a world-class churn rate of 1.4% for both periods.
Strengthen our financial position, based on improved operating
performance
- The Company reduced net debt and continued to improve its financial
ratios in the third quarter and nine months ended September 30, 2003.
The Net debt to EBITDA ratio decreased from 3.3:1 at the end of 2002
to reach the original 2003 year-end target of 3.0:1 by June 30, 2003,
and was further reduced to 2.7:1 at September 30, 2003. Management has
further revised its guidance to 2.7:1 or less for the end of 2003 from
the 2.8:1 or less set at the end of July;
- During the third quarter of 2003, Moody's changed its outlook for
TELUS debt to 'positive' from 'stable', and Standard & Poor's changed
its outlook to 'stable' from 'negative'. Collectively, the debt rating
agencies have improved their outlooks or trend for TELUS debt to one
'positive' and three 'stable' assessments from four 'negative'
assessments at the beginning of the year. In the bond markets, prices
on TELUS Corporation notes have appreciated by approximately 15%,
while interest rate spreads over the relevant benchmark government
bonds have narrowed by 60% on average as at September 30, 2003, when
compared with December 31, 2002.
Achieving a settlement with our unionized employees
In 2000, TELUS commenced collective bargaining with the
Telecommunications Workers Union ("TWU") for a new collective agreement
replacing the legacy agreements from BC TELECOM and Alberta-based TELUS. Since
January 2003, the Company and the TWU continue to participate in a
conciliation process, which includes a global review of all outstanding issues
and a subsequent 60-day conciliation period. In July 2003, the conciliators
concluded their global review and released their action plan, which was agreed
to and accepted by the Company and the TWU. The conciliators' action plan sets
out that the 60-day conciliation period will commence November 14, 2003,
while, in the interim, pensions and employee benefits discussions will
continue. If the outstanding issues are not resolved at the end of the 60-day
period, the parties may agree to extend this phase or, alternatively,
following a 21 day cooling off period, a legal work stoppage may occur no
earlier than February 2004.
If the outstanding issues are not resolved and a new collective agreement
is not achieved, there is the risk of a labour disruption. While the financial
and operational impacts of a labour disruption are difficult to estimate, the
Company expects that in the short-term, profitability would be reduced, but
cash flow would increase due to reduced capital expenditures.
2. Capability to Deliver Results
Impact of Forest Fires in Western Canada, the Power Grid Failure in
Eastern Canada, and computer viruses
A number of natural disasters and other emergencies occurred during the
third quarter of 2003, which tested TELUS' emergency response capability.
TELUS activated its Emergency Operations Centre on four separate occasions
during the month of August 2003 in response to forest fires and wind storms in
B.C. and Alberta, the 'Niagara loop' power grid failure affecting Ontario, and
the spread of computer viruses over the Internet. The Emergency Operations
Centre provided strategic direction and support to local TELUS staff dealing
with various situations, and assisted in determining short-term priorities and
developing solutions. The total value of lost revenues and indirect costs of
responding to these events have not been quantified.
The B.C. forest fires in August destroyed approximately 80 km of fibre
optic cable, approximately 100 km of copper cable, one cable junction box, and
one TELUS Mobility cellular site. In the Kamloops area, approximately 5,000
lines were out of service - all but 65 lines were restored within 72 hours. In
the Kelowna area, the damage to TELUS facilities was less severe and service
was restored prior to evacuation orders being lifted. The total capital and
financial losses from the various fires is currently estimated at over $2
million and is reflected in the September 30, 2003 quarterly results; however,
as each fire is a separate insurance event, little if any of the losses will
be recovered from insurance.
During the electrical blackout that affected parts of Ontario in mid-
August, TELUS' wireline network and emergency 911 services were fully
operational. Customers with hosting services in TELUS' Intelligent Internet
Data Centres in Toronto experienced no outages during the power grid failure.
The TELUS Mobility network in the affected areas did experience heavy call
volume, which affected performance of the network. TELUS Mobility experienced
some site outages as the blackout endured. Additional power supply was sent to
sites to help minimize the impact, especially where customers providing
emergency services were affected.
August and September is traditionally a busy time of year for the
wireline business, with student moves and customers back from summer holidays.
Call volumes to TELUS' customer contact centres increased as a result of the
situations described above and as a result of the spread of computer viruses
over the Internet to many of TELUS' Internet customers. Despite having added
staff to customer care and technical help functions in July, the Company could
not provide enough customer help resources to deal with all of these
situations concurrently.
Despite these circumstances, TELUS is meeting 15 of 19 of its retail
quality of service indicators filed monthly with the CRTC. TELUS remains
committed to not only maintaining but also improving customer service levels
in coming quarters.
Regulatory updates
Approval for National video-on-demand service (Broadcasting Decision
2003-453) and Regional broadcasting distribution undertakings in Alberta
and British Columbia (Broadcasting Decision 2003-407)
On August 20, 2003, the CRTC approved applications by TELUS
Communications Inc. ("TCI") to operate terrestrial broadcasting distribution
undertakings to serve various communities in Alberta and British Columbia. On
September 9, 2003, the CRTC approved TELUS' application for a video-on-demand
undertaking licence with the same terms and conditions as previously licensed
video-on-demand undertakings in Canada. The licence is national in scope and
extends for a seven-year term. TCI continues to test and assess this
opportunity and no launch date has been set.
Access to Municipal Rights-of-Way (Supreme Court of Canada dismisses of
Appeal of Telecom Decision 2001-23 - Ledcor/Vancouver - Construction,
operation and maintenance of transmission lines in Vancouver)
In Telecom Decision 2001-23, the CRTC resolved a dispute between the City
of Vancouver and Ledcor over the access to municipal rights-of-way, granting
permission to Ledcor to construct, maintain and operate transmission lines
that Ledcor has constructed in Vancouver, and prescribing terms and conditions
related to that permission. The Federal Court of Appeal later dismissed an
appeal of Decision 2001-23. Subsequently, the Federation of Canadian
Municipalities, the City of Vancouver and other appellants sought leave to
appeal the Federal Court of Appeal's decision with the Supreme Court of
Canada.
On September 4, 2003, the Supreme Court of Canada decided to not hear the
appeal. The significant claims for annual fees by the cities (estimated at
between $30 to $60 million annually for TELUS) will not be payable.
Accordingly, the CRTC's jurisdiction to grant access to municipal rights-of-
way has been affirmed and TELUS, other telecommunications carriers and
broadcast distribution companies will be in a better position to negotiate
fair and reasonable terms of access to municipal rights-of-way for placement
of facilities.
Appeal of Telecom Decision 2003-45 - Provision of telecommunications
services to customers in multi-dwelling units
On July 30, 2003, the Canadian Institute of Public and Private Real
Estate Companies and the Building Owners and Managers Association - Canada
filed a motion for leave to appeal Telecom Decision 2003-45 with the Federal
Court of Appeal. In Decision 2003-45, the CRTC announced principles that allow
for access by all local telephone companies to equipment and wire in buildings
known as multi-dwelling units. The decision reduced considerably the
uncertainty TELUS had faced in gaining access to such buildings, both where
TELUS is an entrant in the market and in its incumbent territory where onerous
terms and conditions of access, including fees, were being demanded by
building owners. From a financial perspective, the decision reduced TELUS'
exposure to potential significantly increased costs of building access. This
matter is still before the courts.
Telecom Decision 2003-49 - CRTC directs incumbent telephone companies to
offer high-speed Internet services to competitors' residential telephone
customers
On July 21, 2003, the CRTC directed the incumbent telephone companies to
provide their retail high-speed Internet services to residential customers
receiving primary local telephone service from competitors upon request.
Currently the provision of high-speed service is directly linked to the local
telephone line. TELUS has determined a plan to reconfigure numerous automated
systems and processes to effect this decision by the second quarter of 2004
for estimated capital and operating costs of up to $10 million. In the
meantime, a manual process should begin to be rolled out towards the end of
2003.
Telecom Decision 2003-64 - TELUS' revised service improvement plan
On September 25, 2003, the CRTC approved TELUS' $21.4 million total
service improvement program, including high cost and non-high cost service
areas, to be completed over four years ending in 2006, and approved recovery
of this amount from the Deferral Account. TELUS continues to defer revenues in
accordance with Telecom Decision CRTC 2002-34 as the CRTC has not determined
the process for disposal of the balance of deferral account liability.
Public Notice 2003-8 - Review of Price Floor Safeguards for Retail
Tariffed Services and Related Issues
On October 23, 2003, the CRTC issued a public notice requesting comments
on its current imputation test, bundling rules and other matters. The CRTC
also proposed interim rules that could be effective in the first quarter of
2004. A public process to consider final rules may extend into the second half
of 2004. These interim rules would have the effect of increasing the floor
price that TELUS is subject to when pricing new tariffed (non-forborne)
services and when offering new bundles of services that include at least one
tariffed service. TELUS intends to fully participate in these public
proceedings and present its perspective on the issues addressed.
3. Results and Key Performance Indicators
Accounting Policy Developments
Guarantees
In the normal course of its operations, the Company enters into
obligations which GAAP may consider to be guarantees. Effective for reporting
periods ending after December 31, 2002, Canadian GAAP requires the disclosure
of these guarantees and their maximum, undiscounted amounts, even when the
likelihood of the Company having to make any payments under the guarantees is
slight. See Note 2a and Note 16c to the interim consolidated financial
statements.
Asset Retirement Obligations
Commencing with the Company's 2004 fiscal year, the new recommendations
of the Canadian Institute of Chartered Accountants ("CICA") for accounting for
asset retirement obligations (CICA Handbook Section 3110) will apply. The new
section focuses on the recognition and measurement of liabilities for
statutory, contractual or legal obligations, normally when incurred,
associated with the retirement of property, plant and equipment when those
obligations result from the acquisition, construction, development or normal
operation of the assets. The Company is currently evaluating the impact of
this standard on its financial statements.
Hedging Relationships
Commencing with the Company's 2004 fiscal year, the new guidelines of the
CICA for accounting for hedging relationships apply to the Company (CICA
Accounting Guideline AcG-13). The Company's previously disclosed hedge
accounting policy is compliant with the new Guideline.
Financial Impact of Price Cap Decisions
On May 30, 2002 and July 31, 2002, the CRTC announced its decisions on
the Regulatory Framework for the Second Price Cap Period for the ILECs
(Incumbent Local Exchange Carriers), or Telecom Decision 2002-34 and Telecom
Decision 2002-43, which established the framework for regulation of ILECs,
including TELUS. These decisions cover a four-year period beginning June 2002
for TELUS Communications Inc. and beginning August 2002 for TELUS
Communications (Quebec) Inc. ("TCQI").
On March 18, 2003, the CRTC issued Telecom Decision 2003-11, which
finalized for the industry the assignment of tariffed services to the service
baskets established in Regulatory Framework for the Second Price Cap Period.
Also on March 18, 2003, the CRTC released Telecom Decision 2003-18, TELUS
Communications Inc. - 2002 Annual price cap filing, in which it approved, on a
final basis, the majority of the applications filed in 2002 by TELUS proposing
rate changes pursuant to Decision 2002-34. On August 27, 2003, the CRTC
released Telecom Order 2003-352 - 2003 Annual Price Cap Filing. This order
approved all of TCI's tariff applications, for implementation on a prospective
basis, to meet its 2003 price cap commitments.
On August 22, 2003, the CRTC issued Telecom Decision 2003-56, which
finalized for TCQI the assignment of tariffed services to the service baskets
established in Decision 2002-43. The assignment was made in a manner very
similar with the assignments for large ILECs in Decision 2003-11. Also on
August 22, 2003, the CRTC issued Telecom Decision 2003-57 which approved, with
changes, applications filed by TCQI for rate changes and directed TCQI to file
further rate changes to meet its 2002 price cap commitment. All other TCQI
rates were approved on a final basis.
The impact of these decisions on TELUS was a decrease in Communications
segment Operating revenues of $11.7 million and $58.7 million, respectively,
for the third quarter and nine month period ended September 30, 2003, when
compared with the same periods in 2002. In addition, the Communications
segment EBITDA decreased by $10.6 million and $57.7 million, respectively, for
the third quarter and nine month period ended September 30, 2003, when
compared to the same period one year earlier.
Results of Operations
Highlights
Quarter ended September 30 2003 2002 Change %
--------------------------------------------------------------------------
($ in millions except per
share amounts)
Operating revenues 1,806.2 1,766.3 39.9 2.3
EBITDA(1) 754.5 663.1 91.4 13.8
Restructuring and workforce
reduction costs 2.3 313.3 (311.0) (99.3)
Income taxes (recovery) 84.0 (50.5) 134.5 -
Net income (loss) 115.9 (107.4) 223.3 -
Common Share and
Non-Voting Share income (loss) 113.2 (110.0) 223.2 -
Earnings (loss) per share (EPS) 0.32 (0.35) 0.67 -
Capital expenditures 304.0 327.2 (23.2) (7.1)
Free cash flow(2) 417.1 239.9 177.2 73.8
--------------------------------------------------------------------------
Nine months ended September 30 2003 2002 Change %
--------------------------------------------------------------------------
($ in millions except per share amounts)
Operating revenues 5,320.4 5,212.3 108.1 2.1
EBITDA 2,145.1 1,873.4 271.7 14.5
Restructuring and workforce
reduction costs 12.1 328.9 (316.8) (96.3)
Income taxes (recovery) 133.0 (0.9) 133.9 -
Net income (loss) 281.9 (89.8) 371.7 -
Common Share and
Non-Voting Share income (loss) 274.0 (97.5) 371.5 -
Earnings (loss) per share (EPS),
basic 0.79 (0.32) 1.11 -
Capital expenditures 817.3 1,281.7 (464.4) (36.2)
Free cash flow 861.8 79.1 782.7 -
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) is defined as Operating revenues ($1,806.2 million and
$1,766.3 million, respectively, for the third quarter of 2003 and
2002) less Operations expense ($1,051.8 million and $1,103.2
million, respectively, for the third quarter of 2003 and 2002). As
defined, EBITDA excludes Restructuring and workforce reduction costs
of $2.3 million and $313.3 million, respectively, for the third
quarter of 2003 and 2002.
The Company has issued guidance on and reports EBITDA because it is
a key measure used by management to evaluate performance of business
units and it is utilized in measuring compliance with debt
covenants. The Company also believes EBITDA is a measure commonly
reported and widely used by investors as an indicator of a company's
operating performance and ability to incur and service debt. The
Company believes EBITDA assists investors in comparing a company's
performance on a consistent basis without regard to depreciation and
amortization, which are non-cash in nature and can vary
significantly depending upon accounting methods or non-operating
factors such as historical cost; and without regard to Restructuring
and workforce reduction costs, which are transitional in nature.
EBITDA is not a calculation based on Canadian or U.S. Generally
Accepted Accounting Principles and should not be considered an
alternative to Operating income or Net income in measuring the
Company's performance or used as an exclusive measure of cash flow
because it does not consider the impact of working capital growth,
capital expenditures, debt principal reductions and other sources
and uses of cash which are disclosed in the Consolidated Statements
of Cash Flows. Investors should carefully consider the specific
items included in TELUS' computation of EBITDA. While EBITDA has
been disclosed herein to permit a more complete comparative analysis
of the Company's operating performance and debt servicing ability
relative to other companies, investors should be cautioned that
EBITDA as reported by TELUS may not be comparable in all instances
to EBITDA as reported by other companies.
(2) Free cash flow is defined as EBITDA less Capital expenditures, cash
interest paid, cash taxes and cash dividends. For the third quarter
of 2003 and 2002, the calculation is:
($ in millions) 2003 2002 Reference
---- ---- ---------
EBITDA 754.5 663.1 Defined above
Less: Capital Consolidated statements
expenditures 304.0 327.2 of cash flows
Less: Cash interest paid 27.7 48.6 Consolidated statements
of cash flows
Less: Cash income taxes Consolidated statements
(recov.) (38.4) 4.2 of cash flows
Less: Cash dividends 41.6 43.2 Consolidated statements
of cash flows
Less: Investment tax Included in EBITDA and Cash
credits received 2.5 -.- income taxes (recov.)
--- ---
417.1 239.9
----- -------
This measure is used to provide an indication of underlying cash
flows in the business for the items identified. As defined, free
cash flow excludes Restructuring and workforce reduction costs,
working capital changes, and other sources and uses of cash, which
are disclosed in the consolidated statements of cash flows. Free
cash flow is not a calculation based on Canadian or U.S. Generally
Accepted Accounting Principles and should not be considered an
alternative to consolidated statements of cash flows. Free cash flow
is a measure that can be used to gauge TELUS' performance over time.
Investors should be cautioned that Free cash flow as reported by
TELUS may not be comparable in all instances to Free cash flow as
reported by other companies.
Significant changes included in the third quarter 2003 financial results,
when compared with the third quarter of 2002, were:
- Communications segment revenues decreased by $47.4 million or 3.8%.
Normalized for incremental year-over-year $11.7 million negative price
cap decision impacts, revenues decreased by $35.7 million or 2.8%,
primarily as a result of lower voice equipment sales, lower long
distance revenues from reduced long distance minutes and prices, and
reduced application development revenues due to the disposal of
certain assets earlier in 2003;
- Communications segment EBITDA improved by $10.7 million or 2.1%, as
the decrease in revenues was more than offset by a $58.1 million
decrease in operations expense. The decrease in operations expense was
primarily a result of Operational Efficiency Program savings partially
offset by increased pension and other expenses;
- Communications segment high-speed Internet net additions of 47,200
exceeded net additions of the same period in 2002 as well as net
additions for the first and second quarters of 2003;
- Mobility Network revenue continued its strong growth, increasing
$83.5 million or 16.9%. Mobility Network revenue growth, combined with
significant operating efficiencies and economies of scale, flowed
through to EBITDA at a rate of 96.6%. TELUS' Canadian industry-leading
ARPU increased $2 to $60;
- Mobility EBITDA increased $80.7 million or 49.0% as a result of strong
ARPU and subscriber growth combined with a significant reduction in
the churn rate and cost containment efforts;
- Mobility EBITDA margin expanded by 9 percentage points to a record
42.5% of Network revenue;
- Mobility net subscriber additions for the third quarter were 100,600,
an increase of 7.4% continuing the positive trend experienced in the
second quarter of 2003. Notably, higher revenue-generating net
postpaid subscriber additions increased by 13.5% over the third
quarter of 2002;
- Mobility blended postpaid and prepaid churn declined to 1.4% per
month, a considerable improvement from 1.7% for the same quarter last
year, driving the 7.4% year-over-year net subscriber additions
increase despite gross additions being flat.
- Interest expense on long-term and short-term debt decreased by
$14.5 million as a result of lower debt balances, while $30.7 million
of interest income was recorded in the third quarter of 2003 primarily
with respect to the settlement of tax matters. Interest income, net of
related income taxes, contributed five cents to earnings per share in
the third quarter of 2003;
- Consolidated Free cash flow increased to $417.1 million, exceeding
cash payments of $32.1 million under Restructuring and workforce
reduction initiatives; and
- Net debt decreased by $516.4 million in the third quarter of 2003 and
decreased by $810.0 million during the last twelve months.
The discussion below for Operating revenues, Operations expense, EBITDA
and Capital expenditures is presented on a segmented basis. All other
discussion is presented for the consolidated interim financial results.
Operating revenues - Communications segment
-------------------------------------------------------------------------
Quarter ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Voice local(1) 526.2 524.4 1.8 0.3
Voice contribution 16.7 24.9 (8.2) (32.9)
Voice long distance(2) 238.5 252.3 (13.8) (5.5)
Data(3) 331.9 332.2 (0.3) (0.1)
Other(4) 73.0 100.0 (27.0) (27.0)
-------------------------------------------------------------------------
External operating revenue 1,186.3 1,233.8 (47.5) (3.8)
Intersegment revenue 24.6 24.5 0.1 0.4
-------------------------------------------------------------------------
Total operating revenue 1,210.9 1,258.3 (47.4) (3.8)
-------------------------------------------------------------------------
Nine months ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Voice local(1) 1,574.4 1,580.9 (6.5) (0.4)
Voice contribution 48.6 62.8 (14.2) (22.6)
Voice long distance(2) 728.8 772.2 (43.4) (5.6)
Data(3) 1,027.1 1,026.7 0.4 0.0
Other(4) 225.1 302.5 (77.4) (25.6)
-------------------------------------------------------------------------
External operating revenue 3,604.0 3,745.1 (141.1) (3.8)
Intersegment revenue 71.4 72.5 (1.1) (1.5)
-------------------------------------------------------------------------
Total operating revenue 3,675.4 3,817.6 (142.2) (3.7)
-------------------------------------------------------------------------
(1) Voice local - incremental price cap reductions of $1.5 million for
the third quarter and $32.2 million for the nine months ended
September 30, 2003.
(2) Voice long distance - incremental price cap changes of positive
$0.4 million for the third quarter and negative $1.2 million for the
nine months ended September 30, 2003.
(3) Data - incremental price cap reductions of $10.4 million for the
third quarter and $25.1 million for the nine months ended September
30, 2003.
(4) Other - incremental price cap reductions of $0.2 million for the
third quarter and $0.2 million for the nine months ended September
30, 2003.
TELUS Communications continued its strategic focus on driving increased
profitability by focusing on operational efficiency and cost control in the
face of declining revenues.
Voice local revenue is generated from access to the Company's network,
which is provided to customers on a monthly subscription basis, and from the
Company's optional and pay-per-use enhanced services. Local access revenue
decreased by $0.5 million and $16.7 million, respectively, for the third
quarter and first nine months of 2003, when compared with the same periods
last year, due to price cap decision impacts and fewer access lines than one
year ago were partly offset by growth in Non-ILEC business. Increased local
enhanced services revenue of $2.3 million and $10.2 million, respectively, for
the third quarter and first nine months, partly offset the decline in local
access revenues. Excluding the negative price cap impacts, voice local revenue
increased by $3.3 million or 0.6% and $25.7 million or 1.6%, respectively, for
the third quarter and first nine months of 2003 as compared to 2002.
Network access lines decreased by 4,000 lines during the third quarter of
2003 as compared with an increase of 7,000 in the third quarter of 2002.
Consumer lines increased by 3,000 and 7,000, respectively, for the third
quarter of 2003 and 2002, which primarily reflects seasonal increases
associated with students returning to university and college. Lower seasonal
growth in 2003 was a result of increased competitive line losses. Business
lines decreased by 7,000 during the third quarter of 2003 and were unchanged
during the same period in 2002. Business lines decreased primarily as a result
of competitive losses in Western Canada exceeding gains in Central and Eastern
Canada, as well as continued migration to more efficient ISDN services. For
the nine-month period ended September 30, 2003, network access lines decreased
by 28,000 as compared with a decrease of 46,000 for the same period in 2002.
Network access lines decreased by 0.8% in the twelve-month period ended
September 30, 2003, an improvement from the 1.1% rate for the twelve months
ended December 31, 2002. The combined ILEC business and local consumer market
share was estimated to be 96.2% at September 30, 2003 (97.0% one year
earlier).
Voice contribution revenue, which represents TELUS' share of contribution
pool funds for providing service in high cost rural service areas, decreased
for the quarter and nine-month periods ended September 30, 2003, when compared
with the same periods one year ago. The decrease was a result of a lower
shortfall calculated according to the methods prescribed by the CRTC for TELUS
and other industry competitors.
Voice long distance revenue decreased for the third quarter and nine-
month period ended September 30, 2003, when compared with the same periods
last year, primarily as a result of fewer consumer and business minutes and
price competition. Consumer revenues decreased as a result of competitive
pressures including 'dial-around' services; partly offset by an increase in
the monthly long distance plan administration fee from $1.25 to $2.95 in
February of this year. Business revenues decreased as a result of fewer
minutes and lower rates. Wholesale settlement revenues were relatively
unchanged in the third quarter and the first nine months of 2003 as higher
volumes were offset by lower prices. Substitution to alternative technologies
such as e-mail, Internet and wireless contributed to long distance revenue and
minute erosion.
Data revenues include Internet access, hosting and applications, LAN/WAN,
gateway service, internetworking and remote access, managed information
technology (IT) services and legacy data services such as private line,
switched data services, data local access, data settlements and data equipment
sales. Wireless data revenues are included in Mobility segment Network
revenues. Communications segment data revenue growth was relatively flat as
increased Internet-related revenues were offset by price cap impacts and lower
revenues for data equipment sales and other services. This included a
reduction of application development revenues by approximately $7 million and
$14 million, respectively, for the third quarter and first nine months of
2003, when compared with the prior year, due to the disposal of certain assets
during the second quarter of 2003. Data revenue growth excluding the negative
price cap impacts was $10.1 million or 3.0% and $25.5 million or 2.5%,
respectively, for the third quarter and first nine months of 2003 as compared
to 2002. Internet service revenues increased by $14.8 million and $62.2
million, respectively, primarily as a result of growth in the Internet
subscriber base. TELUS high-speed Internet subscriber additions were a strong
47,200 during the third quarter of 2003 due in part to a new introductory
offer. This is in contrast to an industry trend of lower net additions each
quarter.
Other revenue decreased for the third quarter and first nine months of
2003, when compared with the same periods in 2002, primarily as a result of
lower voice equipment rental and sales, as well as lower rent from support
structures, lower installation and contract services, and lower individual
line service grants in respect of the conversion of multi-party lines to
single lines in high cost rural areas in Alberta in the early 1990s.
Total external operating revenue discussed above included Non-ILEC
revenues of $138.4 million for the third quarter of 2003 and $135.9 million
for the third quarter of 2002, an increase of $2.5 million or 1.8%. Non-ILEC
revenues for the nine-month period ended September 30, 2003 were $417.7
million, compared with $375.0 million for the same period last year - an
increase of $42.7 million or 11.4%. Growth in Non-ILEC application development
revenues was affected by the disposal of certain assets discussed in data
revenues above, reducing the revenues by approximately $7 million and $14
million, respectively, for the quarter and nine months ending September 30,
2003, when compared with the same periods in 2002. Normalized for such asset
disposal, Non-ILEC revenues increased by approximately $9.5 million or 7% in
the third quarter and approximately $56.7 million or 15% respectively.
Intersegment revenues represent services provided by the Communications
segment to the Mobility segment. These revenues are eliminated upon
consolidation together with the associated expense from the Mobility segment.
Key operating indicators - Communications segment
(000s for subscribers and additions) 2003 2002 Change %
-------------------------------------------------------------------------
As at September 30
------------------
Network access lines, end of period 4,883 4,921 (38) (0.8)
Total Internet subscribers(1),
end of period 849.7 783.0 66.7 8.5
Dial-up 333.7 416.2 (82.5) (19.8)
High-speed 516.0 366.8 149.2 40.7
Quarter ended September 30
--------------------------
Change in Network access lines (4) 7 (11) (157.1)
Total Internet subscriber
net additions 29.1 25.4 3.7 14.6
Dial-up (18.1) (15.4) (2.7) (17.5)
High-speed 47.2 40.8 6.4 15.7
Nine months ended September 30
------------------------------
Change in Network access lines (28) (46) 18 39.1
Total Internet subscriber
net additions(1) 48.0 113.1 (65.1) (57.6)
Dial-up (58.0) (38.9) (19.1) (49.1)
High-speed 106.0 152.0 (46.0) (30.3)
-------------------------------------------------------------------------
(1) As a result of a subscriber audit following a billing system
conversion in the third quarter of 2002, Internet subscriber counts
and net additions for the first six months of 2003 are net of
reductions of approximately 13,000 dial-up subscribers and
approximately 4,700 high-speed Internet subscribers.
Operating revenues - Mobility segment
Quarter ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Network revenue 577.4 493.9 83.5 16.9
Equipment revenue 42.5 38.6 3.9 10.1
-------------------------------------------------------------------------
External operating revenue 619.9 532.5 87.4 16.4
Intersegment revenue 4.0 4.9 (0.9) (18.4)
-------------------------------------------------------------------------
Total operating revenue 623.9 537.4 86.5 16.1
-------------------------------------------------------------------------
Nine months ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Network revenue 1,595.9 1,362.2 233.7 17.2
Equipment revenue 120.5 105.0 15.5 14.8
-------------------------------------------------------------------------
External operating revenue 1,716.4 1,467.2 249.2 17.0
Intersegment revenue 11.6 13.2 (1.6) (12.1)
-------------------------------------------------------------------------
Total operating revenue 1,728.0 1,480.4 247.6 16.7
-------------------------------------------------------------------------
Mobility Network revenue is generated from monthly billings for access
fees, incremental airtime charges, prepaid time consumed or expired, wireless
Internet services and fees for value-added services. Network revenue increased
for the three months ended September 30, 2003 as compared to the same period
in 2002 as a result of increased ARPU and the continued expansion of TELUS
Mobility's subscriber base by 14.0% to approximately 3.3 million subscribers
from 2.9 million one year ago. ARPU increased to $60 from $58 for the same
quarter last year.
TELUS Mobility's execution of its strategic focus on profitable revenue
growth and subscriber retention resulted in a higher ARPU and a substantially
improved churn rate year-over-year. The $2 increase in ARPU continued to build
upon the year-over-year increases experienced in the first half of 2003,
reversing the previously declining trend. Similarly, ARPU for the first nine
months of 2003 was $57 as compared to $55 for the same period last year. The
improved ARPU was a result of increased usage and disciplined pricing changes
including per-minute billing and the reduction of eligible hours included in
certain 'free evening and weekend' rate plan features. Average minutes of use
("MOU") per subscriber per month were 367 for the third quarter of 2003 and
342 for the first nine months of 2003 as compared to 297 and 286,
respectively, for the same periods in 2002. As of September 30, 2003, postpaid
subscribers accounted for 82.4% of the total cumulative subscriber base as
compared to 84.1% one year earlier and have been stable during the current
year. Net postpaid subscriber additions of 76,400 for the third quarter of
2003 represented 75.9% of all net additions in the period as compared to
67,300 (71.8%) for the corresponding period one year ago. Moreover, net
postpaid additions increased by 13.5% in the current period, reversing a
negative trend experienced since the third quarter of 2002. For the first nine
months of 2003, net postpaid additions represented 74.3% of all net additions
as compared to 76.7% in the same period one year earlier. Total net subscriber
additions for the third quarter increased 7.4%.
Blended postpaid and prepaid churn rate averaged 1.4% per month in the
third quarter of 2003, a considerable improvement from 1.7% for the comparable
period one year earlier, and up only slightly from 1.3% in the second quarter
of 2003. The churn rate for the first nine months of 2003 was 1.4% as compared
to 1.8% for the same period last year. Deactivations declined 6.6% to 133,500
for the third quarter 2003 as compared to 142,900 for the same period in 2002
despite a 14.0% increase in the subscriber base. Deactivations for the first
nine months of 2003 were 393,900 as compared to 451,700 for the same period
last year representing a 12.8% decline. The decline in churn can be attributed
to improved network quality and coverage, improved client service levels,
client contracting as part of loyalty and retention programs, and specific
grandfathered rate plans related to per-second billing and the change to
certain 'free evening and weekend' rate plan features.
Equipment sales, rental and service revenue in the three-month period
ended September 30, 2003, was $42.5 million as compared to $38.6 million for
the same period in 2002. Equipment revenue for the first nine months of 2003
was $120.5 million representing an increase of $15.5 million or 14.8% over the
same period in 2002. The increase occurred despite a decline in gross
subscriber additions to 234,100 and 664,000 for the third quarter and first
nine months of 2003, respectively, as compared to 236,600 and 738,500 for the
same periods in 2002. The increase in revenue was principally due to handset
price increases, product mix, and increased retention and upgrade activity.
Intersegment revenues represent services provided by the Mobility segment
to the Communications segment. These revenues are eliminated upon
consolidation together with the associated expense from the Communications
segment.
Key operating indicators - Mobility segment
(000s for subscribers and additions) 2003 2002 Change %
-------------------------------------------------------------------------
As at September 30
------------------
Subscribers - postpaid 2,691.4 2,408.9 282.5 11.7
Subscribers - prepaid 574.2 455.6 118.6 26.0
--------- --------- ------- ------
Subscribers - total 3,265.6 2,864.5 401.1 14.0
Total POPs(1) covered including
roaming/resale (millions)(2) 29.1 26.9 2.2 8.2
Quarter ended September 30
--------------------------
Net subscriber additions - postpaid 76.4 67.3 9.1 13.5
Net subscriber additions - prepaid 24.2 26.4 (2.2) (8.3)
--------- --------- ------- ------
Net subscriber additions - total 100.6 93.7 6.9 7.4
Churn, per month (%)(3a) 1.4 1.7 (0.3) -
Acquisition COA(3b) per
gross subscriber add. ($)(3c) 406 391 15 3.8
ARPU ($)(3d) 60 58 2 3.4
EBITDA to network revenue (%) 42.5 33.4 9.1 -
Retention COA to network revenue (%) 3.9 3.6 0.3 -
EBITDA excluding
Acquisition COA ($ millions)(3e) 340.6 256.8 83.8 32.6
Nine months ended September 30
------------------------------
Net subscriber additions - postpaid 200.8 219.9 (19.1) (8.7)
Net subscriber additions - prepaid 69.3 66.9 2.4 3.6
--------- --------- ------- ------
Net subscriber additions - total 270.1 286.8 (16.7) (5.8)
Churn, per month (%) 1.4 1.8 (0.4) -
Acquisition COA per gross
subscriber add. ($)(4) 420 405 15 3.7
ARPU ($) 57 55 2 3.6
EBITDA to network revenue (%) 39.2 29.8 9.4 -
Retention COA to network revenue (%) 4.0 4.0 - -
EBITDA excluding Acquisition COA
($ millions) 904.0 683.0 221.0 32.4
-------------------------------------------------------------------------
(1) POPs is an abbreviation 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.
(2) TELUS Mobility has not activated all digital-roaming areas. As at
September 30, 2003, TELUS Mobility PCS digital population coverage
was 21.7 million and 29.0 million including the roaming/resale
agreements principally with Bell Mobility and Aliant Telecom
Wireless.
(3) The following are not measures under accounting principles generally
accepted in Canada and the U.S. These measures are industry metrics
and are useful in assessing the operating performance of a wireless
company. The definitions of these measures are as follows:
a. Churn is calculated as the number of subscriber units
disconnected during the period divided by the average number
of units on the network, expressed as a rate per month.
b. Acquisition COA consists of the total of handset subsidies,
commissions, and advertising & promotion expenses related to
the initial customer acquisition during a given period.
c. Acquisition COA per gross subscriber add - Acquisition COA
divided by gross subscriber activations during the period.
d. ARPU is calculated as network service revenue divided by the
average number of units on the network during the period,
expressed as a rate per month.
e. EBITDA excluding Acquisition COA is a measure for operational
profitability normalized for the period costs of adding new
customers.
(4) For the nine-month period ended September 30, 2002, Acquisition COA
of $405 excluded the $21.0 million favourable clarification of tax
legislation by the Ontario Provincial Sales Tax authorities,
representing a reversal of a cumulative COA liability.
Operations expense - Communications segment
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 701.9 760.0 (58.1) (7.6)
Nine months ended September 30 2,155.7 2,350.4 (194.7) (8.3)
-------------------------------------------------------------------------
Operations expense for the Communications segment decreased in the
quarter and nine-month periods ended September 30, 2003, when compared with
the same periods last year, primarily due to the traction of the Operational
Efficiency Program that became significant beginning in the third quarter last
year, as well as lower Non-ILEC expenses and lower equipment costs of sales,
partly offset by an increased pension expense in 2003. In addition, expenses
in the nine-month period last year were reduced by a $40 million investment
tax credit.
The significant changes in operating expenses for the third quarter and
nine months ended September 30, 2003, when compared with the same periods in
2002, were:
- Incremental Operational Efficiency Program savings from lower salaries
and benefits of $73.0 million and $225.0 million, respectively. Staff
levels, including hiring of temporary and regular customer contact
centre staff, increased by 38 in the third quarter of 2003, but have
decreased by 835 and 3,339, respectively, when compared with the end
of 2002 and with September 2002. During the fourth quarter of 2003,
over 500 net staff reductions are expected to occur so that the
Company achieves the planned targets announced under Operational
Efficiency Program initiatives;
- Incremental Operational Efficiency Program non salary-related savings
were $7.0 million and $54.0 million, respectively. The non salary-
related savings were from lower employee-related overhead costs, use
of fewer contractors, and lower advertising and promotions expense;
- Equipment cost of sales decreased by $9.7 million and $45.2 million,
respectively, primarily as a result of lower sales of voice and data
equipment. This included approximately $12 million year-to-date, of
lower high-speed Internet cost of sales as a result of reduced gross
additions of high-speed Internet subscribers, lower modem prices, and
recognition of certain promotional discounts to customers recorded as
an offset against revenues;
- Bad debt expense decreased by $4.5 million and $2.2 million,
respectively;
- The expense for the Software and Related Technology and Service
Agreements with Verizon Communications Inc. ("Verizon"), was lower by
$1.2 million and $8.1 million, respectively;
- Expenses for the nine-month period ended September 30, 2003 increased
by $38.8 million, when compared with 2002, as a result of significant
investment tax credits recorded in 2002 ($40.0 million in 2002;
$1.2 million in 2003). The investment tax credits were recognized as a
result of a settlement with tax authorities for previous years' claims
and were recorded as a reduction to operations expense;
- Increased pension expense for defined benefit and defined contribution
plans of $11.5 million and $39.3 million, respectively;
- Expenses increased by $3.8 million and $30.6 million, respectively, as
a result of lower labour capitalization representing lower capital
build activities consistent with lower salaries and benefits as a
result of Operational Efficiency Program savings;
- Overtime expenses increased by $3.8 million in the third quarter and
first nine months of 2003, as compared with 2002 in response to a
number of natural disasters and other emergencies;
- All other changes increased expenses by $18.2 million for the quarter
and $27.3 million for the nine-month period.
Included in the total segment expenses discussed above, Non-ILEC
operations expenses for the quarter and nine-month periods ended September 30,
2003 were $144.4 million and $444.3 million, respectively, compared with
$159.2 million and $464.5 million, respectively, in the same periods last
year. This represented decreases of $14.8 million or 9.3% and $20.2 million or
4.3%, respectively as a result of operating efficiencies and the greater use
of on-net facilities, despite increasing revenues.
Operations expense - Mobility segment
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 378.4 372.6 5.8 1.6
Nine months ended September 30 1,102.6 1,074.2 28.4 2.6
-------------------------------------------------------------------------
Mobility operations expense in the third quarter increased by $5.8
million or 1.6% and increased (after normalizing for the $21.0 million
favourable PST ruling in 2002) by $7.4 million or 0.7% for the first nine
months of 2003, when compared with the same periods in 2002. TELUS Mobility
has been able to achieve significant economies of scale as evidenced by growth
in subscribers of 14.0% and Network revenue of 16.9% in the third quarter
while maintaining flat operating expenses year-over-year.
Expenses related to equipment sales increased $1.1 million (1.3%) to
$86.4 million in the third quarter as compared to $85.3 million for the same
period one year earlier. Despite a decline in gross subscriber additions in
the third quarter from 236,600 to 234,100, the increase in equipment expense
was due to higher retention activity. For the first nine months of 2003,
equipment expenses increased by $8.5 million or 3.4% over the same period last
year. However, prior year expenses included a $21.0 million reduction
resulting from a clarification of provincial sales tax legislation related to
handset subsidies, which represented the reversal of a cumulative liability
previously recorded in marketing cost of acquisition ("COA"). Once normalized
to exclude the 2002 provincial sales tax credit, equipment expense for the
first nine months of 2003 decreased $12.5 million or 4.6% as compared with the
same period in 2002. This decrease was principally due to a decline in gross
subscriber activations and improved handset pricing including favourable
exchange rates. Gross subscriber activations were 664,000 for the first nine
months of 2003 as compared to 738,500 for the same period last year. The cost
improvement due to the reduction in gross subscriber additions was partially
offset by increased retention activity in the first nine months of 2003.
Handset costs are included in marketing cost of acquisition (COA).
Network operating expenses consist of site-related expenses, transmission
costs, spectrum licence fees, contribution revenue taxes, and other direct
costs related to network operations. Network operating expenses remained
relatively flat at $97.9 million and $274.7 million for the third quarter and
first nine months of 2003, respectively, compared to $97.9 million and $274.6
million for the same periods last year. This occurred despite increases in
transmission and site-related expenses to support the increased cell sites,
subscriber base, and improved network quality and coverage. These costs were
offset by a reduction in Industry Canada spectrum licence fees of
approximately $7.0 million for the first nine months. TELUS Mobility has
focused efforts on containing these costs through negotiating improved leased
transmission rates, roaming rates, and maintenance rates with a number of
telecommunications carriers and key vendors. PCS digital population coverage
expanded by 7.3 million (principally due to roaming with Bell - 5.1 million
and Aliant - 1.5 million) to 29.0 million during the year.
Marketing expenses excluding handset subsidies were $67.2 million for the
third quarter and $188.3 million for the first nine months of 2003 as compared
to $56.7 million and $164.3 million for the same periods in 2002. The
increases were primarily due to higher dealer compensation costs associated
with the expanded cumulative subscriber base and to increased re-contracting
activity. Acquisition COA was $406 for the third quarter of 2003 as compared
to $391 for the same period last year. However, Acquisition COA for the third
quarter of 2003 declined $22 from $428 in the second quarter of 2003.
Acquisition COA for the first nine months of 2003 was $420 as compared to $405
(excluding any benefit from the $21.0 million PST clarification) for the same
period in 2002. The small increases in acquisition COA were principally due to
higher marketing costs and lower gross subscriber additions partially offset
by lower handset subsidies.
General and Administration ("G&A") expenses consist of employee
compensation and benefits, facilities, client services, bad debt and various
other expenses. G&A expenses declined in the third quarter and for the first
nine months of 2003 despite a subscriber base growth of 14.0% and Network
revenue growth of 16.9% in the quarter. G&A expenses were $126.9 million and
$380.4 million for the third quarter and first nine months of 2003,
respectively, as compared to $132.7 million and $384.6 million for the same
periods in 2002. The declines of $5.8 million in the third quarter and $4.2
million for the first nine months of 2003 were primarily due to lower bad
debts. The improvements in bad debts can be attributed to the completion of
billing system conversions in 2002 and improvement in credit and collections.
TELUS Mobility completed five major billing system conversions by October 2002
after an 18-month period. TELUS Mobility only slightly increased full-time
equivalent employees (FTE's) to 5,175 from 5,149 one year earlier despite the
increase in the subscriber base and the number of retail store personnel over
the same period.
Earnings(1) Before Interest, Taxes, Depreciation and Amortization
(EBITDA) by segment
Quarter ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 509.0 498.3 10.7 2.1
Mobility segment 245.5 164.8 80.7 49.0
-------------------------------------------------------------------------
TELUS Consolidated 754.5 663.1 91.4 13.8
-------------------------------------------------------------------------
Nine months ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 1,519.7 1,467.2 52.5 3.6
Mobility segment 625.4 406.2 219.2 54.0
-------------------------------------------------------------------------
TELUS Consolidated 2,145.1 1,873.4 271.7 14.5
-------------------------------------------------------------------------
(1) Excluding Restructuring and workforce reduction costs.
EBITDA(1) margin(2) by segment (%)
Quarter ended September 30 2003 2002 Change
---------------------------------------------------------------
($ in millions)
Communications segment 42.0 39.6 2.4
Mobility segment(3) 39.3 30.7 8.6
TELUS Consolidated 41.8 37.5 4.3
---------------------------------------------------------------
Nine months ended September 30 2003 2002 Change
---------------------------------------------------------------
($ in millions)
Communications segment 41.3 38.4 2.9
Mobility segment(3) 36.2 27.4 8.8
TELUS Consolidated 40.3 35.9 4.4
---------------------------------------------------------------
(1) Excluding Restructuring and workforce reduction costs.
(2) EBITDA divided by total revenue.
(3) EBITDA margin as a percentage of network revenue was 42.5% and 39.2%
for the third quarter and year-to-date 2003, respectively, as
compared to 33.4% and 29.8% (28.3% before PST clarification) for the
same periods last year.
Communications segment EBITDA and EBITDA margin excluding Restructuring
and workforce reduction costs improved for the third quarter and nine months
ended September 30, 2003, when compared with the same periods in 2002,
primarily as a result of:
- Operational Efficiency Program savings of $80 million and
$279 million, respectively;
- Non-ILEC EBITDA improved by $17.3 million and $62.9 million,
respectively; and
- Partly offset by negative price cap decision impacts, decreasing
long distance and other revenues, increased pension costs, and the
investment tax credits received in 2002.
Normalized for price cap decision impacts, Communications segment EBITDA
increased by $21.3 million or 4.3% and $110.2 million or 7.5%, respectively,
for the third quarter and first nine months of 2003 as compared to 2002.
TELUS Mobility segment EBITDA and EBITDA margin improvement for the third
quarter and first nine months of 2003 was attributed to strong ARPU and
subscriber growth combined with a significant reduction in the churn rate and
cost containment.
TELUS Mobility EBITDA growth for the third quarter represented a
flow-through rate of 96.6% of Network revenue growth. Consequently, EBITDA for
the first nine months of 2003 grew 54.0% to $625.4 million. When the
$21.0 million favourable PST clarification is excluded, EBITDA for the first
nine months of 2003 increased by 62.4%. EBITDA margin, when calculated as a
percentage of network revenue, improved to 42.5% for the third quarter and
39.2% for the first nine months of 2003 as compared to 33.4% and 29.8% (28.3%
before the PST clarification), respectively, for the same periods one year
earlier.
Depreciation and amortization
Quarter ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Depreciation 308.9 307.3 1.6 0.5
Amortization of intangible assets 98.3 93.5 4.8 5.1
-------------------------------------------------------------------------
Nine months ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Depreciation 949.5 898.5 51.0 5.7
Amortization of intangible assets 278.9 261.9 17.0 6.5
-------------------------------------------------------------------------
Depreciation and amortization expenses increased by $6.4 million and
$68.0 million, respectively, in the quarter and nine-month periods ended
September 30, 2003, when compared with the same periods in 2002, primarily as
a result of growth in shorter life capital assets, including billing system
and customer relationship management software, data network capital assets.
Restructuring and workforce reduction costs
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 2.3 313.3 (311.0) (99.3)
Nine months ended September 30 12.1 328.9 (316.8) (96.3)
-------------------------------------------------------------------------
Restructuring and workforce reduction costs were recorded for initiatives
under the Company's Operational Efficiency Program. In 2001, the Company
initiated the phased Operational Efficiency Program aimed at improving
operating and capital productivity and competitiveness. The second and third
phases commenced in 2002, with the third phase continuing into 2003. Thirty-
nine customer contact centres have been closed and consolidated to date, and
it is currently expected that the Company will achieve its target for closing
or consolidating 44 customer contact centres by the end of 2003. It is
estimated that additional restructuring charges of approximately $7 million
may be recorded in 2003. For further detail, refer to Note 4 to the interim
consolidated financial statements.
Net staff reductions since the beginning of 2002 through to September 30,
2003 were approximately 6,000. Since the inception of the Operational
Efficiency Program in 2001 through September 30, 2003, the Company has reduced
its staff count by approximately 6,800, comprised of 4,900 bargaining unit
positions and 1,900 management positions. TELUS believes it will attain the
500 additional net employee reductions in 2003 required to meet the
Operational Efficiency Program targeted reduction of 7,300 net positions since
inception or 6,500 since the beginning of 2002.
EBITDA savings since inception of the Operational Efficiency Program have
increased to approximately $429 million by the end of the third quarter of
2003. The annual savings for 2003 are currently expected to be approximately
$450 million. Thereafter, annual recurring savings are currently estimated to
be approximately $550 million.
Other expense
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 7.6 7.7 (0.1) (1.3)
Nine months ended September 30 19.8 18.4 1.4 7.6
-------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense,
charitable donations, income or impairments in portfolio investments, gains
and losses on disposal of property, and 2002 discontinued operations. The
Company recorded $2.4 million lower losses on portfolio investments and asset
sales for the third quarter of 2003 as compared with the same period in 2002,
offset by later timing of charitable donations in 2003. For the first nine
months of 2003, gains from the sale of properties were $7.7 million compared
with $1.3 million for the same period in 2002. Accounts receivable
securitization expense decreased by $0.6 million and increased by
$5.4 million, respectively, for the third quarter and nine-month period ended
September 30, 2003, when compared with the same periods in 2002. The increase
for the nine month period was as a result of expanding the securitization
program in July 2002. Proceeds from securitization averaged $471 million for
the first nine months of 2003, compared with $191 million in the same period
last year.
Financing costs
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 136.5 98.6 37.9 38.4
Nine months ended September 30 467.2 454.0 13.2 2.9
-------------------------------------------------------------------------
Financing costs include interest expense on long-term and short-term
debt, gains on debt repurchase (in 2002), interest income, foreign exchange
gains and losses and amortization of debt issue costs. See note 5 to the
interim consolidated financial statements.
- Financing costs in the third quarter of 2002, were net of an
$82.4 million pre-tax gain on debt redemption. The gain in 2002 arose
from the repurchase of approximately $402 million principal amount of
notes and debentures of TELUS Corporation and TELUS Communications
Inc. for a cash outlay of approximately $310 million including
commissions and net of cross currency swap unwind proceeds.
- Interest on long-term and short-term debt decreased by $14.5 million
and $34.0 million, respectively, in the third quarter and nine month
periods ended September 30, 2003, when compared with the same periods
in 2002. This was primarily a result of debt repurchases and
retirements. TELUS maintains a hedging program using cross-currency
swaps, and as a result, financing costs were generally unaffected by
the appreciation of the Canadian dollar against the U.S. dollar in
2003.
- Interest income, which has the effect of reducing financing costs,
increased by $30.1 million and $35.6 million, respectively, for the
third quarter and first nine months of 2003, when compared with the
same periods in 2002. Interest income in 2003 and in 2002 was
recognized primarily as a result of tax refunds received from the
settlement of various tax matters.
The average debt principal outstanding was $7,750 million in the third
quarter of 2003 ($8,899 million in the third quarter of 2002), while the
effective interest rate on the average debt outstanding was 8.3% (7.9% in
2002). During the first nine months of 2003, the average debt principal
outstanding was $7,993 million ($8,836 million during the first nine months of
2002), while the effective interest rate on the average debt outstanding was
8.2% (8.0% in 2002).
Income taxes (recovery)
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 84.0 (50.5) 134.5 -
Nine months ended September 30 133.0 (0.9) 133.9 -
-------------------------------------------------------------------------
The increase in Income taxes for the quarter and nine-month periods ended
September 30, 2003, when compared with the same periods in 2002, were
primarily related to increases in income before taxes of $358.2 million and
$505.9 million, respectively. In addition, for the nine-month period ended
September 30, 2003, TELUS, recorded a $47.0 million income tax recovery for
settlement of previous years' tax matters, which significantly impacted the
year-to-date effective tax rate. See note 6 to the interim consolidated
financial statements.
Non-controlling interest
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 1.0 0.6 0.4 66.7
Nine months ended September 30 2.7 2.4 0.3 12.5
-------------------------------------------------------------------------
Non-controlling interest primarily represents a partner's interest in a
small foreign subsidiary.
Preferred dividends
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 0.9 0.8 0.1 -
Nine months ended September 30 2.6 2.6 - -
-------------------------------------------------------------------------
There were no significant changes to quarterly dividends on preferred
shares.
Interest on convertible debentures
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 1.8 1.8 - -
Nine months ended September 30 5.3 5.1 0.2 3.9
-------------------------------------------------------------------------
The interest on convertible debentures is presented net of related income
taxes. As these debentures are convertible into non-voting shares and are
classified as equity on the balance sheet, the related interest is recorded as
a charge to retained earnings rather than an interest expense.
Liquidity and capital resources
Cash provided by operating activities
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 849.7 804.8 44.9 5.6
Nine months ended September 30 1,729.1 1,381.1 348.0 25.2
-------------------------------------------------------------------------
Cash provided by operating activities increased for the quarter and nine
month period ended September 30, 2003, when compared with the same periods
last year principally as a result of improvement in operating profitability,
lower cash interest from debt reduction, and recovery of income taxes in 2003
associated with settlement of tax matters. This was partially offset by
reduced investment in accounts receivable in 2002 from expanding the accounts
receivable securitization program. Payments under restructuring and workforce
reduction initiatives in 2003 were $32.1 million for the third quarter and
$233.6 million for nine-month period, compared with $56.7 million and $134.0
million, respectively, in the same periods in 2002. Contributions to defined
benefit pension plans net of defined benefit plan expenses (credits) increased
by $6.9 million for the third quarter and decreased by $17.6 million for the
nine-month period. Other working capital changes included: (i) increased
Accounts payable for the third quarter of 2003 and 2002 for accrual of
interest to be paid in the fourth quarter, partly offset in 2002 by a drop in
accounts payable due to Operational Efficiency Program initiatives and timing
of payments to vendors; (ii) increased Advance billings and customer deposits
primarily from the price cap deferral account.
During the third quarter the Company delivered notice that, effective
October 27, 2003, it would make an accounts receivable securitization
reduction payment of $106 million. In October 2003, TELUS received a $162
million refund of income taxes as a result of previously announced settlements
with income tax authorities. Cash flow from operations in the fourth quarter
of 2003 will include the tax refund and the securitization reduction payment.
Cash provided (used) by investing activities
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 (307.8) (322.1) 14.3 4.4
Nine months ended September 30 (776.4) (1,310.3) 533.9 40.7
-------------------------------------------------------------------------
Net cash used by investing activities decreased for the third quarter and
nine-month period ended September 30, 2003, when compared with the same
periods last year, primarily as a result of reduced capital spending. In
addition, the Company disposed of non-strategic properties and monetized an
investment for net proceeds of $19.0 million in the second quarter of 2003. In
the first quarter of 2003, the Company disposed of an administrative property
under the terms of a sale and leaseback transaction. An $8.2 million pre-tax
gain on the administrative property sale, on total cash proceeds of $19.3
million, was deferred and is amortized over the term of the lease. In the
third quarter of 2002, the Company disposed of its remaining directory
operations in the U.S. for proceeds of $7.8 million.
Capital expenditures by segment
Quarter ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 208.9 230.2 (21.3) (9.3)
Mobility segment 93.7 92.5 1.2 1.3
-------------------------------------------------------------------------
Capital expenditures - general 302.6 322.7 (20.1) (6.2)
Mobility segment - wireless spectrum 1.4 4.5 (3.1) (68.9)
-------------------------------------------------------------------------
Total capital expenditures 304.0 327.2 (23.2) (7.1)
-------------------------------------------------------------------------
-----------------------------------------------------------------
Capital expenditure intensity(1)(%) 16.8 18.5 (1.7)
-----------------------------------------------------------------
Nine months ended September 30 2003 2002 Change %
-------------------------------------------------------------------------
($ in millions)
Communications segment 589.8 947.2 (357.4) (37.7)
Mobility segment 226.1 330.0 (103.9) (31.5)
-------------------------------------------------------------------------
Capital expenditures - general 815.9 1,277.2 (461.3) (36.1)
Mobility segment - wireless spectrum 1.4 4.5 (3.1) (68.9)
-------------------------------------------------------------------------
Total capital expenditures 817.3 1,281.7 (464.4) (36.2)
-------------------------------------------------------------------------
-----------------------------------------------------------------
Capital expenditure intensity(1)(%) 15.4 24.6 (9.2)
-----------------------------------------------------------------
(1) Capital Intensity is measured by dividing capital expenditures into
operating revenues, expressed as a percentage. This measure provides
a method of comparing the level of capital expenditures to other
companies within the same industry.
Capital spending decreased in the Communications segment in the third
quarter and first nine months of 2003, when compared to the same periods in
2002. For the third quarter, Non-ILEC expenditures decreased by $27.9 million
to $22.4 million, and for the first nine months Non-ILEC expenditures
decreased by $97.6 million to $76.0 million. Non-ILEC capital expenditures
decreased as a result of the Company concentrating its deployment activity on
meeting growth demands through the use of assets in place. ILEC capital
expenditures increased by $6.6 million to $186.5 million for the third
quarter, and decreased by $259.8 million to $513.8 million for the first nine
months, when compared with the same periods in 2002. The primary changes in
ILEC capital expenditures were:
- High-speed Internet ("ADSL") facilities and systems expenditures
increased by $2.2 million to $25.2 million for the third quarter and
decreased by $96.2 million, to $66.4 million for the first nine
months of 2003, when compared to the same periods in 2002. Lower
spending on ADSL in 2003 was due to a focus on higher utilization of
existing facilities, the completion of accelerated facility
deployment and system in 2002, and slowing growth in the industry;
- There were no purchases from Verizon in 2003 for software licences
and trademark licences compared with $55.5 million in the first nine
months of 2002; and
- Increased spending on new service development was partly offset by
reductions in other spending in the third quarter of 2003. For the
first nine months of 2003, spending on network infrastructure
decreased due to lower demand for facilities and spending on internal
systems and processes also decreased due to completion of initiatives
in 2002, as planned, such as the national long distance and card
service platform and internal web enablement projects, partly offset
increased spending on new service development.
The Communications segment capital intensity ratios for the quarter and
nine-month period ended September 30, 2003 were 17.3% and 16.0%, respectively,
when compared with 18.3% and 24.8%, respectively, for the same periods last
year. As a result of reduced capital expenditures and improved EBITDA, the
Communications segment contribution to Cash flow (EBITDA less capital
expenditures) for the quarter and nine months ended September 30, 2003
increased to $300.1 million and $929.9 million, respectively, from
$268.1 million and $520.0 million, respectively, in the same periods last
year.
Mobility capital expenditures were relatively flat for the third quarter
and significantly lower for the first nine months of 2003 as compared to the
same periods in 2002. TELUS Mobility continued the enhancement of digital
wireless coverage during the third quarter of 2003. Also, TELUS Mobility has
started building out a significant amount of Microwave in 2003 aimed at
reducing future leased line costs. Capital spending declined significantly
year-over-year principally as a result of:
- Implementation of the 1X digital network in 2002;
- Digital conversion of analogue networks in 2002;
- Reduced coverage expansion costs in 2003 due to operationalized
roaming/resale agreements in 2002 with Bell Mobility and Aliant
Telecom Wireless; and
- Timing of network capital expenditures in 2003, lower planned net
subscriber additions, improved infrastructure equipment costs, and a
stronger Canadian dollar.
Capital expenditure intensity for TELUS Mobility was 15.2% and 13.2% for
the third quarter and first nine months of 2003, respectively, as compared to
18.0% and 22.6% for the same periods one year ago due to both lower capital
spending and significant growth in network revenues. As a result of continued
EBITDA growth and reduced capital expenditure intensity, Mobility generated
substantially improved cash flow (EBITDA less capital expenditures) of $150.4
million and $397.9 million, or 26.0% and 24.9% of Network revenue, for the
third quarter and first nine months of 2003, respectively, as compared with
$67.8 million and $71.7 million, or 13.7% and 5.3%, for the same periods in
2002, respectively.
Both segments have contributed to significantly improved consolidated
cash flow (EBITDA less capital expenditures) to $450.5 million and $1,327.8
million, respectively, for the quarter and nine-month periods ended September
30, 2003, when compared with the $335.9 million and $591.7 million,
respectively, in same periods in 2002.
Cash provided (used) by financing activities
($ in millions) 2003 2002 Change %
-------------------------------------------------------------------------
Quarter ended September 30 (456.2) (479.0) 22.8 4.8
Nine months ended September 30 (841.4) (93.2) (748.2) -
-------------------------------------------------------------------------
Cash used by financing activities decreased in the third quarter of 2003
and increased in the first nine months of 2003, when compared with the same
periods one year ago.
- Common and Non-voting shares issued - Proceeds received from shares
issued from Treasury under the employee share purchase plan and from
share option plans were $20.6 million and $61.7 million respectively
for the third quarter and first nine months of 2003, compared with
proceeds of $16.6 million and $73.9 million, respectively, in the
same periods in 2002 under the same plans, from exercised warrants
and from additional shares purchased by Verizon pursuant to anti-
dilutive rights.
- Public issuance of Non-voting shares - $nil in 2003; $337.4 million
in 2002. In September 2002, a public issuance of 34.25 million Non-
voting shares was offered concurrently in Canada and the U.S. at a
share price of $9.85 (Canadian dollars) for aggregate gross proceeds
of $337.4 million. The net proceeds of $322.9 million were used to
repurchase and repay debt, including bank debt incurred to repurchase
notes of TELUS Corporation and notes and debentures of TELUS
Communications Inc. and for general corporate purposes. The debt was
repurchased at an average discount of 21%, while equity dilution was
limited to 10% from the September 2002 public share issuance.
- Dividends to shareholders - Cash dividends paid to shareholders
decreased by $1.6 million and increased by $33.9 million,
respectively, for the third quarter and first nine months of 2003,
when compared with the same periods in 2002. The increase in cash
dividends for the nine month period resulted from an increased number
of shares outstanding, partly offset by a higher enrolment in
dividend reinvestment plans (approximately 24% for the dividend paid
in July 2003, compared with approximately 10% one year earlier). The
15-cent dividend paid per Common share and Non-voting share remained
unchanged from one year ago.
- Net debt redemptions (Long-term debt issued net of Redemptions and
repayment of long-term debt and Change in short-term obligations) -
were $434.4 million and $765.2 million, respectively, for the quarter
and nine-month periods ended September 30, 2003, compared with net
debt repurchases and redemptions of $779.1 million and $389.2
million, respectively, for the same periods in 2002. Net debt
redemptions in the first nine months of 2003 included approximately
$585 million of bank facilities, $151 million of medium-term notes,
and $30 million of First Mortgage Bonds. In the third quarter of
2002, the Company repurchased approximately $402 million principal
amount of notes and bank debt for a cash outlay of approximately
$310 million including commissions and net of cross-currency swap
unwind proceeds.
Liquidity and capital resource measures
Sept. 30, Sept. 30, June 30,
Period ended 2003 2002 Change 2003
-------------------------------------------------------------------------
Components of debt and coverage ratios
--------------------------------------
Net debt(1)($ millions) 7,522.3 8,332.3 (810.0) 8,038.7
Total capitalization(2)
- book value ($ millions) 14,169.5 14,942.6 (773.1) 14,593.6
EBITDA (12-month trailing,
$ millions) 2,790.3 2,471.7 318.6 2,698.9
Net interest cost(3)
(12-month trailing, $ millions) 617.6 716.8 (99.2) 662.1
Debt ratios
-----------
Fixed rate debt as a
proportion of total
indebtedness (%) 100.0 94.1 5.9 94.6
Average term to maturity
of debt (years) 6.4 6.6 (0.2) 6.4
Net debt(1) to total
capitalization(2)(%) 53.1 55.8 (2.7) 55.1
Net debt to EBITDA(4) 2.7 3.4 (0.7) 3.0
Coverage ratios
---------------
Earnings coverage(5) 1.3 0.8 0.5 0.8
EBITDA interest coverage(6) 4.5 3.4 1.1 4.1
Other measures
--------------
Free cash flow(7)(3-month,
$ millions) 417.1 239.9 177.2 69.0
Free cash flow(7)(12-month
trailing, $ millions) 757.4 (431.0) 1,188.4 579.6
-------------------------------------------------------------------------
(1) Net debt is defined as Long-term debt plus current obligations and
cheques outstanding less Cash and temporary investments and cross-
currency foreign exchange hedge asset (plus cross-currency foreign
exchange hedge liability) related to U.S. dollar notes. The cross-
currency foreign exchange hedge liability as at September 30, 2003
was $580.8 million ($123.7 million hedge asset as at September 30,
2002; $588.2 million hedge liability as at June 30, 2003). Net Debt
as calculated herein, includes a notional amount related to accounts
receivable securitization of approximately $125.5 million at
September 30, 2003 ($106.3 million at September 30, 2002, and
$124.1 million at June 30, 2003), which is required to be included in
the numerator of the Leverage Ratio covenant calculation in TELUS'
credit facilities. Net debt is unaffected by foreign exchange
fluctuations because it includes (deducts) the net deferred hedging
liability (asset).
(2) Total capitalization is defined as Net debt plus Non-controlling
interest and Shareholders' Equity.
(3) Net Interest Cost is defined as Net financing cost before gains on
redemption and repayment of debt, calculated on a 12-month trailing
basis. Gains on redemption and repayment of debt were recorded in the
third and fourth quarters of 2002. Excluding $61.5 million of
interest income recorded in the twelve month period ended September
30, 2003, net interest cost is $679.1 million. Excluding interest
income, the comparable net interest cost for the twelve month period
ended September 30, 2002 was $723.1 million and for the twelve-month
period ended June 30, 2003 was $693.5 million.
(4) Net debt to EBITDA is defined as Net debt as at the end of the period
divided by 12-month trailing EBITDA, where EBITDA excludes
Restructuring and workforce reduction costs. This measure is
substantially the same as the Leverage Ratio covenant in TELUS'
credit facilities.
(5) Earnings coverage ratio is calculated on a 12-month trailing basis as
Net income before interest expense on total debt and income tax
expense divided by interest expense on total debt.
(6) EBITDA interest coverage is defined as EBITDA excluding Restructuring
and workforce reduction costs divided by Net interest cost. Excluding
$61.5 million of interest income recorded in the twelve months ending
September 30, 2003, this ratio is 4.1 for September 2003. Excluding
$30.4 million of interest income for the twelve months ended June 30,
2003, this ratio was 3.9 for June 2003. This measure is substantially
the same as the Coverage Ratio covenant in TELUS' credit facilities.
(7) Free cash flow is defined as EBITDA excluding Restructuring and
workforce reduction costs less Capital expenditures, cash interest
paid, cash taxes and cash dividends. This measure is used to provide
an indication of underlying cash flows in the business for the items
identified. As defined, free cash flow excludes Restructuring and
workforce reduction costs, working capital changes, and other sources
and uses of cash, which are disclosed in the consolidated statements
of cash flows.
The short-term obligation and long-term debt balance as at September 30,
2003 decreased by $1,470 million to $6,918 million from $8,388 million as at
December 31, 2002. This reduction in the debt balance included a $707 million
decrease in the Canadian dollar value of U.S. dollar denominated Notes as a
result of an approximate 17% appreciation of the Canadian dollar between
December 31, 2002 and September 30, 2003. TELUS' U.S. dollar debt is fully
hedged, resulting in a corresponding increase of $707 million being recorded
in the net Deferred hedging liability (the Deferred hedging asset of $126.8
million as at December 31, 2002 has become a Deferred hedging liability of
$580.8 million as at September 30, 2003). The remaining reduction was from
debt repayment and repurchases. TELUS expects to continue applying surplus
cash flow to reduce accounts receivable securitization and possible other
repurchases of debt.
The proportion of debt with fixed interest rates increased as at
September 30, 2003, when compared with September 30, 2002, as the amount of
utilized bank facilities at September 30, 2003 decreased to $70 million from
approximately $655 million since the beginning of the year. The remaining $70
million bank facility amount was repaid on October 6, 2003.
The primary reasons for a reduction in the net debt to total
capitalization ratio measured at September 30, 2003, when compared to a year
ago, were the net debt repayments in 2003. The Company's Operational
Efficiency Program, improved Non-ILEC margins, reduced capital expenditures,
improved Mobility cash generation and tax refunds resulted in significant
increased free cash flow allowing for additional debt reduction in 2003. Free
cash flow for the third quarter and first nine months of 2003 exceeded cash
payments for Restructuring and workforce reduction of $32.1 million and $233.6
million, respectively. The $350.6 million increase in Free cash flow in the
third quarter of 2003, when compared with the second quarter of 2003, was due
primarily to lower cash interest payments (significant semi-annual interest
payments are made in the second and fourth quarters), lower third quarter cash
taxes and higher third quarter EBITDA.
The net debt to EBITDA ratio measured at September 30, 2003 improved
significantly, when compared with September 30, 2002 and June 30, 2003, as a
result of debt reduction and an increase in twelve-month trailing EBITDA. The
EBITDA interest coverage ratio measured at September 30, 2003 improved, when
compared with September 30, 2002 and June 30, 2003, as a result of higher
twelve-month trailing EBITDA and lower twelve-month trailing net interest
costs including significant interest income.
Credit Facilities
TELUS' credit facilities at September 30, 2003 consisted of a $1.5
billion (or U.S. dollar equivalent) revolving credit facility expiring on May
30, 2004 ($70 million drawn along with $98.2 million in outstanding undrawn
letters of credit), an undrawn $600 million (or the U.S. dollar equivalent)
364 day-revolving credit facility extendible at TELUS' option for any amount
outstanding as at May 26, 2004 for one year on a non-revolving basis, and
approximately $74 million in other bank facilities (nil drawn and
approximately $9.4 million in committed and outstanding undrawn letters of
credit). On October 6, 2003, TELUS repaid the remaining $70 million drawn
against the $1.5 billion facility.
At September 30, 2003, TELUS had unutilized available liquidity well in
excess of $1 billion. TELUS' credit facilities contain customary covenants
including a requirement that TELUS not permit its consolidated Leverage Ratio
(Funded Debt and Asset Securitization Amount to trailing 12-month EBITDA) to
exceed 4.0:1 (approximately 2.7:1 as at September 30, 2003) and not permit its
consolidated Coverage Ratio (EBITDA to Interest Expense and Asset
Securitization Charges on a trailing 12-month basis) to be less than 2.5:1
(approximately 4.1:1 as at September 30, 2003) at the end of any financial
quarter. There are certain minor differences in the calculation of the
Leverage Ratio and Coverage Ratio under the credit agreement as compared with
the calculation of Net debt to EBITDA and EBITDA interest coverage. The
calculations are not expected to be materially different. Continued access to
TELUS' credit facilities is not contingent on the maintenance by TELUS of a
specific credit rating.
Accounts Receivable Sale
TELUS Communications Inc., a wholly owned subsidiary of TELUS, is able to
sell an interest in certain of its receivables up to a maximum of $650 million
and is required to maintain at least a BBB(low) credit rating by Dominion Bond
Rating Service (DBRS), or the purchaser may require the sale program to be
wound down. The necessary credit rating was exceeded by one level at BBB as of
October 28, 2003. The proceeds of securitized receivables were $481 million at
September 30, 2003. The Company also delivered notice that, effective October
27, 2003, it would make a securitization reduction payment of $106 million.
See Note 9 to the interim consolidated financial statements.
TELUS' credit facilities require that a portion of sold accounts
receivable be added to debt for purposes of calculating the Leverage Ratio
covenant under the credit agreement. This portion is calculated on a monthly
basis and is a function of the ongoing collection performance of the
receivables pool. At September 30, 2003, this amount, defined as the Asset
Securitization Amount, was $125.5 million.
Credit Ratings
The following rating actions occurred during 2003:
- On September 12, 2003, Moody's Investor Service affirmed its Ba1
rating and changed its outlook for TELUS Corporation's senior
unsecured credit to 'positive' from 'stable'. Earlier, on April 16,
2003, Moody's changed the outlook for TELUS Corporation's senior
unsecured credit rating to 'stable' from 'negative';
- On August 8, 2003, Standard & Poor's Rating Services ("S&P") affirmed
its 'BBB' long-term corporate credit rating for TELUS Corporation and
revised its outlook to 'stable' from 'negative'. The revised outlook
also applied to TELUS Communications Inc. and TELUS Communications
(Quebec) Inc. Earlier in the year, on May 29, 2003, S&P had affirmed
its 'BBB' long-term corporate credit rating for TELUS Corporation,
TELUS Communications Inc. and TELUS Communications (Quebec) Inc.,
each with a 'negative' outlook. S&P withdrew its short-term corporate
credit rating on TELUS due to the discontinuance of commercial paper
programs. S&P also raised the issue rating on TELUS Communications
(Quebec) Inc.'s first mortgage bonds from BBB+ to A-.
- On June 17, 2003, Dominion Bond Rating Service ("DBRS") revised the
trend from 'negative' to 'stable' for its ratings on TELUS
Corporation, TELUS Communications Inc. and TELUS Communications
(Quebec) Inc. On May 1, 2003, DBRS discontinued its rating on
commercial paper programs of TELUS Corporation, TELUS Communications
Inc. and TELUS Communications (Quebec) Inc. as TELUS had no issues
outstanding; and
- On May 28, 2003, Fitch Ratings changed the outlook to 'stable' from
'negative' for its ratings on TELUS Corporation and TELUS
Communications Inc.
TELUS has an objective to preserve access to capital markets at a
reasonable cost by maintaining investment grade credit ratings.
Credit rating summary
DBRS(1) S&P(1) Moody's(2) Fitch(1)
----------------------------------------------------------------------
TELUS Corporation
Senior bank debt --- --- --- BBB
Notes BBB BBB Ba1 BBB
TELUS Communications Inc.
Debentures BBB BBB --- BBB
Medium-term Notes BBB BBB --- BBB
Preferred shares Pfd-3 P-3(high) --- ---
TELUS Communications
(Quebec) Inc.
First mortgage bonds BBB A- --- ---
Medium-term Notes BBB BBB --- ---
--------------------------------------------------------------------
(1) Outlook or trend 'stable'
(2) Outlook 'positive'
Off-Balance Sheet Arrangements and Contractual Liabilities
Financial Instruments
TELUS uses various financial instruments, the fair values of which are
not reflected on the balance sheet, to reduce or eliminate exposure to
interest rate and currency risks. These instruments are accounted for on the
same basis as the underlying exposure being hedged.
The Company is exposed to interest rate risk arising from fluctuations in
interest rates on its temporary investments, short-term obligations and long-
term debt. On October 6, 2003, the Company terminated an interest rate swap
that had the effect of fixing the interest rate on $70 million of floating
rate debt that was repaid.
The Company is exposed to currency risks arising from fluctuations in
foreign exchange rates on its U.S. Dollar denominated long-term debt. Currency
hedging relationships have been established for the related semi-annual
interest payments and principal payments at maturity. The Company's foreign
exchange risk management also includes the use of foreign currency forwards to
fix the exchange rates on short-term foreign currency transactions and
commitments. Hedge accounting is not generally applied to these foreign
currency forwards. The Company entered into foreign currency forward contracts
that have the effect of fixing the exchange rates on, as at September 30,
2003, U.S. $38 million of fiscal 2003 purchase commitments; hedge accounting
has been applied to these foreign currency forward contracts all of which
relate to the Mobility segment.
The Company is exposed to credit risk with respect to its short-term
deposits, accounts and leases receivable, interest rate swap agreements and
foreign exchange hedges. Credit risk associated with short-term deposits is
minimized substantially by ensuring that these financial assets are placed
with governments, well-capitalized financial institutions and other
creditworthy counterparties. An ongoing review is performed to evaluate
changes in the status of counterparties.
The carrying value of cash and temporary investments, bank indebtedness,
accounts receivable, leases receivable, accounts payable, restructuring and
workforce reduction accounts payable, dividends payable and short-term
obligations approximates their fair values due to the immediate or short-term
maturity of these financial instruments.
Commitments and Contingent Liabilities (Note 16 of the interim
consolidated financial statements)
The Company has a number of commitments and contingent liabilities. The
Company has $178.9 million in outstanding commitments for its Operational
Efficiency Program as at September 30, 2003, and approximately $7 million of
additional Restructuring and workforce reduction expense may be recorded for
items that were not eligible to be recorded prior to September 30, 2003. The
Company occupies leased premises in various centres and has land, buildings
and equipment under operating leases. The Company is currently engaged in
contract negotiations through the federal conciliation process. In the normal
course of the Company's operations, it enters into commercial agreements that
require, as a part of normal terms, guarantees by the Company.
Revised Guidance for 2003
The Company publicly set certain estimated financial and operational
targets for 2003 in December 2002. Each quarter, management reviews the
targets and updates the guidance, if deemed necessary. The third quarter
revised guidance for 2003 is shown:
Third Second 2003
quarter quarter original
revised 2003 revised 2003 targets
guidance guidance
----------------------------------------------------------------------
Consolidated
Revenues no change $7.1 to $7.2 $7.2 to $7.3
billion billion
EBITDA(1) $2.8 to $2.75 to $2.7 to $2.8
$2.85 $2.85 billion
billion billion
Earnings (loss) per 85 to 95 80 to 90 35 to 55
share cents cents cents
Capital expenditures $1.2 to $1.2 to $1.3 Approx. $1.5
$1.25 billion billion
billion
Free cash flow $900 $800 million $300 to $600
million to to $1 million(2)
$1 billion billion
Net debt to EBITDA 2.7 times 2.8 times or 3.0 times
or less less
Communications segment
Revenue (external) $4.8 to $4.85 to $5.0 to
$4.85 $4.9 billion $5.05
billion billion
Non-ILEC revenue no change no change $575 million
EBITDA(1) $2.025 to $2.0 to $2.075 to
$2.05 $2.075 $2.15
billion billion billion
Non-ILEC EBITDA no change Approx. Approx.
$(30) $(60)
million million
Capital expenditures $850 to $875 $850 to $900 Approx.
million million $1.05
billion
High-speed Internet Approx. Approx. 150,000 to
subscriber net adds 150,000 125,000 175,000
Mobility segment
Revenue (external) $2.3 to $2.25 to $2.2 to
$2.35 $2.3 billion $2.25
billion billion
EBITDA(1) $775 to $750 to $775 $625 to $650
$800 million million
million
Capital expenditures $350 to $375 $350 to $400 Approx. $450
million million million
Wireless subscriber net Approx. 350,000 to 400,000 to
additions 400,000 375,000 450,000
----------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization,
excluding Restructuring and workforce reduction costs.
(2) Original target of $300 to $600 million was revised in the 2002
Annual Report to $500 to $600 million as a result of a settlement
with tax authorities in late February 2003.
4. Risks and Uncertainties
A comprehensive discussion of the risks and uncertainties can be found in
Management's Discussion and Analysis in TELUS' Annual Information Form, TELUS'
2002 Annual Report, and filings on www.sedar.com and on Edgar at www.sec.gov.
consolidated statements of income
Three months Nine months
Periods ended September 30
(unaudited) (millions) 2003 2002 2003 2002
-------------------------------------------------------------------------
OPERATING REVENUES $ 1,806.2 $ 1,766.3 $ 5,320.4 $ 5,212.3
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,051.7 1,103.2 3,175.3 3,338.9
Depreciation 308.9 307.3 949.5 898.5
Amortization of
intangible assets 98.3 93.5 278.9 261.9
Restructuring and
workforce reduction
costs 2.3 313.3 12.1 328.9
-------------------------------------------------------------------------
1,461.2 1,817.3 4,415.8 4,828.2
-------------------------------------------------------------------------
OPERATING INCOME (LOSS) 345.0 (51.0) 904.6 384.1
Other expense 7.6 7.7 19.8 18.4
Financing costs 136.5 98.6 467.2 454.0
-------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME
TAXES AND NON-CONTROLLING
INTEREST 200.9 (157.3) 417.6 (88.3)
Income taxes (recovery) 84.0 (50.5) 133.0 (0.9)
Non-controlling interest 1.0 0.6 2.7 2.4
-------------------------------------------------------------------------
NET INCOME (LOSS) 115.9 (107.4) 281.9 (89.8)
Preference and preferred
share dividends 0.9 0.8 2.6 2.6
Interest on convertible
debentures, net of
income taxes 1.8 1.8 5.3 5.1
-------------------------------------------------------------------------
COMMON SHARE AND NON-VOTING
SHARE INCOME (LOSS) $ 113.2 $ (110.0) $ 274.0 $ (97.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INCOME (LOSS) PER COMMON
SHARE AND NON-VOTING
SHARE ($)
- Basic 0.32 (0.35) 0.79 (0.32)
- Diluted 0.32 (0.35) 0.78 (0.32)
DIVIDENDS DECLARED PER
COMMON SHARE AND
NON-VOTING SHARE ($) 0.15 0.15 0.45 0.45
TOTAL WEIGHTED AVERAGE
COMMON SHARES AND
NON-VOTING SHARES
OUTSTANDING (millions)
- Basic 350.1 315.3 348.5 308.7
- Diluted 353.2 315.3 350.8 308.7
consolidated balance sheets
As at As at
September December
(unaudited) (millions) 30, 2003 31, 2002
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ 102.3 $ -
Accounts receivable 504.5 640.4
Income and other taxes receivable 342.1 134.0
Inventories 77.8 96.5
Prepaid expenses and other 160.2 163.5
Current portion of future income taxes 219.4 138.8
-------------------------------------------------------------------------
1,406.3 1,173.2
-------------------------------------------------------------------------
Capital Assets, Net
Property, plant, equipment and other 7,763.0 8,025.9
Intangible assets subject to amortization 819.1 998.5
Intangible assets with indefinite lives 2,954.5 2,950.1
-------------------------------------------------------------------------
11,536.6 11,974.5
-------------------------------------------------------------------------
Other Assets
Deferred charges 615.0 729.1
Future income taxes 736.5 1,170.3
Investments 40.5 48.1
Goodwill 3,125.0 3,124.6
-------------------------------------------------------------------------
4,517.0 5,072.1
-------------------------------------------------------------------------
$ 17,459.9 $ 18,219.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Cash and temporary investments, net $ - $ 9.0
Accounts payable and accrued liabilities 1,266.4 1,198.8
Restructuring and workforce reduction
accounts payable and accrued liabilities 178.9 400.4
Dividends payable 53.3 52.2
Advance billings and customer deposits 390.8 330.3
Current maturities of long-term debt 285.8 190.3
-------------------------------------------------------------------------
2,175.2 2,181.0
-------------------------------------------------------------------------
Long-Term Debt 6,632.5 8,197.4
-------------------------------------------------------------------------
Other Long-Term Liabilities 1,018.7 405.3
-------------------------------------------------------------------------
Future Income Taxes 986.3 992.3
-------------------------------------------------------------------------
Non-Controlling Interest 10.5 11.2
-------------------------------------------------------------------------
Shareholders' Equity
Convertible debentures 151.8 148.5
Preference and preferred shares 69.7 69.7
Common equity 6,415.2 6,214.4
-------------------------------------------------------------------------
6,636.7 6,432.6
-------------------------------------------------------------------------
$ 17,459.9 $ 18,219.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
consolidated statements of cash flows
Three months Nine months
Periods ended September 30
(unaudited) (millions) 2003 2002 2003 2002
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 115.9 $ (107.4) $ 281.9 $ (89.8)
Adjustments to reconcile
net income (loss) to
cash provided by
operating activities:
Depreciation and
amortization 407.2 400.8 1,228.4 1,160.4
Future income taxes 95.7 (57.1) 351.0 (37.8)
Gain on redemption of
long-term debt - (82.4) - (82.4)
Net employee defined
benefit plans expense
(credits) 13.2 (2.1) 39.5 (11.8)
Employer contributions
to employee defined
benefit plans (33.9) (11.7) (69.9) (36.2)
Other, net 2.3 (15.6) 36.7 (13.3)
Restructuring and
workforce reduction
costs, net of cash
payments (29.8) 256.6 (221.5) 194.9
Net change in non-cash
working capital 279.1 423.7 83.0 297.1
-------------------------------------------------------------------------
Cash provided by
operating activities 849.7 804.8 1,729.1 1,381.1
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (304.0) (327.2) (817.3) (1,281.7)
Proceeds from the sale
of property and
other assets 1.3 7.8 39.6 7.8
Other (5.1) (2.7) 1.3 (36.4)
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Cash used by investing
activities (307.8) (322.1) (776.4) (1,310.3)
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FINANCING ACTIVITIES
Common Shares and
Non-Voting Shares issued 20.6 16.6 61.7 73.9
Public issuance of
Non-Voting Shares - 337.4 - 337.4
Cost of public issuance
of Non-Voting Shares - (14.5) - (14.5)
Dividends to shareholders (41.6) (43.2) (130.2) (96.3)
Long-term debt issued 56.0 - 365.4 584.0
Redemptions and repayment
of long-term debt (490.4) (779.1) (1,130.6) (892.7)
Change in short-term
obligations (commercial
paper and bank borrowings) - - - (80.5)
Interest on convertible
debentures - - (5.1) (5.1)
Other (0.8) 3.8 (2.6) 0.6
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Cash used by financing
activities (456.2) (479.0) (841.4) (93.2)
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CASH POSITION
Increase (decrease)
in cash and temporary
investments, net 85.7 3.7 111.3 (22.4)
Cash and temporary
investments, net,
beginning of period 16.6 (9.0) (9.0) 17.1
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Cash and temporary
investments, net,
end of period $ 102.3 $ (5.3) $ 102.3 $ (5.3)
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SUPPLEMENTAL DISCLOSURE
Interest paid $ 27.7 $ 48.6 $ 362.5 $ 392.9
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Income taxes (inclusive
of Investment Tax
Credits (received) paid $ (38.4) $ 4.2 $ (35.1) $ 24.0
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TELUS Corporation
Segmented information
Three-month periods
ended September 30 Communications Mobility
(millions) 2003 2002 2003 2002
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External revenue $ 1,186.3 $ 1,233.8 $ 619.9 $ 532.5
Inter-segment revenue 24.6 24.5 4.0 4.9
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Total operating revenue 1,210.9 1,258.3 623.9 537.4
Operations expenses 701.9 760.0 378.4 372.6
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EBITDA (a) $ 509.0 $ 498.3 $ 245.5 $ 164.8
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CAPEX (b) $ 208.9 $ 230.2 $ 95.1 $ 97.0
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EBITDA less CAPEX $ 300.1 $ 268.1 $ 150.4 $ 67.8
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Three-month periods
ended September 30 Eliminations Consolidated
(millions) 2003 2002 2003 2002
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External revenue $ - $ - $ 1,806.2 $ 1,766.3
Inter-segment revenue (28.6) (29.4) - -
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Total operating revenue (28.6) (29.4) 1,806.2 1,766.3
Operations expenses (28.6) (29.4) 1,051.7 1,103.2
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EBITDA (a) $ - $ - $ 754.5 $ 663.1
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CAPEX (b) $ - $ - $ 304.0 $ 327.2
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EBITDA less CAPEX $ - $ - $ 450.5 $ 335.9
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Nine-month periods
ended September 30 Communications Mobility
(millions) 2003 2002 2003 2002
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External revenue $ 3,604.0 $ 3,745.1 $ 1,716.4 $ 1,467.2
Inter-segment revenue 71.4 72.5 11.6 13.2
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Total operating revenue 3,675.4 3,817.6 1,728.0 1,480.4
Operations expenses 2,155.7 2,350.4 1,102.6 1,074.2
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EBITDA (a) $ 1,519.7 $ 1,467.2 $ 625.4 $ 406.2
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CAPEX (b) $ 589.8 $ 947.2 $ 227.5 $ 334.5
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EBITDA less CAPEX $ 929.9 $ 520.0 $ 397.9 $ 71.7
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Nine-month periods
ended September 30 Eliminations Consolidated
(millions) 2003 2002 2003 2002
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External revenue $ - $ - $ 5,320.4 $ 5,212.3
Inter-segment revenue (83.0) (85.7) - -
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Total operating revenue (83.0) (85.7) 5,320.4 5,212.3
Operations expenses (83.0) (85.7) 3,175.3 3,338.9
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EBITDA (a) $ - $ - $ 2,145.1 $ 1,873.4
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CAPEX (b) $ - $ - $ 817.3 $ 1,281.7
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EBITDA less CAPEX $ - $ - $ 1,327.8 $ 591.7
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(a) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is defined as operating revenues less operations expense
and, as defined, excludes 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 debt covenants.
(b) Total capital expenditures ("CAPEX").
For further information:
Media Relations:
Nick Culo, (780) 493-7236, nick.culo(at)telus.com;
Shafiq Jamal, (604) 488-1100; Investor Relations:
John Wheeler, (780) 493-7310, ir(at)telus.com;
Robert Mitchell, (416) 279-3219
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: October 31, 2003
TELUS Corporation
__ "James W. Peters"___
Name: James W. Peters
Title: Corporate Secretary