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 ___February___ 2005
(Commission File No. 000-24876)
TELUS Corporation
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal registered offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
X
Form 20-F _____ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
X
Yes _____ No _____
This Form 6-K consists of the following:
TELUS Reports 2004 Fourth Quarter Results
______________________________________________________________________________
February 18, 2005
TELUS Reports 2004 Fourth Quarter Results
Strong results exceed revenue, earnings and cash flow targets for 2004
VANCOUVER B.C.- TELUS Corporation (TSX: T and T.NV / NYSE: TU)
today reported financial results for the fourth quarter of 2004 which reflect
outstanding wireless performance at TELUS Mobility, improved revenue growth at
TELUS Communications and a significant increase in profitability and free cash
flow. Consolidated operating revenues of $2.0 billion in the quarter increased
8% from a year ago and operating earnings (EBITDA) were up 12%. Reported
earnings per share (EPS) for the fourth quarter were 38 cents, up 192%
compared with 13 cents for the same period a year ago. Fourth quarter EPS
benefited from a positive tax settlement in the quarter which contributed
4 cents. Free cash flow was $122 million during the quarter, a $50 million or
71% improvement from a year ago.
FINANCIAL HIGHLIGHTS
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C$ in millions, except per share amounts 3 months ended
December 31
(unaudited) 2004 2003 % Change
-------------------------------------------------------------------------
Operating revenues 1,964.9 1,825.6 7.6
EBITDA(1) 766.6 682.8 12.3
Net income 135.6 47.8 183.7
Earnings per share (EPS), basic 0.38 0.13 192.3
Capital expenditures 343.4 435.4 (21.1)
Cash provided by operating activities 613.8 409.8 49.8
Free cash flow(2) 121.9 71.5 70.5
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring and workforce reduction costs. See Section 11.1 of
Management's discussion and analysis.
(2) See Section 11.2 of Management's discussion and analysis.
Darren Entwistle, president and CEO, stated "2004 was a year of
significant financial and operating accomplishment for TELUS. Notably, TELUS
Mobility realized record wireless subscriber growth, and did so consistent
with our priority of delivering profitable growth. Indeed, despite the upfront
expenses related to subscriber loading, we generated record EBITDA and cash
flow in the fourth quarter and year that compare favourably with our major
competitors. Complementing TELUS' strong wireless performance and despite
ongoing wireline industry challenges, TELUS Communications delivered a third
sequential quarter of revenue growth led by a nine per cent increase in data
revenue and the lowest decline in long distance revenue in the last four
years. Also noteworthy was our first ever quarter of operating profit for our
wireline non-incumbent operations focused on the Ontario and Quebec business
markets. TELUS will remain relentless in executing our consistent and
effective strategy, focused set of priorities and attaining our financial
targets, which should stand us in good stead in respect of the emerging
competitive challenges. TELUS' results for 2004 are clearly encouraging across
the board. Notwithstanding this, TELUS must continue to work diligently in
2005 to execute on our stretch business objectives and strive to counter the
increasing competitive pressures that we face."
Robert McFarlane, executive vice president and CFO, commented "TELUS has
clearly delivered on meeting or exceeding our public consolidated revenue,
earnings and cash flow targets for 2004. Notably we exceeded our free cash
flow goal enabling a $1.1 billion decline in net debt and setting the stage
for recent initiatives to increase the return of capital to shareholders
through dividends and share repurchases. This provides a solid foundation to
face the challenging competitive environment ahead in 2005."
OPERATING HIGHLIGHTS
TELUS Mobility
Cash flow improvement of $105 million driven by EBITDA growth of 50%
- revenues increased by $112 million or 18% to $756 million in the
fourth quarter of 2004, when compared with the same period in 2003
- EBITDA increased by $95 million or 50% to $285 million
- EBITDA margin expanded by 8.6 points to 41% of Network revenue and by
8.0 points to 37% of total revenue
- ARPU (average revenue per subscriber unit) increased by $2 to $61,
representing an eighth consecutive quarter of year-over-year increases
- cost of acquisition ("COA") per subscriber improved to $410 from $452
- record quarterly net subscriber additions of 186,400, 12% more than
the fourth quarter of 2003. Higher revenue-generating postpaid
subscriber net additions of 144,800 increased by 20%, representing 78%
of total net additions.
- blended monthly churn improved to 1.45% from 1.58% when compared to
the same quarter a year ago and postpaid churn was 1.17% this quarter
- cash flow (EBITDA less capital expenditures) increased by $105 million
or 181% to $162 million
TELUS Communications
Data revenue growth of 9% contributes to increase in Operating revenue
- revenues increased by $27 million or 2% in the fourth quarter of 2004,
when compared with the same period in 2003 representing a second
quarter of year-over-year growth
- strong 14% increase in non-incumbent revenues in Ontario and Quebec
- data revenue increased 9% driven by a 23% increase in the high-speed
Internet subscriber base
- long-distance revenue declined a modest 1%, the lowest rate since the
first quarter of 2001
- EBITDA decreased by $11 million or 2% as increased revenues were
offset by higher operating costs and a $4 million increase in
restructuring and work force reduction costs
- high-speed Internet net additions were 34,800 in the fourth quarter,
bringing TELUS' total high-speed Internet subscriber base to 689,700,
a 23% increase over the same period last year
- network access lines of 4.8 million, declined 9,000 in the quarter,
down 1.3% from a year ago
- cash flow (EBITDA less capital expenditures) increased by $71 million
or 38% to $261 million in the fourth quarter of 2004, primarily due to
lower capital expenditures
CORPORATE DEVELOPMENTS
Successful secondary offering of Verizon equity stake in TELUS
On November 30, 2004, TELUS and Verizon Communications announced an
agreement whereby TELUS agreed to accommodate Verizon's request to sell its
20.5% equity stake in the Company. A Long-Term Relationship Agreement between
the two companies required Verizon to have approval from a majority of TELUS'
independent directors in order to sell its stake below 19.9%. As part of the
November agreement, TELUS received benefits totaling $245 million including a
$148 million cash payment and reduced annual fees payable to Verizon under an
amended wireline software and technology agreement.
On December 14, the secondary offering of 73.5 million TELUS shares was
completed with Verizon receiving gross proceeds of approximately
C$2.24 billion. This is believed to be the second largest secondary equity
offering, and fourth largest equity offering, in Canadian history.
Verizon indicated that the decision to divest its equity stake in TELUS
was part of its ongoing strategy of divesting selected international
investments while it focuses on core U.S. business growth opportunities such
as broadband and wireless.
TELUS continues its business relationship with Verizon, and a number of
the benefits under the old commercial agreements have been carried over. In
addition, TELUS Mobility and Verizon Wireless also expanded their existing
roaming arrangements under a consolidated long-term roaming agreement to
provide more consistent and comprehensive roaming services to each other's
customers. This agreement reaffirmed TELUS Mobility as the preferred roaming
partner for an ever-increasing number of Verizon Wireless' 44 million
customers when they travel to Canada.
This transaction, including amended wireline and wireless agreements,
significant cash payment, and resulting expansion of share liquidity and
shareholder base, was a positive development for the Company.
TELUS launches purchase program for up to 25.5 million of its shares
In December, TELUS announced acceptance by the Toronto Stock Exchange of
its Normal Course Issuer Bid to purchase from time to time over a 12-month
period, up to 14 million of its outstanding common shares and up to 11.5
million of its outstanding non-voting shares. This represents approximately
seven per cent of the issued and outstanding shares in each share class.
The Board of Directors of TELUS believes that such purchases are in the
best interest of TELUS and constitute an attractive investment opportunity and
desirable use of TELUS' funds that should enhance the value of the remaining
shares. Purchases of common shares and non-voting shares may be made in the
12-month period commencing December 20, 2004 and ending December 19, 2005. All
shares of TELUS purchased will be cancelled by TELUS.
In late December, a total of 2.2 million shares (775,711 common and
1,451,400 non-voting) were repurchased by TELUS, for a total outlay of
approximately $78.0 million.
Canada Industrial Relations Board (CIRB) overturns its binding
arbitration ruling
In early February, the CIRB overturned its year old ruling that imposed
binding arbitration on TELUS. The decision was in response to TELUS' request
for reconsideration of the arbitration ruling and a broad communications ban
on TELUS put in place in April 2004. In addition, the CIRB set aside its April
2004 broad communications ban and reinstated its January 2004 narrower
communications ban with bargaining unit employees, which covers labour
relations issues and negotiations. The Telecommunications Workers Union has
subsequently filed appeals with both the Federal of Court of Appeal and the
CIRB.
TELUS is pleased with the CIRB's decision to overturn the binding
arbitration order. The company is eager to successfully conclude a collective
agreement that recognizes the needs of employees, customers and shareholders
while maintaining the economic viability and competitiveness of TELUS.
The CIRB in two decisions declared that TELUS Mobility's non-unionized
team members, predominantly located in Ontario and Quebec, performing work
similar to their unionized Mobility segment counterparts in Alberta and
British Columbia, should be included in the Telecommunications Workers' Union
without a representational vote. TELUS Mobility applied to the Federal Court
of Appeal for a judicial review of these decisions, which was dismissed in
December 2004. TELUS Mobility applied to the Supreme Court of Canada for leave
to appeal the decision in February 2005.
TELUS makes strategic investments
In support of TELUS' national data and IP growth strategy, in November
2004 TELUS acquired ADCOM, Inc., the largest videoconferencing company in
Canada, for $12.2 million. Through the acquisition, TELUS gained approximately
80 ADCOM employees, a new customer base, as well as multi-site operations and
state-of-the-art facilities. Post- acquisition, ADCOM added $4.6 million in
revenue to TELUS Communications segment. ADCOM's annual revenues in 2003 were
$24.7 million. Headquartered in Toronto, ADCOM has offices in Calgary,
Edmonton, Ottawa, Montreal and Halifax.
TELUS partners with the B.C. government
In December, TELUS signed a 10-year, $20 million agreement to
sub-contract services including contact center technology and a speech
recognition system to MAXIMUS BC Health Benefits Operations Inc. (a MAXIMUS
Canada company). This supports MAXIMUS' delivery of program management and
information technology services to B.C.'s health benefits operations. These
operations include responding to public inquiries, registering clients and
processing medical and pharmaceutical claims from health professionals.
TELUS also partnered with the B.C. government on several technology-based
service delivery projects. In November, the B.C. government signed a 10-year,
$133 million partnership with TELUS Sourcing Solutions, to deliver its
corporate human resources and payroll systems and services.
Four Quebec school boards select TELUS as their technology partner of
choice
TELUS continues to make significant inroads in the field of education in
Quebec with the recent signing of four agreements with school boards in the
greater Montreal and Quebec City areas. TELUS now serves more than 30 of the
72 school boards in Quebec.
The four contracts, which exceed $3 million, involve the deployment of a
number of state-of-the-art communications and network solutions including IP
telephony, dedicated fibre-optic links, voice messaging systems, Interactive
Voice Response (IVR) and enhanced call center functions. School boards benefit
from enhanced quality and flexibility of their data and voice transmissions
and significant cost savings.
TELUS launches HomeSitter(R) as part of TELUS Future Friendly(R) Home
In November 2004, TELUS launched HomeSitter, a unique home monitoring
system based on wireless broadband technology that offers customers peace of
mind by allowing them to remotely monitor their home or business through a
private account via any high-speed Internet connection. Customers can view
either real-time streaming video or short video files recorded automatically
after a camera's motion sensor detects movement. They can also configure TELUS
HomeSitter to notify them by wireless phone, pager, or e-mail when a motion
sensor detects movement.
TELUS HomeSitter is the latest innovation to the TELUS Future Friendly
Home portfolio, where fun, convenient and informative home communications
solutions, from the Internet to wireless networking, come together to allow
customers to experience the future.
TELUS Mobility extends Push To Talk(TM) (PTT(TM)) leadership
TELUS Mobility confirmed its position as Canada's PTT leader by
announcing in January both a new CDMA 1X PTT service on its national PCS
network and the upcoming extension of Mike iDEN PTT service into Mexico and
South America.
Instant Talk allows clients on TELUS Mobility's national CDMA 1X network
to talk to contacts at the push of a button, just like a walkie-talkie. A less
powerful version of Mike's Direct Connect, Instant Talk is available on two
handsets - the Kyocera KX440 and, early in 2005 the Motorola V65p - both of
which feature a dedicated PTT button on the side of the phone. TELUS Mobility
also announced it will extend Mike PTT and phone service into Mexico,
Argentina, Brazil and Peru in early 2005 in partnership with NII Holdings,
formerly Nextel International. The move follows last year's expansion of Mike
PTT service across the continental United States and Hawaii.
Also in January, TELUS Mobility announced a roaming agreement with Boost
Mobile, a division of Nextel Communications that offers prepaid iDEN PTT
service to the youth market. The agreement allows Boost Mobile and Mike users
to PTT with each other in their respective coverage areas in Canada and the
United States.
New TELUS Mobility products
TELUS Mobility launched several leading-edge phones in the fourth quarter
of 2004, all of them focused on "do more" services such as text, video and
picture messaging, and ringtone and image downloads. Exclusive new phones
introduced by TELUS Mobility included:
- Fastap LG 6190: TELUS Mobility was the first carrier in the world to
introduce a phone built around Fastap technology, which neatly
integrates text keys around a standard numeric keypad. It makes it
faster and easier to send text messages and e-mail, or input other
data into the phone. Canadians sent more than 710 million
phone-to-phone messages in 2004, an increase of more than 100 per cent
over 2003, and are now sending more than 2.7 million text messages
each day
- Motorola V710: Canada's first CDMA Bluetooth phone, the Motorola V710
offers advanced video and picture messaging capabilities, an MP3
player, integrated speakerphone, independent speech recognition and
optional Motorola Bluetooth accessories, such as wireless headsets and
car kits, that provide excellent hands-free mobility
- Nokia 3205i Chameleon: focused on multimedia messaging and
personalization, the youth-oriented Chameleon features an integrated
camera, large colour screen and Multimedia Messaging Service (MMS)
capability that takes advantage of TELUS Mobility's picture and video
messaging services. It also offers unique, do-it-yourself cut-out
covers that allow clients to personalize their phones with their own
graphics
- Audiovox 8920 King Kam: Canada's first 1.3 megapixel camera phone, the
King Kam offers exceptional resolution (four times the current camera
phone standard of 300 kilopixels) along with a built-in flash, dual
colour displays and the ability to snap, send or save photos with
TELUS Mobility's powerful picture messaging service
- Kyocera K494 Energi: characterized by unique styling and
personalization, the hip Kyocera Energi features user-changeable
faceplates to match different moods and styles. Built for ringtone,
image and game downloads, the youth-oriented Energi features a
built-in flashlight, world clock and stopwatch.
TELUS supports tsunami relief efforts and the community
In late 2004 and early 2005, TELUS and its team members made significant
contributions to the tsunami relief efforts in South Asia, TELUS quickly
announced a donation program whereby TELUS matched, dollar for dollar, all
donations by employees to the Red Cross, Oxfam, and UNICEF of up to $250,000
and combined we donated more than $575,000 to the relief activities.
In November, the Canadian Film Centre announced a $3 million gift from
the TELUS Foundation. The Foundation was established by TELUS to foster a
culture of excellence and creativity in Canada's film, TV and new media
industries. This contribution will be used to directly invest in Canadian
talent and projects through the newly created TELUS Innovation Fund for Film,
TV & New Media. As well, it enhances existing Canadian Film Centre initiatives
in training, production, promotion and scholarships.
TELUS also announced its continued support of golf in Alberta with a
three-year extension of the Canadian Tour's TELUS Edmonton Open through 2007.
TELUS has been a supporter of the tournament and the Canadian Tour since 1996.
The 2005 TELUS Edmonton Open will be held at the Edmonton Country Club from
June 27 to July 3, with 156 golfers competing for a purse of $150,000.
New TELUS board member appointed
In December, TELUS announced the appointment of R.E.T. (Rusty) Goepel to
its board of directors. Mr. Goepel is currently senior vice president of
Raymond James Financial's Canadian operations. He is chairman of both the
Business Council of BC and Yellow Point Equity partners, and he serves as
director of several organizations including the Vancouver 2010 Olympic
Organizing Committee, The Vancouver Airport Authority, Spur Ventures, Amerigo
Resources, and Premium Brands Ltd. Mr. Goepel is a member of both Simon Fraser
University's and the Canadian Olympic Association's pension advisory
committees, and is a recipient of the Queen's Jubilee Medal for Business
Leadership and Community Services.
Mr. Goepel fills one of two board positions vacated by Verizon executives
when Verizon divested its equity position in TELUS in December 2004.
TELUS top executives honored by Women's Executive Network
In November, the Women's Executive Network recognized two senior TELUS
executives on its annual list of Canada's most powerful women. Janet Yale,
TELUS executive vice president of legal, government and regulatory affairs,
and Karen Radford, executive vice president and president TELUS Partner
Solutions, were among those on Canada's Most Powerful Women: Top 100 list for
2004. Women from across Canada were honoured in several categories, including
Corporate Executive, Entrepreneurs, Public Sector, Leaders, Professionals,
Trailblazers, and Champions. Radford and Yale were recognized in the Corporate
Executive category. Visit www.powerwomen.ca for the complete recipient list.
An independent advisory board selected Yale and Radford for their career
successes as well as their dedication to bettering their communities. Yale
works with the National Arts Centre, the United Way, and the Ottawa Hospital,
while Radford is known for her commitment to youth organizations and to
mentoring emerging leaders.
TELUS' 2003 annual report rated best in Canada
For the 10th consecutive year, the Canadian Institute of Chartered
Accountants (CICA) recognized TELUS for excellence in corporate reporting. At
the December CICA Corporate Reporting Awards, TELUS was presented with the
Award of Excellence for best annual report across all industry sectors. The
TELUS 2003 Annual Report was also given the Award of Excellence in the
Communications and Media sector.
The CICA Corporate Reporting Awards recognize superior corporate
reporting in four areas: annual reporting, electronic disclosure, corporate
governance and sustainable development. The judging panel noted TELUS went
above and beyond the required disclosure, clearly demonstrating the company's
key goals of accountability and transparency. Singled out for praise were the
electronic version of the annual report and the sections entitled Management's
Discussion and Analysis and Risks and Uncertainties.
TELUS to redeem convertible debentures
On February 16, TELUS announced its intention to redeem at par on
June 16, 2005 all C$149.6 million of its 6.75% Convertible Unsecured
Subordinated Debentures due June 15, 2010. The TELUS convertible debentures
were originally issued in exchange for all outstanding Clearnet Communications
Inc. convertible debentures and trade on the Toronto Stock Exchange under the
symbol T.DB.
There is no assurance that this redemption will be completed as planned
and TELUS Corporation would only become obligated to complete this redemption
when a formal Redemption Notice is provided to the Trustee of the 6.75%
Convertible Unsecured Subordinated Debentures due June 15, 2010.
Dividend declaration
The Board of Directors declared a quarterly dividend of twenty cents
($0.20) per share on outstanding Common and Non-Voting Shares payable on
April 1, 2005 to shareholders of record on the close of business on March 11,
2005.
/For further information:
(T. T.NV. TU)
Media Relations: Investor Relations:
Nick Culo John Wheeler
(780) 493-7236 (780) 493-7310
nick.culo@telus.com ir@telus.com
Forward-looking statements
==========================================================================
This document and the management's discussion and analysis contain
statements about expected future events and financial and operating
results of TELUS Corporation (TELUS or the Company) that are forward-
looking. By their nature, forward-looking statements require the Company
to make assumptions and are subject to inherent risks and uncertainties.
There is significant risk that predictions and other forward-looking
statements will not prove to be accurate. Readers are cautioned not to
place undue reliance on forward-looking statements as a number of factors
could cause actual future results, conditions, actions or events to
differ materially from the targets, expectations, estimates or intentions
expressed in the forward-looking statements.
Factors that could cause actual results to differ materially include but
are not limited to: competition; economic fluctuations; financing and
debt requirements; tax matters; human resources (including the outcome of
outstanding labour relations issues); technology (including reliance on
systems and information technology); regulatory developments; process
risks; manmade and natural threats; health and safety; litigation;
business continuity events and other risk factors discussed herein and
listed from time to time in TELUS' reports, comprehensive public
disclosure documents including the Annual Information Form, and in other
filings with securities commissions in Canada (filed on SEDAR at
www.sedar.com) and the United States (filed on EDGAR at www.sec.gov).
For further information, see the Risks and uncertainties section in
TELUS' 2003 annual Management's discussion and analysis, and significant
updates in interim reports for 2004.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise.
==========================================================================
Management's discussion and analysis - February 16, 2005
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month and twelve-
month periods ended December 31, 2004 and 2003. This discussion contains
forward-looking information that is qualified by reference to, and should be
read together with, the discussion regarding forward-looking statements above.
This fourth quarter interim discussion is comprised of significant updates
since Management's discussion and analysis reported in TELUS' 2003 Annual
Report and in interim reports for the first, second and third quarters of
2004. Accounting policies are consistent with those described in the 2003
Annual Report, with the exception of two accounting policy developments,
discussed in Section 8.2 Accounting policy developments.
Management's discussion and analysis was reviewed by TELUS' Audit
Committee on February 15, 2005 and approved by TELUS' Board of Directors on
February 16, 2005. All amounts are in Canadian dollars unless otherwise
specified.
Non-GAAP measures
The Company has issued guidance on and reports on certain non-GAAP
measures that are used by management to evaluate performance of business units
and segments. On a consolidated basis, non-GAAP measures are used in measuring
compliance with debt covenants. Because non-GAAP measures do not have a
standardized meaning, securities regulations require that non-GAAP measures be
clearly defined and qualified, reconciled with their nearest GAAP measure and
given no more prominence than the closest GAAP measure. For the readers'
reference, the definition, calculation and reconciliation of consolidated non-
GAAP measures is provided in Section 11: Reconciliation of non-GAAP measures
and definition of key operating indicators.
Management's discussion and analysis contents
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Section Contents
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1. Overall performance A summary of fourth quarter results and a
description of performance against annual
targets set for 2004.
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2. Core business, vision and Recent examples of TELUS' activities in
strategy support of its six strategic imperatives.
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3. Key performance drivers An update on certain key 2004 corporate
priorities.
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4. Capability to deliver A description of factors that affect the
results capability to execute strategies, manage
key performance drivers, and deliver
results.
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5. Results of operations A detailed discussion of fourth quarter
operating results.
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6. Financial condition A discussion of significant changes in
the balance sheet for the full year.
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7. Liquidity and capital A discussion of cash flow, liquidity,
resources credit facilities, off-balance sheet
arrangements and other disclosures.
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8. Critical accounting A description of accounting estimates,
estimates and accounting which are critical to determining
policy developments financial results, and changes to
accounting policies in 2004.
-------------------------------------------------------------------------
9. Looking forward to 2005 A discussion of the 2005 outlook,
operational and financial targets,
financing plans, and key assumptions.
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10. Risks and uncertainties A description of the risks and
uncertainties facing TELUS.
-------------------------------------------------------------------------
11. Reconciliation of non-GAAP A description, calculation and
measures and definition of reconciliation of certain measures used
key operating indicators by management.
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1. Overall performance
1.1 Materiality for disclosure
Management determines whether or not information is "material" based on
whether it believes a reasonable investor's decision to buy, sell or hold
securities in the Company would likely be influenced or changed if the
information were omitted or misstated.
1.2 Consolidated highlights
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($ in millions except
per share amounts) Quarters ended December 31 Years ended December 31
2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Operating revenues 1,964.9 1,825.6 7.6 % 7,581.2 7,146.0 6.1 %
EBITDA(1) 766.6 682.8 12.3 % 3,090.6 2,815.8 9.8 %
Operating income 349.1 258.4 35.1 % 1,447.5 1,163.0 24.5 %
Net income 135.6 47.8 183.7 % 565.8 324.4 74.4 %
Earnings per share,
basic 0.38 0.13 192.3 % 1.58 0.92 71.7 %
Earnings per share,
diluted 0.37 0.13 184.6 % 1.57 0.91 72.5 %
Cash dividends
declared per share 0.20 0.15 33.3 % 0.65 0.60 8.3 %
Cash provided by
operating activities 613.8 409.8 49.8 % 2,538.1 2,133.8 18.9 %
Cash used by
investing activities 342.8 421.4 (18.7)% 1,299.5 1,197.8 8.5 %
Capital
expenditures 343.4 435.4 (21.1)% 1,319.0 1,252.7 5.3 %
Cash provided (used)
by financing
activities 3.3 (84.5) 103.9 % (348.3) (920.8) 62.2 %
Free cash flow(2) 121.9 71.5 70.5 % 1,297.3 844.9 53.5 %
-------------------------------------------------------------------------
(1) Earnings before interest, taxes, depreciation and amortization is a
non-GAAP measure. See Section 11.1 Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA).
(2) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash
flow.
-------------------------------------------------------------------------
Consolidated Operating revenues and EBITDA increased significantly in the
fourth quarter and full year of 2004, when compared with the same period in
2003, driven by continued significant TELUS Mobility growth as well as
improved results in the Communications segment, which has now experienced
three quarters of sequential revenue growth and year-over-year growth in third
and fourth quarters of 2004. Net income increased due to improved operating
profitability, lower Financing costs and lower effective income tax rates.
Basic and diluted Earnings per share increased in the fourth quarter and full
year of 2004, as compared with the same periods in 2003, as a result of higher
Net income, partly offset by a larger number of shares outstanding. Strong
growth in EBITDA combined with lower restructuring payments contributed to
free cash flow growth. Cash used by financing activities decreased due mainly
to lower repayments of debt maturing in 2004.
1.3 Performance relative to targets and revised guidance
TELUS met or exceeded all of its original consolidated targets for 2004,
except for capital expenditures. TELUS Mobility exceeded or met all of its
original targets, while TELUS' Communications segment original targets were
not achieved, except for high-speed Internet subscriber net additions. TELUS
met or exceeded all of its consolidated and segmented final guidance for 2004.
-------------------------------------------------------------------------
Performance to 2004
targets and final
guidance
XX Exceeded top of
range of target
or guidance
X Met target or
guidance
- Did not meet
target or
guidance
-------------------------------------------------------------------------
Original Final
2004 Targets Guidance
Results For 2004 Result For 2004 Result
-------------------------------------------------------------------------
Consolidated $7.45 to $7.5 to
Revenues $7.581 billion $7.55 billion XX $7.575 billion XX
$2.95 to $3.05 to
EBITDA(1) $3.09 billion $3.05 billion XX $3.1 billion X
Earnings per
share - basic $1.58 $1.05 to $1.25 XX $1.50 to $1.55 XX
Capital Approx. Approx.
expenditures $1.319 billion $1.225 billion - $1.3 billion X
Free cash $1.13 to $1.25 to
flow(2)(3) $1.30 billion $1.23 billion XX $1.3 billion X
Net debt to 2.5 times 2.2 times
EBITDA(4) 2.1 times or less XX or less X
Communications
Segment
Revenue $4.8 to $4.725 to
(external) $4.769 billion $4.85 billion - $4.775 billion X
Non-ILEC Approx. $545 to
revenue $561 million(5) $610 million - $555 million XX
$1.975 to $1.925 to
EBITDA $1.948 billion $2.025 billion - $1.95 billion X
Non-ILEC Approx. $(20) to
EBITDA $(22) million $5 million - $(25) million X
Capital Approx. Approx.
expenditures $964 million $875 million - $950 million X
High-speed
Internet
subscriber
net additions 128,100 Approx. 125,000 X Approx. 125,000 X
Mobility
Segment
Revenue $2.65 to $2.775 to
(external) $2.812 billion $2.7 billion XX $2.8 billion XX
$975 million to $1.125 to
EBITDA $1.142 billion $1.025 billion XX $1.15 billion X
Capital Approx. Approx.
expenditures $355 million $350 million X $350 million X
Wireless
subscriber 375,000 to 425,000 to
net additions 512,400 425,000 XX 475,000 XX
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA).
(2) See Section 11.2 Free cash flow.
(3) Free cash flow (2004 method).
(4) Using EBITDA (excluding restructuring). See Section 11.4 Definition
of liquidity and capital resource measures.
(5) Includes $4.6 million of revenues from ADCOM.
-------------------------------------------------------------------------
2. Core business, vision and strategy
2.1 Strategic imperatives
TELUS continues to be guided by its six strategic imperatives established
four years ago that serve as a guideline for the Company's actions. Some
recent examples of TELUS' activities in support of these imperatives follow:
Partnering, acquiring and divesting to accelerate the implementation of
TELUS' strategy and focus TELUS' resources on core business
In November 2004, TELUS acquired the shares of ADCOM, Inc., the largest
video conferencing company in Canada, on an all cash basis for $12.2 million.
Through this acquisition, TELUS gained approximately 80 employees, a new
customer base, multi-site operations and state-of-the-art equipment. ADCOM has
offices in Calgary, Edmonton, Ottawa, Montreal and Halifax. ADCOM's annual
revenues in 2003 were $24.7 million. Also in November, TELUS Sourcing
Solutions signed an agreement with the Government of B.C. to provide it with
payroll systems and services. Approximately 141 employees joined TELUS from
the provincial government.
In December 2004, Verizon sold its 20.5% equity interest in TELUS, or
73.5 million shares, through a secondary equity offering. The long-term
relationship agreement between the companies required Verizon to have approval
of a majority of TELUS' independent directors, and allowed TELUS to negotiate
favourable terms to permit the transaction to proceed. TELUS received
$148.1 million (U.S. $125 million) and, under amendments to long-term
agreements, annual fees payable to Verizon were reduced to a nominal amount.
The secondary offering increased the public float of TELUS shares by
approximately 26%, providing more trading liquidity, and increasing the
breadth of the shareholder base. In addition, TELUS Mobility and Verizon
Wireless expanded their current roaming arrangements.
In the fourth quarter, TELUS also sold several real estate properties for
total proceeds of $9.4 million. For the full year, total proceeds from the
sale of non-strategic properties and other assets were $27.6 million.
3. Key performance drivers
TELUS is focused on addressing six 2004 corporate priorities to help
drive operational performance. An update on certain priorities follows:
3.1 Reaching a collective agreement
Reaching a collective agreement remains a priority in 2005. The recent
decision by the Canada Industrial Relations Board (CIRB) overturning its year
old binding arbitration order returns the parties to the collective bargaining
process. Every effort will be made to achieve a long overdue resolution to
these negotiations, which first commenced in 2000. The status of certain CIRB
decisions and related appeals in 2004 follows.
Appeal for reconsideration of CIRB Decisions 1004 and 271
In February 2004, TCI filed applications with both the CIRB and the
Federal Court of Appeal seeking a review of the CIRB's earlier decisions,
which imposed a communications ban and required TCI to offer binding
arbitration to the Telecommunications Workers Union (TWU). On April 8, 2004,
in Decision 271, the CIRB rendered the full reasons regarding the complaints
that led to its earlier decisions. The CIRB imposed a further communications
ban on TCI, prohibiting communications with bargaining unit members on matters
of employment and collective interest until such time as the conditions of the
Canada Labour Code with respect to gaining the right to strike or lockout had
been satisfied. TCI then sought reconsideration and a judicial review of the
CIRB's April 8, 2004 decision. The Federal Court of Appeal granted TCI a stay
of its judicial review application until the CIRB issued the reconsideration
decision. The CIRB issued a summary decision on February 2, 2005, overturning
its previous ruling that imposed binding arbitration. In addition, the Board
set aside the April 2004 broad communications ban, and re-instated its
narrower January 2004 ban related to communications with bargaining unit team
members on labour relations issues and negotiations. TCI is awaiting the
CIRB's full reasons for its decision. In the interim, TCI has requested that
the Federal Court of Appeal judicial review application be stayed until the
CIRB issues its full written reasons for its February 2005 decision. TCI
awaits the Federal Court of Appeal's determination. On February 16, 2005, the
Telecommunications Workers Union filed an application in the Federal Court of
Appeal of this latest CIRB decision that reversed the Board's previous
decision that had placed the parties in binding arbitration.
Appeal of CIRB Decisions 1088 and 278
The CIRB in Decisions 1088 and 278 declared that TELUS Mobility's non-
unionized team members, predominantly located in Ontario and Quebec,
performing work similar to their unionized Mobility segment counterparts in
Alberta and British Columbia, should be included in the TWU bargaining unit
without a representational vote. TELUS Mobility's application to the Federal
Court of Appeal for judicial review of Decisions 1088 and 278 was heard in
October 2004. The Federal Court of Appeal dismissed the application on
December 16, 2004, and TELUS Mobility applied to the Supreme Court of Canada
for leave to appeal the decision in February 2005.
On February 4, 2005, the CIRB rendered a further decision to include the
former QuebecTel Mobilite employees (clerical and administrative) represented
by the Syndicat quebecois des employees de TELUS, Local 5044 (SQET) in the
bargaining unit represented by the TWU. The CIRB also confirmed that the
former QuebecTel Mobilite employees (professional) represented by the Syndicat
des agents de maitrise de TELUS, Local 5144 (SAMT), would remain a
separate/distinct bargaining unit continuing to be represented by the SAMT.
4. Capability to deliver results
4.1 Operational capabilities - TELUS Communications
A little less than one-third of the Communications segment revenues are
currently subject to rate regulation by the CRTC. Regulated services include
residential and business services, competitor services and public telephone
(payphone) services.
In the past, management has indicated a need to address the declining
revenue streams and profitability in the wireline business. This is caused by
ongoing industry-wide trends including declining access lines, reduced long
distance revenue as a result of price competition and lower usage due in part
to technological substitution, and new revenue streams having lower margins.
To meet these challenges TELUS has set out to offset these factors in three
ways. First, TELUS is pursuing the non-incumbent growth opportunity in the
large business market in Ontario and Quebec with a focus on managed data and
IP solutions. Second, in incumbent areas TELUS is investing in and launching a
suite of integrated and advanced digital and wireless services with the TELUS
Future Friendly Home initiative. Third, TELUS aims to deliver continued
improvements in efficiency and productivity to address cost structure and
maintenance of margins in the mid-term. TELUS Communications has had some
success in 2004 with an increase non-ILEC revenues in the second half of the
year, the launch of two new services, TELUS Home Networking and TELUS
HomeSitter, and new efficiency initiatives. It is encouraging that TELUS
Communications attained sequential quarterly revenue growth in the second,
third and fourth quarters of 2004 and year-over-year growth in the third and
fourth quarters of 2004.
In 2004, TELUS Communications recorded $52.6 million in restructuring
charges for three new restructuring initiatives. In light of strong
competition from existing telecommunications companies, and plans by cable-TV
companies and other competitors to expand VoIP offerings in TELUS' incumbent
territories, ongoing efficiency initiatives continue to be necessary in 2005.
4.2 Operational capabilities - TELUS Mobility
Wireless services are not rate-regulated by the CRTC.
With the overall wireless marketplace exhibiting continued growth, TELUS
Mobility has generated best-in-class results in many respects. Focus on
customer care, value-added solutions and superior network quality provides its
growing subscriber base with an exceptional service experience. With the
strategic focus on profitable wireless growth and operating scale
efficiencies, a significant proportion of every incremental network revenue
dollar earned continues to flow through to EBITDA. As a result, TELUS Mobility
is generating significant EBITDA margins ahead of its peer group. This
performance resulted in TELUS Mobility being named as the top ranked wireless
operator in North America by N. Moore Capital for the third consecutive
quarter in November 2004.
4.3 Liquidity and capital resources
TELUS' 2004 financing plan was to use free cash flow generated by its
business operations to reduce or repurchase debt and amounts outstanding under
its accounts receivable securitization program, as well as to redeem the
publicly held Preference and Preferred Shares of TELUS Communications Inc. As
planned, new credit facilities were established in May 2004 for $1.6 billion,
the Company maintained its foreign exchange hedging programs, and the
proportion of fixed rate debt was reduced to 93.2% by a series of fixed-rate
to floating interest rate swaps.
In 2004, TELUS repaid approximately $210 million in debt that matured in
August, reduced the cash proceeds from the sale of securitized accounts
receivable by $150 million and redeemed $72.8 million in Preference and
Preferred shares. Following acceptance of the Company's Normal Course Issuer
Bid by the Toronto Stock Exchange in mid-December, a total of 2,207,111 Common
Shares and Non-Voting Shares were repurchased for cancellation, for
$78.0 million. With a Net debt to EBITDA ratio of 2.1 times and a Net debt to
total capitalization ratio of 47.9% at December 31, 2004, TELUS has achieved
ahead of schedule, not only its original 2004 target for Net debt to EBITDA of
2.5 times or less, but also the long-term targets of 2.2 times or less for Net
debt to EBITDA and 45 to 50% for Net debt to total capitalization. In October
2004, on a prospective basis, the Company set a target guideline for a
dividend payout ratio of 45 to 55% of net earnings.
With $896.5 million of cash at December 31, 2004, access to undrawn
credit facilities of $1.6 billion and cash provided by operating activities,
the Company believes it has sufficient capability to fund its requirements in
2005 and refinancing requirements in 2006. See Section 9.2 Financing Plan for
2005. On February 16, 2005, TELUS announced its intention to redeem its
$149.6 million of 6.75% convertible debentures at par on June 16, 2005.
5. Results of operations
5.1 General
The Company's reportable segments, which reflect TELUS' organization
structure and are used to manage the business, are TELUS Communications and
TELUS Mobility. The two segments are differentiated based on management,
products and services, distribution channels, technology, and regulatory
treatment. Intersegment sales are recorded at the exchange value.
5.2 Quarterly consolidated results summary
-------------------------------------------------------------------------
($ in millions, except
per share amounts) 2004 Q4 2004 Q3 2004 Q2 2004 Q1 2003 Q4 2003 Q3
-------------------------------------------------------------------------
Segmented revenue
(external)
TELUS
Communications
segment 1,209.3 1,199.9 1,189.0 1,171.1 1,182.4 1,186.3
TELUS Mobility
segment 755.6 747.0 676.6 632.7 643.2 619.9
------- ------- ------- ------- ------- -------
Operating revenues
(consolidated) 1,964.9 1,946.9 1,865.6 1,803.8 1,825.6 1,806.2
Restructuring and
workforce reduction
costs 19.8 16.2 0.7 15.9 16.2 2.3
Net income 135.6 156.6 172.3 101.3 47.8 114.1
Per weighted average
Common Share and
Non-Voting Share
outstanding
- basic 0.38 0.44 0.48 0.28 0.13 0.32
- diluted 0.37 0.43 0.48 0.28 0.13 0.32
Dividends declared
per Common Share
and Non-Voting
Share outstanding 0.20 0.15 0.15 0.15 0.15 0.15
-------------------------------------------------------------------------
---------------------------------------
($ in millions, except
per share amounts) 2003 Q2 2003 Q1
---------------------------------------
Segmented revenue
(external)
TELUS
Communications
segment 1,209.2 1,208.5
TELUS Mobility
segment 564.1 532.4
------- -------
Operating revenues
(consolidated) 1,773.3 1,740.9
Restructuring and
workforce reduction
costs 3.3 6.5
Net income 73.0 89.5
Per weighted average
Common Share and
Non-Voting Share
outstanding
- basic 0.21 0.26
- diluted 0.21 0.26
Dividends declared
per Common Share
and Non-Voting
Share outstanding 0.15 0.15
---------------------------------------
The trend in Operating revenues continued to reflect strong wireless
growth resulting from an increased subscriber base and increased average
revenue per subscriber unit ("ARPU"). TELUS Communications segment revenues
increased for the third consecutive quarter, as a result of traction gained
from new contracts. Strong data revenues helped Communications segment
revenues increase in the third and fourth quarters of 2004, when compared to
the same periods in 2003 due, partially offset by a more modest decline in
voice revenues and equipment sales. Communications segment revenues include
the impacts of regulatory price cap decisions.
Restructuring charges in 2003 and 2004 were recorded as a result of
Communications segment initiatives.
Net income and earnings per share reflect improved operating
profitability, as well as decreasing interest on long-term and short-term
debt. There is significant fourth quarter seasonality at TELUS Mobility in
terms of subscriber gross additions, related acquisition costs and equipment
sales, and to a lesser extent, at TELUS Communications in terms of high-speed
Internet subscriber net additions. Significant semi-annual interest payments
are also made in the fourth quarter.
For five of the periods shown above, Net income and earnings per share
included significant favourable impacts for the settlement of tax matters and
consequential adjustments, as shown in the table below:
-------------------------------------------------------------------------
($ in millions, except 2004 2004 2004 2004 2003 2003 2003 2003
per share amounts) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Approximate Net
income impact 14 - 45 14 - 19 - 53
Approximate per
share impact 0.04 - 0.13 0.04 - 0.05 - 0.15
Approximate basic
earnings per share,
excluding favourable
tax-related impacts 0.34 0.44 0.35 0.24 0.13 0.27 0.21 0.11
-------------------------------------------------------------------------
5.3 Consolidated results of operations
-------------------------------------------------------------------------
Quarters ended Years ended
($ in millions except December 31 December 31
EBITDA margin) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Operating revenues 1,964.9 1,825.6 7.6 % 7,581.2 7,146.0 6.1 %
Operations expense 1,178.5 1,126.6 4.6 % 4,438.0 4,301.9 3.2 %
Restructuring and
workforce reduction
costs 19.8 16.2 22.2 % 52.6 28.3 85.9 %
-------------------------------------------------------------------------
EBITDA(1) 766.6 682.8 12.3 % 3,090.6 2,815.8 9.8 %
EBITDA margin (%)(2) 39.0 37.4 1.6 pts 40.8 39.4 1.4 pts
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA).
(2) EBITDA margin is EBITDA divided by Operating revenues.
Consolidated Operating revenues and EBITDA increased significantly in the
fourth quarter and full year of 2004, when compared with the same period in
2003. This was driven by TELUS Mobility Operating revenue growth of 17.7% for
the fourth quarter and 19.3% for the full year, while the corresponding
increase in TELUS Mobility Operations expense was only 4.4% and 8.4%,
respectively. TELUS' Communications segment Operating revenues experienced
modest growth of 2.4% in the fourth quarter and was relatively flat at (0.3)%
for the full year, while its Operations expense increased by 5.1% and 0.4% for
the corresponding periods. Expenses increased to maintain high service levels
and provide in-sourcing services to customers, and were partly offset by
savings from the Operational Efficiency Program, which concluded in 2003.
Communications segment restructuring charges of $52.6 million were recorded
for the full year of 2004 for ongoing efficiency initiatives, an increase of
$24.3 million when compared with 2003.
For further detail, see Section 5.4 Communications segment results and
Section 5.5 Mobility segment results.
-------------------------------------------------------------------------
Depreciation and Quarters ended Years ended
amortization December 31 December 31
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Depreciation 338.3 323.4 4.6 % 1,307.8 1,272.9 2.7 %
Amortization of
intangible assets 79.2 101.0 (21.6)% 335.3 379.9 (11.7)%
-------------------------------------------------------------------------
417.5 424.4 (1.6)% 1,643.1 1,652.8 (0.6)%
-------------------------------------------------------------------------
Depreciation and amortization expenses, in total, were not significantly
changed in the fourth quarter and full year of 2004. Increased depreciation
and amortization for growth in data network and wireless capital assets,
increased depreciation for certain assets, as well as write-offs of network
equipment and software assets in 2004, were largely matched by lower
amortization resulting from certain software applications becoming fully
amortized and from the write-off of software assets in 2003.
-------------------------------------------------------------------------
Quarters ended Years ended
Other expense, net December 31 December 31
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
8.7 3.5 148.6 % 8.7 23.3 (62.7)%
-------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense, gains
and losses on disposal of property, income (loss) or impairments in equity or
portfolio investments, and charitable donations. Accounts receivable
securitization expense decreased by $0.9 million and $9.8 million,
respectively, for the fourth quarter and full year of 2004, when compared to
the same periods in 2003. This was due to the reduction in the amount of
securitized receivables. See Section 7.6 Accounts receivable sale. Upon expiry
of TELUS' offer to purchase Microcell in the fourth quarter of 2004,
accumulated acquisition costs of approximately $5 million were written off. In
addition, net gains from the sale of land and several buildings and
investments increased by $5.9 million and $10.4 million, respectively, for the
fourth quarter and full year of 2004, when compared with 2003. Charitable
donations expense continues to reflect TELUS' objective of donating 1% or more
of average pre-tax income, as defined under the Imagine Caring Company
formula.
-------------------------------------------------------------------------
Quarters ended Years ended
Financing costs December 31 December 31
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Interest on Long-term
Debt, short-term
obligations and
other 160.9 165.5 (2.8)% 655.5 683.0 (4.0)%
Foreign exchange
losses (gains) (2.1) (0.4) - (3.1) (0.4) -
Interest income (6.0) (1.4) - (39.1) (43.3) 9.7 %
-------------------------------------------------------------------------
152.8 163.7 (6.7)% 613.3 639.3 (4.1)%
-------------------------------------------------------------------------
Interest on long-term and short-term debt decreased primarily due to the
repayment of bank facilities, Medium-term Notes and First Mortgage Bonds
during 2003, and the repayment of TELUS Communications Inc. Debentures and
Medium-term Notes in the third quarter of 2004. TELUS maintains a hedging
program using cross currency swaps, and as a result, long-term financing costs
were generally unaffected by fluctuations in the value of the Canadian dollar
against the U.S. dollar. Debt, which includes Long-term Debt, Current
maturities and the deferred hedging liability, but excludes cash-on-hand, was
$7,374.2 million at December 31, 2004, when compared with $7,576.7 million at
December 31, 2003. Interest income was recognized primarily as a result of tax
refunds ($26.2 million for the full year of 2004 and $38.9 million for the
full year of 2003) from the settlement of various tax matters, as well as from
interest earned on cash and temporary investments.
-------------------------------------------------------------------------
Income taxes Quarters ended Years ended
($ millions, except December 31 December 31
tax rates) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Blended federal and
provincial statutory
income tax 64.9 34.3 89.2 % 286.6 185.7 54.3 %
Tax rate differential
on, and consequential
adjustments from,
the settlement of
prior year tax
issues (14.2) - - (50.3) (49.7) (1.2)%
Revaluation of future
tax assets and
liabilities for
changes in statutory
income tax rates (12.9) 13.6 - (12.9) 13.6 -
Large corporations
tax and other 12.6 (5.1) - 31.7 23.1 37.2 %
-------------------------------------------------------------------------
50.4 42.8 17.8 % 255.1 172.7 47.7 %
-------------------------------------------------------------------------
Blended federal and
provincial statutory (3.0) (2.4)
tax rates (%) 34.6 37.6 pts 34.7 37.1 pts
Effective tax rates (20.0) (3.6)
(%) 26.9 46.9 pts 30.9 34.5 pts
-------------------------------------------------------------------------
Blended federal and provincial statutory income tax increased due to
higher income before taxes of $96.4 million and $325.1 million, respectively,
partly offset by lower blended tax rates. Tax recoveries were related to
losses carried back and settlement of tax matters and consequential
adjustments for prior years that had higher tax rates. Revaluation of future
tax balances arose from changes in Federal and provincial tax rates.
-------------------------------------------------------------------------
Non-controlling Quarters ended Years ended
interest December 31 December 31
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
1.6 0.6 166.7 % 4.6 3.3 39.4 %
-------------------------------------------------------------------------
Non-controlling interest primarily represents minority shareholders'
interests in several small subsidiaries.
-------------------------------------------------------------------------
Preference and Quarters ended Years ended
preferred dividends December 31 December 31
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
- 0.9 (100.0)% 1.8 3.5 (48.6)%
-------------------------------------------------------------------------
Preference and preferred dividends ended with the redemption of all of
the publicly held TELUS Communications Inc. Preference and Preferred Shares,
completed on August 3, 2004.
5.4 Communications segment results
-------------------------------------------------------------------------
Operating revenues
- Communications Quarters ended Years ended
segment December 31 December 31
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Voice local 534.4 537.7 (0.6)% 2,145.4 2,160.7 (0.7)%
Voice long distance 229.7 232.3 (1.1)% 921.3 961.1 (4.1)%
Data 372.8 341.0 9.3 % 1,416.4 1,368.1 3.5 %
Other 72.4 71.4 1.4 % 286.2 296.5 (3.5)%
-------------------------------------------------------------------------
External operating
revenue 1,209.3 1,182.4 2.3 % 4,769.3 4,786.4 (0.4)%
Intersegment revenue 24.6 23.1 6.5 % 96.6 94.5 2.2 %
-------------------------------------------------------------------------
Total operating
revenue 1,233.9 1,205.5 2.4 % 4,865.9 4,880.9 (0.3)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Key operating indicators -
Communications segment
At December 31
(000s) 2004 2003 Change
------------------------
Residential network
access lines 3,047 3,086 (1.3)%
Business network
access lines 1,761 1,784 (1.3)%
----- ----- ------
Total network access
lines(1) 4,808 4,870 (1.3)%
High-speed Internet
subscribers 689.7 561.6 22.8 %
Dial-up Internet
subscribers 281.6 319.8 (11.9)%
----- ----- -------
Total Internet
subscribers(2) 971.3 881.4 10.2 %
Quarters ended Years ended
December 31 December 31
(000s) 2004 2003 Change 2004 2003 Change
---------------------------------------------------
Change in residential
network access lines (11) (13) - (39) (36) -
Change in business
network access lines 2 - - (23) (5) -
-------- ------- ------- --------- -------- ------
Change in total
network access lines (9) (13) 30.8 % (62) (41) (51.2)%
High-speed Internet
net additions 34.8 45.5 (23.5)% 128.1 151.6 (15.5)%
Dial-up Internet net
reductions (11.1) (13.9) 20.1 % (38.2) (71.9) 46.9 %
-------- ------- ------- --------- -------- ------
Total Internet
subscriber net
additions 23.7 31.6 (25.0)% 89.9 79.7 12.8 %
-------------------------------------------------------------------------
(1) Network access lines are measured at the end of the reporting period
based on information in billing and other systems.
(2) Internet subscribers are measured at the end of the reporting period
based on Internet access counts from billing and other systems.
-------------------------------------------------------------------------
Relative to a general industry trend of declining traditional revenues,
the Communications segment performed relatively well due to improving data
service revenues and a slowing of the rate of long distance revenue erosion.
- Voice local revenue is generated from access to the Company's network
on a monthly subscription basis, from optional and pay-per-use
services, and from voice contribution revenues, which represents
TELUS' share of contribution pool funds for providing services in
high cost areas. Local revenue for 2004 includes a positive
adjustment of $10.2 million recorded in the second quarter of 2004
for CRTC Decision 2004-42. In the decision TELUS was allowed to
recover on-going operating costs to support previously incurred local
number portability and local competition capital investments.
Excluding this adjustment, the local service decrease was primarily
as a result of a reduction in access lines, partly offset by
implementation of approved rate increases for business single and
multi-line services effective June 1, 2004. Interconnection revenue,
contribution revenues and enhanced services revenues were relatively
unchanged in 2004, when compared with 2003.
Residential network access lines continued to decrease as a result of
competitive activity and technological substitution, including
substitution to wireless services. Business lines decreased primarily
as a result of incumbent local exchange carrier ("ILEC") Centrex line
losses to competition and migration to more efficient ISDN data
services. It is expected that the trend of declining network access
lines will worsen due to the cable-TV competitor beginning to offer
voice telephony services, and increased competition from new and
existing voice over IP ("VOIP") competitors.
- Voice long distance revenue continued to decrease in 2004, but at a
lower rate than the 5.4% revenue decrease observed in 2003, due
primarily to non-incumbent minute growth. The decrease in revenue in
2004, when compared with 2003, was primarily a result of fewer
consumer minutes, price competition, and technological substitution
partly offset by a $1 increase in certain monthly long distance plan
administrative charges, effective June 2004, as well as increased
non-incumbent long distance minute volumes. Price competition and
substitution to alternative technologies are expected to continue.
- Communications segment 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 and data equipment sales. TELUS' November 2004 acquisition of
ADCOM, Inc. added $4.6 million of revenue in 2004, while in 2003 TELUS
divested certain application development assets, which had annual 2003
revenues of $17.8 million.
Internet and enhanced data service revenues increased by $27.2 million
and $63.1 million respectively, for the fourth quarter and full year
of 2004, when compared with the same periods in 2003. The increase was
primarily as a result of a 22.8% growth in the high-speed Internet
subscriber base over the last 12 months and traction gained from
contracts with new customers, partly offset by an 11.9% reduction in
dial-up subscribers over the last 12 months. Managed workplace
revenues increased by $7.4 million and $28.9 million, respectively,
due to providing higher functional outsourcing services and technology
upgrades for TELUS' customers. Other data revenue increased in the
fourth quarter of 2004 due to the acquisition of ADCOM and greater
equipment sales than the same period in 2003. For the full year of
2004, other data services and equipment sales decreased by
$48.3 million.
- Other revenue increased in the fourth quarter of 2004, when compared
with the same period in 2003, due to primarily to increased voice
equipment sales. For the full year of 2004, revenue decreased, when
compared with 2003, primarily as a result of lower late payment fees,
lower voice equipment sales and the conclusion in the first quarter of
2004 of amortization of deferred individual line service grant
revenues (annual impact $6.7 million). Individual line service grants
were provided in respect of the conversion of multi-party lines to
single lines in high cost rural areas in Alberta in the early 1990s.
- Intersegment revenue represents services provided by the
Communications segment to the Mobility segment. These revenues are
eliminated upon consolidation together with the associated expense in
TELUS Mobility.
Total external operating revenue discussed above included Non-ILEC
revenues of $156.4 million and $560.7 million, respectively, for the fourth
quarter and full year of 2004, as compared with $137.7 million and
$555.4 million, respectively, for the same periods in 2003. This reflects
increases of $18.7 million or 13.6% for the fourth quarter and $5.3 million or
1.0% for the full year. The increases were primarily due to billings
associated with a number of new multi-year contracts, including the TD Bank
and the Co-operators, a focus on recurring longer-term revenues and higher
long distance traffic volume and prices, partly offset by lower equipment
sales in 2004 and reduced revenues due to divestiture of certain application
development assets in 2003. Non-ILEC revenues increased year-over-year in the
third and fourth quarters following declines in the first two quarters of the
year. This reflects execution on our objective to migrate away from
non-recurring equipment sales toward quality recurring revenues.
-------------------------------------------------------------------------
Operations expense -
Communications segment Quarters ended Years ended
($ millions, December 31 December 31
except employees) 2004 2003 Change 2004 2003 Change
--------------------------------------------------------------------------
Salaries, benefits
and other employee-
related costs 429.9 402.1 6.9 % 1,650.1 1,616.9 2.1 %
Other operations
expenses 302.3 294.4 2.7 % 1,214.8 1,235.3 (1.7)%
-------------------------------------------------------------------------
Total operations
expense 732.2 696.5 5.1 % 2,864.9 2,852.2 0.4 %
-------------------------------------------------------------------------
Full-time equivalent
employees, end of
period 18,839 18,430 2.2 %
-------------------------------------------------------------------------
Salaries, benefits and employee-related cost increases were incurred
primarily to maintain high service levels and compensation increases, but also
increased for the provision of in-sourcing of payroll services to government
and health care industry clients, the purchase of ADCOM and the establishment
of a call centre in Montreal to handle calls previously outsourced to a
third-party. Full-time equivalent employees increased by 221 employees for the
provision of payroll services to the Government of B.C. and from the purchase
of ADCOM. The decrease in Other operations expense, for the full year, was due
mainly to lower facility costs and call centre outsourcing costs, partly
offset by increased network support and maintenance costs with third parties.
These increases were partly offset by Operational Efficiency Program savings.
- Salaries, benefits and employee-related costs included:
(i) Costs associated with temporary staff, overtime, training and
travel increased by $34.2 million for the full year 2004, when
compared with 2003. This increase was related to activities to
maintain high customer service levels, improve internal
processes, emergency operations training, and an increased
expenditure on leadership training and team development.
However, for the fourth quarter, these costs decreased by $5.3
million, from one year earlier, as a result of extra efforts
required at the end of 2003 to recover from a series of natural
disasters;
(ii) Additional costs of $5.6 million and $24.6 million,
respectively, for the fourth quarter and full year of 2004,
when compared with the same periods in 2003, for operating
structure changes. These costs were for the new partnership
with the Calgary Health Region, the establishment of the new
Montreal call centre, the purchase of ADCOM, and a new
agreement in which TELUS Sourcing Solutions will provide
payroll services to the Government of B.C. These increased
costs were partly offset by savings on outsourcing of
$4.8 million and $10.4 million, respectively, which are
included in Other operations expense. Non-cash share-based
compensation expense recognized commencing January 1, 2004, as
discussed in Section 8.2 Accounting policy developments, were
$7.0 million and $23.8 million, respectively, in 2004;
(iii) Base compensation and benefits increases; and
(iv) Partly offsetting the increases noted above were savings from
the Operational Efficiency Program (duration 2001 to 2003) of
approximately $10.6 million and $60.0 million, respectively, in
2004. Communications segment pension expense for defined
benefit and defined contribution plans decreased by
$9.5 million and $27.2 million, respectively, primarily as a
result of increased investment returns.
- Other operations expenses were inclusive of additional Operational
Efficiency Program savings of approximately $8.4 million and
$24.0 million, respectively, for the fourth quarter and full year of
2004. Other operations expenses decreased for the fourth quarter and
full year of 2004, when compared with 2003, principally due to:
(i) reduced facilities, transit and termination costs, which
decreased by $3.9 million and $40.2 million, respectively, due
to lower rates for domestic, U.S. and international traffic
termination, as well as migration to the NGN, partially offset
by higher outbound traffic volumes;
(ii) a lower bad debt expense that decreased by $7.1 million and
$16.4 million, respectively, as a result of stringent
enforcement of credit policy, more effective collection
practices and reduced loss exposure;
(iii) increased capitalized labour of $7.8 million and $15.4 million,
respectively, related to higher capital expenditure activity
and more effective utilization of the workforce; and
(iv) The above noted expense reductions were partially offset by
expense increases associated with network support and
maintenance costs with third parties, product and service cost
of sales due to higher associated revenue, advertising and
promotion costs associated with the premier corporate citizen
campaign and additional sponsorship costs, higher contract and
consulting costs primarily due to increased use of Accenture
information technology resources partly offset by in-sourcing
of certain call centre operations. All other costs collectively
increased in line with inflation.
Included in the total segment expenses discussed above are Non-ILEC
operations expenses of $152.7 million and $582.9 million, respectively, for
the fourth quarter and full year of 2004, as compared with $139.8 million and
$584.1 million, respectively, for the same periods in 2003. Operations
expenses reflect increased costs from the acquisition of ADCOM, increased
salaries and benefits, and increased wholesale transit and termination costs
for higher outbound international and U.S. traffic volumes, partly offset by
lower costs of sales associated with lower equipment sales, migration of
domestic traffic to NGN and a lower bad debt expense.
-------------------------------------------------------------------------
Restructuring and
workforce reduction
costs - Quarters ended Years ended
Communications segment December 31 December 31
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
19.8 16.2 22.2 % 52.6 28.3 85.9 %
-------------------------------------------------------------------------
Restructuring costs in 2004 include the following activities in the
Communications segment:
- In the first quarter of 2004, a departmental reorganization was
initiated, primarily in the Communications segment information
technology resources area, consolidating from 15 locations to two
primary locations. This reorganization, which had an implementation
cost in 2004 of approximately $12 million, is expected to enable
greater efficiencies of scale and effectiveness of program delivery.
- In the third quarter of 2004, a departmental reorganization was
initiated in the Communications segment with the merging of two
customer-facing business units. The resulting integration and
consolidation aimed to improve the Company's competitiveness as well
as its operating and capital productivity. This reorganization had an
implementation cost in 2004 of approximately $24 million.
- In addition to the foregoing initiatives, the Company had undertaken
additional activities in 2004 aimed at improving its operating and
capital productivity and competitiveness. These additional activities
had a cost in 2004 of approximately $16 million.
At December 31, 2004, no future costs remain to be recorded under the
Operational Efficiency Program (2001-2003). Cumulative annual cost structure
reductions in the Communications segment under the Operational Efficiency
Program were approximately $538 million by December 31, 2004, or over 97% of
the $550 million target set in mid-2002.
-------------------------------------------------------------------------
EBITDA and EBITDA
margin - Quarters ended Years ended
Communications December 31 December 31
segment 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 481.9 492.8 (2.2)% 1,948.4 2,000.4 (2.6)%
EBITDA margin (%) 39.1 40.9 (1.8)pts 40.0 41.0 (1.0)pt
-------------------------------------------------------------------------
While Communications segment data revenue increased in the fourth quarter
and full year of 2004, when compared with the same periods in 2003, EBITDA and
EBITDA margin decreased due to higher restructuring charges, decreasing voice
revenues and operations expense growth rates exceeding overall revenue growth
rates. Non-ILEC EBITDA turned positive in the fourth quarter of 2004, while
for the full year of 2004, Non-ILEC EBITDA losses decreased by 22.6%.
Communications segment capital expenditures are discussed in 7.2 Cash
used by investing activities.
5.5 Mobility segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Years ended
Mobility segment December 31 December 31
($ millions) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Network revenue 696.0 587.8 18.4 % 2,599.9 2,183.7 19.1 %
Equipment revenue 59.6 55.4 7.6 % 212.0 175.9 20.5 %
-------------------------------------------------------------------------
External operating
revenue 755.6 643.2 17.5 % 2,811.9 2,359.6 19.2 %
Intersegment revenue 6.3 4.1 53.7 % 21.5 15.7 36.9 %
-------------------------------------------------------------------------
Total operating
revenue 761.9 647.3 17.7 % 2,833.4 2,375.3 19.3 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Key operating indicators - Mobility segment
-------------------------------------------------------------------------
(000s) At December 31
2004 2003 Change
---------------------------
Subscribers -
postpaid 3,240.3 2,811.8 15.2 %
Subscribers -
prepaid 696.1 612.2 13.7 %
-------- -------- ------
Subscribers -
total(1) 3,936.4 3,424.0 15.0 %
Digital POPs(2)
covered including
roaming/resale
(millions)(3) 30.0 29.5 1.7 %
---------------------------
Quarters ended Years ended
December 31 December 31
(000s) 2004 2003 Change 2004 2003 Change
----------------------------------------------------
Subscriber net
additions - postpaid 144.8 120.4 20.3 % 428.5 321.2 33.4 %
Subscriber net
additions - prepaid 41.6 45.6 (8.8)% 83.9 109.9 (23.7)%
------- -------- ------ -------- -------- -------
Subscriber net
additions - total 186.4 166.0 12.3 % 512.4 431.1 18.9 %
Churn, per
month (%)(4) 1.45 1.58 (0.13)pts 1.40 1.46 (0.06)pts
COA(5) per gross
subscriber
addition ($)(4) 410 452 (9.3)% 389 430 (9.5)%
ARPU ($)(4) 61 59 3.4 % 60 57 5.3 %
Average minutes of
use per subscriber
per month ("MOU") 390 373 4.6 % 384 350 9.7 %
EBITDA to network
revenue (%) 40.9 32.3 8.6 pts 43.9 37.3 6.6 pts
Retention spend to
network
revenue(4) (%) 6.2 6.4 (0.2)pts 5.1 4.7 0.4 pts
EBITDA 284.7 190.0 49.8 % 1,142.2 815.4 40.1 %
EBITDA excluding COA
($ millions)(4) 429.1 336.0 27.7 % 1,578.0 1,240.0 27.3 %
-------------------------------------------------------------------------
pts - percentage points
(1) Subscribers are measured at the end of the reporting period based on
information from billing systems.
(2) POPs is an acronym for population. A POP refers to one person living
in a population area, which in whole or substantial part is included
in the coverage areas.
(3) At December 31, 2004, TELUS Mobility PCS digital population coverage
was 22.5 million and 30.0 million including the roaming/resale
agreements principally with Bell Mobility and Aliant Telecom
Wireless.
(4) See Section 11.3 Definition of key operating indicators. These are
industry measures useful in assessing operating performance of a
wireless company, but are not defined under accounting principles
generally accepted in Canada and the U.S.
(5) Cost of acquisition.
-------------------------------------------------------------------------
- TELUS Mobility Network revenue 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 by 18.4% for the fourth quarter and by 19.1%
for the year ended December 31, 2004 as compared with the same periods
in 2003. This growth was a result of the continued expansion of the
subscriber base by 15.0% during 2004 to approximately 3.9 million
subscribers, combined with increased ARPU. As a result of an overall
4.6% increase in average minutes of use per subscriber per month,
continued pricing discipline, and increased usage of data and Internet
based products, including picture and text messaging, ARPU increased
to $61 per month in the fourth quarter of 2004 as compared with
$59 per month in 2003, representing an eighth successive quarter of
year over year increases. Similarly, ARPU for the full year of 2004
was $60 per month or $3 higher than in 2003.
Average minutes of use per subscriber per month increased in the
fourth quarter and full year of 2004 as shown in the table above. At
December 31, 2004, postpaid subscribers represented 82.3% of the total
cumulative subscriber base remaining stable from one year earlier,
contributing to the ARPU premium TELUS Mobility enjoys over its
competitors. Postpaid subscriber net additions of 144,800 for the
fourth quarter of 2004 represented 77.7% of all net additions as
compared with 120,400 (72.5%) for the corresponding period in 2003.
This represents a significant increase of 20.3% in the postpaid
subscriber net additions when compared to the previous year. Likewise,
postpaid subscriber net additions of 428,500 for the full year of 2004
represented 83.6% of total net additions as compared with 74.5% for
the same period in 2003. This was the sixth consecutive quarter of
year over year positive net postpaid subscriber growth. Subscriber net
additions of 186,400 and 512,400, respectively, for the fourth quarter
and full year of 2004 were a record for TELUS Mobility.
Blended postpaid and prepaid churn improved considerably to 1.45% in
the fourth quarter of 2004 when compared with 1.58% for the same
quarter in 2003. Deactivations were 165,700 and 608,300 for the fourth
quarter and full year of 2004, respectively, as compared with 157,200
and 556,100 for the same periods in 2003. The improved churn rates, in
the face of increased deactivations associated with a larger
cumulative subscriber base, were notable accomplishments, especially
in a competitive market. Churn is typically higher in the fourth
quarter due to the significant number of contract expiries and
marketing promotions by all competitors during the seasonally high
selling period. These churn and deactivation results reflect a
continued focus on client care including loyalty and retention
efforts, value-added solutions and superior network quality providing
the growing subscriber base with an exceptional service experience.
Combined with the higher ARPU and improved churn, the lifetime revenue
per subscriber increased in the fourth quarter full year of 2004, as
compared with the same periods in 2003.
- Equipment sales, rental and service revenue increased in the fourth
quarter and twelve month period ended December 31, 2004 as compared to
the corresponding periods in 2003. Handset revenue increased mainly
due to subscriber growth from a stronger wireless market, increased
promotional, retention and contracting activity, and to a lesser
extent, a shift in product mix to higher priced handsets. Gross
subscriber additions grew to 352,100 for the fourth quarter and
1,120,700 for the full year of 2004, as compared to 323,200 and
987,200 for the same periods in 2003. Handset revenues associated with
gross subscriber activations are netted against costs in the
calculation of COA per gross subscriber addition.
- Intersegment revenues represent services provided by the Mobility
segment to the Communications segment and are eliminated upon
consolidation along with the associated expense in TELUS
Communications.
-------------------------------------------------------------------------
Operations expense -
Mobility segment Quarters ended Years ended
($ millions, except December 31 December 31
employees) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Equipment sales
expenses 125.2 119.5 4.8 % 424.7 378.7 12.1 %
Network operating
expenses 99.9 96.3 3.7 % 401.1 371.0 8.1 %
Marketing expenses 116.0 109.1 6.3 % 329.2 297.4 10.7 %
General and
administration
expenses 136.1 132.4 2.8 % 536.2 512.8 4.6 %
-------------------------------------------------------------------------
Total operations
expense 477.2 457.3 4.4 % 1,691.2 1,559.9 8.4 %
-------------------------------------------------------------------------
Full-time equivalent
employees, end of
period 5,915 5,387 9.8 %
-------------------------------------------------------------------------
TELUS Mobility operations expense increased in the fourth quarter and
full year of 2004, when compared with the same periods in 2003. TELUS Mobility
has been able to achieve significant economies of scale as evidenced by the
4.4% increase in total operations expense compared to fourth quarter Network
revenue growth of 18.4% and 15.0% growth in subscribers.
- Expenses related to equipment sales increased in the fourth quarter
and full year of 2004 when compared with the same periods in 2003,
principally due to an increase in gross subscriber activations, more
expensive handset costs and higher retention activity, partly offset
by favourable foreign exchange rates. TELUS Mobility did hedge its
foreign exchange rates for a certain proportion of its handset
purchases. The increase in handset volume related in part to fourth
quarter marketing promotions including a new high-resolution camera
phone and other video phones. Handset costs associated with gross
subscriber activations are included in the calculation of COA per
gross subscriber addition.
- Network operating expenses consist of site-related expenses,
transmission costs, spectrum licence fees, contribution revenue taxes,
and other direct costs related to network operations. Transmission and
site-related expenses increased to support the greater number of cell
sites, a larger subscriber base, and improved network quality and
coverage. Contribution fees increased in the fourth quarter of 2004,
as the comparable period in 2003 included a credit for $3.3 million as
a result of a rate adjustment from 1.3% to 1.1% effective
January 1, 2003. In addition, Industry Canada spectrum licence fees
were higher in 2004 principally due to a $6.4 million credit received
during 2003, as part of a retroactive filing with Industry Canada for
years prior to 2003. Network costs, once normalized for these events,
were flat and increased by 6.3% over the same periods in 2003.
Further, Network roaming costs increased by $2.9 million in the fourth
quarter and $15.2 million for the full year of 2004, as compared to
the same periods in 2003, largely due to higher volumes as well as
successful marketing efforts in non-urban roaming/resale areas. TELUS
Mobility believes this variable cost increase is reflective of the
overall positive industry trend of subscriber growth and increased
subscriber usage evidenced in the ongoing strength of Network revenue
growth. Finally, in an effort to contain Network costs, TELUS Mobility
negotiated improved roaming rates and continued to build out microwave
facilities aimed at reducing future leased line transmission costs.
The digital population coverage grew to 30.0 million at
December 31, 2004, as a result of continued activation of digital
roaming regions and network expansion.
- Marketing expenses increased primarily due to higher dealer
compensation costs and advertising expenses associated with the
expanded subscriber base and increased re-contracting activity.
Despite the higher marketing expenses and significant subscriber
growth, COA per gross subscriber addition improved by 9.3% in the
fourth quarter to $410 and improved by 9.5% to $389 for the full year,
as compared with the same periods in 2003. Because of the higher ARPU,
improved churn and lower COA per gross subscriber addition, the
lifetime revenue of the subscriber improved significantly in 2004.
- General and administration expenses consist of employee compensation
and benefits, facilities, client services, bad debt and various other
expenses. General and administration expenses increased by only 2.8%
in the fourth quarter and 4.6% for the full year of 2004. TELUS
Mobility increased full-time equivalent employees to support the
significant growth in the subscriber base and continued expansion of
the client care team and Company-owned retail stores, partly offset by
a lower bad debt expense due to reduced loss experience.
-------------------------------------------------------------------------
EBITDA and EBITDA Quarters ended Years ended
margin - December 31 December 31
Mobility segment 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 284.7 190.0 49.8 % 1,142.2 815.4 40.1 %
EBITDA margin (%) 37.4 29.4 8.0 pts 40.3 34.3 6.0 pts
-------------------------------------------------------------------------
Significant growth in TELUS Mobility EBITDA and EBITDA margin was
attributed to its strategic focus on profitable subscriber growth. This was
accomplished by achieving increased ARPU, a lower COA per gross subscriber
addition, maintenance of a world-class churn rate, and successful cost
containment efforts during the year, which offset the near-term dilutive
impact of generating record subscriber net additions. The EBITDA margin, when
calculated as a percentage of Network revenue, improved to 40.9% for the
fourth quarter and 43.9% for the full year of 2004 as compared with 32.3% and
37.3% for the same periods in 2003, representing positive increases of 8.6 and
6.6 percentage points, respectively. Incremental Network revenue flowed
through to EBITDA at a rate of 87.5% in the fourth quarter of 2004, as
compared to 63.1% for the same period in 2003.
Mobility segment capital expenditures are discussed in Section 7.2 Cash
used by investing activities.
6. Financial condition
The following are the significant changes in the Consolidated balance
sheets between December 31, 2003 and December 31, 2004.
-------------------------------------------------------------------------
Periods ended December 31 Explanation
($ millions) 2004 2003 Change
-------------------------------------------------------------------------
Current Assets
Cash and
temporary 896.5 6.2 890.3 See Section 7. Liquidity
investments, net capital and resources
-------------------------------------------------------------------------
Changes due to a reduction
in securitized accounts
receivables and increased
Accounts Mobility billings partly
receivable 863.5 723.8 139.7 offset by lower wireline
trade receivables due to
improved collection
processes. See Section 7.6
Accounts receivable sale
-------------------------------------------------------------------------
Income and other Decreased due to the
taxes receivable 132.5 187.4 (54.9) receipt of tax settlements
-------------------------------------------------------------------------
Increase in wireless
handset inventory partly
Inventories 133.3 123.5 9.8 offset by reduced wireline
consumer retail inventory
-------------------------------------------------------------------------
Prepaid expenses Increase in prepaid
and other 183.4 172.4 11.0 maintenance contracts
-------------------------------------------------------------------------
Current portion Expected increase in the
of future 438.4 304.0 134.4 use of loss carry forward
income taxes amounts over next 12
months
-------------------------------------------------------------------------
Current Liabilities
Accounts payable
and accrued 1,362.6 1,294.5 68.1 Increased payroll and
liabilities other liabilities
-------------------------------------------------------------------------
Restructuring
and workforce
reduction
accounts payable 70.7 141.0 (70.3) Decreased as payments from
and accrued previous programs exceeded
liabilities new obligations
-------------------------------------------------------------------------
Remittance of the fourth
Dividends payable - 53.5 (53.5) quarter 2004 dividend on
Dec. 31, 2004
-------------------------------------------------------------------------
Increase in price cap
Advance billings deferred revenue and
and customer 531.5 445.0 86.5 billings due to subscriber
deposits growth
-------------------------------------------------------------------------
Maturities in 2005 are
Current primarily capital leases.
maturities of 4.3 221.1 (216.8) See Section 7.3 Cash used
long-term debt by financing activities
-------------------------------------------------------------------------
Primarily reflects
accumulation of cash, and
Working capital(1) 678.5 (637.8) 1,316.3 lower debt maturities in
2005
-------------------------------------------------------------------------
See Sections 5.3
Consolidated results of
Capital Assets, operations - Depreciation
Net 11,221.0 11,563.6 (342.6) and amortization and 7.2
Cash used by investing
activities
-------------------------------------------------------------------------
Other Assets
Primarily due to increased
transitional pension
assets and pension plan
Deferred charges 704.4 610.7 93.7 contributions in excess of
charges to income partly
offset by $25.1 million
repayment of service and
access fees by Verizon
-------------------------------------------------------------------------
Future income Reflects use of loss carry
taxes 99.8 626.0 (526.2) forward amounts
-------------------------------------------------------------------------
Consists of a number of
small portfolio
Investments 38.4 41.9 (3.5) investments, of which
certain investments were
monetized in 2004
-------------------------------------------------------------------------
The increase resulted from
a small acquisition in
2004. No impairment was
Goodwill 3,126.8 3,118.0 8.8 required following an
annual impairment test for
goodwill
-------------------------------------------------------------------------
The decrease is primarily
lower Canadian dollar
value of U.S. dollar
Long-Term Debt 6,332.2 6,609.8 (277.6) denominated Notes. See
Section 7.6 Liquidity and
capital resource measures
-------------------------------------------------------------------------
Primarily an increase in
Other Long-Term the deferred hedging
Liabilities 1,506.1 1,173.7 332.4 liability. See Section 7.6
Liquidity and capital
resource measures
-------------------------------------------------------------------------
Includes tax recoveries on
Future Income amortization and
Taxes 991.9 1,007.0 (15.1) revaluation for Alberta
provincial tax decrease
-------------------------------------------------------------------------
Increase in minority
Non-Controlling partners' share of
Interest 13.1 10.7 2.4 earnings in several small
subsidiaries
-------------------------------------------------------------------------
Shareholders'
Equity
Value of the convertible
Convertible 8.8 8.8 - debentures conversion
debentures option
-------------------------------------------------------------------------
Preference and See Section 7.3 Cash used
preferred shares - 69.7 (69.7) by financing activities
-------------------------------------------------------------------------
See Section 7.3 Cash used
Common equity 7,016.8 6,442.7 574.1 by financing activities
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
7. Liquidity and capital resources
7.1 Cash provided by operating activities
-------------------------------------------------------------------------
Quarters ended Years ended
($ millions) December 31 December 31
2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
613.8 409.8 49.8 % 2,538.1 2,133.8 18.9 %
-------------------------------------------------------------------------
Cash provided by operating activities increased in fourth quarter and
full year of 2004, when compared with 2003, principally due to improved
operating profitability, lower payments under restructuring programs, and
lower interest expense, partly offset by an increase in contributions to
defined benefit plans. The full year of 2004 also included increased cash
recovery of income taxes associated with settlement of tax matters (including
interest income).
- EBITDA increased by $83.8 million and $274.8 million, respectively,
for the fourth quarter and full year of 2004, when compared with 2003.
EBITDA in 2004 includes a non-cash share-based compensation expense of
$5.9 million and $23.8 million, respectively, as a result of adopting
the amended recommendations of the CICA for accounting for share-based
compensation - see Section 8.2 Accounting policy developments.
- Restructuring and workforce reduction payments decreased by
$19.1 million and $164.8 million, respectively, for the fourth quarter
and full year of 2004, when compared with 2003. The decrease was
primarily from winding down the 2001 to 2003 Operational Efficiency
Program and lower associated payments, partly offset by payments under
new restructuring initiatives.
- Income taxes received increased by $29.1 million for the full year, as
the cash recovery of income taxes and investment tax credits net of
tax installments was $194.6 million in 2004, compared with
$165.5 million in 2003.
- Interest paid decreased by $1.8 million and $24.6 million,
respectively, for the fourth quarter and full year of 2004 when
compared with 2003, due to debt repayments.
- In the fourth quarter of 2004, TELUS received $33.3 million from
Verizon, recorded as a reduction of prepaid and deferred services. A
further $114.8 million was received from Verizon as part of a
contribution of capital (recorded in Cash provided by financing
activities) when the independent Directors of TELUS agreed to
extinguish a right which restrained Verizon from divesting of its
entire 20.5% equity interest in TELUS.
- Non-cash working capital included changes in proceeds from securitized
accounts receivable. For the fourth quarter and full year of 2004, the
Company made payments of $nil and $150 million, respectively, to
reduce securitized accounts receivables, compared with payments of
$181 million and $175 million, respectively, for the same periods in
2003.
Partly offsetting the above increases were:
- Income taxes received, net of tax installments paid, decreased by
$133.2 million in the fourth quarter of 2004, as compared to the same
period in 2003, due to the receipt of a $136.2 million recovery in the
fourth quarter of 2003.
- A decrease in interest received of $22.6 million and $14.3 million,
respectively, for the fourth quarter and full year of 2004, when
compared with 2003. Interest received in both years was primarily from
the settlement of tax matters, as well as from interest earned on cash
and temporary investments.
- Employer contributions to employee defined benefit plans increased by
$37.0 million for the full year of 2004, when compared with 2003. The
increase reflects updated actuarial valuations and the net
acceleration of discretionary funding.
7.2 Cash used by investing activities
-------------------------------------------------------------------------
Quarters ended Years ended
($ millions) December 31 December 31
2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
342.8 421.4 (18.7)% 1,299.5 1,197.8 8.5 %
-------------------------------------------------------------------------
The changes in cash used by investing activities were primarily the
result of changes in capital expenditures. The Company also received proceeds
of $27.6 million in 2004 from the sale of non-strategic assets, including
several real estate properties. In 2003, the Company disposed of non-strategic
properties and monetized an investment for total proceeds of $51.2 million.
Funds used for other investing activities in 2004 included TELUS' purchase of
ADCOM, Inc.
-------------------------------------------------------------------------
Capital expenditures
by segment
($ in millions, except Quarters ended Years ended
capital expenditure December 31 December 31
intensity) 2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
Communications
segment 220.8 303.0 (27.1)% 964.3 892.8 8.0 %
Mobility segment 122.6 132.4 (7.4)% 354.7 359.9 (1.4)%
-------------------------------------------------------------------------
TELUS consolidated 343.4 435.4 (21.1)% 1,319.0 1,252.7 5.3 %
-------------------------------------------------------------------------
Capital expenditure (6.3) (0.1)
intensity(1) (%) 17.5 23.8 pts 17.4 17.5 pts
-------------------------------------------------------------------------
(1) Capital expenditure intensity is measured by dividing capital
expenditures into operating revenues. This measure provides a method
of comparing the level of capital expenditures to other companies of
varying size within the same industry.
-------------------------------------------------------------------------
- Communications segment ILEC capital expenditures decreased by 21.4% in
the fourth quarter of 2004, when compared with the same period in
2003, and increased by 7.3% to $826.4 million for the full year of
2004, when compared with 2003. The fourth quarter decrease was due in
part to higher fourth quarter 2003 spending from Operational
Efficiency Program constraints in early 2003, which is reflected in
lower investment in network infrastructure and high-speed Internet in
the fourth quarter of 2004 on a comparative basis. The full year
increase was due to significant investments in internal systems and
processes, as well as investments in network infrastructure to improve
customer service and network reliability, the development of new IP
services, and the delivery of services to new customers. Expenditures
for high-speed Internet (or ADSL) were relatively flat at
$95.7 million in 2004, consistent with more moderate subscriber
growth.
Non-ILEC capital expenditures decreased by 58.5% to $19.4 million in
the fourth quarter of 2004, when compared with the same period in
2003, due to reduced spending on network infrastructure. For the full
year, Non-ILEC capital expenditures increased by 12.4% to
$137.9 million in 2004, when compared with 2003. The increase in
Non-ILEC expenditures was primarily to support the Company's IP
strategy and delivery of services to new customers, which included
implementation of several large contracts.
The Communications segment capital expenditure intensity ratio was
19.8% in 2004, compared with 18.3% in 2003. Cash flow (EBITDA less
capital expenditures) decreased by 11.2% to $984.1 million in 2004,
when compared to 2003, mainly due to higher capital spending and
increased restructuring charges.
- Mobility segment capital expenditures decreased by 7.4% in the fourth
quarter and 1.4% for the full year of 2004 when compared with same
periods in 2003. TELUS Mobility continued the enhancement of digital
wireless coverage and continued building microwave facilities during
2004 aimed at reducing future leased line transmission costs. Capital
spending decreased from 2003 principally as a result of improved
infrastructure equipment costs and a stronger Canadian dollar.
Capital expenditure intensity for TELUS Mobility decreased to 16.1% in
the fourth quarter of 2004 from 20.5% in the fourth quarter of 2003,
due primarily to significant growth in Network revenues. Similarly,
the capital expenditure intensity was 12.5% for the full year of 2004
as compared to 15.2% in 2003. As a result of continued strong growth
in EBITDA and reduced capital expenditure intensity, Mobility
generated cash flow (EBITDA less capital expenditures) of
$162.1 million, a TELUS Mobility record for the fourth quarter, as
compared with $57.6 million for the same period in 2003. Similarly,
cash flow for the full year of 2004 was $787.5 million as compared
with $455.5 million in 2003.
Consolidated cash flow (EBITDA less capital expenditures) increased by
71.1% to $423.2 million in the fourth quarter of 2004, when compared with the
same period in 2003, as a result of both increased EBITDA and lower capital
expenditures. For the full year, consolidated cash flow increased by 13.3% to
$1,771.6 million in 2004, when compared with 2003, driven by increased EBITDA
net of higher capital expenditures.
7.3 Cash provided (used) by financing activitie
-------------------------------------------------------------------------
Quarters ended Years ended
($ millions) December 31 December 31
2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
3.3 (84.5) 103.9 % (348.3) (920.8) 62.2 %
-------------------------------------------------------------------------
Cash used by financing activities decreased in 2004, when compared with
2003, due primarily to lower scheduled debt redemptions in 2004. Financing
activities included the following:
- Proceeds from Common Shares and Non-Voting Shares issued increased by
$53.1 million in the fourth quarter of 2004 and $62.2 million for the
full year of 2004, when compared with the same periods in 2003. Shares
were issued from treasury under the employee share purchase plan and
under share-based compensation plans in 2004 and 2003. In addition,
2004 proceeds included those from the exercise of warrants. Effective
November 1, 2004, TELUS began to purchase employee share purchase plan
shares in the market rather than issuing from treasury.
- In the fourth quarter of 2004, TELUS received $114.8 million from
Verizon as part of a contribution of capital when the independent
Directors of TELUS agreed to extinguish a right which restrained
Verizon from divesting of its 20.5% equity interest in TELUS.
- TELUS' Normal Course Issuer Bid for the repurchase of its Common
Shares and Non-Voting Shares was accepted by the Toronto Stock
Exchange, and commenced December 20, 2004. The repurchase program
enables TELUS to repurchase on the market, over a 12-month period, up
to a maximum of 14.0 million Common Shares and 11.5 million Non-Voting
Shares, representing approximately 7% of the issued and outstanding
Common Shares and Non-Voting Shares. In December 2004, TELUS purchased
for cancellation Common Shares and Non-Voting Shares for a total
outlay of $78.0 million, of which $39.3 million was recorded as a
reduction to share capital and $38.7 million, representing the amount
in excess of book value, was recorded as a reduction to retained
earnings. The maximum number of shares that can be repurchased in any
30-day period is 2% of the issued and outstanding shares of each class
of shares.
Normal Course Issuer Bid to December 31, 2004
-------------------------------------------------------------------------
Purchased, Total Maximum
(number of Purchased but not purchased permitted
shares) and cancelled at for under the
cancelled Dec. 31, 2004 cancellation program
-------------------------------------------------------------------------
Common Shares 655,711 120,000 775,711 14,000,000
Non-voting Shares 1,300,000 151,400 1,451,400 11,500,000
-------------------------------------------------------------------------
1,955,711 271,400 2,227,111 25,500,000
-------------------------------------------------------------------------
- Cash dividends paid to shareholders increased by $70.8 million in the
fourth quarter of 2004 and increased by $76.7 million for the full
year of 2004, when compared with the same periods in 2003. The
increase in cash dividends paid was primarily due to remittance of the
fourth quarter 2004 dividend on December 31, 2004, while the dividend
for the fourth quarter of 2003 was remitted in January 2004. The
increase in dividends paid was also due to the five-cent increase in
the dividend declared in the fourth quarter of 2004 and a larger
number of Common Shares and Non-Voting Shares outstanding. Commencing
with the dividend declared in the fourth quarter, TELUS began to
purchase dividend reinvestment plan shares in the market rather than
issuing from treasury and the previous 3% plan discount was
eliminated.
- The redemption of all of the publicly held TELUS Communications Inc.
Preference and Preferred Shares was completed by August 3, 2004 for an
outlay of $72.8 million.
- Debt redemptions in 2004 included $189.5 million of TELUS
Communications Inc. Series A Debentures and $20 million of TELUS
Communications Inc. Medium-term Notes. The maximum outstanding bank
facility balance of $34 million was repaid in full in the first
quarter of 2004.
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
Dec. 31, Dec. 31,
Period ended 2004 2003 Change
-------------------------------------------------------------------------
Components of debt and coverage ratios(1)
--------------------------------------
Net debt ($ millions) 6,477.7 7,570.5 (1,092.8)
Total capitalization - book value
($ millions) 13,516.4 14,102.4 (586.0)
EBITDA (excluding restructuring)
($ millions) 3,143.2 2,844.1 299.1
Net interest cost ($ millions) 613.3 639.3 (26.0)
Debt ratios
-----------
Fixed rate debt as a proportion of total
indebtedness (%) 93.2 100.0 (6.8)
Average term to maturity of debt (years) 5.4 6.2 (0.8)
Net debt to total capitalization (%)(1) 47.9 53.7 (5.8)
Net debt to EBITDA(1) 2.1 2.7 (0.6)
Coverage ratios(1)
---------------
Earnings coverage 2.3 1.7 0.6
EBITDA interest coverage 5.1 4.4 0.7
Other measures
--------------
Free cash flow (fourth quarter,
$ millions)(2) 121.9 71.5 50.4
Free cash flow ($ millions) 1,297.3 844.9 452.4
Dividend payout ratio (%)(1) 41 65 (24)
-------------------------------------------------------------------------
(1) See Section 11.4 Definition of liquidity and capital resource
measures.
(2) See Section 11.2 Free cash flow.
-------------------------------------------------------------------------
The balance of Long-term Debt and Current maturities of Long-term Debt
was $6,336.5 million as at December 31, 2004, a decrease of $494.4 million
from December 31, 2003. The lower debt balance was due to redemptions and a
$291.9 million decrease in the Canadian dollar value of U.S. dollar
denominated Notes, as the Canadian dollar appreciated against the U.S. dollar
by approximately 7.3% during 2004. TELUS' U.S. dollar debt is fully hedged,
resulting in a corresponding increase of $291.9 million being recorded in the
deferred hedging liability.
While the amount of utilized bank facilities decreased to $nil from
$7.0 million one year earlier, TELUS converted $500 million of debt from a
fixed rate to a floating rate basis during the first half of 2004, reducing
the proportion of fixed rate debt. The net debt to total capitalization ratio
measured at December 31, 2004 decreased, when compared with one year earlier,
primarily as a result of debt repayments and increased common equity. The net
debt to EBITDA ratio measured at December 31, 2004 improved significantly,
when compared with one year earlier, as a result of debt reduction and an
increase in 12-month trailing EBITDA (excluding restructuring).
The earnings coverage ratio improved significantly because of the
improvement in income before interest and taxes and decreased interest on
total debt. The EBITDA interest coverage ratio improved as a result of higher
EBITDA (excluding restructuring) and lower interest costs, partly offset by
lower interest income. The Free cash flow measure for the year ended December
31, 2004 increased, when compared with one year earlier, primarily because of
improved EBITDA, higher tax recoveries, lower payments under restructuring
programs and lower net interest payments, partly offset by increased capital
expenditures.
As announced in October 2004, on a prospective basis, the Company has set
a target guideline for the annual dividend payout ratio of 45 to 55%. The
annualized effective payout ratio of 20 cents per share per quarter is in the
range of 43 to 48% based upon the annual 2005 targets for basic earnings per
share of $1.65 to $1.85.
7.5 Credit facilities
The following are the credit facilities available to TELUS at December
31, 2004:
-------------------------------------------------------------------------
Outstanding
Credit Facilities undrawn
At December 31, 2004 letters of
($ millions) Expiry Available Drawn credit
-------------------------------------------------------------------------
Revolving credit
facility(1) May 7, 2008 800.0 - 102.6
364-day revolving
facility(2) May 6, 2005 800.0 - -
Other bank facilities - 74.0 - 7.2
-------------------------------------------------------------------------
Total - 1,674.0 - 109.8
-------------------------------------------------------------------------
(1) Canadian dollars or U.S. dollar equivalent.
(2) Canadian dollars or U.S. dollar equivalent, extendible at the
Company's option on a non-revolving basis for one year for any
amounts outstanding on the May 6, 2005 anniversary date.
-------------------------------------------------------------------------
Including cash of $896.5 million and the credit facilities described in
the table above, TELUS had unutilized available liquidity well in excess of
$2.0 billion at December 31, 2004. TELUS' credit facilities contain customary
covenants including a requirement that TELUS not permit its consolidated
Leverage Ratio (Funded Debt to trailing 12-month EBITDA) to exceed 4.0:1
(approximately 2.1:1 at December 31, 2004) and not permit its consolidated
Coverage Ratio (EBITDA to Interest Expense on a trailing 12-month basis) to be
less than 2.0:1 (approximately 5.1:1 at December 31, 2004) at the end of any
financial quarter. There are certain minor differences in the calculation of
the Leverage Ratio and Coverage Ratio under the credit agreement as compared
with the calculation of net debt to EBITDA and EBITDA interest coverage. The
calculations are not expected to be materially different. The covenants are
not impacted by revaluation of capital assets, intangible assets and goodwill
for accounting purposes, and continued access to TELUS' credit facilities is
not contingent on the maintenance by TELUS of a specific credit rating.
7.6 Accounts receivable sale
TELUS Communications Inc., a wholly-owned subsidiary of TELUS, is able to
sell an interest in certain of its receivables up to a maximum of $650 million
and is required to maintain at least a BBB(low) credit rating by Dominion Bond
Rating Service (DBRS), or the purchaser may require the sale program to be
wound down. The necessary credit rating was exceeded by two levels at
BBB(high) as of February 16, 2005. The proceeds of securitized receivables
were $150 million at December 31, 2004, as compared with $300 million at
December 31, 2003. It is necessary to retain a minimum of $150 million
proceeds under this program to keep it active. Average proceeds from
securitization were $181 million in 2004 and $453 million in 2003.
7.7 Credit ratings
In the fourth quarter of 2004, in response to the announcement that
Verizon was selling all its TELUS Voting Shares and Non-Voting Shares, three
of four rating agencies that cover TELUS issued updates or confirmations.
Moody's Investors Service affirmed its Baa3 senior unsecured rating for TELUS
Corporation and changed its outlook to positive from stable. On February 17,
2005 DBRS confirmed its ratings for TELUS Corporation and TELUS Communications
Inc. with a stable trend. Standard and Poor's announced that its ratings were
unchanged.
On February 10, 2005, S&P revised its outlook to 'positive' from 'stable'
and affirmed its long-term corporate credit and senior unsecured ratings for
TELUS and TCI.
TELUS has an objective to preserve access to capital markets at a
reasonable cost by maintaining investment grade credit ratings and targeting
improved credit ratings in the range of BBB+ to A-, or the equivalent, in
future.
7.8 Off-balance sheet arrangements and contractual liabilities
Financial instruments
During the first half of 2004, the Company entered into two series of
hedging relationships to which hedge accounting has been applied: one series
of hedging relationships results in fixing the Company's compensation cost
arising from a specific grant of restricted stock units, and the other series
results in the notional conversion of $500 million of the 2006 (Canadian
Dollar) Notes from a fixed interest rate of 7.5% to a floating interest rate
based upon the three-month Bankers' Acceptance Canadian Dollar Offered Rate
plus a spread. TELUS intends to hedge its exposure with respect to share-based
compensation arrangements granted in 2005 using cash-settled equity forward
transactions.
As at December 31, 2004, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rates on U.S.
$48 million of fiscal 2005 purchase commitments; hedge accounting has been
applied to these foreign currency forward contracts, all of which relate to
the Mobility segment.
Fair value: The fair values of the Company's long-term debt and
convertible debentures are estimated based on quoted market prices for the
same or similar issues or on the current rates offered to the Company for debt
of the same maturity as well as the use of discounted future cash flows using
current rates for similar financial instruments subject to similar risks and
maturities. The fair values of the Company's derivative financial instruments
used to manage exposure to interest rate and currency risks are estimated
similarly. The fair value of the Company's debt at December 31, 2004 was
estimated at $8,643.1 million ($8,698.8 million at December 31, 2003).
Commitments and contingent liabilities
The Company has a number of commitments and contingent liabilities.
- The Company has $70.7 million in outstanding commitments for its
restructuring programs as at December 31, 2004. In addition, the
Company disclosed in its guidance for 2005 that it expected to record
approximately $100 million of restructuring and employee reduction
costs in 2005 in support of ongoing efficiency initiatives.
- In accordance with CRTC Price Cap Decisions 2002-34 and 2002-43, the
Company defers a portion of revenues in a deferral account, which at
December 31, 2004, was $128.7 million. Due to the Company's use of the
liability method of accounting for the deferral account, the CRTC
Decision 2005-6, in respect of the Competitor Digital Network Access
(CDNA), does not currently affect the Company's income statement. The
mechanism for disposing of the balance in this deferral account, other
than as already approved by the CRTC in Decision 2005-6 and
previously, is currently the subject of a CRTC proceeding.
- On May 21, 2004, the Canada Industrial Relations Board (CIRB) declared
TELE-MOBILE COMPANY and TELUS Communications Inc. a single employer
for labour relations purposes. The CIRB also determined that TELUS
Mobility's non-unionized team members, predominantly located in
Ontario and Quebec, performing work similar to their unionized TELUS
Mobility counterparts in Alberta and British Columbia, should be
included in the bargaining unit represented by the Telecommunications
Workers Union. The application to the Federal Court of Appeal for
judicial review of Decision 278 was heard in October 2004 and the
Court subsequently dismissed the appeal in a December 16, 2004
decision. On February 14, 2005, TELE-MOBILE COMPANY and TELUS
Communications Inc. applied to the Supreme Court of Canada for leave
to appeal the Federal Court of Appeal's December 16, 2004 decision.
Should the ultimate operational and financial impacts of Decision 278
differ from management's assessments and assumptions, a material
adjustment to the Company's financial position and the results of its
operations could result.
Canadian GAAP requires the disclosure of certain types of guarantees and
their maximum, undiscounted amounts. The maximum potential payments represent
a "worst-case scenario" and do not necessarily reflect results expected by the
Company. Guarantees requiring disclosure are those obligations that require
payments contingent on specified types of future events; in the normal course
of its operations, the Company enters into obligations which GAAP may consider
to be guarantees. As defined by Canadian GAAP, guarantees subject to these
disclosure guidelines do not include guarantees that relate to the future
performance of the Company. As at December 31, 2004, the Company has no
liability recorded in respect of performance guarantees, and $1.0 million
(December 31, 2003 - $1.5 million) recorded in respect of lease guarantees.
The maximum undiscounted guarantee amounts as at December 31, 2004, without
regard for the likelihood of having to make such payment, were not
significant.
In the normal course of operations, the Company may provide
indemnification in conjunction with certain transactions. The term of these
indemnification obligations range in duration and often are not explicitly
defined. Where appropriate, an indemnification obligation is recorded as a
liability. In many cases, there is no maximum limit on these indemnification
obligations and the overall maximum amount of the obligations under such
indemnification obligations cannot be reasonably estimated. Other than
obligations recorded as liabilities at the time of the transaction,
historically the Company has not made significant payments under these
indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the
Company agreed to bear a proportionate share of the new owner's increased
directory publication costs if the increased costs were to arise from a change
in the applicable CRTC regulatory requirements. The Company's proportionate
share would be 80% through May 2006, declining to 40% in the next five-year
period and then to 15% in the final five years. As well, should the CRTC take
any action which would result in the owner being prevented from carrying on
the directory business as specified in the agreement, TELUS would indemnify
the owner in respect of any losses that the owner incurred. As at December 31,
2004, the Company has no liability recorded in respect of indemnification
obligations.
A number of claims and lawsuits seeking damages and other relief are
pending against the Company. It is impossible at this time for the Company to
predict with any certainty the outcome of such litigation. However, management
is of the opinion, based upon legal assessment and information presently
available, that it is unlikely that any liability, to the extent not provided
for through insurance or otherwise, would be material in relation to the
Company's consolidated financial position, excepting items disclosed in
previous reports.
7.9 Related party transactions
On November 30, 2004, Verizon and the Company entered into an agreement
pursuant to which the Company's independent members of the Board of Directors
agreed to facilitate the divestiture by Verizon of its 20.5% equity investment
in the Company. Such agreement was necessary due to certain restrictive
provisions in the Long Term Relationship Agreement, dated January 31, 1999,
between Verizon and the Company. Such divestiture was effected by a public
secondary offering of Verizon's entire equity interest in the Company on
December 14, 2004; post divestiture, Verizon and the Company are no longer
related parties for purposes of generally accepted accounting principles and
Verizon no longer has a pre-emptive right to buy shares from treasury.
Pursuant to the agreement, and the amended agreement pursuant to which
the Company acquires certain rights to Verizon's software, technology,
services and other benefits, Verizon paid the Company $148 million
(U.S.$125 million). In conjunction with the divestiture, a number of
agreements between Verizon and the Company were terminated or altered,
including the amended and restated software and related technology and
services agreement ("SRT") pursuant to which the Company acquired certain
rights to Verizon's software, technology, services and other benefits. The
term of the SRT was extended to 2008. The Company will continue to have
exclusive rights in Canada to specified Verizon trademarks, software and
technology acquired prior to Verizon's divestiture of its investment in the
Company and Verizon is required to continue to provide upgrade and support on
the software and technology licensed to the Company. The annual fees payable
by the Company under the SRT for the years 2005 to 2008 have been reduced from
an aggregate of U.S. $82 million to a nominal amount; Verizon and the Company
remain committed to use each other's cross-border services where capabilities
and customer requirements permit and the Company has been released from its
obligation not to compete in the United States.
As of December 31, 2004, in aggregate, $312.1 million of specified
software licences and a trademark licence have been acquired under the
agreement and have been recorded as capital and other assets. These assets are
valued at fair market value at the date of acquisition as determined by an
arm's-length party's appraisal. The total commitment under the SRT was
U.S. $275 million (2003 - U.S. $377 million) for the period 2001 to 2008 and
the commitment remaining after December 31, 2004, as a result of the
amendment, is a nominal amount (2003 - U.S. $102 million).
7.10 Outstanding share information
The following is a summary of the outstanding shares for each class of
equity at December 31, 2004 and at January 31, 2005. In addition, for January
31, 2005, the total number of outstanding and issuable shares is presented,
assuming full conversion of convertible debentures, options and warrants.
-------------------------------------------------------------------------
Class of equity security Common Non-Voting Total
Shares Shares Shares
outstanding outstanding outstanding
-------------------------------------------------------------------------
At December 31, 2004
Common equity - Common
Shares outstanding 192,748,738 - 192,748,738
Common equity -
Non-Voting Shares
outstanding - 165,803,123 165,803,123
------------- ------------- -------------
192,748,738 165,803,123 358,551,861 (1)
------------- ------------- -------------
At January 31, 2005
Common equity - Common
Shares outstanding 192,853,859 - 192,853,859
Common equity -
Non-Voting Shares
outstanding - 167,396,834 167,396,834
------------- ------------- -------------
192,853,859 167,396,834 360,250,693
------------- ------------- -------------
Outstanding and issuable
shares(2) at January 31,
2005
Common Shares and
Non-Voting Shares
outstanding 192,853,859 167,396,834 360,250,693
TELUS Corporation
convertible
debentures - 3,765,820 3,765,820
Options 2,926,123 24,855,697 27,781,820
Warrants - 562,423 562,423
Channel stock incentive
plan - 176,950 176,950
------------- ------------- -------------
195,779,982 196,757,724 392,537,706
------------- ------------- -------------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share for the
fourth quarter of 2004, the number of shares outstanding at December
31, 2004 was 362,104,496.
(2) Assuming full conversion and ignoring exercise prices.
-------------------------------------------------------------------------
8. Critical accounting estimates and accounting policy developments
Accounting principles applied by TELUS are consistent with those
disclosed in the 2003 annual report; except for the adoption in 2004 of
amended recommendations of the CICA, as described in section 8.2.
8.1 Critical accounting estimates
The Company's critical accounting estimates are discussed in the
Company's 2003 annual Management's discussion and analysis. The preparation of
financial statements in conformity with generally accepted accounting
principles ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
8.2 Accounting policy developments
Share-based compensation
Commencing with the Company's 2004 fiscal year, the amended
recommendations of the CICA for accounting for share-based compensation (such
amendments arising in 2003) (CICA Handbook Section 3870) apply to the Company.
The Company has selected the modified-prospective transition method (also
referred to as the retroactive application without restatement method),
implemented effective January 1, 2004. To reflect the fair value of options
granted subsequent to 2001, and vesting prior to 2004, certain components of
common equity in the December 31, 2003, Consolidated Balance Sheet balances
have been restated.
Equity settled obligations
Commencing with the Company's 2004 fiscal year, the Company early adopted
the amended recommendations of the CICA for the presentation and disclosures
of financial instruments (CICA Handbook Section 3860) specifically concerning
the classification of obligations that an issuer can settle with its own
equity instruments (such amendments arising in 2003). The amendments result in
the Company's convertible debentures being classified as a liability on the
consolidated balance sheets (previously classified as a component of equity)
and the associated interest expense correspondingly being classified with
financing costs on the Consolidated statements of income (previously recorded
net of income taxes as an adjustment to retained earnings). The conversion
option embedded in the convertible debentures continues to be presented as a
component of shareholders' equity. As required, these amended recommendations
have been applied retroactively. As a result of the reclassification of
convertible debentures, minor changes were effected in historical Net debt to
EBITDA ratios, and historical Net debt to total capitalization ratios. The
reclassification of the associated interest expense also resulted in minor
changes in historical EBITDA interest coverage ratios.
9. Looking forward to 2005
9.1 Financial and operating targets and issues for 2005
TELUS continues to have the following policy guidelines, which were
announced previously:
- Net debt to EBITDA of 2.2 times or less (compared with 2.1 times at
December 31, 2004);
- Net debt to total capitalization of 45 to 50% (compared with 47.9% at
December 31, 2004); and
- In addition TELUS has a target Dividend payout ratio guideline of
45 to 55% of net earnings.
The following targets for 2005 were announced publicly on December 17,
2004 and the Company has a practice of reaffirming or adjusting guidance on a
quarterly basis.
-------------------------------------------------------------------------
Revised guidance
summary 2004 results Targets for 2005 Change
-------------------------------------------------------------------------
Consolidated
Revenues $7.58 $7.9 to $8.0 $320 to $420
billion billion million
-------------------------------------------------------------------------
EBITDA(1) $3.09 $3.2 to $3.3 $110 to $210
billion billion million
-------------------------------------------------------------------------
Earnings per share
- basic $1.58 $1.65 to $1.85 7 to 27 cents
-------------------------------------------------------------------------
Capital expenditures $1.32 $1.3 to $1.4 $(20) to $80
billion billion million
-------------------------------------------------------------------------
Free cash flow(2) $1.30 $1.2 to $1.3 $(100) to $0
billion billion million
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Communications segment
Revenue (external) $4.77 $4.7 to $4.75 $(20) to $(70)
billion billion million
-------------------------------------------------------------------------
Non-ILEC revenue $561 $600 to $650 $39 to $89
million million million
-------------------------------------------------------------------------
EBITDA $1.95 $1.85 to $1.9 $(50) to $(100)
billion billion million
-------------------------------------------------------------------------
Non-ILEC EBITDA $(22) $0 to $10 $22 to $32
million million million
-------------------------------------------------------------------------
Capital expenditures $964 $950 million to $(14) to $36
million $1.0 billion million
-------------------------------------------------------------------------
High-speed Internet
net additions 128,100 Approx. 100,000 Approx. (28,100)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mobility segment
Revenue (external) $2.81 $3.2 to $3.25 $390 to $440
billion billion million
-------------------------------------------------------------------------
EBITDA $1.14 $1.35 to $1.40 $210 to $260
billion billion million
-------------------------------------------------------------------------
Capital expenditures $355 $350 to $400 $(5) to $45
million million million
-------------------------------------------------------------------------
Wireless subscriber (37,400)
net additions 512,400 425,000 to 475,000 to (87,400)
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA) for the definition, calculation and
reconciliation of 2004 EBITDA.
(2) See Section 11.2 Free cash flow for the definition, calculation and
reconciliation of 2004 Free cash flow.
-------------------------------------------------------------------------
The 2005 targets reflect strong growth in both revenue and profitability,
with the target range for consolidated earnings per share representing an 8 to
21% increase over 2004. With capital expenditures remaining near 2004 levels,
TELUS expects to have another strong year of free cash flow of more than
$1.2 billion in 2005. This bodes well for TELUS' ability to successfully
overcome competitive pressures and continue to enhance shareholder value.
Communications segment EBITDA is expected to decline in the range of 3 to
5% in 2005, resulting from slightly lower wireline revenue and increased
restructuring costs, partially offset by continued operating efficiencies.
Excluding restructuring and workforce reduction costs, Communications segment
EBITDA is expected to range between negative 2.5% and flat compared to that of
2004. Communications segment revenue growth in the non-incumbent territory in
Central Canada is expected to increase 9 to 18%, while targeting positive
EBITDA in 2005.
TELUS Mobility EBITDA is expected to increase by 18 to 23% driven by an
approximate 14 to 16% increase in revenues, continued economies of scale, cost
containment and expansion in wireless subscribers.
The double-digit earnings per share increase is not only being driven by
higher consolidated operating profitability, but also by reduced depreciation
due to improved capital efficiency in recent years and by lower financing
costs as a consequence of lower debt levels, and potentially a lower number of
shares outstanding. This significant growth in earnings per share is despite
the fact that 2004 earnings included 21 cents of positive impacts from the
settlement of tax matters (and related interest), which are not projected to
reoccur in 2005.
Key assumptions and sensitivities for 2005 targets
Earnings per share, cash balances, net debt and common equity may be
affected by purchases of up to 23.3 million additional TELUS shares under the
normal course issuer bid.
For projection purposes, the following assumptions were made:
- No impact has been assumed for the possibility of a work stoppage
resulting from the collective bargaining process;
- Assumed economic growth is consistent with provincial and national
estimates by the Conference Board of Canada;
- No change in foreign ownership rules;
- Continued softness in wireline demand;
- A three-player national wireless market, with niche players offering
products on a resale basis;
- An approximate four percentage point gain in wireless market
penetration;
- Approximately $100 million of restructuring and workforce reduction
expenses (compared with $52.6 million in 2004);
- Minimal cash income taxes due to utilization of tax losses carried
forward;
- No significant changes in the effective tax rate;
- No prospective significant acquisitions or divestitures are reflected;
- Cash dividend payments of approximately $290 million;
- No significant debt retirements; and
- Maintenance or improvement of credit ratings.
There is no assurance that these assumptions or the 2005 financial and
operating targets and projections will turn out to be accurate.
9.2 Financing plan for 2005
TELUS has no significant amount of debt maturing in 2005, and the
$150 million amount outstanding under its accounts receivable securitization
program at the end of 2004 is the minimum required to maintain the program.
TELUS' financing plan is to use the $896.5 million cash-on-hand at December
31, 2004 and free cash flow generated by its business operations in 2005 to:
(i) pay dividends; (ii) repurchase TELUS Common Shares and Non-Voting Shares
under the normal course issuer bid; and (iii) maintain cash-on-hand in
anticipation of the maturation of $1.6 billion of 7.5% Canadian dollar TELUS
Corporation Notes in June 2006. Consideration may also be given to redeeming
debt (including TELUS' convertible debentures) or repurchases of debt in the
open market. On February 16, 2005, TELUS announced its intention to redeem its
$149.6 million of 6.75% convertible debentures at par on June 16, 2005.
TELUS also expects to maintain its current position of fully hedging its
foreign exchange exposure for indebtedness. At the end of 2004, approximately
93% of TELUS' total debt was borrowed on a fixed-rate basis. The Company plans
to renew its bank credit facility in May 2005 and generally expects to
maintain a minimum of $1 billion in unutilized liquidity.
10. Risks and uncertainties
A full update on the risks and uncertainties facing TELUS will made in
TELUS' 2004 annual filings on SEDAR (www.sedar.com) and EDGAR (www.sec.gov).
The following are updates since TELUS' 2004 third quarter Management's
discussion and analysis.
10.1 Competition - wireline
In February 2005, Shaw Communications Inc, a cable-TV competitor in
TELUS' Western incumbent markets, launched cable-based telephony services lin
Calgary, with plans to launch in other markets throughout the year. The
cable-TV competitor indicated that it would focus on bundled television,
Internet and digital services across Western Canada. TELUS has a broadcasting
distribution licence to offer digital television services in select
communities across Alberta and B.C., as well as a licence to offer commercial
video-on-demand services. By using TELUS' existing high-speed infrastructure,
these licences could enable the Company to compete with cable-TV companies and
satellite service providers for TV entertainment services. TELUS is testing
and evaluating these services for possible launch in the future.
10.2 Regulatory - Telecom Decision 2005-6
The proceeding to consider competitor digital network access (CDNA)
service, was completed in December 2003 and a decision was released on
February 3, 2005. Telecom Decision 2005-6 finalized the scope of the CDNA
service and the terms and conditions under which it is made available. For
existing CDNA elements (link and access), TELUS will be compensated through
deferral account draw downs, calculated based on the difference between retail
rates on June 1, 2002 and the rates approved in Decision 2005-6. Some new
elements were added to the scope of CDNA (e.g. intra-exchange service,
inter-exchange service in metropolitan areas, and a channelization service),
which are to be priced above cost plus 15% with higher margins up to and
including existing retail rates. TELUS will be compensated through the
deferral account for retail digital network access (DNA) rate reductions to
competitors stemming from this decision, based on the difference between
retail rates today and the reduced rates provided for in the decision. The
reduced rates for the new elements apply on a prospective basis. For TELUS'
incumbent operations, negative retail re-pricing is primarily confined to
services on legacy copper facilities and the value of TELUS' investments in
higher bandwidth intra- and inter-exchange fibre facilities is preserved.
Competitors seeking deeper discounted rates must remain on copper facilities.
TELUS' non-ILEC wireline business can take advantage of cost savings and the
additional service elements included by the decision.
11. Reconciliation of non-GAAP financial measures and definition of key
operating indicators
11.1 Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA)
The Company has issued guidance on and reports EBITDA because it is a key
measure used by management to evaluate performance of business units and it is
utilized in measuring compliance with debt covenants. The Company also
believes EBITDA is a measure commonly reported and widely used by investors as
an indicator of a company's operating performance and ability to incur and
service debt. The Company believes EBITDA assists investors in comparing a
company's performance on a consistent basis without regard to depreciation and
amortization, which are non-cash in nature and can vary significantly
depending upon accounting methods or non-operating factors such as historical
cost.
EBITDA can be calculated from TELUS' Consolidated Statements of Income,
as follows:
-------------------------------------------------------------------------
Quarters ended Dec. 31 Years ended Dec. 31
($ millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
Operating revenues 1,964.9 1,825.6 7,581.2 7,146.0
Less: Operations expense 1,178.5 1,126.6 4,438.0 4,301.9
Less: Restructuring and
workforce reduction costs 19.8 16.2 52.6 28.3
-------------------------------------------------------------------------
EBITDA 766.6 682.8 3,090.6 2,815.8
-------------------------------------------------------------------------
EBITDA is not a calculation based on Canadian or U.S. GAAP and should not
be considered an alternative to Operating income or Net income in measuring
the Company's performance or used as an exclusive measure of cash flow because
it does not consider the impact of working capital growth, capital
expenditures, debt principal reductions and other sources and uses of cash,
which are disclosed in the Consolidated statements of cash flows. Investors
should carefully consider the specific items included in TELUS' computation of
EBITDA. While EBITDA has been disclosed herein to permit a more complete
comparative analysis of the Company's operating performance and debt servicing
ability relative to other companies, investors should be cautioned that EBITDA
as reported by TELUS may not be comparable in all instances to EBITDA as
reported by other companies.
The following is a reconciliation of EBITDA with Net income and Operating
income:
-------------------------------------------------------------------------
Quarters ended Dec. 31 Years ended Dec. 31
($ millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
Net income 135.6 47.8 565.8 324.4
Other expense 8.7 3.5 8.7 23.3
Financing costs 152.8 163.7 613.3 639.3
Income taxes 50.4 42.8 255.1 172.7
Non-controlling interest 1.6 0.6 4.6 3.3
-------------------------------------------------------------------------
Operating income 349.1 258.4 1,447.5 1,163.0
Depreciation 338.3 323.4 1,307.8 1,272.9
Amortization of intangible
assets 79.2 101.0 335.3 379.9
-------------------------------------------------------------------------
EBITDA 766.6 682.8 3,090.6 2,815.8
-------------------------------------------------------------------------
11.2 Free cash flow
The Company has issued guidance on and reports Free cash flow because it
is a key measure used by management to evaluate performance of the
consolidated operations. Free cash flow excludes certain working capital
changes, and other sources and uses of cash, which are disclosed in the
Consolidated statements of cash flows. Free cash flow is not a calculation
based on Canadian or U.S. GAAP and should not be considered an alternative to
the Consolidated statements of cash flows. Free cash flow is a measure that
can be used to gauge TELUS' performance over time. Investors should be
cautioned that Free cash flow as reported by TELUS may not be comparable in
all instances to Free cash flow as reported by other companies. While the
closest GAAP measure is Cash provided by operating activities less Cash used
by investing activities, Free cash flow is relevant because it provides an
indication of how much cash generated by operations is available after capital
expenditures, but before proceeds from divested assets and changes in certain
working capital items (such as trade receivables, which can be significantly
distorted by securitization changes that do not reflect operating results, and
trade payables).
The following shows management's calculation of Free cash flow.
-------------------------------------------------------------------------
Quarters ended Dec. 31 Years ended Dec. 31
($ millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
EBITDA 766.6 682.8 3,090.6 2,815.8
Restructuring and workforce
reduction costs, net of cash
payments (15.2) (37.9) (70.3) (259.4)
Share-based compensation 5.9 - 23.8 -
Cash interest paid (293.2) (295.0) (632.9) (657.5)
Cash interest received 4.0 26.6 27.3 41.6
Income taxes received (paid) (2.8) 130.4 194.6 165.5
Capital expenditures (capex) (343.4) (435.4) (1,319.0) (1,252.7)
Investment tax credits
received (reported in
current or prior EBITDA or
capex, and in Income taxes
received (paid)) - - (16.8) (8.4)
-------------------------------------------------------------------------
Free cash flow 121.9 71.5 1,297.3 844.9
-------------------------------------------------------------------------
The following reconciles Free cash flow with Cash provided by operating
activities less Cash used by investing activities:
-------------------------------------------------------------------------
Quarters ended Dec. 31 Years ended Dec. 31
($ millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
Cash provided by operating
activities 613.8 409.8 2,538.1 2,133.8
Cash (used) by investing
activities (342.8) (421.4) (1,299.5) (1,197.8)
-------------------------------------------------------------------------
271.0 (11.6) 1,238.6 936.0
Net employee defined
benefit plans expense (3.7) (13.5) (18.4) (53.0)
Employer contributions to
employee defined benefit
plans 24.5 29.9 136.8 99.8
Other net operating
activities (14.2) (7.6) (27.9) (45.1)
Related party transaction
payment received (33.3) - (33.3) -
Non-cash working capital
changes except changes in
taxes and interest (121.8) 88.3 21.0 (37.9)
Proceeds from the sale of
property and other assets (9.4) (11.6) (27.6) (51.2)
Other investing activities 8.8 (2.4) 8.1 (3.7)
-------------------------------------------------------------------------
Free cash flow 121.9 71.5 1,297.3 844.9
-------------------------------------------------------------------------
11.3 Definition of key operating indicators
These measures are industry metrics and are useful in assessing the
operating performance of a wireless company.
Churn
-----
Calculated as the number of subscriber units disconnected during the
period divided by the average number of subscriber units on the
network, expressed as a rate per month. A prepaid subscriber is
deactivated when the subscriber has no usage for 90 days following
expiry of the prepaid card.
Cost of acquisition (COA)
-------------------------
Consists of the total of handset subsidies, commissions, and
advertising and promotion expenses related to the initial customer
acquisition during a given period. As defined, COA excludes costs to
retain existing subscribers (Retention spend).
COA per gross subscriber addition
---------------------------------
COA divided by gross subscriber activations during the period.
Average revenue per subscriber unit, or ARPU
--------------------------------------------
Calculated as Network revenue divided by the average number of
subscriber units on the network during the period, expressed as a rate
per month.
Retention Spend to Network revenue
----------------------------------
Represents direct costs associated with marketing and promotional
efforts aimed at the retention of the existing subscriber base, divided
by Network revenue.
EBITDA excluding COA
--------------------
A measure of operational profitability, normalized for the period costs
of adding new customers.
11.4 Definition of liquidity and capital resource measures
Net debt
--------
Defined as Long-term Debt plus current maturities of Long-term Debt and
cheques outstanding less Cash and temporary investments plus cross
currency foreign exchange hedge liability (less cross currency foreign
exchange hedge asset) related to U.S. dollar notes. The cross currency
foreign exchange hedge liability was $1,037.7 million at December 31,
2004 (compared with deferred hedge liabilities of $745.8 million at
December 31, 2003). Net debt is unaffected by foreign exchange
fluctuations because it includes (deducts) the net deferred hedging
liability (asset). Under TELUS' new credit facilities, a notional
amount related to accounts receivable securitization is no longer added
to the numerator of the Leverage Ratio covenant calculation. Consistent
with the new credit facility calculation, Net debt for current and
prior periods excludes notional accounts receivable securitization
amounts.
Total capitalization
--------------------
Defined as Net debt plus Non-controlling interest and Shareholders'
equity.
Net debt to total capitalization
--------------------------------
Provides a measure of the proportion of debt used in the Company's
capital structure. The long-term target ratio for Net debt to total
capitalization is 45 to 50%.
EBITDA (excluding restructuring)
--------------------------------
EBITDA (excluding restructuring) is used for the calculation of Net
debt to EBITDA and EBITDA interest coverage, consistent with the
calculation of the Leverage Ratio and the Coverage Ratio in credit
facility covenants. Restructuring and workforce reduction costs were
$52.6 million and $28.3 million, respectively, for the 12-month periods
ended December 31, 2004 and December 31, 2003.
Net debt to EBITDA
------------------
Defined as Net debt as at the end of the period divided by the 12-month
trailing EBITDA (excluding restructuring). This measure is
substantially the same as the Leverage Ratio covenant in TELUS' credit
facilities. TELUS' target for Net debt to EBITDA is 2.2 times or less.
Net interest cost
-----------------
Defined as Financing costs before gains on redemption and repayment of
debt, calculated on a 12-month trailing basis. No gains on redemption
and repayment of debt were recorded in 2004 and 2003.
Earnings coverage ratio
-----------------------
Calculated on a 12-month trailing basis as Net income before interest
expense on total debt and income tax expense divided by interest
expense on total debt.
EBITDA interest coverage
------------------------
Defined as EBITDA (excluding restructuring) divided by Net interest
cost. This measure is substantially the same as the Coverage Ratio
covenant in TELUS' new credit facilities.
Dividend payout ratio
---------------------
Defined as Dividends declared per share divided by basic Earnings Per
Share. For interim periods, a 12-month trailing measurement is
reported. The target guideline for the annual dividend payout ratio is
45 to 55% of net earnings.
TELUS Corporation
_____________________________________
TELUS Corporation
Consolidated Statements of Income
---------------------------------
Periods ended Three months Twelve months
December 31 (millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
(restated) (restated)
OPERATING REVENUES $ 1,964.9 $ 1,825.6 $ 7,581.2 $ 7,146.0
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,178.5 1,126.6 4,438.0 4,301.9
Restructuring and
workforce reduction
costs 19.8 16.2 52.6 28.3
Depreciation 338.3 323.4 1,307.8 1,272.9
Amortization of
intangible assets 79.2 101.0 335.3 379.9
-------------------------------------------------------------------------
1,615.8 1,567.2 6,133.7 5,983.0
-------------------------------------------------------------------------
OPERATING INCOME 349.1 258.4 1,447.5 1,163.0
Other expense, net 8.7 3.5 8.7 23.3
Financing costs 152.8 163.7 613.3 639.3
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES
AND NON-CONTROLLING
INTEREST 187.6 91.2 825.5 500.4
Income taxes 50.4 42.8 255.1 172.7
Non-controlling interest 1.6 0.6 4.6 3.3
-------------------------------------------------------------------------
NET INCOME 135.6 47.8 565.8 324.4
Preference and preferred
share dividends - 0.9 1.8 3.5
-------------------------------------------------------------------------
COMMON SHARE AND NON-VOTING
SHARE INCOME $ 135.6 $ 46.9 $ 564.0 $ 320.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INCOME PER COMMON SHARE
AND NON-VOTING SHARE ($)
- Basic 0.38 0.13 1.58 0.92
- Diluted 0.37 0.13 1.57 0.91
DIVIDENDS DECLARED PER
COMMON SHARE AND
NON-VOTING SHARE ($) 0.20 0.15 0.65 0.60
TOTAL WEIGHTED AVERAGE
COMMON SHARES AND NON-VOTING
SHARES OUTSTANDING
(millions)
- Basic 358.0 351.5 355.3 349.3
- Diluted 362.1 354.5 357.6 351.8
TELUS Corporation
Consolidated Balance Sheets
---------------------------
As at As at
December 31, December 31,
(millions) 2004 2003
-------------------------------------------------------------------------
(restated)
ASSETS
Current Assets
Cash and temporary investments, net $ 896.5 $ 6.2
Accounts receivable 863.5 723.8
Income and other taxes receivable 132.5 187.4
Inventories 133.3 123.5
Prepaid expenses and other 183.4 172.4
Current portion of future income taxes 438.4 304.0
-------------------------------------------------------------------------
2,647.6 1,517.3
-------------------------------------------------------------------------
Capital Assets, Net
Property, plant, equipment and other 7,528.2 7,764.3
Intangible assets subject to amortization 737.0 844.7
Intangible assets with indefinite lives 2,955.8 2,954.6
-------------------------------------------------------------------------
11,221.0 11,563.6
-------------------------------------------------------------------------
Other Assets
Deferred charges 704.4 610.7
Future income taxes 99.8 626.0
Investments 38.4 41.9
Goodwill 3,126.8 3,118.0
-------------------------------------------------------------------------
3,969.4 4,396.6
-------------------------------------------------------------------------
$ 17,838.0 $ 17,477.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and
accrued liabilities $ 1,362.6 $ 1,294.5
Restructuring and workforce
reduction accounts payable and
accrued liabilities 70.7 141.0
Dividends payable - 53.5
Advance billings and customer deposits 531.5 445.0
Current maturities of long-term debt 4.3 221.1
-------------------------------------------------------------------------
1,969.1 2,155.1
-------------------------------------------------------------------------
Long-Term Debt 6,332.2 6,609.8
-------------------------------------------------------------------------
Other Long-Term Liabilities 1,506.1 1,173.7
-------------------------------------------------------------------------
Future Income Taxes 991.9 1,007.0
-------------------------------------------------------------------------
Non-Controlling Interest 13.1 10.7
-------------------------------------------------------------------------
Shareholders' Equity
Convertible debentures conversion option 8.8 8.8
Preference and preferred shares - 69.7
Common equity 7,016.8 6,442.7
-------------------------------------------------------------------------
7,025.6 6,521.2
-------------------------------------------------------------------------
$ 17,838.0 $ 17,477.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
Consolidated Statements of Cash Flows
-------------------------------------
Periods ended Three months Twelve months
December 31 (millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
(restated) (restated)
OPERATING ACTIVITIES
Net income $ 135.6 $ 47.8 $ 565.8 $ 324.4
Adjustments to reconcile
net income to cash
provided by operating activities:
Depreciation and
amortization 417.5 424.4 1,643.1 1,652.8
Future income taxes 99.0 46.5 380.9 394.4
Share-based compensation 5.9 - 23.8 -
Net employee defined
benefit plans expense 3.7 13.5 18.4 53.0
Employer contributions to
employee defined
benefit plans (24.5) (29.9) (136.8) (99.8)
Restructuring and
workforce reduction
costs, net of
cash payments (15.2) (37.9) (70.3) (259.4)
Other, net 14.2 7.6 27.9 45.1
Related party transaction
payment received 33.3 - 33.3 -
Net change in non-cash
working capital (55.7) (62.2) 52.0 23.3
-------------------------------------------------------------------------
Cash provided by operating
activities 613.8 409.8 2,538.1 2,133.8
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (343.4) (435.4) (1,319.0) (1,252.7)
Proceeds from the sale of
property and other assets 9.4 11.6 27.6 51.2
Other (8.8) 2.4 (8.1) 3.7
-------------------------------------------------------------------------
Cash used by investing
activities (342.8) (421.4) (1,299.5) (1,197.8)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting
Shares issued 78.0 24.9 148.8 86.6
Dividends to shareholders (112.6) (41.8) (248.7) (172.0)
Purchase of Common Shares
and Non-Voting Shares
for cancellation (78.0) - (78.0) -
Payment for redemption of
preference and
preferred shares - - (72.8) -
Related party transaction
payment received 114.8 - 114.8 -
Long-term debt issued 2.0 7.6 39.8 373.0
Redemptions and repayment
of long-term debt (0.9) (71.1) (248.6) (1,201.7)
Other - (4.1) (3.6) (6.7)
-------------------------------------------------------------------------
Cash used by
financing activities 3.3 (84.5) (348.3) (920.8)
-------------------------------------------------------------------------
CASH POSITION
Increase in cash and
temporary investments, net 274.3 (96.1) 890.3 15.2
Cash and temporary
investments, net,
beginning of year 622.2 102.3 6.2 (9.0)
-------------------------------------------------------------------------
Cash and temporary
investments, net,
end of year $ 896.5 $ 6.2 $ 896.5 $ 6.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS
Interest (paid) $ (293.2) $ (295.0) $ (632.9) $ (657.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest received $ 4.0 $ 26.6 $ 27.3 $ 41.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income taxes (inclusive
of Investment Tax
Credits received (paid) $ (2.8) $ 130.4 $ 194.6 $ 165.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
Segmented Information
---------------------
Three months ended
December 31 Communications Mobility
(millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
External revenue $ 1,209.3 $ 1,182.4 $ 755.6 $ 643.2
Inter-segment revenue 24.6 23.1 6.3 4.1
-------------------------------------------------------------------------
Total operating revenue 1,233.9 1,205.5 761.9 647.3
Operations expense 732.2 696.5 477.2 457.3
Restructuring and work-
force reduction costs 19.8 16.2 - -
-------------------------------------------------------------------------
EBITDA(1) $ 481.9 $ 492.8 $ 284.7 $ 190.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 220.8 $ 303.0 $ 122.6 $ 132.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 261.1 $ 189.8 $ 162.1 $ 57.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended
December 31 Eliminations Consolidated
(millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
External revenue $ - $ - $ 1,964.9 $ 1,825.6
Inter-segment revenue (30.9) (27.2) - -
-------------------------------------------------------------------------
Total operating revenue (30.9) (27.2) 1,964.9 1,825.6
Operations expense (30.9) (27.2) 1,178.5 1,126.6
Restructuring and work-
force reduction costs - - 19.8 16.2
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 766.6 $ 682.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 343.4 $ 435.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 423.2 $ 247.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Years ended
December 31 Communications Mobility
(millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
External revenue $ 4,769.3 $ 4,786.4 $ 2,811.9 $ 2,359.6
Inter-segment revenue 96.6 94.5 21.5 15.7
-------------------------------------------------------------------------
Total operating revenue 4,865.9 4,880.9 2,833.4 2,375.3
Operations expense 2,864.9 2,852.2 1,691.2 1,559.9
Restructuring and work-
force reduction costs 52.6 28.3 - -
-------------------------------------------------------------------------
EBITDA(1) $ 1,948.4 $ 2,000.4 $ 1,142.2 $ 815.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 964.3 $ 892.8 $ 354.7 $ 359.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 984.1 $ 1,107.6 $ 787.5 $ 455.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Years ended
December 31 Eliminations Consolidated
(millions) 2004 2003 2004 2003
-------------------------------------------------------------------------
External revenue $ - $ - $ 7,581.2 $ 7,146.0
Inter-segment revenue (118.1) (110.2) - -
-------------------------------------------------------------------------
Total operating revenue (118.1) (110.2) 7,581.2 7,146.0
Operations expense (118.1) (110.2) 4,438.0 4,301.9
Restructuring and work-
force reduction costs - - 52.6 28.3
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 3,090.6 $ 2,815.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 1,319.0 $ 1,252.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 1,771.6 $ 1,563.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is defined by the Company as operating revenues less
operations expense and restructuring and workforce reduction
costs. The Company has issued guidance on, and reports, EBITDA
because it is a key measure used by management to evaluate
performance of its business segments and is utilized in
measuring compliance with certain debt covenants.
(2) Total capital expenditures ("CAPEX").
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: February 18, 2005
SIGNATURES
TELUS Corporation
/s/ Audrey Ho
_____________________________
Name: Audrey Ho
Title: Vice President, Legal Services and
General Counsel and Corporate Secretary