TELUS CORPORATIONDetailed Chart...TELUS CORPORATIONDetailed Chart...TELUS CORPORATIONDetailed Chart...TELUS Reports Third Quarter ResultsFocus on operational efficiency and launch of next generation wireless network and devices
Operating revenue was
Free cash flow of
FINANCIAL HIGHLIGHTS
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C$ and in millions, except per share amounts 3 months ended
September 30
(unaudited) 2009 2008 % Change
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Operating revenues 2,411 2,450 (1.6)
Operations expense 1,456 1,465 (0.6)
Restructuring costs 32 10 n.m.
EBITDA(1) 923 975 (5.3)
Income before income taxes 386 411 (6.1)
Net income(2) 280 286 (2.1)
Earnings per share (EPS), basic(2) 0.88 0.89 (1.1)
Cash provided by operating activities 814 985 (17.4)
General capital expenditures 558 473 18.0
Total capital expenditures(3) 558 1,355 (58.8)
Free cash flow(3)(4) 266 (482) n.m.
Total customer connections (millions) 11.86 11.54 2.8
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring costs. See Section 11.1 of Management's discussion
and analysis.
(2) Net income and EPS for the three month period in 2009 included
favourable income tax-related adjustments related to prior year tax
matters of approximately $14 million net of tax or four cents per
share respectively, compared to $nil for the same period in 2008.
(3) The three month period in 2008 included $882 million payment for
wireless spectrum licences.
(4) See Section 11.2 of Management's discussion and analysis.
"TELUS is leading the change in Canada's wireless competitive landscape by delivering exceptional client experiences through a series of major initiatives coming to fruition simultaneously," said
"We have also introduced a fantastic array of brand new HSPA smartphones including the iconic Apple iPhone 3GS. Importantly, the new Blackberry Bold 9700 and the Android HTC Hero also join our compelling selection of innovative devices for Canadians. These devices are complemented by our new Clear Choice(TM) wireless rate plans, which simplify the rate plan options for our clients," Robert McFarlane, TELUS executive vice-president and CFO said that "while we continue to appropriately focus on investing in cost reduction initiatives given the economic and competitive environment, we are at an exciting inflection point in respect of our major growth investments as we transition into the commercialization phase of our wireless and wireline broadband expansion initiatives. As a result, we expect capital expenditures to peak in the second half of 2009, while subscriber growth in wireless, Internet and TV should accelerate."
The Company has updated its 2009 full year guidance to reflect the impacts of ongoing weak economic growth in
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This news release contains statements about expected future events and
financial and operating results of TELUS 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 the 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 and events to differ materially from that expressed in the
forward-looking statements. Accordingly this news release is subject to
the disclaimer and qualified by the assumptions (including assumptions
for 2009 guidance and preliminary assessment of expected 2010 capital
expenditures), qualifications and risk factors (including those
associated with the deployment and operation of the new national high-
speed packet access network and associated introduction of new products,
services and systems) referred to in the Management's discussion and
analysis in the 2008 annual report, and in the 2009 first, second and
third quarter reports. Except as required by law, TELUS disclaims any
intention or obligation to update or revise forward-looking statements,
and reserves the right to change, at any time at its sole discretion, its
current practice of updating annual targets and guidance.
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OPERATING HIGHLIGHTS
TELUS wireless
- External revenues increased by $4 million or 0.3% to $1.2 billion in
the third quarter of 2009, compared with the same period in 2008, as
equipment sales and other revenue growth of 16%, which included one
month of revenue from newly acquired Black's Photo Corporation,
offset lower network revenue growth.
- Wireless data revenue increased $48 million or 27% due to the
continued adoption of full function smartphones and mobile Internet
keys, and increased use of data services such as text messaging and
social networking.
- ARPU (average revenue per subscriber unit per month) declined by 7.3%
to $59.45 compared to the same quarter a year ago, but continued to
reflect the usual sequential seasonal improvement. The fast-growing
data component of $12.05 represented 20% of ARPU. Voice revenue
continued to trend down due to declining minutes of use and plan
optimization by consumers and businesses, lower business-oriented
Mike service revenue, decreased inbound roaming revenues, and an
increased proportion of Koodo Mobile customers.
- Net subscriber additions of 125,000 decreased 29% from the same
period a year ago, when excluding the deactivation of subscribers
from the turndown of the analogue network one year ago, but improved
13% sequentially. The year-over-year decrease was primarily due to
current churn of Koodo subscribers being at normal levels, whereas a
year ago there was minimal churn given its then recent service
launch, and reduced prepaid customers. Postpaid net additions were
131,000, while prepaid net losses were 6,000.
- Blended monthly subscriber churn increased slightly to 1.55% from
1.52% a year ago, when excluding the deactivation of analogue
subscribers in September 2008 from last year's churn rate.
- EBITDA of $517 million decreased by 1.7% due to increased retention
costs and higher network operating expenses, partially offset by
lower costs of acquisition.
- Cost of acquisition per gross addition decreased 11% year-over-year
to $320 reflecting lower advertising and promotion expenses and
commissions, partially offset by higher subsidies on smartphones.
- Simple cash flow (EBITDA less capital expenditures) decreased by
$69 million to $324 million in the quarter due to lower EBITDA growth
and higher general capital spending to support the major next
generation HSPA network build-out being completed this year. However,
when factoring in the payment for AWS spectrum last year, simple cash
flow increased by $813 million.
TELUS wireline
- External revenues decreased by $43 million or 3.4% to $1.2 billion in
the third quarter of 2009, when compared with the same period in
2008, due to declines in voice local and long distance revenues.
- Data revenues increased by $8 million or 1.6% primarily due to higher
managed workplace and Internet, TELUS TV subscriber growth, and
enhanced data and hosting revenues.
- TELUS high-speed Internet net additions of 9,000 were down from
13,000 in the same period a year ago, due to a maturing market and
promotional activity from cable-TV competitors.
- TELUS TV net additions were 22,000, an increase of 83% over the same
period last year, due to enhanced broadband coverage, expanded
marketing efforts and the introduction of TELUS Satellite TV service
that supplements the coverage IP-based services.
- Network access lines (NALs) declined by 44,000 in the quarter to
4.1 million, which is down 4.3% from a year ago. Residential NAL
losses of 41,000 improved year-over-year due to more effective
winbacks and from the benefit of bundling services, including TELUS
TV. A decrease in business NALs in Western Canada due to economic and
competitive factors more than offset increased business lines in
Ontario and Quebec.
- EBITDA of $406 million decreased by 9.6% due primarily to higher
restructuring costs and pension expenses. EBITDA excluding
restructuring costs and pension expenses increased by $4 million
benefitting from decreased full-time equivalent employees and strong
cost containment as wireline operations expenses excluding these
expenses declined 5.4%.
- Simple cash flow (EBITDA less capital expenditures) decreased
$68 million to $41 million in the quarter due to lower EBITDA and
increased capital expenditures, which primarily relates to continued
broadband network enhancements and TELUS TV subscriber growth.
CORPORATE AND BUSINESS DEVELOPMENTS
TELUS launches Canada's largest 3G+ network
TELUS launched Canada's largest 3G+ network on With TELUS' new High Speed Packet Access plus (HSPA+) network, customers can experience dramatically decreased download times for web pages, emails, songs and movies.
TELUS brings iPhone 3GS to
On iPhone 3GS is the fastest, most powerful iPhone yet, packed with incredible new features including improved speed and performance - up to twice as fast as iPhone 3G - with longer battery life, a high-quality 3 megapixel autofocus camera, easy to use video recording and hands free voice control. iPhone 3GS includes iPhone OS 3.1, the world's most advanced mobile operating system with features such as Cut, Copy and Paste, MMS, Spotlight Search, landscape keyboard and more. Exciting new smartphones on TELUS' 3G+ network
TELUS clients can now access the world's leading smartphones on TELUS' new 3G+ network, including the very popular Nokia E71, and the BlackBerry Bold 9700. Exclusive to TELUS in TELUS introduces Clear Choice(TM) Rate Plans for Canadians
TELUS launched on These new plans are consistent with TELUS' brand promise, the future is friendly. Existing TELUS clients can continue to renew on their existing rate plans or have the option to switch to the new rate plans. Reduced pricing complexity better positions TELUS to win and retain customers in the competitive wireless market, and the reduced number of rate plans supports operational efficiency. TELUS acquires Black's Photo and launches camera phone sales
TELUS acquired Black's Photo Corporation for CRTC net neutrality decisions
The Canadian Radio-television and Telecommunications Commission (CRTC) decisions released on In its decision on Internet traffic management practices (popularly known as throttling, traffic shaping, and/or net neutrality), the CRTC has permitted Bell, Rogers, Shaw and other ISPs to continue traffic shaping peer-to-peer file sharing traffic for now; however, the CRTC will evaluate each carrier's measures in future proceedings against the framework that it has established. The issue of whether throttling is permitted has therefore not been definitively resolved yet but the commission recognized that, in some circumstances, it may be the only viable response to traffic congestion.
The CRTC decisions do not have any immediate impact on TELUS because we have not traffic shaped, however we are pleased to see the CRTC preserve ISPs flexibility to adopt usage-based pricing at wholesale and retail. The CRTC's recognition that congestion is a real problem and needs to be managed is positive. The decision strikes a good balance between the realities ISPs are facing and fairness to customers. The chairman of the CRTC has correctly proclaimed that " CRTC finds new wireless entrant not currently eligible to operate
In April, TELUS asked the CRTC to determine if new wireless entrant Globalive was compliant with federal laws in respect of foreign ownership that all communication companies in
Globalive purchased wireless spectrum in a government auction 15 months ago. TELUS advocated to Industry
TELUS has never opposed foreign ownership restrictions being lifted in
This CRTC decision does not prevent Globalive or any other new wireless company from competing in TELUS will again recommend to government that bidders in future auctions should be pre-qualified.
TELUS/Rotman IT security study reveals increasing number and cost of
security breaches
In September, TELUS and the Rotman School of Management released the results of their annual study of the IT security environment in TELUS is a global leader in security products and services, operating one of the world's leading threat and vulnerability analysis labs. TELUS' application, data, and infrastructure security solutions help ensure businesses can focus on the future. For more information about TELUS Security Solutions, please visit telus.com.
AWARDS AND RECOGNITION
TELUS Annual Report ranked No. 3 in world
For the seventh consecutive year, the Annual Report on Annual Reports recognized TELUS for having produced one the 10 best annual reports in the world. The 2008 TELUS report placed No. 3 in the world, unchanged from the previous year. Enterprise.com is the only organization in the world that compares, rates and ranks annual reports globally. An independent panel evaluates 300 annual reports short-listed from an even wider selection of publicly listed corporations. The comprehensive survey looks at 10 key evaluation criteria: packaging, highlights, strategy, business, financials, investors, governance, accounting, responsibility and communication. TELUS named to Dow Jones Sustainability World Index For the ninth consecutive year, the Dow Jones Sustainability World Index (DJSI World) has ranked TELUS among the world's leading companies for corporate social responsibility (CSR). TELUS is the only North American telecommunications company and one of just 11 Canadian businesses across all sectors included in the global index of the world's top economic, environmental, and social leaders. Companies included in the DJSI ranking actively lead their industries in setting best practices in strategy, innovation, governance and relations with shareholders, employees and other stakeholders. The annual review is based on a thorough assessment of companies' performance on more than 50 general and industry-specific CSR criteria.
TELUS named Top 100 Employers in
In October, TELUS was named one of Canada's best employers by Mediacorp TELUS named best in directory assistance provider
TELUS has been recognized as top directory assistance provider in Three TELUS team members named to Global Telecom Business Top 40 Under 40
Global Telecom Business in August named three TELUS team members to its Top 40 Under 40 list of people most likely to lead the global telecom industry over the next decade.
COMMUNITY INVESTMENT AND SUPPORT
TELUS and Edmonton Oilers score with new hockey partnership
In September, TELUS announced it has entered into a multi-year, multi-million dollar sponsorship of the
TELUS Celebration of Giving in
In September, TELUS celebrated B.C. Lower Mainland charities at the second annual TELUS
TELUS
In August and September, TELUS invited Canadians to enjoy a diverse and rich cultural experience at TELUS TAIWANfest in
DIVIDEND DEVELOPMENTS
TELUS to change dividend reinvestment program to treasury issuance and
offer 3% discount
TELUS plans to change to its dividend reinvestment program to issue shares from treasury at a three per cent discount from the average market price. Non-voting shares acquired with optional cash payments under the program would be issued from treasury at 100% of the average market price. In recent years, non-voting shares purchased under the company's dividend reinvestment plan have been purchased on the open market without discount. These changes would come into effect on Dividend Declaration
The Board of Directors has declared a quarterly dividend of forty-seven and one half cents ( Access to Quarterly results information Interested investors, the media and others may review this quarterly earnings release, quarterly results slides, supplementary financial information and our full first and second quarter 2009 report on our website at telus.com/investors Quarterly conference call and webcast presentation
TELUS quarterly conference call is scheduled for About TELUS
TELUS (TSX: T, T.A; NYSE: TU) is a leading national telecommunications company in
TELUS Corporation
interim consolidated statements of income and
other comprehensive income (unaudited)
Three months Nine months
Periods ended September 30
(millions except per
share amounts) 2009 2008 2009 2008
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(as adjusted) (as adjusted)
OPERATING REVENUES $ 2,411 $ 2,450 $ 7,163 $ 7,199
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OPERATING EXPENSES
Operations 1,456 1,465 4,348 4,336
Restructuring costs 32 10 113 21
Depreciation 330 344 994 1,033
Amortization of intangible
assets 100 92 287 245
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1,918 1,911 5,742 5,635
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OPERATING INCOME 493 539 1,421 1,564
Other expense, net 6 6 22 25
Financing costs 101 122 302 345
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INCOME BEFORE INCOME TAXES 386 411 1,097 1,194
Income taxes 106 125 251 348
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NET INCOME 280 286 846 846
OTHER COMPREHENSIVE INCOME
Change in unrealized fair
value of derivatives
designated as cash flow
hedges 9 4 36 (6)
Foreign currency translation
adjustment arising from
translating financial
statements of
self-sustaining foreign
operations (4) 3 (12) (1)
Change in unrealized fair
value of available-for-sale
financial assets - (6) 1 (2)
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5 1 25 (9)
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COMPREHENSIVE INCOME $ 285 $ 287 $ 871 $ 837
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NET INCOME ATTRIBUTABLE TO:
Common Shares and
Non-Voting Shares $ 279 $ 285 $ 843 $ 843
Non-controlling interests 1 1 3 3
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$ 280 $ 286 $ 846 $ 846
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TOTAL COMPREHENSIVE INCOME
ATTRIBUTABLE TO:
Common Shares and
Non-Voting Shares $ 284 $ 286 $ 868 $ 834
Non-controlling interests 1 1 3 3
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$ 285 $ 287 $ 871 $ 837
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NET INCOME PER COMMON SHARE
AND NON-VOTING SHARE
- Basic $ 0.88 $ 0.89 $ 2.65 $ 2.62
- Diluted $ 0.87 $ 0.89 $ 2.65 $ 2.61
DIVIDENDS DECLARED PER COMMON
SHARE AND NON-VOTING SHARE $ 0.475 $ 0.45 $ 1.425 $ 1.35
TOTAL WEIGHTED AVERAGE COMMON
SHARES AND NON-VOTING SHARES
OUTSTANDING
- Basic 318 319 318 321
- Diluted 318 320 318 323
TELUS Corporation
interim consolidated statements of financial position (unaudited)
September 30, December 31,
As at (millions) 2009 2008
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(as adjusted)
ASSETS
Current Assets
Cash and temporary investments, net $ 34 $ 4
Accounts receivable 781 966
Income and other taxes receivable 112 25
Inventories 192 333
Prepaid expenses and other 200 176
Derivative assets - 10
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1,319 1,514
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Capital Assets, Net
Property, plant, equipment and other 7,664 7,317
Intangible assets subject to amortization 1,282 1,317
Intangible assets with indefinite lives 3,856 3,849
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12,802 12,483
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Other Assets
Other long-term assets 1,556 1,418
Investments 43 42
Goodwill 3,572 3,564
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5,171 5,024
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$ 19,292 $ 19,021
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 1,417 $ 1,465
Income and other taxes payable 14 163
Restructuring accounts payable and
accrued liabilities 84 51
Dividends payable 151 151
Advance billings and customer deposits 646 689
Current maturities of long-term debt 82 4
Current portion of derivative liabilities 82 75
Current portion of future income taxes 586 459
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3,062 3,057
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Long-Term Debt 5,809 6,348
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Other Long-Term Liabilities 1,560 1,295
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Future Income Taxes 1,328 1,213
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Shareholders' Equity (as adjusted)
Common Share and Non-Voting Share equity 7,513 7,085
Non-controlling interests 20 23
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7,533 7,108
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$ 19,292 $ 19,021
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TELUS Corporation
interim consolidated statements of cash flows (unaudited)
Three months Nine months
Periods ended September 30
(millions) 2009 2008 2009 2008
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OPERATING ACTIVITIES
Net income (as adjusted) $ 280 $ 286 $ 846 $ 846
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and
amortization 430 436 1,281 1,278
Future income taxes 110 113 231 290
Share-based compensation (3) 9 17 25
Net employee defined
benefit plans expense 3 (25) 12 (75)
Employer contributions to
employee defined benefit
plans (31) (27) (135) (78)
Restructuring costs, net
of cash payments 3 (9) 33 (14)
Amortization of deferred
gains on sale-leaseback
of buildings, amortization
of deferred charges and
other, net (14) (2) 9 (8)
Net change in non-cash
working capital 36 204 (14) (192)
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Cash provided by operating
activities 814 985 2,280 2,072
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INVESTING ACTIVITIES
Capital expenditures (558) (473) (1,589) (1,228)
Payment for advanced wireless
services spectrum licences - (882) - (882)
Acquisitions (26) (5) (26) (696)
Proceeds from the sale of
property and other assets - 10 - 13
Change in non-current
materials and supplies,
purchase of investments
and other (1) (3) - 3
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Cash used by investing
activities (585) (1,353) (1,615) (2,790)
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FINANCING ACTIVITIES
Common Shares and Non-Voting
Shares issued - - 1 -
Dividends to shareholders (149) - (451) (289)
Purchase of Common Shares
and Non-Voting Shares for
cancellation - (75) - (274)
Long-term debt issued 936 2,971 7,109 9,545
Redemptions and repayment of
long-term debt (1,006) (2,538) (7,288) (8,243)
Dividends paid by a
subsidiary to
non-controlling interests (2) - (6) (5)
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Cash provided (used) by
financing activities (221) 358 (635) 734
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CASH POSITION
Increase (decrease) in cash
and temporary investments,
net 8 (10) 30 16
Cash and temporary
investments, net, beginning
of period 26 46 4 20
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Cash and temporary
investments, net, end of
period $ 34 $ 36 $ 34 $ 36
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SUPPLEMENTAL DISCLOSURE OF
CASH FLOWS
Interest (paid) $ (38) $ (43) $ (271) $ (264)
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Interest received $ 19 $ - $ 54 $ 2
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Income taxes (inclusive of
Investment Tax Credits)
(paid) received, net $ (48) $ (1) $ (270) $ (8)
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TELUS Corporation
segmented information (unaudited)
Three-month periods ended
September 30 Wireline Wireless
(millions) 2009 2008 2009 2008
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Operating revenues
External revenue $ 1,205 $ 1,248 $ 1,206 $ 1,202
Intersegment revenue 34 33 7 7
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1,239 1,281 1,213 1,209
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Operating expenses
Operations expense 804 823 693 682
Restructuring costs 29 9 3 1
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833 832 696 683
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EBITDA(1) $ 406 $ 449 $ 517 $ 526
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Capital expenditures $ 365 $ 340 $ 193 $ 133
Advanced wireless services
spectrum licences - - - 882
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CAPEX(2) $ 365 $ 340 $ 193 $ 1,015
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EBITDA less CAPEX $ 41 $ 109 $ 324 $ (489)
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Three-month periods ended
September 30 Eliminations Consolidated
(millions) 2009 2008 2009 2008
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Operating revenues
External revenue $ - $ - $ 2,411 $ 2,450
Intersegment revenue (41) (40) - -
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(41) (40) 2,411 2,450
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Operating expenses
Operations expense (41) (40) 1,456 1,465
Restructuring costs - - 32 10
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(41) (40) 1,488 1,475
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EBITDA(1) $ - $ - $ 923 $ 975
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Capital expenditures $ - $ - $ 558 $ 473
Advanced wireless services
spectrum licences - - - 882
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CAPEX(2) $ - $ - $ 558 $ 1,355
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EBITDA less CAPEX $ - $ - $ 365 $ (380)
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EBITDA (from above) $ 923 $ 975
Depreciation 330 344
Amortization 100 92
---------------------------------------------
Operating income 493 539
Other expense, net 6 6
Financing costs 101 122
---------------------------------------------
Income before income
taxes 386 411
Income taxes 106 125
---------------------------------------------
Net income (as adjusted) $ 280 $ 286
---------------------------------------------
---------------------------------------------
Nine-month periods ended
September 30 Wireline Wireless
(millions) 2009 2008 2009 2008
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Operating revenues
External revenue $ 3,681 $ 3,755 $ 3,482 $ 3,444
Intersegment revenue 98 96 21 21
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3,779 3,851 3,503 3,465
-------------------------------------------------------------------------
Operating expenses
Operations expense 2,471 2,503 1,996 1,950
Restructuring costs 104 19 9 2
-------------------------------------------------------------------------
2,575 2,522 2,005 1,952
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EBITDA(1) $ 1,204 $ 1,329 $ 1,498 $ 1,513
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Capital expenditures $ 1,011 $ 916 $ 578 $ 312
Advanced wireless services
spectrum licences - - - 882
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CAPEX(2) $ 1,011 $ 916 $ 578 $ 1,194
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EBITDA less CAPEX $ 193 $ 413 $ 920 $ 319
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Nine-month periods ended
September 30 Eliminations Consolidated
(millions) 2009 2008 2009 2008
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Operating revenues
External revenue $ - $ - $ 7,163 $ 7,199
Intersegment revenue (119) (117) - -
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(119) (117) 7,163 7,199
-------------------------------------------------------------------------
Operating expenses
Operations expense (119) (117) 4,348 4,336
Restructuring costs - - 113 21
-------------------------------------------------------------------------
(119) (117) 4,461 4,357
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EBITDA(1) $ - $ - $ 2,702 $ 2,842
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Capital expenditures $ - $ - $ 1,589 $ 1,228
Advanced wireless services
spectrum licences - - - 882
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CAPEX(2) $ - $ - $ 1,589 $ 2,110
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EBITDA less CAPEX $ - $ - $ 1,113 $ 732
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EBITDA (from above) $ 2,702 $ 2,842
Depreciation 994 1,033
Amortization 287 245
---------------------------------------------
Operating income 1,421 1,564
Other expense, net 22 25
Financing costs 302 345
---------------------------------------------
Income before income
taxes 1,097 1,194
Income taxes 251 348
---------------------------------------------
Net income (as adjusted) $ 846 $ 846
---------------------------------------------
---------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is a measure that does not have any standardized
meaning prescribed by GAAP and is therefore unlikely to be comparable
to similar measures presented by other issuers; EBITDA is defined by
the Company as operating revenues less operations expense and
restructuring 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") is the sum of capital
expenditures and advanced wireless services spectrum licences.
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TELUS CORPORATION
Management's discussion and analysis
2009 Q3
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Caution regarding forward-looking statements
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This document contains forward-looking statements about expected future
events and financial and operating results of TELUS Corporation (TELUS or
the Company, and where the context of the narrative permits, or requires,
its subsidiaries). By their nature, forward-looking statements require
the Company to make assumptions, and forward-looking statements are
subject to inherent risks and uncertainties. There is significant risk
that assumptions, 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. Except
as required by law, the Company disclaims any intention or obligation to
update or revise any forward-looking statements, and reserves the right
to change, at any time at its sole discretion, its current practice of
updating annual targets and guidance. Annual targets, revised guidance
and related assumptions for 2009, and a preliminary assessment of
expected 2010 capital expenditure levels, are described in Section 9:
Annual guidance for 2009.
Factors that could cause actual results to differ materially include, but
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are not limited to:
-------------------
Competition (including more active price competition; the likelihood of
new wireless competitors beginning to offer services in late 2009 and
into 2010 as a result of the 2008 advanced wireless services (AWS)
spectrum auction; as well as variability in subscriber acquisition and
retention costs that are dependent on subscriber loading and retention
volumes, smartphone sales and subsidy levels, and TELUS TV installation
costs); economic growth and fluctuations (including strength and
persistence of the economic recovery in Canada, and pension performance,
funding and expenses); capital expenditure levels (increased in 2009 and
potentially in future years due to the Company's wireline broadband
initiatives, fourth generation (4G) wireless deployment strategy, and any
new Industry Canada wireless spectrum auctions); financing and debt
requirements (including ability to carry out refinancing activities and
fund share repurchases); tax matters (including acceleration or deferral
of required payments of significant amounts of cash taxes); human
resource developments (including collective bargaining in the TELUS
Québec region); business integrations and internal reorganizations
(including ability to successfully implement cost reduction initiatives);
technology (including reliance on systems and information technology,
broadband and wireless technology options, choice of suppliers and
suppliers' ability to maintain and service their product lines, expected
technology and evolution path and transition to 4G technology, expected
future benefits and performance of high-speed packet access (HSPA)/long-
term evolution (LTE) wireless technology, successful implementation of
the wireless network build and sharing arrangement with Bell Canada to
achieve cost efficiencies and reduce deployment risks, successful
deployment and operation of new wireless networks and successful
introduction of new products (such as the Apple iPhone and other new HSPA
devices), new services and supporting systems); regulatory approvals and
developments (including interpretation and application of tower sharing
and roaming rules, the design and impact of future spectrum auctions, and
possible changes to foreign ownership restrictions); process risks
(including conversion of legacy systems and billing system integrations,
and implementation of large complex enterprise deals that may be
adversely impacted by available resources and degree of co-operation from
other service providers); health, safety and environmental developments;
litigation and legal matters; business continuity events (including
manmade and natural threats); any future acquisitions or divestitures;
and other risk factors discussed herein and listed from time to time in
TELUS' reports and public disclosure documents including its annual
report, annual information form, and other filings with securities
commissions in Canada (on SEDAR at sedar.com) and in its filings in the
United States, including Form 40-F (on EDGAR at sec.gov).
For further information, see Section 10: Risks and risk management in
TELUS' 2008 annual and 2009 first and second quarter Management's
discussions and analyses, as well as updates in Section 10 of this
document.
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Management's discussion and analysis (MD&A)
November 6, 2009
The following is a discussion of the consolidated financial position and results of operations of TELUS Corporation for the three-month and nine-month periods ended TELUS' Consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP), which differ in certain respects from U.S. GAAP. See Note 21 to the interim Consolidated financial statements for a summary of the principal differences between Canadian and U.S. GAAP as they relate to TELUS. The interim Consolidated financial statements and Management's discussion and analysis were reviewed by TELUS' Audit Committee and approved by TELUS' Board of Directors. All amounts are in Canadian dollars unless otherwise specified. TELUS' Consolidated financial statements include the accounts of the Company and all of the Company's subsidiaries, of which the principal one is TELUS Communications Inc. (TCI). Currently, through the TELUS Communications Company partnership and the TELE-MOBILE COMPANY partnership, TCI includes substantially all of the Company's wireline segment's operations and all of the wireless segment's operations. TELUS has issued guidance on and reports on certain non-GAAP measures used by management to evaluate performance of segments and the Company. Non-GAAP measures are also used to determine compliance with debt covenants and manage the capital structure. Because non-GAAP measures do not have a standardized meaning, securities regulations require that non-GAAP measures be clearly defined and qualified, and reconciled with their nearest GAAP measure. For the reader's reference, the definition, calculation and reconciliation of consolidated non-GAAP measures are provided in Section 11: Reconciliation of non-GAAP measures and definition of key operating indicators. The terms EBITDA and Free cash flow, as used in this document, refer to management's definitions.
Management's discussion and analysis contents
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Section Contents
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1. Introduction A summary of TELUS' consolidated results
for the third quarter and first nine
months of 2009
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2. Core business and A discussion of activities in support of
strategy TELUS' six strategic imperatives
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3. Key performance drivers A list of corporate priorities for 2009
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4. Capabilities A description of the factors that affect
the capability to execute strategies,
manage key performance drivers and deliver
results
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5. Results from operations A detailed discussion of operating results
for the third quarter and first nine
months of 2009
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6. Changes in financial A discussion of changes in the
position Consolidated statements of financial
position for the nine-month period ended
September 30, 2009
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7. Liquidity and capital A discussion of cash flow, liquidity,
resources credit facilities and other disclosures
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8. Critical accounting Accounting estimates that are critical to
estimates and accounting determining financial results, and changes
policy developments to accounting policies
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9. Annual guidance for 2009 TELUS' revised guidance for the full year,
and related assumptions
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10. Risks and risk management An update on certain risks and
uncertainties facing TELUS and how the
Company manages these risks
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11. Reconciliation of A description, calculation and
non-GAAP measures and reconciliation of certain measures used
definition of key by management
operating indicators
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1. Introduction The discussion in this section is qualified by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis. 1.1 Materiality for disclosures Management determines whether or not information is material based on whether it believes a reasonable investor's decision to buy, sell or hold securities in the Company would likely be influenced or changed if the information were omitted or misstated. 1.2 Canadian economic environment
Canada's economy entered into recession in the fourth quarter of 2008. In its Economic effects on TELUS in the third quarter Wireless results for the third quarter of 2009 reflect usual historical seasonal effects when compared to the preceding second quarter, namely sequential growth in gross and net subscriber additions and a sequential increase in average revenue per subscriber unit (ARPU). However, uncertainty regarding the strength and persistence of the economic recovery, and high competitive intensity continue to affect wireless, as reflected in year-over-year decreases in gross and net additions of subscribers, and a year-over-year decrease in ARPU, while the subscriber churn rate stabilized.
Year-over-year wireless gross subscriber additions decreased by 6% in the third quarter of 2009, while net subscriber additions decreased by 16%. When normalizing for the impact of turning down the analogue network in The 6% year-over-year decrease in wireless subscriber gross additions in the third quarter compares to year-over-year changes of (4.7%), 0.3% and 4.8%, respectively, for the second quarter of 2009, first quarter of 2009, and fourth quarter of 2008, while growth for the full year of 2008 was 15%. The worsening growth trend for gross subscriber additions is believed to be primarily due to competitive pressures (including exclusive availability of the iPhone from one competitor), as well as uncertainty about the economic recovery, leading to deferral of buying decisions by customers, lower and more cautious business spending, and lower employment levels.
The decline in wireless ARPU is being impacted by year-over-year decreases in voice revenues largely due to an increased use of lower per-minute rate plans (including increased use of in-bucket minutes), lower service revenue from the Company's Mike(R) service, and decreased roaming revenues. Voice revenue declines can be attributed to the continued highly competitive market being experienced in The wireline segment has been impacted in the third quarter of 2009 by slower year-over-year data revenue growth and faster erosion in voice revenues, similar to the second quarter. Strong price competition in both data and voice services, as well as more cautious spending by consumers and businesses, are contributing factors. In 2009, the Company has observed a larger number of disconnections and fewer installations of business network access lines (NALs), in B.C. and Alberta, attributed partly to economic uncertainty and partly to competition. Over the past 12 months, business NALs have decreased by 1%, while residential NAL losses have moderated in B.C. and Alberta.
Considering uncertainty in the strength and persistence of Canada's economic recovery and weaker than expected results experienced by the Company in the first nine months of 2009, the expected impacts from the acquisition of Black's Photo Corporation in September, and early launch of the new HSPA wireless network and service (including the Apple iPhone) in
TELUS' capital structure financial policies, which are discussed under Capabilities - Section 4.3 Liquidity and capital resources, were designed with credit cycles in mind. The Company believes that these financial policies and guidelines, and maintaining credit ratings in the range of BBB+ to A-, or the equivalent, provide reasonable access to capital markets. The economic weakness and stock market decline in 2008 have increased TELUS' net defined benefit pension plans expense and funding, which is reflected in the Company's public guidance for 2009.
1.3 Consolidated highlights
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Quarters ended Nine-month periods
($ millions, unless September 30 ended Sept. 30
noted otherwise) 2009 2008 Change 2009 2008 Change
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Consolidated statements
of income
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Operating revenues 2,411 2,450 (1.6)% 7,163 7,199 (0.5)%
Operating income 493 539 (8.5)% 1,421 1,564 (9.1)%
Income before
income taxes 386 411 (6.1)% 1,097 1,194 (8.1)%
Net income(1) 280 286 (2.1)% 846 846 - %
Earnings per share
(EPS)(2) basic ($) 0.88 0.89 (1.1)% 2.65 2.62 1.1 %
EPS(2) diluted ($) 0.87 0.89 (2.2)% 2.65 2.61 1.5 %
Cash dividends
declared per
share(2) ($) 0.475 0.45 5.6 % 1.425 1.35 5.6 %
Average shares(2)
outstanding - basic
(millions) 318 319 (0.3)% 318 321 (0.9)%
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Consolidated statements
of cash flows
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Cash provided by
operating activities 814 985 (17.4)% 2,280 2,072 10.0 %
Cash used by
investing activities 585 1,353 (56.8)% 1,615 2,790 (42.1)%
Capital expenditures
General 558 473 18.0 % 1,589 1,228 29.4 %
Payment for AWS
spectrum licences - 882 n.m. - 882 n.m.
Total 558 1,355 (58.8)% 1,589 2,110 (24.7)%
Acquisitions 26 5 n.m. 26 696 n.m.
Cash (used) provided by
financing activities (221) 358 n.m. (635) 734 n.m.
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Subscribers and other
measures
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Subscriber connections(3)
(thousands) 11,863 11,537 2.8 %
EBITDA(4) 923 975 (5.3)% 2,702 2,842 (4.9)%
Free cash flow(4) 266 (482) n.m. 535 300 78.3 %
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Debt and payout ratios(5)
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Net debt to EBITDA -
excluding restructuring
costs (times) 1.9 1.9 -
Dividend payout
ratio(6) (%) 60 54 6 pts
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n.m. - not meaningful; pts - percentage points
(1) Net income for the third quarter and nine-month period ended
September 30, 2008 has been adjusted. See Section 5.2 Quarterly
results summary table - Note 2.
(2) Includes Common Shares and Non-Voting Shares.
(3) The sum of wireless subscribers, network access lines, Internet
access subscribers and TELUS TV(R) subscribers (IP TV and satellite
TV), measured at the end of the respective periods, based on
information in billing and other systems. In the second quarter of
2009, the opening balance for 2009 subscriber connections was reduced
by five thousand to reflect prior period reporting adjustments to
high-speed Internet subscribers.
(4) EBITDA and free cash flow are non-GAAP measures. See Section 11.1
Earnings before interest, taxes, depreciation and amortization
(EBITDA) and Section 11.2 Free cash flow.
(5) See Section 7.4 Liquidity and capital resource measures and Section
11.4 Definitions of liquidity and capital resource measures.
(6) Based on four-quarter trailing earnings per share excluding
favourable tax-related adjustments of 40 cents per share for the
period ended September 30, 2009 and 49 cents per share for the period
ended September 30, 2008, and minor impacts from a net-cash
settlement feature.
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Highlights from operations, comparing results for the third quarter and
first nine months of 2009, or measures at September 30, 2009, to those one
year earlier:
- Subscriber connections increased by 326,000 in the 12-month period
ended September 30, 2009. This includes 7.2% growth in wireless
subscribers, 117% growth in TELUS TV subscribers and minimal growth
in total Internet subscribers, partly offset by a 4.3% decrease in
total network access lines.
- Wireless ARPU was $59.45 in the current quarter, or $0.84 higher than
the second quarter of 2009, but reflected a decrease of 7% when
compared to the third quarter of 2008. Wireless subscriber net
additions were 125,000 in the third quarter of 2009, reflecting an
increase of 14,000 from the second quarter of 2009 and a decrease of
24,000 or 16% from the third quarter of 2008.
- Consolidated operating revenues decreased by $39 million and
$36 million, respectively, in the third quarter and first nine months
of 2009 when compared to the same periods in 2008. Strong price
competition and uncertainty regarding the economic recovery in
Canada, described in Section 1.2, have contributed to lower data
revenue growth and accelerated voice revenue declines.
- Operating income decreased by $46 million and $143 million,
respectively, in the third quarter and nine-month period, primarily
due to lower EBITDA, which included increased defined benefit pension
plan (DBPP) expenses (up by $29 million and $88 million,
respectively) and higher restructuring costs (up by $22 million and
$92 million, respectively).
EBITDA decreased by $52 million and $140 million, respectively, in
the third quarter and first nine months. Excluding DBPP and
restructuring impacts, EBITDA decreased by $1 million in the third
quarter and increased by $40 million in the first nine months. The
underlying flat performance for the third quarter reflects a decline
in higher margin wireline voice local and long distance revenues
offset by cost containment efforts. The underlying improvement in the
nine month period included 9% lower expenditures on salaries, other
benefits and employee-related expenditures. It also included lower
advertising and promotion expenditures and lower costs to acquire new
wireless subscribers, net of higher costs for delivery of TELUS TV
services and to support implementation of services for new wireline
enterprise customers, as well as higher wireless subscriber retention
costs and bad debt expenses.
- Income before income taxes decreased by $25 million and $97 million,
respectively, in the third quarter and nine-month period. Lower
Operating income was partly offset by increased interest income of
$19 million and $43 million, respectively, primarily from the
settlement of prior years' tax matters.
- Net income decreased by $6 million in the third quarter of 2009 and
was unchanged in the first nine months of 2009 when compared to the
same periods in 2008. Net income in the third quarter and first nine
months of 2009, as well as the first nine months of 2008, include
income tax-related adjustments arising from legislated income tax
changes, settlements and tax reassessments for prior years, and any
related interest on reassessments (see Section 5.2). Net income
before income tax-related adjustments was $266 million and
$751 million, respectively, in the third quarter and first nine
months of 2009, or decreases of $20 million and $78 million,
respectively, compared to the same periods in 2008.
- Basic earnings per share decreased one cent in the third quarter of
2009 when compared to the same period in 2008, as lower income for
the quarter was partly offset by fewer shares outstanding. Basic
earnings per share for the first nine months of 2009 increased by
three cents compared to the same period in 2008, due to fewer average
shares outstanding. Earnings per share in the third quarter and first
nine months of 2009 include favourable income tax-related adjustments
of approximately four cents and 30 cents, respectively, while
earnings per share for the first nine months of 2008 includes five
cents of such favourable adjustments.
- Average shares outstanding are lower in 2009 due to market
repurchases of shares in 2008 under the normal course issuer bid
(NCIB) program.
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Quarters Nine-month
Net income analysis ended periods ended
($ millions) September 30 Sept. 30
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Net income in 2008 286 846
Deduct net favourable income tax-related
adjustments in 2008 (see Section 5.2) - (17)
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286 829
Tax-effected changes
--------------------
Higher defined benefit pension plan expenses(1) (20) (61)
Higher restructuring charges(1) (15) (64)
Other changes in EBITDA(1)(2) (1) 27
Changes in depreciation and amortization(1)(2) 5 (2)
Other 11 22
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266 751
Net favourable income tax-related adjustments
in 2009 (see Section 5.2) 14 95
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Net income in 2009 280 846
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(1) For the purposes of this presentation, the 2009 blended statutory tax
rate was used.
(2) Excluding investment tax credits that are including in tax-related
adjustments.
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Liquidity and capital resources highlights, including a comparison of
results for the third quarter and first nine months of 2009, or measures as at
September 30, 2009, to those one year earlier:
- At September 30, 2009, TELUS had unutilized credit facilities of
$1.6 billion, as well as additional unutilized availability under its
accounts receivable securitization program, consistent with its
objective of generally maintaining more than $1 billion of unutilized
liquidity.
- Net debt to EBITDA (excluding restructuring costs) at September 30,
2009 was 1.9 times, within the Company's long-term target policy
range of 1.5 to 2.0 times.
- The dividend payout ratio, based on the annualized third quarter
dividend and earnings for the twelve-month period ended September 30,
2009 (excluding favourable income tax-related adjustments and minimal
impact from a net-cash settlement feature), was 60%, while the ratio
based on actual earnings for the same period was 53%. The Company's
prospective guideline is 45% to 55% of sustainable net earnings.
- Cash provided by operating activities decreased by $171 million in
the third quarter of 2009, and increased by $208 million in the first
nine months of 2009, when compared to the same periods in 2008.
Changes were primarily due to comparative changes in proceeds from
securitized receivables and commencement of significant income tax
payments in 2009.
- Cash used by investing activities decreased by $768 million and
$1,175 million, respectively, in the third quarter and first nine
months of 2009, when compared to the same periods in 2008. The
decreases resulted mainly from payment of $882 million for AWS
spectrum licences in the third quarter of 2008, partly offset by
increased capital investments for wireless and wireline broadband
infrastructure to enhance the Company's competitive position and
support long-term growth. In addition, the Company acquired Black's
Photo Corporation for $28 million cash ($26 million net of acquired
cash) in the third quarter of 2009. The decrease for the nine month
period also resulted from the January 2008 acquisition of Emergis for
approximately $696 million net of acquired cash.
- Cash used by financing activities was $221 million and $635 million,
respectively, in the third quarter and first nine months of 2009, to
make dividend payments and reduce debt. The Company reduced amounts
drawn on the 2012 credit facility and reduced outstanding commercial
paper with proceeds from the May debt issue and cash-on-hand. In
comparison, during the third quarter and first nine months of 2008,
net cash provided by financing activities was $358 million and
$734 million, respectively, used for corporate purposes including the
third quarter AWS spectrum auction and the January acquisition of
Emergis.
- Free cash flow increased by $748 million and $235 million,
respectively, in the third quarter and first nine months of 2009 when
compared to the same periods in 2008. The increase resulted mainly
from lower total capital expenditures due to the payment for AWS
spectrum last year (see cash used by investing activities above) and
higher interest received from income tax-related settlements, partly
offset by higher income tax payments and lower EBITDA adjusted for
defined benefit plan contributions, share-based compensation payments
and restructuring payments.
2. Core business and strategy The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis. TELUS' core business and strategy were described in its 2008 Management's discussion and analysis. Activities in the third quarter of 2009 that support the Company's six strategic imperatives include the following: Building national capabilities across data, IP, voice and wireless
A key focus for TELUS in 2009 is its investment in broadband networks and services to enhance its competitive position and support future growth opportunities. TELUS expects to launch its new advanced wireless network in
The Company expanded coverage of IP-based TELUS TV to several communities in Alberta during the third quarter and expects more communities to be added in B.C. and Alberta during the fourth quarter. In Eastern
In September, the Company expanded and complemented its national distribution capabilities for wireless products through the acquisition of Black's Photo Corporation (see the strategic imperative Partnering, below). TELUS expects to add wireless product capabilities to the stores in Focusing relentlessly on the growth markets of data, IP and wireless
The Company announced that it would begin to offer the Apple iPhone 3G and 3GS in
TELUS continues to incur upfront costs in 2009 to implement services for several large enterprise and public sector customers, for which revenues are expected to be increasingly realized in 2010. This includes a seven-to-ten year contract worth up to Partnering, acquiring and divesting to accelerate the implementation of TELUS' strategy and focus TELUS' resources on core business
On
In the third quarter of 2009, Black's contributed approximately Investing in internal capabilities to build a high-performance culture and efficient operations
The Company increased its focus on its ongoing operating efficiency program beginning in the third quarter of 2008, accelerating into 2009. Restructuring costs were The Company continues to implement an array of initiatives that are expected to improve efficiency and reduce costs, including:
- rationalizing external supplier spending;
- simplifying processes and decommissioning uneconomic products;
- reducing staffing levels, freezing management compensation increases
and containing benefit costs;
- leveraging business process outsourcing and off-shoring; and
- reducing expenses operation-wide.
TELUS' full-time equivalent (FTE) employees increased by approximately 450 during the third quarter of 2009, as 700 FTE employees (more than 1,000 team members) from Black's Photo joined TELUS in September. Since 3. Key performance drivers This section is qualified by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis. Management sets corporate priorities each year to advance TELUS' strategy and focus on the near-term opportunities and challenges to create value for shareholders.
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Corporate priorities for 2009
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Execute on TELUS' broadband strategy, leveraging investments in leading
wireline and wireless networks to deliver winning solutions for customers
Increase the efficiency of operations to improve TELUS' cost structure
and economic performance
Outpace the competition and earn the patronage of clients through an
engaged TELUS team.
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4. Capabilities The discussion in this section is qualified by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis. 4.1 Principal markets addressed and competition The principal markets addressed by the Company and its competition are described in Section 4.1 of TELUS' 2008 Management's discussion and analysis. 4.2 Operational resources Operational resources are described in Section 4.2 of TELUS' 2008 Management's discussion and analysis. The following is an update to the annual disclosure. Systems and processes
The provinces of British Columbia and Ontario announced that they planned to harmonize their provincial sales tax regimes with the federal goods and services tax regime, effective 4.3 Liquidity and capital resources Capital structure financial policies The Company's objectives when managing capital are: (i) to maintain a flexible capital structure that optimizes the cost of capital at acceptable risk; and (ii) to manage capital in a manner that balances the interests of equity and debt holders. In the management and definition of capital, the Company includes shareholders' equity (excluding accumulated other comprehensive income), long-term debt (including any associated hedging assets or liabilities, net of amounts recognized in accumulated other comprehensive income), cash and temporary investments and securitized accounts receivable. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, issue new shares from treasury, purchase shares for cancellation pursuant to normal course issuer bids, issue new debt, issue new debt to replace existing debt with different characteristics and/or increase or decrease the amount of sales of trade accounts receivable to an arm's-length securitization trust. The Company monitors capital utilizing a number of measures, including: net debt to EBITDA - excluding restructuring costs; and dividend payout ratio of sustainable net earnings. For further discussion, see Section 7.4 Liquidity and capital resource measures.
Reporting back on TELUS' financing and capital structure management
plan for 2009
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Repurchase TELUS Common Shares and TELUS Non-Voting Shares under the
normal course issuer bid (NCIB)
No shares were repurchased in the first nine months of 2009. The program
remains available until December 22, 2009, to repurchase up to
eight million shares.
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Pay dividends
The dividend declared for the third quarter of 2009 (paid October 1,
2009) was 47.5 cents per share as compared to 45 cents per share in the
same period in 2008, or an increase of 5.6%. A dividend of 47.5 cents
per share was declared for the fourth quarter, payable January 4, 2010 to
shareholders of record on December 11, 2009, unchanged from the dividend
declared in the fourth quarter of 2008.
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Use proceeds from securitized receivables, bank facilities, commercial
paper and dividend re-investment, as needed, to supplement free cash flow
and meet other cash requirements
In May 2009, TELUS extended the termination date for its accounts
receivable securitization program to 2012. Proceeds from securitized
accounts receivable were $400 million at September 30 and June 30, 2009,
up from $300 million on March 31, 2009 and December 31, 2008.
The Company used increased proceeds from securitized receivables and
proceeds received from the $700 million May 2009 Note issue to reduce
amounts drawn against its 2012 credit facility to $nil from $300 million
at March 31, 2009, and to reduce issued commercial paper to $534 million
at September 30, 2009 from $1,188 million at March 31, 2009. Since
December 31, 2008, amounts drawn against the 2012 credit facility were
reduced by $980 million, while issued commercial paper increased by
$102 million.
The Company has announced that effective with the dividend to be paid
January 4, 2010, shares will be issued from treasury at a discount of 3%
in respect of the dividend re-investment program. These shares were
previously purchased in the market with no discount.
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Maintain compliance with financial objectives, policies and guidelines
Maintain a minimum $1 billion in unutilized liquidity - The Company had
unutilized credit facilities of $1.6 billion at September 30, 2009, as
well as additional availability under its accounts receivable
securitization program.
Net debt to EBITDA excluding restructuring costs ratio of 1.5 to 2.0
times - Actual result of 1.9 times at September 30, 2009.
Dividend payout ratio of 45 to 55% of sustainable net earnings on a
prospective basis - The historical ratio was 60% when calculated based on
the annualized third quarter dividend and 12-month trailing earnings,
excluding favourable tax-related adjustments and minimal impacts from a
net-cash settlement feature. The ratio was 53% based on actual earnings
for the 12-month period ended September 30, 2009.
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Maintain position of fully hedging foreign exchange exposure for
indebtedness
Maintained for the 8.00% U.S. dollar Notes due 2011, the only foreign
currency-denominated debt issue.
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Give consideration to issuing long-term public debt or establishing new
term credit facilities in 2009 to refinance short-term financing sources
or upcoming debt maturities
In May 2009, the Company successfully closed an offering of 4.95% Notes
due May 2014, for aggregate gross proceeds of $700 million. The net
proceeds of the offering were used for corporate purposes, including
repayment of amounts outstanding under the 2012 credit facility and
outstanding commercial paper. In June, the Company extended the term of
its 365-day revolving credit facility to December 31, 2010, with the
available amount becoming $300 million. In September 2009, the Company
renewed its shelf prospectus pursuant to which it can offer up to
$4 billion of debt and equity.
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Preserve access to the capital markets at a reasonable cost by
maintaining investment grade credit ratings and targeting improved credit
ratings in the range of BBB+ to A-, or the equivalent, in the future
At November 6, 2009, investment grade credit ratings from the four rating
agencies that cover TELUS were in the desired range. TELUS' May 2009 debt
issue was assigned credit ratings of: A(low) by DBRS Ltd., BBB+ by
Standard and Poor's, Baa1 by Moody's Investors Service, and BBB+ by Fitch
Ratings, all with a stable trend or outlook and consistent with the
agencies' existing ratings of TELUS debt securities.
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The following table reflects debt maturities after the May 2009 debt issue
and subsequent reductions in utilized bank facilities and issued commercial
paper.
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Debt maturities as at September 30, 2009
Long-term debt maturities(1), principal
-----------------------------------------
All except Interest and like
($ millions) capital leases Capital leases carrying costs(2)
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2009 fourth quarter - - 197
2010 80 2 461
2011 2,950 - 333
2012 834 - 197
2013 300 - 182
Thereafter 2,649 - 767
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Total 6,813 2 2,137
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(1) Where applicable, principal-related maturities reflect foreign
currency exchange rates at September 30, 2009.
(2) Interest and like carrying costs for commercial paper have been
calculated based upon rates in effect as at September 30, 2009.
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4.4 Internal control over financial reporting Changes in internal control over financial reporting There were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 5. Results from operations The discussion in this section is qualified by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis. 5.1 General The Company has two reportable segments: wireline and wireless. Segmentation is based on similarities in technology, the technical expertise required to deliver the products and services, the distribution channels used and regulatory treatment. Intersegment sales are recorded at the exchange value. Segmented information is regularly reported to the Company's Chief Executive Officer (the chief operating decision-maker). Segmented disclosure is reported in Note 5 of the interim Consolidated financial statements. 5.2 Quarterly results summary
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($ in millions, except per 2009 2009 2009 2008
share amounts) Q3 Q2 Q1 Q4
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Operating revenues 2,411 2,377 2,375 2,454
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Operations expenses 1,456 1,451 1,441 1,479
Restructuring costs 32 53 28 38
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EBITDA(1) 923 873 906 937
Depreciation 330 330 334 351
Amortization of intangible assets 100 94 93 84
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Operating income 493 449 479 502
Other expense 6 11 5 11
Financing costs 101 106 95 118
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Income before income taxes 386 332 379 373
Income taxes (recovery) 106 88 57 88
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Net income(2) 280 244 322 285
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Net income attributable to Common
Shares and Non-Voting Shares(2) 279 243 321 285
Income per Common Share and
Non-Voting Share - basic 0.88 0.77 1.01 0.90
- diluted 0.87 0.77 1.01 0.89
Dividends declared per Common
Share and Non-Voting Share 0.475 0.475 0.475 0.475
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($ in millions, except per 2008 2008 2008 2007
share amounts) Q3 Q2 Q1 Q4
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Operating revenues 2,450 2,399 2,350 2,330
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Operations expenses 1,465 1,477 1,394 1,371
Restructuring costs 10 4 7 6
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EBITDA(1) 975 918 949 953
Depreciation 344 343 346 386
Amortization of intangible assets 92 77 76 68
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Operating income 539 498 527 499
Other expense 6 2 17 6
Financing costs 122 114 109 109
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Income before income taxes 411 382 401 384
Income taxes (recovery) 125 114 109 (19)
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Net income(2) 286 268 292 403
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Net income attributable to Common
Shares and Non-Voting Shares(2) 285 267 291 400
Income per Common Share and
Non-Voting Share - basic 0.89 0.83 0.90 1.23
- diluted 0.89 0.83 0.90 1.22
Dividends declared per Common
Share and Non-Voting Share 0.45 0.45 0.45 0.45
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(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) Net income has been adjusted for the periods prior to 2009 Q1, and no
longer includes a deduction for non-controlling interests. As
described further in Section 8.2.4 of Accounting policy developments,
the change results from the January 1, 2009 adoption of the new
recommendations for business combinations (Canadian Institute of
Chartered Accountants (CICA) Handbook Section 1582), consolidations
(CICA Handbook Section 1601) and non-controlling interests (CICA
Handbook Section 1602). Net income attributable to Common Shares and
Non-Voting Shares is equivalent to Net income previously reported in
the 2008 and 2007 periods shown above.
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Trends The recent economic downturn has heightened consumer and business customers' focus on value and increased expectations for better pricing or packaging of services. The consolidated revenue trend reflects lower year-over-year growth in wireless network revenues. Wireless ARPU for the third quarter of 2009 decreased 7% year-over-year, as strong growth in data ARPU was more than offset by declining voice ARPU. The voice ARPU decline includes pricing competition, greater spending restraint and price optimization on the part of customers, increased use of in-bucket or included-minute service plans, continued decline in Mike service ARPU, lower roaming revenues and to a lesser extent, the growing base of Koodo postpaid basic subscribers. The expected entry of a number of new wireless competitors in late 2009 or in 2010 may disrupt usual seasonal patterns for wireless subscriber additions in the future. Historically, there has been significant fourth quarter seasonality with respect to higher wireless subscriber additions, related acquisition costs and equipment sales, resulting in lower fourth quarter wireless EBITDA. The third quarter has become more significant in terms of subscriber additions in recent years as a result of back-to-school offers, while subscriber additions have typically been lowest in the first quarter. In addition, wireless ARPU has generally risen sequentially in the second and third quarters, and declined sequentially in the fourth and first quarters. The Company experienced a significant decline in wireless ARPU in the fourth quarter of 2008, but ARPU has been stable over time since then. Consolidated revenues also continue to reflect growth in wireline data revenue, which includes new revenues from the acquisition of Emergis beginning in mid-January 2008; however, data revenue growth has moderated in 2009 from strong price competition and was more than offset by declining wireline voice local and long distance revenues. The decline in wireline voice revenues is due to substitution to wireless and Internet services, as well as competition from VoIP service providers, resellers and facilities-based competitors. The number of residential network access line (NAL) losses has moderated in the four most recent quarters because of more effective winback efforts and synergies from bundling services, while TELUS' main cable-TV competitor's digital telephone geographic coverage expansion slowed. The Company has observed a larger number of disconnections and fewer installations of business NALs attributed partly to economic conditions and partly to competition.
Consolidated Operations expenses include expenses from Emergis beginning in
The sequential decline in depreciation in the first quarter of 2009 was due to certain assets becoming fully depreciated in 2008. Depreciation expenses were relatively high in the fourth quarter of 2007 as a result of reductions to estimated useful service lives of certain asset classes. As a result of the expected launch of the new HSPA wireless network in
Amortization of intangible assets in the fourth quarter of 2008 is net of investment tax credits of Financing costs shown in the preceding table are net of varying amounts of interest income, including interest from the settlement of prior years' income tax-related matters, particularly in the first, second and third quarters of 2009. Interest expenses for the second and third quarters of 2009 have decreased slightly, when compared to the same periods in 2008, as lower effective interest rates offset higher average debt balances. Interest expenses in the third and fourth quarters of 2008 had increased from preceding quarters due to a higher debt balance that helped fund the third quarter 2008 payment for advanced wireless services (AWS) spectrum licences. The trends in Net income and earnings per share (EPS) reflect the items noted above, as well as adjustments arising from legislated income tax changes, settlements and tax reassessments for prior years, including any related interest on reassessments. EPS has also been positively impacted by decreased shares outstanding from share repurchases prior to 2009.
-------------------------------------------------------------------------
Income tax-related adjustments 2009 2009 2009 2008
($ in millions, except EPS amounts) Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Approximate Net income impact 14 19 62 32
Approximate EPS impact 0.04 0.06 0.20 0.10
Approximate basic EPS excluding
tax-related impacts 0.84 0.71 0.81 0.80
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income tax-related adjustments 2008 2008 2008 2007
($ in millions, except EPS amounts) Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Approximate Net income impact - - 17 143
Approximate EPS impact - - 0.05 0.44
Approximate basic EPS excluding
tax-related impacts 0.89 0.83 0.85 0.79
-------------------------------------------------------------------------
5.3 Consolidated results from operations
-------------------------------------------------------------------------
($ in millions, except Quarters ended Nine-month periods
EBITDA margin) September 30 ended Sept. 30
2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Operating revenues 2,411 2,450 (1.6)% 7,163 7,199 (0.5)%
Operations
expenses 1,456 1,465 (0.6)% 4,348 4,336 0.3 %
Restructuring costs 32 10 n.m. 113 21 n.m.
-------------------------------------------------------------------------
EBITDA(1) 923 975 (5.3)% 2,702 2,842 (4.9)%
Depreciation 330 344 (4.1)% 994 1,033 (3.8)%
Amortization of
intangible assets 100 92 8.7 % 287 245 17.1 %
-------------------------------------------------------------------------
Operating income 493 539 (8.5)% 1,421 1,564 (9.1)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA margin (%)(2) 38.3 39.8 (1.5)pts 37.7 39.5 (1.8)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) EBITDA divided by Operating revenues.
-------------------------------------------------------------------------
The following discussion is for the consolidated results of TELUS. Segmented discussion is provided in Section 5.4 Wireline segment results, Section 5.5 Wireless segment results and Section 7.2 Cash used by investing activities - capital expenditures. Operating revenues
Consolidated Operating revenues decreased by Operations expenses
Operations expenses decreased by
-------------------------------------------------------------------------
Quarters ended Nine-month periods
Operations expenses September 30 ended Sept. 30
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Salaries, benefits
except DBPP,(1) and
employee-related
expenses 576 646 (10.8)% 1,770 1,942 (8.9)%
DBPP expense (recovery) 4 (25) n.m. 13 (75) n.m.
Other operations
expenses 876 844 3.8 % 2,565 2,469 3.9 %
-------------------------------------------------------------------------
1,456 1,465 (0.6)% 4,348 4,336 0.3 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) DBPP - defined benefit pension plans.
-------------------------------------------------------------------------
In respect of changes in the third quarter and first nine months of 2009,
as compared to the same periods in 2008:
- Salaries, benefits (except DBPP benefits) and employee-related
expenses decreased by $70 million and $172 million, respectively.
These decreases resulted mainly from lower performance bonus expenses
arising from lower than originally planned operating performance, as
well as a decrease in full-time equivalent (FTE) employees in 2009,
while management base salaries were frozen at 2008 levels.
- TELUS' defined benefit pension plans expense increased by $29 million
and $88 million, respectively. The increase was mainly due to the
decline in value of defined benefit pension plans assets in 2008.
- Other operations expenses increased by $32 million and $96 million,
respectively, in the third quarter and first nine months of 2009 when
compared to the same periods in 2008. The increases included higher
wireless subscriber retention costs, higher wireless network costs
from increasing smartphone use, and a higher wireless bad debt
expense for the nine-month period, as well as increased wireline
TELUS TV programming and customer acquisition costs, and costs to
implement services for new wireline enterprise customers. These
increases were partly offset by lower wireless roaming and marketing
costs and lower wireline advertising and promotions costs.
Restructuring costs
Restructuring costs were EBITDA
Consolidated EBITDA decreased by approximately five per cent, or Depreciation; Amortization of intangible assets
Combined depreciation and amortization expenses decreased by
- Depreciation decreased by $14 million and $39 million, respectively.
This reflects accelerated depreciation during 2008 from a reduction
in estimated useful service lives for certain digital switching
assets, as well as certain digital cell sites becoming fully
depreciated. This was slightly offset by growth in capital assets
over the past 12 months.
- Amortization increased by $8 million and $42 million, respectively.
The increases include $3 million and $18 million, respectively,
arising from the July 2008 implementation of the converged wireline
billing and client care platform in B.C. The balance is mainly due to
increases in other administrative and network application software.
Operating income
Operating income decreased by Other income statement items
-------------------------------------------------------------------------
Quarters ended Nine-month periods
Other expense, net September 30 ended Sept. 30
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
6 6 - % 22 25 (12.0)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other expense, net includes accounts receivable securitization expense, income (losses) or impairments in equity or portfolio investments, gains and losses on disposal of real estate, and charitable donations.
Accounts receivable securitization expenses were
-------------------------------------------------------------------------
Quarters ended Nine-month periods
Financing costs September 30 ended Sept. 30
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Interest on long-
term debt, short-
term obligations
and other 121 124 (2.4)% 352 353 (0.3)%
Foreign exchange
(gains) losses - (1) n.m. (3) (1) n.m.
Capitalized interest
during construction - - - % - (3) n.m.
Interest income (20) (1) n.m. (47) (4) n.m.
-------------------------------------------------------------------------
101 122 (17.2)% 302 345 (12.5)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expenses on long-term and short-term debt and other decreased by
-------------------------------------------------------------------------
Income taxes Quarters ended Nine-month periods
($ millions, except September 30 ended Sept. 30
tax rates) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Basic blended federal
and provincial tax
at statutory income
tax rates 117 128 (8.6)% 332 370 (10.3)%
Tax rate differential
on, and consequential
adjustments from,
reassessments of
prior years' tax
issues - - - (48) (1) -
Revaluation of future
income tax liability
to reflect future
statutory income
tax rates (10) (6) - (36) (32) -
Share option award
compensation - 1 - 3 4 -
Other (1) 2 - - 7 -
-------------------------------------------------------------------------
106 125 (15.2)% 251 348 (27.9)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Blended federal and
provincial statutory
tax rates (%) 30.3 31.2 (0.9)pts 30.3 31.0 (0.7)pts
Effective tax
rates (%) 27.5 30.4 (2.9)pts 22.9 29.2 (6.3)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Blended statutory income taxes decreased in the third quarter and first nine months of 2009 due to lower income before taxes and lower blended statutory tax rates. The effective tax rates in both years were lower than the statutory tax rates due to the tax rate differential and consequential adjustments from reassessments of prior years' tax issues, revaluations of future income tax liabilities resulting from reductions to future B.C. provincial income tax rates, as well as future tax rates being applied to temporary differences. Changes to future B.C. income tax rates were enacted in the first quarter of 2009, reducing rates beginning Comprehensive income Currently, the concept of comprehensive income for purposes of Canadian GAAP, in the Company's specific instance, is primarily to include changes in shareholders' equity arising from unrealized changes in the fair values of financial instruments. 5.4 Wireline segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Nine-month periods
wireline segment September 30 ended Sept. 30
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Voice local 466 494 (5.7)% 1,406 1,493 (5.8)%
Voice long distance 148 173 (14.5)% 477 527 (9.5)%
Data 524 516 1.6 % 1,592 1,544 3.1 %
Other 67 65 3.1 % 206 191 7.9 %
-------------------------------------------------------------------------
External operating
revenue 1,205 1,248 (3.4)% 3,681 3,755 (2.0)%
Intersegment revenue 34 33 3.0 % 98 96 2.1 %
-------------------------------------------------------------------------
Total operating
revenues 1,239 1,281 (3.3)% 3,779 3,851 (1.9)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Wireline revenues decreased $42 million and $72 million, respectively, in
the third quarter and first nine months of 2009 when compared to the same
periods in 2008.
- Voice local revenue decreased by $28 million and $87 million,
respectively, in the third quarter and first nine months of 2009,
when compared to the same periods in 2008. Decreases were mainly due
to lower revenues from basic access and optional enhanced services
caused by competition for residential subscribers, the consequent
decline in local residential access lines and matching of competitive
offers, as well as decreases in business lines from economic impacts.
-------------------------------------------------------------------------
Network access lines (NALs) As at September 30
(000s) 2009 2008 Change
-------------------------------------------------------------------------
Residential 2,279 2,444 (6.8)%
Business 1,821 1,838 (0.9)%
-------------------------------------------------------------------------
Total 4,100 4,282 (4.3)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net (losses) additions Quarters ended Nine-month periods
in NALs September 30 ended Sept. 30
(000s) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Residential (41) (53) 22.6 % (123) (152) 19.1 %
Business (3) 10 n.m. (23) 30 n.m.
-------------------------------------------------------------------------
Total (44) (43) (2.3)% (146) (122) (19.7)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There were fewer residential NAL losses in the third quarter and first nine months of 2009 when compared to the same periods in 2008, because of more effective winback efforts and synergy with bundled services including TELUS TV, as well as slowing of a cable-TV competitor's geographic expansion of digital telephone service. The decrease in business NALs during the third quarter and first nine months of 2009 reflects competitive inroads in the small and medium business market by cable-TV companies, as well as economic impacts leading to a larger number of disconnections and fewer installations, particularly in B.C. and Alberta. Business NALs increased in Ontario and
- Voice long distance revenues decreased by $25 million and
$50 million, respectively, in the third quarter and first nine months
of 2009, when compared to the same periods in 2008. The decreases
were due mainly to lower average per-minute rates resulting from
ongoing industry-wide price competition, a lower base of residential
subscribers, and lower billed retail minute volumes.
- Wireline data revenues increased by $8 million and $48 million,
respectively, in the third quarter and first nine months of 2009,
when compared to the same periods in 2008. The increases were
primarily due to (i) higher managed workplace revenues from growth in
outsourcing services for business customers; (ii) subscriber growth
in digital entertainment services; and (iii) increased Internet,
enhanced data and hosting services, partly offset by lower average
pricing from competitive pressures. These increases were partly
offset by lower broadcast and videoconferencing revenues and lower
data equipment sales, including the effect of a larger equipment sale
in the first quarter of 2008.
-------------------------------------------------------------------------
Wireline Internet and
TELUS TV subscribers As at September 30
(000s) 2009 2008 Change
-------------------------------------------------------------------------
High-speed Internet subscribers(1) 1,117 1,077 3.7 %
Dial-up Internet subscribers 96 134 (28.4)%
-------------------------------------------------------------------------
Total Internet subscribers(1) 1,213 1,211 0.2 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS TV subscribers(2) 137 63 117.5 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net additions (losses)
of wireline Internet
and TELUS TV Quarters ended Nine-month periods
subscribers September 30 ended Sept. 30
(000s) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
High-speed Internet
subscriber net
additions 9 13 (30.8)% 26 57 (54.4)%
Dial-up Internet
subscriber net losses (9) (8) (12.5)% (28) (21) (33.3)%
-------------------------------------------------------------------------
Total Internet
subscriber net
additions (losses) - 5 (100.0)% (2) 36 n.m.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS TV subscriber
net additions(2) 22 12 83.3 % 59 28 110.7 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Opening balances for high-speed Internet subscribers and total
Internet subscribers for the second quarter of 2009, were reduced by
five thousand to reflect prior period reporting adjustments.
(2) Includes TELUS Satellite TV(TM) subscribers beginning in 2009.
-------------------------------------------------------------------------
High-speed Internet subscriber net additions were lower in the third quarter and first nine months of 2009 when compared to the same periods in 2008, due to a maturing market, as well as a cable-TV competitors' expanded product offerings, promotional pricing and winback offers. Growth in subscriptions to digital TELUS TV service continued at a strong pace, as the Company has improved installation capability, rolled out high-definition TV (HDTV) channels and personal video recorders, increased geographic coverage, introduced satellite-based TELUS TV service that complements the IP-based service, and had success with bundled offers.
- Other revenue increased by $2 million and $15 million, respectively,
in the third quarter and first nine months of 2009, when compared to
the same periods in 2008, primarily due to higher voice equipment
sales.
- Intersegment revenue represents services provided by the wireline
segment to the wireless segment. These revenues are eliminated upon
consolidation together with the associated expense in the wireless
segment.
-------------------------------------------------------------------------
Operating expenses - Quarters ended Nine-month periods
wireline segment September 30 ended Sept. 30
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Salaries, benefits
except DBPP(1)
expense (recovery),
and employee-
related costs 435 493 (11.8)% 1,342 1,478 (9.2)%
DBPP expense (recovery) 4 (23) n.m. 14 (68) n.m.
Other operations
expenses 365 353 3.4 % 1,115 1,093 2.0 %
-------------------------------------------------------------------------
Operations expenses 804 823 (2.3)% 2,471 2,503 (1.3)%
Restructuring costs 29 9 n.m. 104 19 n.m.
-------------------------------------------------------------------------
Total operating
expenses 833 832 0.1 % 2,575 2,522 2.1 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) DBPP - defined benefit pension plans.
-------------------------------------------------------------------------
Total operating expenses increased by $1 million and $53 million,
respectively, in the third quarter and first nine months of 2009 when compared
to the same periods in 2008.
- Salaries, benefits and employee-related costs decreased by
$58 million and $136 million, respectively. The decreases resulted
from a significant reduction in performance bonus expenses from lower
than originally planned operating performance for 2009, fewer FTE
staff and efficiency initiatives including those targeting
discretionary employee-related expenses such as travel.
- The defined benefits pension plans expense increased by $27 million
and $82 million, respectively, mainly due to the decline in value of
these plans' assets in 2008.
- Other operations expenses increased by $12 million and $22 million,
respectively, due to TELUS TV programming and customer acquisition
costs related to increased subscriber loading, and access facility
costs associated with implementing new contracts, partly offset by
lower advertising and promotional expenses.
- Restructuring costs increased by $20 million and $85 million,
respectively. The increases reflect an array of initiatives under the
Company's operating efficiency program.
-------------------------------------------------------------------------
Wireline segment - Quarters ended Nine-month periods
EBITDA September 30 ended Sept. 30
2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 406 449 (9.6)% 1,204 1,329 (9.4)%
EBITDA margin (%) 32.8 35.1 (2.3)pts 31.9 34.5 (2.6)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Wireline segment EBITDA decreased by 5.5 Wireless segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Nine-month periods
wireless segment September 30 ended Sept. 30
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Network revenue 1,126 1,133 (0.6)% 3,289 3,247 1.3 %
Equipment and other
revenue 80 69 15.9 % 193 197 (2.0)%
-------------------------------------------------------------------------
External operating
revenue 1,206 1,202 0.3 % 3,482 3,444 1.1 %
Intersegment revenue 7 7 - % 21 21 - %
-------------------------------------------------------------------------
Total operating
revenues 1,213 1,209 0.3 % 3,503 3,465 1.1 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Wireless segment revenues increased by $4 million and $38 million,
respectively, in the third quarter and first nine months of 2009 when compared
to the same periods in 2008. The increases were due to the following:
- Network revenue decreased by $7 million in the third quarter of 2009
and increased by $42 million in the first nine months of 2009, when
compared to the same periods in 2008. Data revenue growth of
$48 million or 27% in the third quarter was more than offset by lower
voice revenues of $55 million or 6%. Wireless data revenues in the
third quarter of 2009 represent 20% of network revenue as compared to
16% in the same period in 2008. Data revenue growth of $167 million
or 34% in the first nine months was partially offset by lower voice
revenues of $125 million or 5%. This growth in data revenues
continues to reflect strength in text messaging and smartphone
service revenues driven by increased usage and features, and
increased penetration of smartphones, higher-speed EVDO-capable
handsets, and mobile Internet keys, partially offset by lower inbound
data roaming rates.
Blended ARPU of $59.45 decreased by $4.69 or 7% in the third quarter
of 2009 when compared to the same period in 2008, but was up from
$58.61 in the second quarter of 2009. Blended ARPU of $58.82 for the
first nine months of 2009 decreased $4.12 or 6.5% when compared to
the same period in 2008. Third quarter data ARPU of $12.05 increased
by $1.86 or 18% when compared to the same period in 2008, while voice
ARPU of $47.40 decreased $6.55 or 12%. Data ARPU for the first nine
months of 2009 was $11.63, an increase of $2.26 or 24%, while voice
ARPU of $47.19 decreased $6.38 or 12%. Declining voice ARPU is a
continuing trend and included a combination of factors: declining
minutes of use by both consumers and businesses, increased use of
included-minute rate plans as subscribers shift usage patterns and
move to optimize price plans, lower Mike service ARPU, decreased
inbound roaming rates and increased penetration of the lower ARPU
Koodo brand, partly offset by higher service feature revenues.
Postpaid subscriber gross additions represented approximately 69% of
total gross additions for the third quarter of 2009 and 64% of total
gross additions for the first nine months of 2009. This compares to
67% and 64%, respectively, in the same periods in 2008. This reflects
an improvement in mix of gross and net subscribers for the third
quarter of 2009.
Net additions for the third quarter and first nine months of 2009
were down 29% and 35%, respectively, when the prior year comparatives
are normalized for deactivation of 28,000 subscribers on
September 15, 2008 from the turndown of TELUS' analogue network. Net
additions were impacted by higher overall churn and market
competition as compared to normalized net additions in 2008. Postpaid
subscriber net additions represented 105% and 95%, respectively, of
total net additions for the third quarter and first nine months of
2009, as compared to 90% and 88%, respectively, in the same periods
of 2008.
The blended churn rate increase year-over-year reflects higher
involuntary churn, lower prior year churn in the Koodo brand due to
its initial launch in March 2008, and continued competitive marketing
intensity within both the postpaid and prepaid market segments. The
blended churn rate for the third quarter of 2009 increased slightly
to 1.55% when compared to 1.52% in the third quarter of 2008
(excluding the effect of deactivating analogue subscribers in
September 2008), but was unchanged from the second quarter of 2009.
The blended churn rate for the first nine months of 2009 was 1.57%,
up from 1.49% in the same period in 2008 (excluding deactivation of
analogue subscribers in September 2008).
-------------------------------------------------------------------------
Wireless operating indicators
-------------------------------------------------------------------------
As at September 30
2009 2008 Change
-------------------------------------------------------------------------
Subscribers (000s)
Postpaid 5,192 4,803 8.1 %
Prepaid 1,221 1,178 3.7 %
-------------------------------------------------------------------------
Total 6,413 5,981 7.2 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proportion of subscriber base that is
postpaid (%) 81 80 1 pt
Digital POPs(1) covered (millions)(2) 32.7 32.4 0.9 %
Quarters ended Nine-month periods
September 30 ended Sept. 30
2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Subscriber gross
additions (000s)
Postpaid 291 300 (3.0)% 753 783 (3.8)%
Prepaid 129 147 (12.2)% 415 431 (3.7)%
-------------------------------------------------------------------------
Total 420 447 (6.0)% 1,168 1,214 (3.8)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Subscriber net
additions (000s)
Postpaid 131 133 (1.5)% 270 362 (25.4)%
Prepaid (6) 16 n.m. 14 51 (72.5)%
-------------------------------------------------------------------------
Total(3) 125 149 (16.1)% 284 413 (31.2)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total subscriber
net additions -
adjusted(3) 125 176 (29.0)% 284 440 (35.4)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ARPU(4) ($) 59.45 64.14 (7.3)% 58.82 62.94 (6.5)%
Churn, per
month(4) (%) 1.55 1.68 (0.13)pts 1.57 1.55 0.02 pts
Adjusted churn,
per month (%)(3) 1.55 1.52 0.03 pts 1.57 1.49 0.08 pts
Average monthly
minutes of use per
subscriber (MOU) 397 416 (4.6)% 394 410 (3.9)%
COA (5) per gross
subscriber
addition(4)(6) ($) 320 358 (10.6)% 322 344 (6.4)%
Retention spend to
network
revenue(4)(6) (%) 10.3 8.7 1.6 pts 10.5 8.7 1.8 pts
EBITDA excluding COA
($ millions) 652 686 (5.0)% 1,874 1,931 (3.0)%
EBITDA to network
revenue (%) 45.9 46.4 (0.5)pts 45.5 46.6 (1.1)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
pt(s) - percentage point(s)
(1) POPs is an abbreviation for population. A POP refers to one person
living in a population area that is wholly or substantially included
in the coverage area.
(2) Including roaming/resale agreements, principally with Bell Canada.
(3) Net Additions and blended churn for the third quarter of 2008 include
the impact of TELUS' analogue network turndown on September 15, 2008.
Adjusted subscriber net additions and churn exclude the impact of
approximately 28,000 subscriber deactivations resulting from turning
down the analogue network.
(4) See Section 11.3 Definitions of key wireless 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.
(6) In the first quarter of 2009, the Company refined the measurement of
the costs of acquisition and retention in its operational systems to
align with changes in the business. Prior year comparative figures
have been restated on a consistent basis.
-------------------------------------------------------------------------
- Equipment sales, rental and service revenue increased by $11 million
or 16% in the third quarter of 2009 and decreased by $4 million or 2%
in the first nine months of 2009, when compared to the same periods
in 2008. The increase for the quarter was due to higher per-unit
revenues from an increasing smartphone mix and higher retention
volumes, partly offset by lower acquisition volumes, contributing to
lower activation and accessory revenues. This category also includes
results from Black's for the month of September.
- Intersegment revenues represent services provided by the wireless
segment to the wireline segment and are eliminated upon consolidation
along with the associated expense in the wireline segment.
-------------------------------------------------------------------------
Operating expenses - Quarters ended Nine-month periods
wireless segment September 30 ended Sept. 30
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Equipment sales
expenses 209 193 8.3 % 582 522 11.5 %
Network operating
expenses 161 155 3.9 % 465 445 4.5 %
Marketing expenses 106 122 (13.1)% 292 346 (15.6)%
General and
administration (G&A)
expenses
Salaries, benefits(1)
and employee-
related costs 142 151 (6.0)% 427 457 (6.6)%
Other G&A expenses 75 61 23.0 % 230 180 27.8 %
-------------------------------------------------------------------------
Operations expense 693 682 1.6 % 1,996 1,950 2.4 %
Restructuring costs 3 1 n.m. 9 2 n.m.
-------------------------------------------------------------------------
Total operating
expenses 696 683 1.9 % 2,005 1,952 2.7 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes defined benefit pension plans recoveries of $nil and
$1 million, respectively, for the third quarter and first nine months
of 2009, as compared to recoveries of $2 million and $7 million,
respectively, for the third quarter and first nine months of 2008.
-------------------------------------------------------------------------
Wireless segment total operating expenses increased by $13 million and $53
million, respectively, in the third quarter and first nine months of 2009 when
compared to the same periods in 2008. The increases were primarily due to the
growth in data services, inclusion of results from Black's for the month of
September, and higher bad debt expenses for the nine-month period.
- Equipment sales expenses increased by $16 million and $60 million,
respectively, in the third quarter and first nine months of 2009 as
compared with the same periods in 2008. The increases were due in
part to higher retention volumes and higher per-unit costs to support
migration of clients to smartphones, as well as higher inventory
valuation adjustments, partly offset by lower acquisition volumes.
Equipment expenses include results from Black's for the month of
September.
- Network operating expenses increased by $6 million and $20 million,
respectively, in the third quarter and first nine months of 2009 as
compared with the same periods in 2008. The increases in network
operating expenses supported growth in data revenues (27% for the
third quarter and 34% for the first nine months), relating to
increased usage, continued penetration of smartphones and mobile
Internet keys that drove increases in revenue share costs to third
parties and licensing costs to service providers, partly offset by
lower roaming costs from reduced rates.
- Marketing expenses decreased by $16 million and $54 million,
respectively, in the third quarter and first nine months of 2009, as
compared with the same periods in 2008, resulting from lower
advertising and promotions and lower commissions due to a change in
product mix and loading through lower variable cost channels. COA per
gross subscriber addition decreased by $38 and $22, respectively, in
the third quarter and first nine months of 2009 when compared to the
same periods in 2008. The decrease in COA reflects lower commissions
and lower per-unit subsidy costs, reflecting changes in promotional
pricing and higher Koodo product mix, partly offset by lower
activation revenues.
Retention costs as a percentage of network revenue increased to 10.3%
and 10.5% in the third quarter and first nine months of 2009 as
compared to 8.7% in the same periods in 2008. The increase in
retention costs was primarily related to continued focus on migration
of clients to smartphones.
- In G&A expenses, salaries, benefits and employee-related costs
decreased by $9 million and $30 million, respectively, in the third
quarter and first nine months of 2009, as compared to the same
periods in 2008, which reflects lower performance bonus accruals and
traction from competitive efficiency programs. Other G&A expenses
increased by $14 million and $50 million, respectively, including
higher external labour costs to support the increased subscriber
base, higher rent reflecting expansion of Koodo distribution channels
and the inclusion of expenses from Black's for the month of
September. Bad debt expense was unchanged in the quarter, but
increased by $17 million for the nine-month period.
- Restructuring costs included various initiatives under the Company's
competitive efficiency program.
-------------------------------------------------------------------------
Wireless segment - Quarters ended Nine-month periods
EBITDA September 30 ended Sept. 30
2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 517 526 (1.7)% 1,498 1,513 (1.0)%
EBITDA margin (%) 42.6 43.5 (0.9)pts 42.8 43.7 (0.9)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Wireless segment EBITDA decreased by 6. Changes in financial position
Changes in the Consolidated statements of financial position for the nine-month period ended
-------------------------------------------------------------------------
Financial
position
as at: Sept. 30, Dec. 31, Change Explanation
($ millions) 2009 2008 of the change
-------------------------------------------------------------------------
Current Assets
Cash and 34 4 30 n.m. See Section 7:
temporary Liquidity and capital
investments, resources
net
Accounts 781 966 (185) (19)% Reduced by $100
receivable million due to an
increase in proceeds
from securitized
accounts receivable,
as well as lower
receivables from
wireless dealers, and
a decrease in
wireless customer
accounts receivable
from a decrease in
postpaid ARPU.
Accounts receivable
turnover was 45 days
at September 30,
2009, up from 43 days
at June 30, 2009 and
down from 48 days at
December 31, 2008.
Income and 112 25 87 n.m. Reflects an increase
other taxes in accrued income and
receivable other taxes
receivable, and
instalments paid, net
of refunds received.
Inventories 192 333 (141) (42)% Mainly a decrease in
wireless handset
volumes, parts and
accessories, as well
as lower average
handset costs.
Prepaid expenses 200 176 24 14 % Primarily pre-payment
and other(1) of property taxes,
maintenance contracts
and wireless licence
fees, all net of
amortization.
Derivative assets - 10 (10) (100)% Fair value
adjustments to
foreign exchange
hedges. See current
Derivative
liabilities.
-------------------------------------------------------------------------
Current
Liabilities
Accounts 1,417 1,465 (48) (3)% Includes lower
payable and accrued employee
accrued benefits and
liabilities employee-related
costs, a decrease in
trade payables from
lower expenditures,
and lower accrued
liabilities partially
offset by a seasonal
increase in interest
payable and five
additional accrued
payroll days.
Income and other 14 163 (149) (91)% Reflects final income
taxes payable tax payments in 2009
for the 2008 tax
year.
Restructuring 84 51 33 65 % New obligations under
accounts current restructuring
payable and initiatives exceeded
accrued payments under
liabilities previous
restructuring
initiatives.
Dividends payable 151 151 - - % The dividend declared
for the third quarter
was paid October 1,
2009, and the
dividend declared for
the fourth quarter of
2008 was paid
January 2, 2009.
Advance billings 646 689 (43) (6)% Primarily a decrease
and customer in deferred revenue
deposits from lower wireless
handset volumes held
by external channels,
and lower wireline
customer deposits.
Current 82 4 78 n.m. Reflects the May 2010
maturities of maturity of
long-term debt $50 million TELUS
Communications Inc.
12% Series 1
debentures and the
July 2010 maturity of
$30 million TELUS
Communications Inc.
11.5% Series U First
Mortgage Bonds, net
of a small reduction
in capital leases.
Derivative 82 75 7 9 % Fair value
liabilities adjustments for share
options and
operational hedges,
offset by options
exercised or
forfeited.
Current portion 586 459 127 28 % Primarily changes in
of future TELUS Communications
income taxes Company and TELE-
MOBILE COMPANY
partnerships' income
that will be
allocated over the
next 12 months.
-------------------------------------------------------------------------
Working (1,743) (1,543) (200) (13)% The reduction in
capital(2) working capital
contributed to a
reduction in long-
term debt.
-------------------------------------------------------------------------
Capital 12,802 12,483 319 3 % See Capital
Assets, Net expenditures in
Section 7.2 Cash used
by investing
activities and
Depreciation and
Amortization in
Section 5.3
Consolidated results
from operations.
-------------------------------------------------------------------------
Other Assets
Other 1,556 1,418 138 10 % Primarily pension
long-term plan funding and
assets(1) continued
amortization of
transitional pension
assets.
Investments 43 42 1 2 % Reflects a minor new
investment.
Goodwill 3,572 3,564 8 - % Goodwill added for
the purchase of
Black's Photo
Corporation.
-------------------------------------------------------------------------
Long-Term Debt 5,809 6,348 (539) (8)% Includes:
- Net proceeds of
$697 million from
the issue of 4.95%
five-year notes in
May;
- A $103 million
increase in
commercial paper;
- A net reduction of
$980 million in
amounts drawn
against the 2012
credit facility;
- $80 million
debentures
reclassified to
current
liabilities; and
- A $280 million
decrease in the
Canadian dollar
value of the 2011
U.S. dollar Notes
from an appreciated
Canadian dollar,
which is largely
offset by a lower
derivative
liability (see
Other Long-Term
Liabilities).
-------------------------------------------------------------------------
Other Long-Term 1,560 1,295 265 20 % Primarily changes
Liabilities in U.S. dollar
exchange rates and a
fair value adjustment
of the derivative
liability associated
with the 2011 U.S.
dollar Notes.
-------------------------------------------------------------------------
Future Income 1,328 1,213 115 9 % An increase in future
Taxes(1) taxes on long-term
assets and
liabilities,
including unrealized
gains and losses on
derivatives and
reassessments for
prior year tax
issues, partly offset
by a revaluation for
statutory tax rate
changes.
-------------------------------------------------------------------------
Shareholders'
Equity
Common Share 7,513 7,085 428 6 % Mainly Net income of
and Non-Voting $843 million and
Share equity(1) Other comprehensive
income of $25 million
attributable to
holders of Common
Shares and Non-Voting
Shares, less $451
million of dividends
paid or payable in
cash.
Non-controlling 20 23 (3) (13)% Dividends paid by a
interests subsidiary to non-
controlling
interests, net of
$3 million Net income
attributable to non-
controlling
interests.
-------------------------------------------------------------------------
(1) Commencing in 2009, the new recommendations of the CICA for goodwill
and intangible assets (Handbook Section 3064) apply to the Company.
The application of this standard resulted in adjustments to the
Consolidated statements of financial position. See Developments in
fiscal 2009 in Section 8.2.4.
(2) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
-------------------------------------------------------------------------
7. Liquidity and capital resources The discussion in this section is qualified by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis. The Company's capital structure financial policies, financing plan and results are described in Section 4.3. In the normal course, the Company has generated annual cash flow from operations exceeding annual capital investment needed to support business growth and re-invest in technology. In 2009, cash provided by operating activities has exceeded cash used by investing activities, and debt was reduced. In 2008, cash provided by operating activities was supplemented with cash provided by financing activities to help fund the January acquisition of Emergis and third quarter payment for AWS spectrum licences.
-------------------------------------------------------------------------
Summary of Consolidated
statements of Quarters ended Nine-month periods
cash flows September 30 ended Sept. 30
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Cash provided by
operating activities 814 985 (17.4)% 2,280 2,072 10.0 %
Cash (used) by
investing activities (585) (1,353) 56.8 % (1,615) (2,790) 42.1 %
Cash (used) provided
by financing
activities (221) 358 n.m. (635) 734 n.m.
-------------------------------------------------------------------------
Increase (decrease) in
cash and temporary
investments, net 8 (10) - 30 16 -
Cash and temporary
investments, net,
beginning of period 26 46 - 4 20 -
-------------------------------------------------------------------------
Cash and temporary
investments, net,
end of period 34 36 - 34 36 (5.6)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7.1 Cash provided by operating activities
Cash provided by operating activities decreased by $171 million in the
third quarter of 2009, and increased by $208 million in the first nine months
of 2009 when compared to the same periods in 2008, primarily due to the
following:
- Changes in proceeds from securitized accounts receivable (included in
Net change in non-cash working capital on the Consolidated statements
of cash flow) are a source of cash when the proceeds are increased,
and a use of cash when proceeds are reduced. There were no changes in
proceeds during the third quarter of 2009, as compared to a
$100 million increase in proceeds during the third quarter of 2008.
Over the first nine months of 2009, the Company increased proceeds by
$100 million, while in the corresponding period in 2008, the Company
reduced proceeds by a net $250 million. See Section 7.6 Accounts
receivable sale.
- Income tax payments net of recoveries were $48 million and
$270 million in the third quarter and first nine months of 2009. Net
payments in 2009 included a $10 million third quarter recovery
($64 million recovery for the first nine months) for settlement of
prior years' tax matters, as well as final instalment payments in
respect of the 2008 tax year made in the first quarter. In
comparison, income tax payments in the third quarter and first nine
months of 2008 were $1 million and $8 million, respectively. The
Company has commenced to make significant income tax payments in 2009
(see income tax payment assumptions in Section 9).
- EBITDA decreased by $52 million and $140 million, respectively, in
the third quarter and first nine months, as described in Section 5:
Results from operations. The decrease in EBITDA included increases in
employee defined benefit pension plan expenses and restructuring
costs. Excluding these non-cash items, EBITDA decreased by $1 million
in the quarter and increased by $40 million in the nine-month period.
- Contributions to employee defined benefit plans increased by
$4 million and $57 million, respectively, in the third quarter and
first nine months of 2009 when compared to the same periods in 2008.
See assumptions for defined benefits pension plans in Section 9:
Annual guidance for 2009.
- Payments under restructuring programs increased by $10 million and
$45 million, respectively, in the third quarter and first nine months
of 2009 when compared to the same periods in 2008.
- Interest received increased by $19 million and $52 million,
respectively, in the third quarter and first nine months of 2009,
when compared to the same periods in 2008, primarily for the
settlement of prior years' tax matters.
- Other changes in non-cash working capital, including reduced customer
and dealer accounts receivable and inventory in the first nine months
of 2009, and liquidation of $42 million of short-term investments in
the first half of 2008.
7.2 Cash used by investing activities
Cash used by investing activities decreased by
Assets under construction were
-------------------------------------------------------------------------
Capital expenditures Quarters ended Nine-month periods
($ millions, except September 30 ended Sept. 30
capital intensity) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Wireline segment
(general) 365 340 7.4 % 1,011 916 10.4 %
Wireless segment
(general) 193 133 45.1 % 578 312 85.3 %
-------------------------------------------------------------------------
Capital expenditures
(general) 558 473 18.0 % 1,589 1,228 29.4 %
Payment for AWS
spectrum licences
(wireless segment) - 882 n.m. - 882 n.m.
-------------------------------------------------------------------------
Total capital
expenditures 558 1,355 (58.8)% 1,589 2,110 (24.7)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total wireless
capital expenditures 193 1,015 (81.0)% 578 1,194 (51.6)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less total
capital
expenditures(1) 365 (380) n.m. 1,113 732 52.0 %
Capital
intensity(2) (%)
Of general capital
expenditures 23 19 4 pts 22 17 5 pts
Of total capital
expenditures 23 55 (32)pts 22 29 (7)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 11.1 EBITDA for the calculation and description.
(2) Capital intensity is the measure of capital expenditures divided by
operating revenues. This measure provides a basis for comparing the
level of capital expenditures to other companies of varying size
within the same industry.
-------------------------------------------------------------------------
Total capital expenditures decreased by
EBITDA less total capital expenditures improved by
- Wireline segment
Wireline capital expenditures increased by $25 million and
$95 million, respectively, in the third quarter and first nine months
of 2009, relative to expenditures in the same periods in 2008. The
increases were mainly due to investments in broadband and TELUS TV
initiatives primarily in B.C. and Alberta. Partly offsetting this
were expenditures incurred in 2008 for the billing and client care
platform implemented for B.C. residential customer accounts in July
2008. Wireline cash flow (EBITDA less capital expenditures) was $41
million in the third quarter of 2009 and $193 million in the first
nine months of 2009, or decreases of $68 million or 62% and
$220 million or 53%, respectively, when compared to the same periods
in 2008.
- Wireless segment
General wireless capital expenditures increased by $60 million and
$266 million, respectively, in the third quarter and first nine
months of 2009, when compared to the same periods in 2008, due mainly
to new investments in HSPA technology and service capability for
planned network launch in November 2009. General expenditures in the
prior year were relatively low due to deferrals pending the outcome
of the July 2008 AWS spectrum auction and finalization of the
Company's wireless technology evolution plans.
Total wireless capital expenditures decreased by $822 million and
$616 million, respectively, in the third quarter and first nine
months of 2009, compared to the same periods in 2008. The decrease
reflected prior year payment of $882 million for AWS spectrum
licences, partly offset by HSPA spending in 2009. Consequently,
wireless cash flow (EBITDA less total capital expenditures) improved
to $324 million and $920 million, respectively, in the third quarter
and first nine months of 2009, as compared to $(489) million and
$319 million, respectively, in the same periods in 2008.
7.3 Cash provided (used) by financing activities
Net cash used by financing activities was $221 million and $635 million,
respectively, in the third quarter and first nine months of 2009. This
compares to net cash provided by financing activities of $358 million, and
$734 million, respectively, in the same periods of 2008.
- Cash dividends paid to shareholders in the third quarter of 2009
totalled $149 million, in respect of the second quarter declared
dividend (47.5 cents per share) that was remitted and paid July 2,
2009. Cash dividends paid to shareholders in the first nine months of
2009 totalled $451 million and were in respect of the dividends
declared in the first and second quarters of 2009, as well as the
fourth quarter of 2008 (47.5 cents per share, each). In comparison,
$289 million in dividends paid for the first nine months of 2008 were
in respect of the 2008 first and second quarter dividends ($0.45
cents per share, each).
- There have been no purchases of TELUS shares under the NCIB program
in 2009. The maximum number of shares that may be repurchased under
the current program, before December 22, 2009, is four million Common
Shares and four million Non-Voting Shares. During the third quarter
of 2008, the Company repurchased approximately 1.97 million shares
for $75 million, while over the first nine months of 2008 the Company
repurchased approximately 6.61 million shares for $274 million.
- Long-term debt issues
In May 2009, the Company successfully closed a public offering of
4.95%, Series CF Notes maturing May 2014, for aggregate gross
proceeds of $700 million. Net proceeds of approximately $697 million
were used for corporate purposes, including repayment of amounts
outstanding under the 2012 Credit Facility and reducing outstanding
commercial paper. The Series CF Notes are redeemable at the option of
the Company, in whole at any time, or in part from time to time, on
not fewer than 30 and not more than 60 days' prior notice, at a
redemption price equal to the greater of (i) the present value of the
Notes discounted at the Government of Canada yield plus 71 basis
points, or (ii) 100% of the principal amount thereof. In addition,
accrued and unpaid interest, if any, will be paid to the date fixed
for redemption.
The Series CF Notes require that the Company make an offer to
repurchase the Notes at a price equal to 101% of their principal plus
accrued and unpaid interest to the date of repurchase upon the
occurrence of a change in control triggering event, as defined in the
supplemental trust indenture. Credit rating agencies assigned the
same investment-grade ratings to these Notes as TELUS' previous
Notes. See Section 7.7 Credit ratings.
In April 2008, the Company publicly issued $500 million, 5.95% Series
CE Notes maturing in April 2015. Net proceeds were used for corporate
purposes including a net reduction in utilized 2012 bank facilities
and a reduction in proceeds from securitized accounts receivable,
with the latter reflected as a change in non-cash working capital
(see Section 7.1 Cash provided by operating activities).
- Bank facilities and commercial paper
The Company often shifts among short-term financing sources to take
advantage of interest cost differentials. In the first quarter of
2009, net amounts drawn on the 2012 credit facility decreased by
$680 million to $300 million, while issued commercial paper increased
by $756 million to $1,188 million. Due primarily to the successful
issue of new Notes in May 2009, during the second quarter the Company
reduced net amounts drawn on the 2012 credit facility to $nil and
reduced commercial paper to $604 million. In the third quarter, the
Company further reduced commercial paper to $534 million.
In 2008, during the first quarter, the Company increased utilization
of the 2012 credit facility from $nil to $321 million and increased
the amount of issued commercial paper by $213 million to $800 million
for general corporate purposes, including the January acquisition of
Emergis. During the second quarter of 2008, the Company reduced the
amount drawn on the 2012 credit facility by $159 million to a balance
of $162 million at June 30, while the balance of commercial paper was
unchanged. During the third quarter, the Company increased utilized
bank facilities to $430 million and increased outstanding commercial
paper to $980 million to help fund payment of AWS spectrum licences.
- TELUS Communications Inc. long-term debt
Effective June 12, 2009, TELUS Corporation guaranteed the payment of
principal and interest for TCI debentures and TCI first mortgage
bonds.
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
Liquidity and capital resource measures
As at, or 12-month periods ended, September 30 2009 2008 Change
-------------------------------------------------------------------------
Components of debt and coverage ratios(1)
($ millions)
-------------------------------------------------------------------------
Net debt 7,177 7,187 (10)
Total capitalization - book value(2) 14,815 14,291 524
EBITDA - excluding restructuring costs 3,790 3,822 (32)
Net interest cost 420 454 (34)
-------------------------------------------------------------------------
Debt ratios
-------------------------------------------------------------------------
Fixed-rate debt as a proportion of total
indebtedness (%) 87 77 10 pts
Average term to maturity of debt (years) 4.0 4.3 (0.3)
Net debt to total capitalization (%)(1)(2) 48.4 50.3 (1.9)pts
Net debt to EBITDA - excluding
restructuring costs(1) 1.9 1.9 -
-------------------------------------------------------------------------
Coverage ratios (12-month trailing)(1)
-------------------------------------------------------------------------
Interest coverage on long-term debt
(Earnings coverage) 4.1 4.5 (0.4)
EBITDA - excluding restructuring costs
interest coverage 9.0 8.4 0.6
-------------------------------------------------------------------------
Other measures (12-month trailing)
-------------------------------------------------------------------------
Free cash flow ($ millions)(3) 596 679 (83)
Dividend payout ratio of sustainable
net earnings guideline - 45 to 55%(1)
--------------------------------------
Dividend payout ratio - actual earnings,
excluding income tax-related adjustments
and net-cash settlement feature (%) 60 54 6 pts
Dividend payout ratio - actual earnings (%) 53 47 6 pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 11.4 Definitions of liquidity and capital resource
measures.
(2) The figure for September 30, 2008 reflects an adjustment to retained
earnings, resulting from adoption of the new recommendations of the
CICA for goodwill and intangible assets. See Section 8.2.
(3) See Section 11.2 Free cash flow for the definition.
-------------------------------------------------------------------------
Net debt at
The proportion of debt on a fixed-rate basis was 87% at
The interest coverage on long-term debt ratio was 4.1 times for the 12-month period ended
Free cash flow for the 12-month period ended The Company's strategy is to maintain the financial policies and guidelines set out below. The Company believes that these measures are currently at the optimal level, and by maintaining credit ratings in the range of BBB+ to A-, or the equivalent, are expected to provide reasonable access to capital markets.
TELUS' long-term financial guidelines and policies are:
- Net debt to EBITDA - excluding restructuring costs of 1.5 to
2.0 times
The ratio at September 30, 2009 was 1.9 times.
- Dividend payout ratio target guideline of 45 to 55% of sustainable
net earnings
The target guideline is on a prospective basis, rather than on a
trailing basis. The ratio calculated for the 12-month trailing period
ended September 30, 2009, excluding income tax-related adjustments
and a minimal effect from a net-cash settlement feature from
earnings, was 60%. The measure calculated based on actual earnings
for the same period was 53%.
7.5 Credit facilities
At
TELUS credit facilities at September 30, 2009
-------------------------------------------------------------------------
Out- Backstop
standing for
undrawn commer-
letters cial
of paper Available
($ in millions) Expiry Size Drawn credit program liquidity
-------------------------------------------------------------------------
Five-year
revolving
facility(1) May 1, 2012 2,000 - (221) (534) 1,245
364-day
revolving
facility(2) December 31, 2010 300 - - - 300
Other bank
facilities - 63 (2) (4) - 57
-------------------------------------------------------------------------
Total - 2,363 (2) (225) (534) 1,602
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Canadian dollars or U.S. dollar equivalent.
(2) Canadian dollars only.
-------------------------------------------------------------------------
TELUS' revolving credit facilities contain customary covenants, including a requirement that TELUS not permit its consolidated Leverage Ratio (debt to trailing 12-month EBITDA) to exceed 4 to 1 (approximately 1.9 to 1 at 7.6 Accounts receivable sale
TELUS Communications Inc. (TCI), a wholly owned subsidiary of TELUS, is a party to an agreement with an arm's-length securitization trust associated with a major Schedule I Canadian bank, under which TCI is able to sell an interest in certain of its trade receivables. As a result of selling the interest in certain of the trade receivables on a fully serviced basis, a servicing liability is recognized on the date of sale and is, in turn, amortized to earnings over the expected life of the trade receivables. A new agreement in
TCI is required to maintain at least a BBB (low) credit rating by DBRS Ltd. or the securitization trust may require the sale program to be wound down. The necessary credit rating was exceeded by three levels at A (low) as of
-------------------------------------------------------------------------
Balance of proceeds from
securitized receivables 2009, 2009, 2009, 2008,
($ millions) Sept. 30 June 30 Mar. 31 Dec. 31
-------------------------------------------------------------------------
400 400 300 300
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance of proceeds from
securitized receivables 2008, 2008, 2008, 2007,
($ millions) Sept. 30 June 30 Mar. 31 Dec. 31
-------------------------------------------------------------------------
250 150 500 500
-------------------------------------------------------------------------
7.7 Credit ratings
There were no changes to the Company's investment grade credit ratings in the first nine months of 2009. Four credit rating agencies that cover TELUS assigned their existing ratings, all with a stable outlook or trend, to the Company's
-------------------------------------------------------------------------
Credit rating summary DBRS Ltd. S&P Moody's FitchRatings
-------------------------------------------------------------------------
Trend or outlook Stable Stable Stable Stable
TELUS Corporation
Senior bank debt - - - BBB+
Notes A (low) BBB+ Baa1 BBB+
Commercial paper R-1 (low) - - -
TELUS Communications Inc.
Debentures A (low) BBB+ - BBB+
Medium-term notes A (low) BBB+ - BBB+
First mortgage bonds A (low) A- - -
-------------------------------------------------------------------------
7.8 Financial instruments, commitments and contingent liabilities Financial instruments (Note 4 of the interim Consolidated financial statements) The Company's financial instruments, and the nature of risks that they may be subject to, are described in the Company's 2008 Management's discussion and analysis. Certain updates are provided below. Credit risk - Accounts receivable/allowance for doubtful accounts
Credit risk associated with accounts receivable is minimized by the Company's large and diverse customer base, which covers substantially all consumer and business sectors in Liquidity risk As a component of capital structure financial policies, discussed under Capabilities - Section 4.3 Liquidity and capital resources, the Company manages liquidity risk by maintaining a daily cash pooling process which enables the Company to manage its liquidity surplus and liquidity requirements according to the actual needs of the Company and its subsidiaries, by maintaining bilateral bank facilities and syndicated credit facilities, by maintaining a commercial paper program, by the sales of trade receivables to an arm's length securitization trust, by continuously monitoring forecast and actual cash flows and by managing maturity profiles of financial assets and financial liabilities.
TELUS has significant debt maturities in future years. The Company has access to a shelf prospectus, in effect until Market risk The sensitivity analysis of reasonably possible changes in market risks due to the Company's exposure to currency risk, interest rate risk, and other price risk arising from share-based compensation is shown in Note 4(g) of the interim Consolidated financial statements. Commitments and contingent liabilities Price cap deferral accounts
An aggregate deferral account liability of
The deferral account was subject to appeals to the Supreme Court of
The Company currently expects to rebate approximately Guarantees
Canadian GAAP requires the disclosure of certain types of guarantees and their maximum, undiscounted amounts. As at Indemnification obligations: In the normal course of operations, the Company may provide indemnification in conjunction with certain transactions. 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 have been 80% through
As at Claims and lawsuits 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, other than as disclosed in Note 19(c) of the interim Consolidated financial statements. 7.9 Outstanding share information
The table below contains a summary of the outstanding shares for each class of equity at
-------------------------------------------------------------------------
Non-
Outstanding shares Common Voting Total
(millions of shares) Shares Shares shares
-------------------------------------------------------------------------
Common equity
Outstanding shares at September 30, 2009 175 143 318(1)
Options outstanding and issuable(2)
at September 30, 2009 - 15 15
-------------------------------------------------------------------------
175 158 333
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share, the
number of shares was 318 million for the nine-month periods ended
September 30, 2009.
(2) Assuming full conversion and ignoring exercise prices.
-------------------------------------------------------------------------
8. Critical accounting estimates and accounting policy developments 8.1 Critical accounting estimates Critical accounting estimates are described in Section 8.1 of TELUS' 2008 Management's discussion and analysis. The preparation of financial statements in conformity with 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 (also see Note 2 of the interim Consolidated financial statements) Accounting policies are consistent with those described in Note 1 of TELUS' 2008 Consolidated financial statements, other than for developments set out below. The discussion in this section includes expectations at the reporting date about the transition from Canadian GAAP to International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Transition to International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB)
In 2006, Canada's Accounting Standards Board ratified a strategic plan that will result in Canadian GAAP, as used by publicly accountable enterprises, being replaced with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS-IASB) over a transitional period to be complete by 2011. TELUS will be required to report using the IFRS-IASB standards effective for interim and annual financial statements relating to fiscal years beginning no later than on or after Canada's Accounting Standards Board will phase in or transition to IFRS-IASB through a combination of three methods:
(i) As current joint convergence projects of the United States
Financial Accounting Standards Board and the IASB are agreed upon,
they will be adopted by Canada's Accounting Standards Board and may
be introduced in Canada before the publicly accountable
enterprises' transition date to IFRS IASB.
(ii) Standards identified by Canada's Accounting Standards Board as key
or significant in which the Accounting Standards Board has
undertaken a project to converge Canadian GAAP with the related
IFRS prior to transition date and issued as Canadian GAAP.
(iii) Standards not subject to a joint convergence project have been
exposed in an omnibus manner for introduction at the time of the
publicly accountable enterprises' transition date to IFRS-IASB.
The first two transition methods may, or will, result in the Company either having the option to, or being required to, effectively, change over certain accounting policies to IFRS-IASB prior to 2011 in the event a new standard is issued or early adoption is permitted.
The IASB's work plan currently, and expectedly, has projects underway that are expected to result in new pronouncements that continue to evolve IFRS-IASB, and as a result, IFRS-IASB as at the transition date is expected to differ from its current form. In
-------------------------------------------------------------------------
Key IFRS dates:
- January 1, 2010 (transition date): TELUS will prepare an opening
statement of financial position according to IFRS-IASB, as at this
date, to facilitate the changeover to IFRS in 2011. TELUS will report
its fiscal 2010 results according to Canadian GAAP.
- January 1, 2011 (changeover date): the date after which TELUS will
prepare and report interim and annual 2011 financial statements
according to IFRS with 2010 comparatives also according to IFRS.
-------------------------------------------------------------------------
Section 8.2.1 First-time adoption of International Financial Reporting Standards (IFRS 1) The transition to IFRS requires the Company to apply IFRS 1, which are the requirements for preparing IFRS-compliant financial statements in the first reporting period after the changeover date. IFRS 1 applies only at the time of changeover, and includes a requirement for retrospective application of each IFRS, as if they were always in effect. IFRS 1 also mandates certain exceptions to retroactive application and provides a series of optional exemptions from retroactive application to ease the transition to the full set of IFRSs. The Company expects to disclose its initial decisions regarding mandatory exceptions and optional exemptions in its annual 2009 Management's discussion and analysis. Section 8.2.2 IFRS accounting policy decisions The Company has determined a modest number of areas where changes in accounting policies are expected that may impact the Consolidated financial statements. The Company expects to disclose its initial IFRS accounting policy decisions in its annual 2009 Management's discussion and analysis. Section 8.2.3 IFRS Changeover Plan The following changeover plan is based on the Company's current assumptions and expectations, which could change in future based on IFRS changes or other factors.
-------------------------------------------------------------------------
Milestones
Key activity (expected timeframes) Status and comments
-------------------------------------------------------------------------
Financial statement
preparation
-------------------------------------------------------------------------
- Initial impact The Company used a Completed in the
assessment and diagnostic process, and first quarter of 2008
scoping phase identified a modest number
of topics impacting either
the Company's financial
results and/or the
Company's effort necessary
to change over to IFRS-IASB.
This diagnostic resulted
in the development of a
detailed plan under which
activities are being
conducted.
----------------------------------------------------
- Key elements Identification, evaluation Completed.
phase and selection of accounting
policies necessary for the
Company to change over to
IFRS-IASB.
----------------------------------------------------
Approval of initial IFRS 1 Senior management
elections and accounting approval received.
policy choices.
Submitted for Audit
Committee review and
Board approval.
Approval received
November 4, 2009.
----------------------------------------------------
Describe major differences Disclosures under
in the 2009 annual MD&A. review.
----------------------------------------------------
Develop financial statements Disclosures under
formats and note disclosures. review.
----------------------------------------------------
2010
----
Disclosure in MD&A of the
impacts on the 2010
comparative period, when
available.
----------------------------------------------------
2011 first quarter
------------------
Disclosure in MD&A of final
quantification of conversion
effects on the 2010
comparative period.
----------------------------------------------------
- Embedding phase Integrate the solutions The Company expects
necessary for the changeover to adapt its existing
into the Company's accounting systems
underlying financial systems for parallel
and processes. (See reporting under IFRS.
Infrastructure below.)
-------------------------------------------------------------------------
- Embedding phase In 2010, the Company expects
to maintain two parallel
sets of books: one according
to contemporary Canadian
GAAP and one according to
contemporary IFRS-IASB.
-------------------------------------------------------------------------
Communication and Provide ongoing training on Communications and
training expected IFRS impacts, training activities
IFRS 1 elections and leveraging internal
accounting policy choices. resources occurred
periodically through
the year.
Training and resource
materials are
available on an
internal IFRS website
dedicated to the
conversion.
-------------------------------------------------------------------------
Infrastructure - Determine necessary changes Largely completed.
Information to systems and processes.
technology
----------------------------------------------------
Update accounting systems to Preparations are
enable the opening financial under way. Testing is
position under IFRS-IASB, expected to be
and facilitate dual complete by 2010
reporting in 2010. first quarter.
----------------------------------------------------
Implement financial planning Processes are
and forecasting capability currently being
under IFRS-IASB standards adapted. Dual
forecasting
capability is to be
implemented during
2010.
-------------------------------------------------------------------------
Business policy Assess impacts on Contracts are
assessment contractual arrangements currently being
and covenants. Implement reviewed.
changes as necessary.
Preliminary review of
covenants has begun.
-------------------------------------------------------------------------
Control environment
-------------------------------------------------------------------------
- Internal control Approval of initial IFRS 1 Senior management
over financial elections and accounting approval received.
reporting policy choices.
Submitted for Audit
Committee review and
Board approval.
Approval received
November 4, 2009.
----------------------------------------------------
Testing of controls for Activities are
2010 comparatives. planned for 2010.
----------------------------------------------------
- Disclosure Review and sign-off by Annual 2009
controls and senior management of 2009 disclosures are being
procedures annual IFRS disclosures. drafted.
----------------------------------------------------
2010
----
Review and sign-off by
senior management of
expected conversion effects
on fiscal 2010.
----------------------------------------------------
December 2010 It is a long-standing
------------- practice of TELUS to
Expect to Issue final release annual
guidance for fiscal 2010 targets for the
according to Canadian GAAP. upcoming year in
December, and provide
Provide updated disclosure a final guidance for
of expected conversion the current year. An
effects on fiscal 2010. investor call
normally follows the
December 2010 to first news release.
----------------------
quarter 2011 Because of the
------------ transition, it may be
Planned release of 2011 necessary to delay
annual targets according to the announcement of
IFRS-IASB standards, 2011 targets until
together with supplementary the first quarter of
disclosure for fiscal 2010 2011, or revise
according to IFRS-IASB. targets at that time.
----------------------------------------------------
May 2011
--------
First quarter 2011 results
with 2010 comparatives
according to IFRS-IASB.
MD&A discussion of final
changeover impacts.
-------------------------------------------------------------------------
Section 8.2.4 Transitional accounting policy changes adopted Developments in fiscal 2009 Goodwill and intangible assets As an activity consistent with Canadian GAAP being converged with IFRS IASB, the previously existing recommendations for goodwill and intangible assets and research and development costs were replaced with new recommendations (CICA Handbook Section 3064). Commencing with the Company's 2009 fiscal year, the new recommendations of the CICA for goodwill and intangible assets apply to the Company. This change in accounting policy has been made in accordance with the transitional provisions of the new recommendations. The new recommendations provide extensive guidance on when expenditures qualify for recognition as intangible assets. Prior to the Company's 2009 fiscal year, upfront wireline customer activation and connection fees, along with the corresponding direct costs not in excess of revenues, were deferred and recognized by the Company over the average expected term of the customer relationship; the impact of the new recommendations on the Company is that these direct costs do not qualify for recognition as intangible assets.
The effects of the application of this new standard on the Company's Consolidated statements of income and other comprehensive income for the three-month and nine-month periods ended Business combinations and non-controlling interests As an activity consistent with Canadian GAAP being converged with IFRS IASB, the previously existing recommendations for business combinations and consolidation of financial statements were replaced with new recommendations for business combinations (CICA Handbook Section 1582), consolidations (CICA Handbook Section 1601) and non-controlling interests (CICA Handbook Section 1602).
Effective Generally, the new recommendations result in measuring business acquisitions at the fair value of the acquired business and a prospectively applied shift from a parent company conceptual view of consolidation theory (which results in the parent company recording book values attributable to non-controlling interests) to an entity conceptual view (which results in the parent company recording fair values attributable to non-controlling interests). Unlike the corresponding new U.S. GAAP, which requires the recognition of the fair value of goodwill attributable to non-controlling interests, both the new Canadian GAAP recommendations and IFRS IASB allow the choice of whether or not to recognize the fair value of goodwill attributable to non controlling interests on an acquisition-by-acquisition basis. Measuring business acquisitions at fair value will, among other things, result in:
- acquisition costs being expensed;
- acquisition-created restructuring costs being expensed;
- contingent consideration, that is accounted for as a financial
liability, being measured at fair value at the time of the
acquisition with subsequent changes in its fair value being included
in determining the results of operations; and
- changes in non controlling ownership interests subsequent to the
parent company's acquisition of control, and not resulting in the
parent company's loss of control, being accounted for as capital
transactions.
Whether the Company will be materially affected by the new recommendations
in the future will depend upon the specific facts of a business combination
occurring subsequent to January 1, 2009. The Company's consolidated financial
statements were subject to a small number of retrospectively applied non
controlling interest-related presentation and disclosure changes:
- the Consolidated statements of financial position now recognizes non
controlling interest as a separate component of shareholders' equity;
and
- the Consolidated statements of income and other comprehensive income
now present the attribution of net income and other comprehensive
income between the Company's shareholders and non-controlling
interests rather than reflecting the non controlling interest in the
results of operations as a deduction in arriving at net income and
other comprehensive income.
Developments in fiscal 2008 As activities consistent with Canadian GAAP being converged with IFRS-IASB, the Company applied the following recommendations commencing in its 2008 fiscal year. Financial instruments - disclosure; presentation The existing recommendations for financial instrument disclosure were replaced with new recommendations (CICA Handbook Section 3862); the existing recommendations for financial instrument presentation were carried forward, unchanged (as CICA Handbook Section 3863). The new recommendations resulted in incremental disclosures, relative to those previously required, with an emphasis on risks associated with both recognized and unrecognized financial instruments to which an entity is exposed during the period and at the statement of financial position date, and how an entity manages those risks. Inventories The previously existing recommendations for accounting for inventories were replaced with new recommendations (CICA Handbook Section 3031). The new recommendations provide more guidance on the measurement and disclosure requirements for inventories; significantly, the new recommendations allow the reversals of previous write-downs to net realizable value where there is a subsequent increase in the value of inventories. The Company's results of operations and financial position were not materially affected by the new recommendations. 9. Annual guidance for 2009 The discussion in this section is qualified by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis.
The Company has revised its 2009 annual guidance, last updated in the second quarter 2009 Management's discussion and analysis. The revisions reflect uncertainty in the strength and persistence of Canada's economic recovery and weaker than expected results experienced by the Company in the first nine months of 2009. It also includes expected impacts from the acquisition of Black's, higher expected full-year restructuring costs and the early launch of the new HSPA wireless network and service, including the iPhone, in
-------------------------------------------------------
Annual Previous annual
Revised annual guidance Expected change guidance,
guidance for 2009 from 2008 Aug. 7, 2009
-------------------------------------------------------------------------
Consolidated
Revenues $9.6 to $9.7 $9.65 to $9.80
billion +/- 0.5 % billion
-------------------------------------------------------------------------
EBITDA(1) $3.475 to $3.6 to $3.7
$3.575 billion (8) to (5)% billion
-------------------------------------------------------------------------
EPS - basic,
excluding
income tax-
related
adjustments(2) $2.80 to $3.00 (17) to (11)% $3.10 to $3.30
-------------------------------------------------------------------------
EPS - basic (3) $3.10 to $3.30 (12) to (6)% $3.35 to $3.55
-------------------------------------------------------------------------
Capital Approx. Unchanged at approx.
expenditures $2.1 billion 13 % $2.05 billion
-------------------------------------------------------------------------
Wireline segment
-------------------------------------------------------------------------
Revenue $4.925 to $5.0 to $5.1
(external) $4.975 billion (2) to (1)% billion
-------------------------------------------------------------------------
EBITDA $1.575 to $1.625 to $1.675
$1.625 billion (11) to (8)% billion
-------------------------------------------------------------------------
Wireless segment
-------------------------------------------------------------------------
Revenue $4.675 to $4.65 to $4.70
(external) $4.725 billion 1 to 2 % billion
-------------------------------------------------------------------------
EBITDA $1.90 to $1.975 to $2.025
$1.95 billion (5) to (3)% billion
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest, taxes, depreciation and
amortization (EBITDA) for the definition, which includes
restructuring costs.
(2) A non-GAAP measure.
(3) Guidance for basic EPS includes income tax-related adjustments.
-------------------------------------------------------------------------
The following key assumptions were made at the time the original 2009
targets were announced on December 16, 2008. Management's revised expectations
are noted.
-------------------------------------------------------------------------
Assumptions for 2009 original Actual result to date, and confirmed or
targets revised expectations for 2009 guidance
-------------------------------------------------------------------------
Ongoing wireline competition in Expectation unchanged, as evident by a
both business and consumer major cable-TV competitor's continued
markets, particularly from digital telephone and Internet
cable-TV and VoIP companies subscriber additions and increasing
penetration among business customers.
-------------------------------------------------------------------------
Canadian wireless industry Expectation may be too high given
market penetration gain of Canadian economic contraction
approximately 4.5 percentage experienced in the first nine months of
points for the year 2009.
-------------------------------------------------------------------------
Downward pressure on wireless Expectation confirmed by 6.5% year-
ARPU over-year decrease in TELUS' blended
ARPU in the first nine months of 2009,
which is more than originally expected.
See Section 5.5 Wireless segment
results.
-------------------------------------------------------------------------
New competitive wireless entry Expectation unchanged. One or two
beginning in the fourth quarter competitors are expected to launch
of 2009 with most entrants services in the fourth quarter of 2009.
starting in 2010
-------------------------------------------------------------------------
Restructuring expenses of Revised to approximately $160 million
approximately $50 million to to reflect increased operational
$75 million efficiency activities (previously
revised on August 7, 2009, to
approximately $150 million and on May
7, 2009, to approximately $125 million
for the full year 2009).
-------------------------------------------------------------------------
A blended statutory tax rate Expectation unchanged. The blended
of approximately 30 to 31% statutory income tax rate for the first
nine months of 2009 was 30.3%.
-------------------------------------------------------------------------
Net payments of income tax The current estimate for 2009 income
of approximately $320 to tax payments net of recoveries is
$350 million approximately $270 million. Income tax
payments in the first nine months of
2009 were $270 million, including final
payments for 2008 and instalments for
2009 less income tax recoveries
received in 2009.
-------------------------------------------------------------------------
Forecast average exchange The current expectation is that the
rate of U.S. $0.80 per Canadian dollar exchange rate will
Canadian dollar average U.S. $0.86 in 2009, based on a
composite of forecasts by Canadian
chartered banks, the Bank of Canada,
Conference Board of Canada and internal
forecasts.
The average closing exchange rate for
the nine-month period ended
September 30, 2009 was approximately
U.S. $0.855 per Canadian dollar. The
closing rate at September 30, 2009 was
U.S. $0.934, while the daily closing
rate varied between approximately
U.S. $0.770 and U.S. $0.939 over the
first nine months of 2009. (Source:
the Bank of Canada)
Most of 2009 capital expenditures,
including wireless HSPA network
expenditures, are priced in Canadian
dollars. The Company employs currency
hedges for a varying portion of
wireless handset purchases, as
circumstances warrant. The principal
repayments and interest obligations on
the Company's U.S. dollar denominated
debt are effectively fixed by cross-
currency interest rate swap agreements.
-------------------------------------------------------------------------
A pension accounting discount The assumptions for defined benefit
rate was estimated at 7.00% pension plan accounting are set at the
(subsequently set at 7.25%) beginning of each year. The Company's
and expected long-term return estimate for contributions to defined
of 7.25% (consistent with the benefit pension plans was revised down
Company's long-run returns and to $191 million for 2009 in the first
its future expectations). quarter MD&A, based on more recent
Defined benefit pension plans actuarial reports.
net expenses and funding were
both estimated to increase in
2009, mainly due to the decline
in value of defined benefits
pension plans assets in 2008.
- Defined benefit pension plans
net expenses were estimated
to be $nil(1) in 2009,
subsequently revised to
approximately $18 million(2)
- Defined benefit pension plans
contributions were estimated
to be approximately
$200 million(1) for 2009,
subsequently revised to
$211 million(2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) December 16, 2008.
(2) Management's discussion and analysis for 2008, dated February 11,
2009.
-------------------------------------------------------------------------
2010 preliminary consolidated capital expenditures
--------------------------------------------------
Driven by the near completion of the next generation wireless network in 2009 and progress on wireline broadband expansion, 2010 capital expenditure levels are currently expected to be as low as 10. Risks and risk management The following are updates to the risks and risk management discussion in Section 10 of TELUS' Management's discussion and analysis for 2008 and the first and second quarters of 2009. 10.1 Regulatory CRTC hearings to assist local broadcasting
In Broadcasting Regulatory Policy CRTC 2009-406 issued on The value-for-signal regime proposed by the CRTC is effectively the same as fee-for-carriage and would increase consumer costs without increasing the value of services received. Moreover, the increased costs to consumers could negatively impact future growth in the broadcasting distribution sector, including TELUS TV services. The Company expects to participate in the eventual CRTC hearings. In the interim, TELUS has joined with other BDUs to launch a public campaign opposing fee-for-carriage to counter a public campaign by broadcasters that supports such fees. Foreign ownership restrictions (CRTC finds new wireless entrant not currently eligible to operate)
In
TELUS has never opposed foreign ownership restrictions being lifted in 10.2 Human resource developments Collective bargaining in the TELUS Québec region
Collective bargaining has resumed for an agreement with the Syndicat québécois des employés de TELUS (SQET) covering approximately 1,050 trades, clerical and operator services team members. The current agreement with the SQET expires on Risk mitigation: A governance model is in place to ensure the financial and operating impact of any proposed terms of settlement are assessed and determined to be aligned with TELUS' strategic direction. As is prudent in any round of collective bargaining, while negotiations proceed, any potential need to continue operations in response to work disruptions will be addressed through contingency planning. 10.3 Process risks Systems and processes
TELUS expects to make changes to several dozen systems and processes in order to accommodate the
Risk mitigation: TELUS has established an enterprise-wide program to implement the necessary changes to dozens of systems and processes. The Company has some experience with harmonized sales taxes in Newfoundland and Labrador, 10.4 Health, safety and environment Concerns about influenza A (H1N1)
In
Lost time resulting from illness of TELUS team members can negatively impact organizational productivity and employee benefit healthcare costs. TELUS is a key provider of critical communications infrastructure in
Risk mitigation: The Company has an extensive enterprise-wide business continuity plan with resources dedicated to business continuity and disaster recovery policies, plans and processes that address a range of scenarios, including pandemics. Responsible driving
Research has shown an increase in distraction levels for drivers using wireless devices while operating vehicles. Canadian provinces of Manitoba, Ontario, Risk mitigation: TELUS promotes responsible driving and recommends that driving safely should be every wireless customer's first responsibility. 10.5 Economic growth and fluctuations Continuation of economic recessions may adversely impact TELUS
In its third quarter monetary report, the Bank of
Risk mitigation: The Company cannot completely mitigate economic risks. Through 2008, TELUS benefited from strong growth in the Canadian wireless sector. Wireless results for the first quarter of 2009 were significantly affected by the economic downturn, but stabilized in the second and third quarter of 2009. However, year-over-year wireless subscriber growth and ARPU continue to be negatively affected. In addition, the cyclical resource economies in B.C. and Alberta are now experiencing contraction or lower growth. TELUS continues to focus on five key vertical markets of the public sector, healthcare, financial services, energy and telecom wholesale. The public sector, healthcare and financial services vertical markets are generally expected to be less exposed to the economic downturn than the manufacturing and export-oriented industries in Ontario and Pension funding Economic and capital market fluctuations could also adversely impact the funding and expense associated with the defined benefit pension plans that TELUS sponsors. There can be no assurance that TELUS' pension expense and funding of its defined benefit pension plans will not increase in the future and thereby negatively impact earnings and/or cash flow. Defined benefit funding risks may occur if total pension liabilities exceed the total value of the respective trust funds. Unfunded differences may arise from lower than expected investment returns, reductions in the discount rate used to value pension liabilities, and actuarial loss experiences.
Risk mitigation: TELUS seeks to mitigate this risk through the application of policies and procedures designed to control investment risk and ongoing monitoring of its funding position. Pension expense and funding for 2009 were largely determined by the rates of return on the plans' assets for 2008 and interest rates at year-end 2008, with revisions to expected funding based on recent actuarial reports. As at 11. Reconciliation of non-GAAP measures and definition of key operating indicators 11.1 Earnings before interest, taxes, depreciation and amortization (EBITDA)
TELUS has issued guidance on and reports EBITDA because it is a key measure that management uses to evaluate performance of segments and the Company. EBITDA is also utilized in measuring compliance with debt covenants. ( EBITDA is a measure commonly reported and widely used by investors as an indicator of a company's operating performance and ability to incur and service debt, and as a valuation metric. Management's definition of EBITDA is simply Operating revenues deducting Operations expense and Restructuring costs, which are items on the Consolidated statements of income and comprehensive income. Management believes EBITDA assists investors in comparing a company's operating performance on a consistent basis, before taking into account financing decisions and before depreciation and amortization expenses, which are non-cash in nature and can vary significantly depending upon accounting methods or non-operating factors such as historical cost. EBITDA is not a calculation based on Canadian or U.S. GAAP and should not be considered an alternative to Net income in measuring the Company's performance, nor should it be 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 are 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 management's definition of EBITDA with Net income and Operating income.
-------------------------------------------------------------------------
EBITDA reconciliation Nine-month
Quarters ended periods
September 30 ended Sept. 30
-----------------------------------
($ millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
Net income 280 286 846 846
Other expense (income) 6 6 22 25
Financing costs 101 122 302 345
Income taxes 106 125 251 348
-------------------------------------------------------------------------
Operating income 493 539 1,421 1,564
Depreciation 330 344 994 1,033
Amortization of intangible assets 100 92 287 245
-------------------------------------------------------------------------
EBITDA (management's definition) 923 975 2,702 2,842
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Management also calculates EBITDA less capital expenditures as a simple proxy for cash flow at a consolidated level and in its two reportable segments. EBITDA less capital expenditures may be used for comparison to the reported results for other telecommunications companies over time and is subject to the potential comparability issues of EBITDA described above.
-------------------------------------------------------------------------
Nine-month
Quarters ended periods
September 30 ended Sept 30
-----------------------------------
($ millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
EBITDA 923 975 2,702 2,842
Capital expenditures (558) (473) (1,589) (1,228)
-------------------------------------------------------------------------
EBITDA less capital expenditures 365 502 1,113 1,614
Payment for AWS spectrum licences - (882) - (882)
-------------------------------------------------------------------------
EBITDA less total capital expenditures 365 (380) 1,113 732
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11.2 Free cash flow TELUS reports free cash flow because it is a key measure used by management to evaluate the Company's performance. Free cash flow excludes certain working capital changes and other sources and uses of cash, as found 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 can be used to gauge TELUS' performance over time. Investors are 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. Management believes its definition of free cash flow provides an indication of how much cash generated by operations is available after capital expenditures, but before acquisitions, 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.
-------------------------------------------------------------------------
Free cash flow calculation Nine-month
Quarters ended periods
September 30 ended Sept. 30
-----------------------------------
($ millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
EBITDA 923 975 2,702 2,842
Share-based compensation (3) 9 17 25
Net employee defined benefit plans
expense (recovery) 3 (25) 12 (75)
Employer contributions to employee
defined benefit plans (31) (27) (135) (78)
Restructuring costs net of cash
payments 3 (9) 33 (14)
Donations and securitization fees
included in Other expense (4) (5) (18) (22)
Cash interest paid (38) (43) (271) (264)
Cash interest received 19 - 54 2
Income taxes refunded (paid);
and other (48) (2) (270) (6)
Capital expenditures (558) (473) (1,589) (1,228)
Payment for AWS spectrum licences - (882) - (882)
-------------------------------------------------------------------------
Free cash flow (management's
definition) 266 (482) 535 300
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following reconciles management's definition of free cash flow with
Cash provided by operations less Cash used by investing activities:
-------------------------------------------------------------------------
Free cash flow reconciliation Nine-month
Quarters ended periods
September 30 ended Sept. 30
-----------------------------------
($ millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash provided by operating activities 814 985 2,280 2,072
Cash used by investing activities (585) (1,353) (1,615) (2,790)
-------------------------------------------------------------------------
229 (368) 665 (718)
Adjustments
Amortization of deferred gains on
sale-leaseback of buildings,
amortization of deferred charges
and other, net 14 2 (9) 8
Reduction (increase) in securitized
accounts receivable - (100) (100) 250
Non-cash working capital changes
except changes from income tax
payments (receipts), interest
payments (receipts) and securitized
accounts receivable, and other (4) (14) (47) 80
Acquisitions 26 5 26 696
Proceeds from the sale of assets - (10) - (13)
Other investing activities 1 3 - (3)
-------------------------------------------------------------------------
Free cash flow (management's
definition) 266 (482) 535 300
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11.3 Definition of key wireless operating indicators These measures are industry metrics and are useful in assessing the operating performance of a wireless company. Average revenue per subscriber unit per month (ARPU) is calculated as Network revenue divided by the average number of subscriber units on the network during the period and expressed as a rate per month. Data ARPU is a component of ARPU, calculated on the same basis for revenues derived from services such as text messaging, mobile computing, personal digital assistance devices, Internet browser activity and pay-per-use downloads. Churn per month is calculated as the number of subscriber units disconnected during a given period divided by the average number of subscriber units on the network during the period, and expressed as a rate per month. A prepaid subscriber is disconnected 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 subscriber acquisition during a given period. As defined, COA excludes costs to retain existing subscribers (retention spend). COA per gross subscriber addition is calculated as cost of acquisition divided by gross subscriber activations during the period. EBITDA excluding COA is a measure of operational profitability normalized for the period costs of adding new customers. 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. 11.4 Definition of liquidity and capital resource measures Dividend payout ratio and dividend payout ratio of sustainable net earnings: For actual earnings, the measure is defined as the quarterly dividend declared per share, as reported on the financial statements, multiplied by four and divided by the sum of basic earnings per share for the most recent four quarters. The target guideline for the annual dividend payout ratio is on a prospective basis, rather than on a trailing basis, and is 45 to 55% of sustainable net earnings. The dividend payout ratio on an actual basis, excluding income tax-related adjustments and ongoing impacts of a net-cash settlement feature introduced in 2007, is considered more representative of a sustainable calculation.
EBITDA - excluding restructuring costs is used in 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 costs were EBITDA - excluding restructuring costs interest coverage is defined as EBITDA excluding restructuring costs divided by Net interest cost. Historically, this measure is substantially the same as the Coverage Ratio covenant in TELUS' credit facilities. Interest coverage on long-term debt is calculated on a 12-month trailing basis as Net income before interest expense on long-term debt and income tax expense, divided by interest expense on long-term debt. The calculation is based on total long-term debt, including long-term debt due within one year. Net debt is a non-GAAP measure whose nearest GAAP measure is Long-term debt, including Current maturities of long-term debt, as reconciled below. Net debt is one component of a ratio used to determine compliance with debt covenants (refer to the description of Net debt to EBITDA below).
-------------------------------------------------------------------------
As at September 30
---------------------
($ millions) 2009 2008
-------------------------------------------------------------------------
Long-term debt including current portion 5,891 6,038
Debt issuance costs netted against long-term debt 28 30
Derivative liability 1,001 1,045
Accumulated other comprehensive income amounts
arising from financial instruments used to manage
interest rate and currency risks associated with
U.S. dollar denominated debt (excluding tax effects) (109) (140)
Cash and temporary investments (34) (36)
Proceeds from securitized accounts receivable 400 250
-------------------------------------------------------------------------
Net debt 7,177 7,187
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The derivative liability in the table above relates to cross currency interest rate swaps that effectively convert principal repayments and interest obligations to Canadian dollar obligations, and is in respect of the U.S. Net debt to EBITDA - excluding restructuring costs is defined as Net debt as at the end of the period divided by the 12-month trailing EBITDA - excluding restructuring costs. TELUS' long-term guideline range for Net debt to EBITDA is from 1.5 to 2.0 times. Historically, Net debt to EBITDA - excluding restructuring costs is substantially the same as the Leverage Ratio covenant in TELUS' credit facilities. Net debt to total capitalization provides a measure of the proportion of debt used in the Company's capital structure.
Net interest cost is defined as Financing costs before gains on redemption and repayment of debt, calculated on a 12-month trailing basis. No gains on redemption and repayment of debt were recorded in the respective periods. Should they occur, losses recorded on the redemption of long-term debt are included in net interest cost. Net interest costs for the 12-month periods ended Total capitalization - book value is calculated as Net debt plus Shareholders' equity, excluding accumulated other comprehensive income or loss:
-------------------------------------------------------------------------
As at September 30
---------------------
($ millions) 2009 2008
-------------------------------------------------------------------------
Net debt 7,177 7,187
Shareholders' equity (2008 - as adjusted)
Common Share and Non-Voting Share equity 7,513 6,969
Add back Accumulated other comprehensive loss 105 113
Non-controlling interests 20 22
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Total capitalization - book value 14,815 14,291
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For further information: Media relations: Shawn Hall, (604) 697-8176, shawn.hall@telus.com; Investor relations: Robert Mitchell, (416) 279-3219, ir@telus.com
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