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/FIRST AND FINAL ADD - TO186 - TELUS First Quarter Results/ TELUS Mobility operations expense increased in the first quarter 2004, when compared with the same period last year. TELUS Mobility has been able to achieve significant economies of scale as evidenced by 14.3% growth in subscribers and 20.4% growth in Network revenue, with only a 9.0% increase in operating expenses year-over-year.2004 when compared with the same period in 2003, principally due to an increase in gross subscriber activations and higher retention activity. The increase related in part to continued marketing promotions including the camera phones and picture messaging service. Handset costs associated with gross subscriber activations are included in acquisition COA. - Network operating expenses consist of site-related expenses, transmission costs, spectrum licence fees, contribution revenue taxes, and other direct costs related to network operations. Transmission and site-related expenses increased to support the greater number of cell sites, a larger subscriber base, and improved network quality and coverage. In addition, Industry Canada spectrum licence fees were higher in the first quarter of 2004 principally due to a $5 million credit, related to years prior to 2003, received in first quarter of 2003 as part of a retroactive filing with Industry Canada. Network Costs once normalized for this event increased 12.5% year-over-year. Further, Network roaming costs increased $7.6 million in the first quarter as compared to the same period in 2003 largely due to successful marketing efforts in non-urban roaming/resale areas. TELUS Mobility believes this variable cost increase is reflective of the overall positive industry trend of subscriber growth and increased subscriber usage evidenced in the continued strength of Network revenue growth. TELUS Mobility has focused efforts on containing network costs through negotiating improved leased transmission rates, roaming rates and maintenance rates with a number of telecommunications carriers and key vendors. TELUS Mobility also continues to build out microwave facilities aimed at reducing future leased line transmission costs. TELUS Mobility's digital population coverage grew by 1.6 million to 29.5 million since March 31, 2003, as a result of continued activation of digital roaming regions and network expansion. - Marketing expenses increased primarily due to higher advertising expenses and dealer compensation costs associated with the expanded subscriber base and increased re-contracting activity. Despite the higher marketing expenses and significant subscriber growth, acquisition COA improved considerably in the first quarter of 2004 at $383 as compared with $425 for the same period last year. Combined with the higher ARPU and steady churn, this indicates COA over the lifetime revenue of the subscriber continued to improve significantly in the first quarter of 2004 as compared with 2003. - General and administration expenses consist of employee compensation and benefits, facilities, client services, bad debt and various other expenses. General and administration expenses increased only by 3.5% in the first quarter of 2004 despite subscriber base growth of 14.3% and Network revenue growth of 20.4%. TELUS Mobility increased full- time equivalent employees (FTEs) by 7.0% to 5,370 from 5,021 one year earlier to support the significant growth in the subscriber base and continued expansion of its company-owned retail stores. Restructuring and workforce reduction costs Quarters ended March 31 2004 2003 Change % ---------------------------------------------------------------------- ($ millions) Communications segment 15.9 6.5 9.4 144.6 Mobility segment - - - - ---------------------------------------------------------------------- TELUS consolidated 15.9 6.5 9.4 144.6 ---------------------------------------------------------------------- Restructuring costs recorded in 2004 were for a departmental reorganization in the Communications segment that is to result in the geographical consolidation of an information technology department from 15 locations to 2 primary locations. This reorganization, which is planned for completion in 2004, is expected to enable greater efficiencies. As at March 31, 2004, no future costs remain to be recorded under the Operational Efficiency Program, but variances from estimates currently recorded may impact amounts ultimately recorded. In 2003, Restructuring and workforce reduction costs were recorded for initiatives under the Company's Operational Efficiency Program, which is now completed. Approximately 50 staff departures occurred under the program occurred during the first quarter of 2004, for which the related costs were recorded in the fourth quarter of 2003. Cumulative net staff reductions under the Operational Efficiency Program from its inception in 2001 to its conclusion were approximately 7,550 comprised of 5,500 bargaining unit positions and 2,050 management positions. Cumulative cost structure reductions in the Communications segment since inception of the Operational Efficiency Program have increased to approximately $477 million by March 31, 2004. TELUS believes that the previously announced estimated annual recurring savings of $550 million from this program will be achieved in 2004. EBITDA by segment Quarters ended March 31 2004 2003 Change % ---------------------------------------------------------------------- ($ millions) Communications segment 473.5 485.7 (12.2) (2.5) Mobility segment 247.8 178.6 69.2 38.7 ---------------------------------------------------------------------- TELUS consolidated 721.3 664.3 57.0 8.6 ---------------------------------------------------------------------- EBITDA margin percentage(1) by segment Quarters ended March 31 2004 2003 Change ------------------------------------------------------------- % Communications segment 39.6 39.4 0.2 pts Mobility segment(2) 38.9 33.3 5.6 pts TELUS consolidated 40.0 38.2 1.8 pts ------------------------------------------------------------- (1) EBITDA divided by total revenue. (2) EBITDA as a percentage of network revenue was 41.8% for 2004, as compared with 36.3% for 2003. pts - percentage points When normalized for share-based compensation expense first recorded in 2004 and non-cash restructuring costs recorded in both 2004 and 2003, Communications segment EBITDA increased by $2.4 million or 0.5% in the first quarter of 2004 as compared with the first quarter of 2003, as the decrease in operations costs slightly exceeded the decrease in revenues. Significant growth in TELUS Mobility EBITDA and the related margin was attributed to strong ARPU and subscriber growth combined with a slightly improved churn rate and cost containment efforts. Consequently, EBITDA grew by 38.7% and the EBITDA margin improved by 5.6 percentage points in the first quarter of 2004 over the same period last year. The EBITDA margin, when calculated as a percentage of network revenue, improved to 41.8% for the first quarter of 2004 as compared with 36.3% for the same quarter in 2003, representing a positive spread of 5.5 percentage points. Depreciation and amortization Quarters ended March 31 2004 2003 Change % ---------------------------------------------------------------------- ($ millions) Depreciation 321.7 318.6 3.1 1.0 Amortization of intangible assets 88.7 92.5 (3.8) (4.1) --------------------------------------------------------------------- 410.4 411.1 (0.7) (0.2) --------------------------------------------------------------------- Depreciation and amortization expenses were not significantly changed in first quarter of 2004, when compared with the same period in 2003. Increased depreciation and amortization for growth in data network and wireless capital assets was largely matched by write-offs of certain software assets, which occurred throughout 2003. Other expense ($ millions) 2004 2003 Change % ---------------------------------------------------------------------- Quarters ended March 31 1.2 5.6 (4.4) (78.6) ---------------------------------------------------------------------- Other expense includes accounts receivable securitization expense, income (loss) or impairments in portfolio investments, gains and losses on disposal of property, and charitable donations. Accounts receivable securitization expense decreased by $2.5 million to $1.0 million in the first quarter of 2004, when compared with the same period in 2003. The decrease resulted from the continued reduction in the amount of securitized receivables. See Liquidity and capital resources - Accounts receivable sale. Net gains of $2.1 million were recorded in the first quarter of 2004 for the disposal of property, including the sale of several buildings. Losses from portfolio investments of $0.8 million and charitable donations expense of $1.4 million recorded in the first quarter of 2004 were not significantly changed from the same period last year. Financing costs ($ millions) 2004 2003 Change % ---------------------------------------------------------------------- Quarters ended March 31 145.0 164.3 (19.3) (11.7) ---------------------------------------------------------------------- Financing costs consist of interest expense on long-term and short-term debt (including interest on convertible debentures), interest income, foreign exchange gains and losses and amortization of debt issue costs. See Note 5 of the interim consolidated financial statements. Interest on long-term and short-term debt was $165.4 million in the first quarter of 2004, a decrease of $8.9 million when compared with the same period in 2003. The decrease was primarily a result of repaying bank facilities, medium-term notes and First mortgage bonds after the first quarter of 2003. TELUS maintains a hedging program using cross currency swaps, and as a result, long-term financing costs were generally unaffected by fluctuations in the value of the Canadian dollar against the U.S. dollar. Debt, including long- term debt, current maturities and the deferred hedging liability, decreased to $7,571 million at March 31, 2004, when compared with $7,577 million at December 31, 2003 and $8,223 million at March 31, 2003. The average debt outstanding in the first quarter of 2004 was $7,572 million, as compared with $8,362 million in the same period in 2003. Interest income, which has the effect of reducing financing costs, was $19.8 million in the first quarter of 2004, an increase of $9.4 million, when compared with the same period in 2003. Interest income in both periods was recognized primarily as a result of tax refunds from the settlement of various tax matters dating back to prior years. Income taxes (recovery) ($ millions) 2004 2003 Change % ---------------------------------------------------------------------- Quarters ended March 31 62.6 (6.9) 69.5 NM ---------------------------------------------------------------------- The increase in Income taxes in 2004, when compared with 2003, was primarily related to the $81.4 million increase in income before taxes. The effective tax rate in 2003 was significantly impacted by a positive $47.0 million income tax adjustment for the settlement of tax matters relating to prior years, which had higher tax rates. See Note 6 of the interim consolidated financial statements. Non-controlling interest ($ millions) 2004 2003 Change % ---------------------------------------------------------------------- Quarters ended March 31 0.8 0.7 0.1 14.3 ---------------------------------------------------------------------- Non-controlling interest primarily represents partners' interests in several small subsidiaries. Preferred dividends ($ millions) 2004 2003 Change % ---------------------------------------------------------------------- Quarters ended March 31 0.9 0.9 - - ---------------------------------------------------------------------- There were no changes to quarterly dividends on preferred shares. On March 25, 2004, TELUS Communications Inc. mailed notices of redemption to the holders of its publicly issued preference and preferred shares. The intention to redeem its publicly issued preference and preferred shares was previously announced on February 12, 2004. General corporate funds will be used to redeem nine classes of preference and preferred shares for total consideration of approximately $72.8 million. Liquidity and capital resources Cash provided by operating activities ($ millions) 2004 2003 Change % ---------------------------------------------------------------------- Quarters ended March 31 588.1 404.7 183.4 45.3 ---------------------------------------------------------------------- Cash provided by operating activities increased in the first quarter of 2004, when compared with 2003, principally due to the recovery of income taxes associated with settlement of tax matters (including interest income), lower payments under restructuring programs, improved operating profitability, lower interest expense and a smaller decrease in accounts payable and accrued liabilities, partly offset by the reduction in securitized account receivables and an increase in contributions to defined benefit plans. - Cash recovery of income taxes associated with settlement of prior years' tax matters was $111.1 million or $104.6 million net of tax installments in the first quarter of 2004, compared with net tax installments of $0.6 million in the first quarter of 2003. - Payments under restructuring and workforce reduction initiatives were $68.4 million in the first quarter of 2004, compared with payments of $153.9 million in the same period in 2003. - EBITDA increased by $57.0 million in the first quarter of 2004, when compared with the same period in 2003. - Interest paid decreased by $13.2 million to $22.8 million in the first quarter of 2004, when compared with the same period in 2003, as a result of debt reduction. - Interest received increased by $13.2 million to $14.2 million in the first quarter of 2004, when compared with the same period in 2003, primarily from the settlement of tax matters. - Non-cash working capital changes for Accounts payable and accrued liabilities, excluding changes in accrued interest, increased by $58.2 million, and is reflective of smaller decrease in sequential quarterly activity levels in the first quarter of 2004, when compared with the same period in 2003. - Employer contributions to employee defined benefit plans, increased by 10.6 million to $28.6 million primarily as a result of different timing of contributions. - The Company made accounts receivable securitization reduction payments of $150 million in the first quarter of 2004, compared with $21.0 million net reduction payments in the same period in 2003. Cash used by investing activities ($ millions) 2004 2003 Change % ---------------------------------------------------------------------- Quarters ended March 31 298.6 182.6 116.0 63.5 ---------------------------------------------------------------------- Cash used by investing activities increased in the first quarter of 2004, when compared with the same period in 2003, primarily as a result of increased capital expenditures, partly offset by $12.1 million proceeds from the sale of non-core assets, including several properties. Results for the first quarter of 2003 included $19.3 million cash proceeds from the sale of an administrative property under the terms of a sale and leaseback transaction, on which an $8.2 million pre-tax gain was deferred and is being amortized over the term of the lease. Capital expenditures by segment Quarters ended March 31 2004 2003 Change % ---------------------------------------------------------------------- ($ millions) Communications segment 259.4 153.5 105.9 69.0 Mobility segment 50.3 54.3 (4.0) (7.4) ---------------------------------------------------------------------- Total capital expenditures 309.7 207.8 101.9 49.0 ---------------------------------------------------------------------- ------------------------------------------------------------- Capital expenditure intensity(1) (%) 17.2 11.9 5.3 ------------------------------------------------------------- (1) Capital intensity is measured by dividing capital expenditures into operating revenues, expressed as a percentage. This measure provides a method of comparing the level of capital expenditures to other companies within the same industry. - Communications segment capital expenditures increased in the first quarter of 2004, when compared with the first quarter of 2003. First quarter expenditures last year were uncharacteristically low as a result of peak impacts from Operational Efficiency Program initiatives, which resulted in approximately 2,500 staff reductions in the fourth quarter of 2002. Non-ILEC capital expenditures increased by $23.7 million to $42.3 million primarily to support the Company's IP strategy and delivery of services to new customers. ILEC capital expenditures increased by $82.2 million to $217.1 million in the first quarter of 2004, when compared with the same period in 2003, due to significant investments in network infrastructure to improve customer service and network reliability, as well as investments in internal systems and processes, and the development of new services. High-speed Internet (ADSL) network facilities and systems expenditures increased by $16.1 million to $36.6 million to support subscriber growth. The Communications segment capital expenditure intensity ratios were 21.7% and 12.5%, respectively for the first quarters of 2004 and 2003. Cash flow (EBITDA less capital expenditures) decreased by $118.1 million to $214.1 million in the first quarter of 2004, when compared with the same period in 2003, because of the increase in capital spending and, to a lesser extent, an increased restructuring charge of $9.4 million. - Mobility segment capital expenditures decreased slightly in the first quarter of 2004 when compared with same period in 2003. TELUS Mobility continued the enhancement of digital wireless coverage and continued its microwave build in the first quarter of 2004 aimed at reducing future leased line transmission costs. Capital spending declined slightly over last year principally as a result of lower infrastructure equipment costs, a stronger Canadian dollar and the timing of network capital expenditures. Capital expenditure intensity for TELUS Mobility decreased to 7.9% in the first quarter of 2004 from 10.1% in the first quarter of 2003, due primarily to significant growth in Network revenues. Capital expenditures are generally lower in the first quarter; however, Mobility still expects to achieve capital expenditure intensity of approximately 13% for the full year. As a result of continued strong growth in EBITDA and reduced capital expenditure intensity, Mobility generated a record cash flow of $197.5 million or 31.0% of total revenue in the first quarter 2004, as compared with $124.3 million or 23.2% in the same period last year. Consolidated cash flow decreased by $44.9 million to $411.6 million in the first quarter of 2004, when compared with the same period in 2003, as increased Communications segment capital expenditures, were partly offset by improvement in Mobility segment EBITDA. Cash used by financing activities ($ millions) 2004 2003 Change % ---------------------------------------------------------------------- Quarters ended March 31 22.2 205.7 (183.5) (89.2) ---------------------------------------------------------------------- Cash used by financing activities decreased in the first quarter of 2004, when compared with the same period in 2003, as a result of the following: - Common Shares and Non-Voting Shares issued - Proceeds received from shares issued from Treasury under the employee share purchase plan, from share-based compensation plans and from warrants were $27.0 million for 2004, compared with proceeds of $20.1 million for 2003 under the employee share purchase plan and share-based compensation plans. - Dividends to shareholders - Cash dividends paid to shareholders decreased by $2.5 million to $42.3 million in the first quarter of 2004, when compared with same period in 2003. The decrease in cash dividends arose from higher enrolment in dividend reinvestment plans (approximately 24% for the dividend paid in January 2004, compared with approximately 17% one year earlier), partly offset by an increased number of shares outstanding. The 15-cent quarterly dividend paid per Common Share and Non-Voting Share remained unchanged from one year earlier. The rate of participation in dividend reinvestment plans decreased to approximately 13% in early April 2004, which is expected to increase cash dividend payments in the second quarter of 2004 by approximately $6 million, as compared with the payment in the first quarter of 2004. - Net debt redemptions (Long-term debt issued net of Redemptions and repayment of long-term debt and Change in short-term obligations) were $6.9 million in the first quarter of 2004, compared with $182.6 million in the same period in 2003. Net debt redemptions in the first quarter of 2004 were primarily bank facilities, for which the maximum outstanding balance reached $34.0 million during the period, prior to being repaid in full. Debt redemptions expected for the remainder of 2004 include: $189.5 million of TELUS Communications Inc. Series A debentures due August 24, 2004, $20 million of TELUS Communications Inc. Medium Term Notes due August 25, 2004 and capital leases. Liquidity and capital resource measures March 31, March 31, Dec. 31, Period ended 2004 2003 Change 2003 ------------------------------------------------------------------------- Components of debt and coverage ratios ---------------------- Net debt(1) ($ millions) 7,360.6 8,337.7 (977.1) 7,658.6 Total capitalization(2) - book value ($ millions) 13,910.5 14,705.5 (795.0) 14,190.9 EBITDA (excluding restructuring)(3) (12-month trailing) ($ millions) 2,910.5 2,600.1 310.4 2,844.1 Net interest cost(4) (12-month trailing) ($ millions) 617.2 678.1 (60.9) 636.5 Debt ratios ----------- Fixed rate debt as a proportion of total indebtedness (%) 95.4 95.1 0.3 100.0 Average term to maturity of debt (years) 6.0 6.5 (0.5) 6.2 Net debt to total capitalization (%) 52.9 56.7 (3.8) 54.0 Net debt to EBITDA(5) 2.5 3.2 (0.7) 2.7 Coverage ratios --------------- Earnings coverage(6) 1.9 0.7 1.2 0.7 EBITDA interest coverage(7) 4.7 3.8 0.9 4.4 Other measures -------------- Free cash flow(8) (three-month $ millions) 443.3 267.6 175.7 71.5 Free cash flow (12-month trailing, $ millions) 1,020.6 42.9 977.7 844.9 ------------------------------------------------------------------------- (1) Net debt is defined as Long-term debt (including convertible debentures) plus current maturities of long-term debt and cheques outstanding less Cash and temporary investments plus cross currency foreign exchange hedge liability (less cross currency foreign exchange hedge asset) related to U.S. dollar notes. The cross currency foreign exchange hedge liability was $700.0 million as at March 31, 2004 (compared with deferred hedge liabilities of $204.6 million as at March 31, 2003 and $745.8 million at December 31, 2003). Net debt as calculated herein, includes a notional amount related to accounts receivable securitization of approximately $62.8 million at March 31, 2004 (as compared with $121.5 million at March 31, 2003 and $88.1 million at December 31, 2003), which is required to be included in the numerator of the Leverage Ratio covenant calculation in TELUS' credit facilities. Net debt is unaffected by foreign exchange fluctuations because it includes (deducts) the net deferred hedging liability (asset). (2) Total capitalization is defined as net debt plus Non-controlling interest and Shareholders' equity. (3) EBITDA (excluding Restructuring and workforce reduction costs of $37.7 million, $563.9 million and $28.3 million, respectively, for the 12-month periods ended March 31, 2004, March 31, 2003, and December 31, 2003). EBITDA (excluding restructuring) is used for the calculation of Net debt to EBITDA and EBITDA interest coverage, consistent with the calculation of the Leverage Ratio and the Coverage Ratio in credit facility covenants. (4) Net interest cost is defined as Net financing cost before gains on redemption and repayment of debt, calculated on a 12-month trailing basis. Gains on redemption and repayment of debt were recorded in the third and fourth quarters of 2002. Excluding interest income, net interest costs for the 12-month periods ended March 31, 2004 and 2003, respectively, were $669.9 million and $714.1 million, and $679.8 million for the year ended December 31, 2003. (5) Net debt to EBITDA is defined as net debt as at the end of the period divided by 12-month trailing EBITDA (excluding restructuring). This measure is substantially the same as the Leverage Ratio covenant in TELUS' credit facilities. (6) Earnings coverage ratio is calculated on a 12-month trailing basis as Net income before interest expense on total debt and income tax expense divided by interest expense on total debt. (7) EBITDA interest coverage is defined as EBITDA (excluding restructuring) divided by Net interest cost (including interest on convertible debentures). When interest income is excluded from the calculation, the ratios were 4.3 and 3.6, respectively, for the 12-month periods ended March 31, 2004 and 2003, and 4.2 for the year ended December 31, 2003. This measure is substantially the same as the Coverage Ratio covenant in TELUS' credit facilities. (8) See Note 2 of the Financial highlights table. ------------------------------------------------------------------------- The long-term debt balance, including current maturities, was $6,871 million as at March 31, 2004, an increase of $40 million from December 31, 2003. This increase in the debt balance included a $45.8 million appreciation in the Canadian dollar value of U.S. dollar denominated Notes as a result of an approximate 1% depreciation of the Canadian dollar during the first quarter of 2004. TELUS' U.S. dollar debt is fully hedged, resulting in a corresponding decrease of $45.8 million being recorded in the net Deferred hedging liability. The proportion of debt with fixed interest rates was relatively unchanged at March 31, 2004, when compared with one year earlier. While the amount of utilized bank facilities decreased to $nil from $504 million one year earlier, TELUS converted $350 million of debt from a fixed rate to a floating rate basis during the quarter through a fixed to floating interest rate swap. Subsequent to March 31, 2004, TELUS converted and additional $150 million of debt from a fixed rate to a floating rate basis, reducing the proportion of fixed rate debt to 93.4%. The net debt to total capitalization ratio measured at March 31, 2004 decreased, when compared with one year earlier, as result of debt repayments and increased in retained earnings since the first quarter of 2003. The net debt to EBITDA ratio measured at March 31, 2004 improved significantly, when compared with one year earlier, as a result of debt reduction and an increase in 12-month trailing EBITDA (excluding restructuring). The earnings coverage ratio improved significantly because of the improvement in income before interest and taxes in 2004. The EBITDA interest coverage ratio improved as a result of higher EBITDA (excluding restructuring) and lower net interest costs, including significant interest income. Free cash flow for the three-month period ended March 31, 2004, increased when compared with one year earlier primarily because of improved EBITDA, cash tax recoveries, lower payments under restructuring programs and lower interest payments, partly offset by increased capital expenditures. Free cash flow for the twelve-month period ended March 31, 2004 increased, when compared with one year earlier, for the same reasons and significantly reduced capital expenditures. Outstanding share data National Instrument 51-102, Section 5.4, requires disclosure of information relating to the outstanding securities of the reporting issuer as of the latest practicable date. Under this Section, the following must be disclosed: - the number of shares for each class and series of voting or equity securities for which there are securities outstanding. - the number of shares that are issuable on the conversion, exercise or exchange of outstanding securities of the reporting issuer for each class and series of securities outstanding that are convertible into, or exercisable or exchangeable for, voting or equity securities of the reporting issuer. The following is a summary of the outstanding shares for each class of equity at March 31, 2004 and at April 26, 2004. In addition, for April 26, 2004, the total number of outstanding and issuable shares is presented, assuming full conversion of convertible debentures, options and warrants. Class of equity security Common Non-Voting Total Shares Shares Shares outstanding outstanding outstanding At March 31, 2004 Common equity - Common Shares outstanding 191,573,384 - 191,573,384 Common equity - Non-Voting Shares outstanding - 162,088,340 162,088,340 ------------ ------------ ------------ 191,573,384 162,088,340 353,661,724(1) ------------ ------------ ------------ At April 26, 2004 Common equity - Common Shares outstanding 191,801,627 - 191,801,627 Common equity - Non-Voting Shares outstanding - 162,361,327 162,361,327 ------------ ------------ ------------ 191,801,627 162,361,327 354,162,954 ------------ ------------ ------------ Outstanding and issuable shares(2) at April 26, 2004 Common Shares and Non-Voting Shares outstanding 191,801,627 162,361,327 354,162,954 TELUS Corporation convertible debentures - 3,765,819 3,765,819 Options 3,309,508 23,307,042 26,616,550 Warrants - 677,412 677,412 ------------ ------------ ------------ 195,111,135 190,111,600 385,222,735 ------------------------------------------------------------------------- (1) For the purposes of calculating diluted earnings per share for the first quarter of 2004, the number of shares outstanding at March 31, 2004 was 355,631,524. (2) Assuming full conversion and ignoring exercise prices. Credit facilities TELUS' credit facilities at March 31, 2004 consisted of a $1.5 billion (or U.S. dollar equivalent) revolving credit facility expiring on May 30, 2004 ($nil drawn along with $98.2 million in outstanding undrawn letters of credit), an undrawn $600 million (or the U.S. dollar equivalent) 364 day revolving credit facility extendible at TELUS' option for any amount outstanding as at May 26, 2004 for one year on a non-revolving basis, and approximately $74 million in other bank facilities ($2 million drawn and approximately $4.3 million in committed and outstanding undrawn letters of credit). TELUS has received $1.6 billion in commitments from a syndicate of financial institutions. The new credit facilities will consist of: (i) an $800 million (or U.S. Dollar equivalent) revolving credit facility with a four-year term, and (ii) a 364-day facility with $800 million (or U.S. Dollar equivalent) in available credit on a revolving basis and which is extendible at the Company's option on a non-revolving basis for one year for any amounts outstanding on the anniversary date. These new facilities are expected to replace the existing committed credit facilities prior to the availability termination dates of such facilities. The commitments are subject to review of final documentation. At March 31, 2004, TELUS had unutilized available liquidity well in excess of $1 billion. TELUS' credit facilities contain customary covenants including a requirement that TELUS not permit its consolidated Leverage Ratio (Funded Debt and Asset Securitization Amount to trailing 12-month EBITDA) to exceed 4.0:1 (approximately 2.5:1 as at March 31, 2004) and not permit its consolidated Coverage Ratio (EBITDA to Interest Expense and Asset Securitization Charges on a trailing 12-month basis) to be less than 2.5:1 (approximately 4.8:1 as at March 31, 2004) at the end of any financial quarter. There are certain minor differences in the calculation of the Leverage Ratio and Coverage Ratio under the credit agreement as compared with the calculation of net debt to EBITDA and EBITDA interest coverage. The calculations are not expected to be materially different. The covenants are not impacted by revaluation of capital assets, intangible assets and goodwill for accounting purposes, and continued access to TELUS' credit facilities is not contingent on the maintenance by TELUS of a specific credit rating. Accounts receivable sale TELUS Communications Inc., a wholly-owned subsidiary of TELUS, is able to sell an interest in certain of its receivables up to a maximum of $650 million and is required to maintain at least a BBB(low) credit rating by Dominion Bond Rating Service (DBRS), or the purchaser may require the sale program to be wound down. The necessary credit rating was exceeded by two levels at BBB(high) as of April 26, 2004. The proceeds of securitized receivables were reduced to $150 million at March 31, 2004, as compared with $454 million one year earlier and $300 million at December 31, 2003. Average proceeds from securitization were $275 million in the first quarter of 2004, compared with $467 million in the same period in 2003. TELUS' credit facilities require that a portion of sold accounts receivable be added to debt for purposes of calculating the Leverage Ratio covenant under the credit agreement. This portion is calculated on a monthly basis and is a function of the ongoing collection performance of the receivables pool. At March 31, 2004, this amount, defined as the Asset Securitization Amount, was $62.8 million. Credit ratings On April 5, 2004, Dominion Bond Rating Service announced that it placed the credit ratings of TELUS Communications (Quebec) Inc. "under review with positive implications". On March 2, 2004, as disclosed in TELUS 2003 Annual Report, Moody's Investors Service upgraded the credit rating on TELUS' senior notes to Baa3 (investment grade) with a stable outlook. In addition, in March 2004, Standard & Poor's (S&P) affirmed the 'BBB' long-term corporate ratings on TELUS and TELUS Communications Inc. with a 'stable' outlook. S&P also affirmed the respective 'BBB' and 'A-' ratings for TELUS Communications (Quebec) Inc.'s $70 million Notes due February 2007 and $30 million First mortgage bonds due July 2010. S&P otherwise withdrew the ratings for TELUS Communications (Quebec) Inc. as a result of announced plans to transfer substantially all the assets and business of TELUS Communications (Quebec) Inc. to TELUS Communications Inc. TELUS has an objective to preserve access to capital markets at a reasonable cost by maintaining investment grade credit ratings. Off-balance sheet arrangements and contractual liabilities Financial instruments (Note 3 of the interim consolidated financial statements) During the first quarter of 2004, the Company entered into two series of hedging relationships to which hedge accounting has been applied: one series of hedging relationships results in fixing the Company's compensation cost arising from a specific grant of restricted share units and the other series of hedging relationships results in the notional conversion of $350 million of the 2006 (Canadian Dollar) Notes from a fixed interest rate of 7.5% to a floating interest rate based upon the three-month Bankers' Acceptance Canadian Dollar Offered Rate plus a spread. In early April 2004, the Company entered into additional hedging relationships that resulted in bringing the total notional conversion of the 2006 (Canadian Dollar) Notes to $500 million with a floating interest rate based upon the three-month Bankers' Acceptance Canadian Dollar Offered Rate plus a spread. As at March 31, 2004, the Company had entered into foreign currency forward contracts that have the effect of fixing the exchange rates on U.S.$60 million of fiscal 2004 purchase commitments; hedge accounting has been applied to these foreign currency forward contracts, all of which relate to the Mobility segment. Fair value: The fair value of the Company's long-term debt, including the convertible debentures, is estimated based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same maturity as well as the use of discounted future cash flows using current rates for similar financial instruments subject to similar risks and maturities. The fair values of the Company's derivative financial instruments used to manage exposure to interest rate and currency risks are estimated similarly. Commitments and contingent liabilities (Note 15 of the interim consolidated financial statements) The Company has a number of commitments and contingent liabilities. In accordance with CRTC Price Cap Decisions 2002-34 and 2002-43, the Company defers a portion of revenues in a deferral account, which at March 31, 2004, was $93 million. The mechanism for disposing of balance of this deferral account, other than as already approved by the CRTC, is currently the subject of a CRTC proceeding, as discussed further in Risks and uncertainties - Regulation. The Company has $88.5 million in outstanding commitments for its restructuring programs as at March 31, 2004. The maximum, undiscounted guarantee amounts for the balance of 2004, without regard for the likelihood of having to make such payment, is $22.3 million. Revised Guidance for 2004 Management has revised guidance for 2004 as follows: - Guidance for basic earnings per share has been increased to reflect the receipt of additional interest income from the settlement of tax matters. - TELUS' Communications segment revenue has been revised downward as a result of weakness in traditional incumbent local exchange carrier ("ILEC") revenues and softness in non-ILEC data revenue growth. - Guidance for consolidated EBITDA is unchanged as an increase in TELUS Mobility EBITDA is expected to be offset by a reduced Communications segment EBITDA, for which guidance has been revised to reflect slower revenue growth. -------------------------------------------------- 2004 Revised 2004 Targets Change Guidance ------------------------------------------------------------------------- Consolidated Revenues $7.45 to $7.45 to - $7.55 billion $7.55 billion ------------------------------------------------------------------------- EBITDA(1) $2.95 to $2.95 to - $3.05 billion $3.05 billion ------------------------------------------------------------------------- Earnings per share - basic $1.10 to $1.05 to five cents $1.30 $1.25 ------------------------------------------------------------------------- Capital expenditures Approx. Approx. - $1.225 billion $1.225 billion ------------------------------------------------------------------------- Free cash flow(2) $1.13 to $1.13 to - $1.23 billion $1.23 billion ------------------------------------------------------------------------- Net debt to EBITDA(3) 2.5 times 2.5 times - or less or less ------------------------------------------------------------------------- Communications segment Revenue (external) $4.7 to $4.8 to $(50) to $4.8 billion $4.85 billion $(100) million ------------------------------------------------------------------------- Non-ILEC revenue $550 to Approx. $(35) to $575 million $610 million $(60) million ------------------------------------------------------------------------- EBITDA $1.925 to $1.975 to $(50) million $1.975 billion $2.025 billion ------------------------------------------------------------------------- Non-ILEC EBITDA $(20) to Approx. $(25) to $(30) million $5 million $(35) million ------------------------------------------------------------------------- Capital expenditures Approx. Approx. - $875 million $875 million ------------------------------------------------------------------------- High-speed Internet net additions Approx. Approx. - 125,000 125,000 ------------------------------------------------------------------------- Mobility segment Revenue (external) $2.65 to $2.65 to - $2.7 billion $2.7 billion ------------------------------------------------------------------------- EBITDA $1.0 to $975 million to $25 million 1.05 billion $1.025 billion ------------------------------------------------------------------------- Capital expenditures Approx. Approx. - $350 million $350 million ------------------------------------------------------------------------- Wireless subscriber net additions 375,000 to 375,000 to - 425,000 425,000 ------------------------------------------------------------------------- (1) Earnings Before Interest, Taxes, Depreciation and Amortization as calculated below. The 2004 target also reflects adoption of CICA Handbook Section 3870 for share-based compensation and other share-based payments, which is expected to be approximately $45 million in 2004. ($ millions) 2004 target range ------------------ Operating revenues 7,450 to 7,550 Less Operations expense 4,470 4,470 Less Restructuring and workforce reduction costs 30 30 ------- ------- EBITDA 2,950 to 3,050 (2) Defined as EBITDA, adding Restructuring and workforce reduction costs, cash interest received and excess of share compensation expense over share compensation payments, subtracting cash interest paid, cash taxes, capital expenditures, and cash restructuring payments. The definition of free cash flow was amended for 2004 to reflect a change in how the Company measures operating performance, as restructuring payments are anticipated to occur for the foreseeable future, and the level of dividend payments is set after consideration of cash flows before dividends are paid out. ($ millions) 2004 target range ------------------ EBITDA 2,950 to 3,050 Restructuring and workforce reduction costs, net of cash payments (85) (85) Excess of share compensation expense over payments 35 35 Cash interest paid net of cash interest received (650) (650) Income taxes received (paid) including investment tax credits 105 105 Capital expenditures (capex) (1,225) (1,225) ------- ------- Free cash flow 1,130 1,230 (3) Net Debt to EBITDA, where EBITDA excludes Restructuring and workforce reduction costs. This measure is substantially the same as the Leverage Ratio covenant in TELUS' credit facilities. 5. Risks and uncertainties The following are updates to the risks and uncertainties described in Management's discussion and analysis in TELUS' 2003 Annual Report, filings on SEDAR (http://www.sedar.com/) and filings on EDGAR (http://www.sec.gov/). Competition Increased competition may adversely affect market shares, volumes and pricing in certain TELUS business segments On March 18, 2004, Manitoba Telecom Services Inc. announced that it had agreed to purchase all of the shares of an existing national competitor Allstream. This transaction, if concluded, could affect the competitive landscape in Canada, particularly for business local, long distance, data, and other services. In March 2004, Bell Mobility and The Virgin Group announced a joint marketing alliance to offer wireless communication services (on a resale basis) aimed at the Canadian youth market. Virgin Mobile Canada expects to launch its services through a nation-wide rollout later this year using Bell Mobility's 1X digital wireless network. Regulation Price cap regulation - Telecom Public Notice CRTC 2004-1 On March 24, 2004, the CRTC initiated a public proceeding, inviting proposals for disposing of the amounts accumulated in the incumbent local exchange carriers' (ILECs') deferral accounts during the first two years of the second price cap period (June 2002 through May 2004, except for TELUS Communications (Quebec) Inc., which is August 2002 through July 2004). The CRTC has already determined that ILECs can recover from their deferral accounts certain mandated reductions in competitor services rates, service improvement plan costs and competitive digital network access discounts. The scope of the proceeding will address the remaining balance of the deferral accounts. The CRTC indicated that possible outcomes include: - Adjustments to the deferral account could be made if the Commission approved rate reductions for residential local services as a result of competitive pressures; - The deferral account could be drawn down to mitigate rate increases for residential services that could result from the approval of exogenous factors when inflation exceeded productivity; and - Other draw downs could occur such as subscriber rebates or the funding of initiatives that would benefit residential customers in other ways. Proceedings under this Public Notice are expected to continue through to the autumn 2004. TELUS is participating in these proceedings. Regulatory framework for voice communication services using Internet protocol - Telecom Public Notice CRTC 2004-2 On April 7, 2004, the CRTC initiated a public proceeding and expressed its preliminary views regarding regulatory requirements for the provision of voice communication services using Internet protocol. A summary of the CRTC's preliminary view follows. - Voice communication services that provide access to and/or from the public switched telephone network and generally use telephone numbers that conform to the North American Numbering Plan, are not retail Internet services and will be regulated as local exchange services. Revenues from such services are contribution-eligible. - Peer-to-peer Internet services, that do not connect to the public switched telephone network, and do not use telephone numbers that conform to the North American Numbering Plan, are retail Internet services and will not be regulated as local exchange services. Revenues from such services are not contribution-eligible. The CRTC invited comments on its preliminary views and related matters to be filed by June 18, 2004, followed by an interrogatory process and a public consultation on September 21-22, 2004. This proceeding will conclude on October 13, 2004 with the filing of reply comments. TELUS is participating in this process. TELUS Corporation consolidated statements of income Three months Periods ended March 31 (unaudited) (millions) 2004 2003 ------------------------------------------------------------------------- (restated) OPERATING REVENUES $ 1,803.8 $ 1,740.9 ------------------------------------------------------------------------- OPERATING EXPENSES Operations 1,066.6 1,070.1 Restructuring and workforce reduction costs 15.9 6.5 Depreciation 321.7 318.6 Amortization of intangible assets 88.7 92.5 ------------------------------------------------------------------------- 1,492.9 1,487.7 ------------------------------------------------------------------------- OPERATING INCOME 310.9 253.2 Other expense, net 1.2 5.6 Financing costs 145.0 164.3 ------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 164.7 83.3 Income taxes (recovery) 62.6 (6.9) Non-controlling interest 0.8 0.7 ------------------------------------------------------------------------- NET INCOME 101.3 89.5 Preference and preferred share dividends 0.9 0.9 ------------------------------------------------------------------------- COMMON SHARE AND NON-VOTING SHARE INCOME $ 100.4 $ 88.6 ------------------------------------------------------------------------- INCOME PER COMMON SHARE AND NON-VOTING SHARE ($) - Basic 0.28 0.26 - Diluted 0.28 0.26 DIVIDENDS DECLARED PER COMMON SHARE AND NON-VOTING SHARE ($) 0.15 0.15 TOTAL WEIGHTED AVERAGE COMMON SHARES AND NON-VOTING SHARES OUTSTANDING (millions) - Basic 353.1 346.8 - Diluted 355.6 347.0 TELUS Corporation consolidated balance sheets As at As at March 31, December 31, (unaudited) (millions) 2004 2003 ------------------------------------------------------------------------- (restated) ASSETS Current Assets Cash and temporary investments, net $ 273.5 $ 6.2 Accounts receivable 762.7 723.8 Income and other taxes receivable 117.5 187.4 Inventories 117.8 123.5 Prepaid expenses and other 208.0 172.4 Current portion of future income taxes 303.8 304.0 ------------------------------------------------------------------------- 1,783.3 1,517.3 ------------------------------------------------------------------------- Capital Assets, Net Property, plant, equipment and other 7,710.4 7,764.3 Intangible assets subject to amortization 790.8 844.7 Intangible assets with indefinite lives 2,954.6 2,954.6 ------------------------------------------------------------------------- 11,455.8 11,563.6 ------------------------------------------------------------------------- Other Assets Deferred charges 632.3 610.7 Future income taxes 532.5 626.0 Investments 41.6 41.9 Goodwill 3,118.0 3,118.0 ------------------------------------------------------------------------- 4,324.4 4,396.6 ------------------------------------------------------------------------- $ 17,563.5 $ 17,477.5 ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and accrued liabilities $ 1,332.8 $ 1,294.5 Restructuring and workforce reduction accounts payable and accrued liabilities 88.5 141.0 Dividends payable 53.8 53.5 Accrual for redemption of preference and preferred shares 72.8 - Advance billings and customer deposits 454.9 445.0 Current maturities of long-term debt 213.1 221.1 ------------------------------------------------------------------------- 2,215.9 2,155.1 ------------------------------------------------------------------------- Long-Term Debt 6,658.2 6,609.8 ------------------------------------------------------------------------- Other Long-Term Liabilities 1,134.4 1,173.7 ------------------------------------------------------------------------- Future Income Taxes 1,005.1 1,007.0 ------------------------------------------------------------------------- Non-Controlling Interest 9.7 10.7 ------------------------------------------------------------------------- Shareholders' Equity Convertible debentures conversion option 8.8 8.8 Preference and preferred shares - 69.7 Common equity 6,531.4 6,442.7 ------------------------------------------------------------------------- 6,540.2 6,521.2 ------------------------------------------------------------------------- $ 17,563.5 $ 17,477.5 ------------------------------------------------------------------------- TELUS Corporation consolidated statements of cash flows Three months Periods ended March 31 (unaudited) (millions) 2004 2003 ------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 101.3 $ 89.5 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 410.4 411.1 Future income taxes 91.8 193.9 Share-based compensation 4.7 - Net employee defined benefit plans expense 4.9 13.1 Employer contributions to employee defined benefit plans (28.6) (18.0) Restructuring and workforce reduction costs, net of cash payments (52.5) (147.4) Other, net 6.1 6.9 Net change in non-cash working capital 50.0 (144.4) ------------------------------------------------------------------------- Cash provided by operating activities 588.1 404.7 ------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (309.7) (207.8) Proceeds from the sale of property and other assets 12.1 19.3 Other (1.0) 5.9 ------------------------------------------------------------------------- Cash used by investing activities (298.6) (182.6) ------------------------------------------------------------------------- FINANCING ACTIVITIES Common Shares and Non-Voting Shares issued 27.0 20.1 Dividends to shareholders (42.3) (44.8) Long-term debt issued 27.3 17.5 Redemptions and repayment of long-term debt (34.2) (200.1) Other - 1.6 ------------------------------------------------------------------------- Cash used by financing activities (22.2) (205.7) ------------------------------------------------------------------------- CASH POSITION Increase in cash and temporary investments, net 267.3 16.4 Cash and temporary investments, net, beginning of period 6.2 (9.0) ------------------------------------------------------------------------- Cash and temporary investments, net, end of period $ 273.5 $ 7.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOWS Interest paid $ 22.8 $ 36.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Interest received 14.2 1.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income taxes (inclusive of Investment Tax Credits) received (paid) $ 104.6 $ (0.6) ------------------------------------------------------------------------- ------------------------------------------------------------------------- TELUS Corporation Segmented Information Periods ended March 31 Communications Mobility Eliminations Consolidated (millions) 2004 2003 2004 2003 2004 2003 2004 2003 ------------------------------------------------------------------------- External revenue $1,171.1 $1,208.5 $632.7 $532.4 $ - $ - $1,803.8 $1,740.9 Inter- segment revenue 25.0 23.4 4.6 3.7 (29.6) (27.1) - - ------------------------------------------------------------------------- Total operating revenue 1,196.1 1,231.9 637.3 536.1 (29.6) (27.1) 1,803.8 1,740.9 Operations expense 706.7 739.7 389.5 357.5 (29.6) (27.1) 1,066.6 1,070.1 Restruc- turing and work-force reduction costs 15.9 6.5 - - - - 15.9 6.5 ------------------------------------------------------------------------- EBITDA(1)$ 473.5 $ 485.7 $247.8 $178.6 $ - $ - $ 721.3 $ 664.3 ------------------------------------------------------------------------- CAPEX(2) $ 259.4 $ 153.5 $ 50.3 $ 54.3 $ - $ - $ 309.7 $ 207.8 ------------------------------------------------------------------------- EBITDA less CAPEX $ 214.1 $ 332.2 $197.5 $124.3 $ - $ - $ 411.6 $ 456.5 ------------------------------------------------------------------------- (1) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") is defined by the Company as operating revenues less operations expense and restructuring and workforce reduction costs. The Company has issued guidance on, and reports, EBITDA because it is a key measure used by management to evaluate performance of its business segments and is utilized in measuring compliance with certain debt covenants. (2) Total capital expenditures ("CAPEX"). END FIRST AND FINAL ADD TELUS Corporation CONTACT: PR Newswire -- May 5 |