capital structure financial policies

6 Months Ended

Jun. 30, 2023

capital structure financial policies

capital structure financial policies

3 capital structure financial policies

General

Our objective when managing financial capital is to maintain a flexible capital structure that optimizes the cost and availability of capital at acceptable risk.

In our definition of financial capital, we include common equity (excluding accumulated other comprehensive income), non-controlling interests, long-term debt (including long-term credit facilities, commercial paper backstopped by long-term credit facilities and any hedging assets or liabilities associated with long-term debt items, net of amounts recognized in accumulated other comprehensive income), cash and temporary investments, short-term borrowings, including those arising from securitized receivables, and other long-term debts, including those arising from securitized receivables.

We manage our financial capital structure and make adjustments to it in light of changes in economic conditions and the risk characteristics of our business. In order to maintain or adjust our financial capital structure, we may adjust the amount of dividends paid to holders of Common Shares, purchase Common Shares for cancellation pursuant to normal course issuer bids, issue new shares (including Common Shares and TELUS International (Cda) Inc. subordinate voting shares), issue new debt, issue new debt to replace existing debt with different characteristics, increase or decrease the amount of receivables sold to an arm’s-length securitization trust, and/or enter into a new arm’s-length securitization trust to replace an existing arm’s-length securitization trust with different characteristics.

During 2023, our financial objectives, which are reviewed annually, were unchanged from 2022. We believe that our financial objectives are supportive of our long-term strategy.

We monitor financial capital utilizing a number of measures, including: net debt to earnings before interest, income taxes, depreciation and amortization (EBITDA*) – excluding restructuring and other costs ratio; coverage ratios; and dividend payout ratios.

Debt and coverage ratios

Net debt to EBITDA – excluding restructuring and other costs is calculated as net debt at the end of the period, divided by 12-month trailing EBITDA – excluding restructuring and other costs. This measure, historically, is substantially similar to the leverage ratio covenant in our credit facilities, except that the covenant includes in EBITDA the unrealized effects of non-currency risk-related derivative financial instruments that are held for trading (see Note 4(d)). Net debt and EBITDA – excluding restructuring and other costs are measures that do not have any standardized meanings prescribed by IFRS-IASB and are therefore unlikely to be comparable to similar measures presented by other issuers. The calculation of these measures is set out in the following table. Net debt is one component of a ratio used to determine compliance with debt covenants.

As at, or for the 12-month periods ended, June 30 ($ in millions)	Objective			2023		2022
Components of debt and coverage ratios
Net debt 1				$	26,485	$	21,693
EBITDA – excluding restructuring and other costs 2				$	6,899	$	6,715
Net interest cost 3 (Note 9)				$	1,084	$	755
Debt ratio
Net debt to EBITDA – excluding restructuring and other costs	2.20	–	2.70 4		3.84		3.23
Coverage ratios
Earnings coverage 5					2.5		4.2
EBITDA – excluding restructuring and other costs interest coverage 6					6.4		8.9

1 Net debt and total managed capitalization are calculated as follows:

As at June 30	Note	2023		2022
Long-term debt	26	$	26,588	$	21,628
Debt issuance costs netted against long-term debt			114		100
Derivative (assets) liabilities used to manage interest rate and currency risks associated with U.S. dollar-denominated long-term debt, net			(72)		(172)
Accumulated other comprehensive income amounts arising from financial instruments used to manage interest rate and currency risks associated with U.S. dollar-denominated long-term debt — excluding tax effects			(90)		240
Cash and temporary investments, net			(649)		(382)
Short-term borrowings	22		594		279
Net debt			26,485		21,693
Common equity			16,407		15,716
Non-controlling interests			1,172		964
Less: accumulated other comprehensive income amounts included above in common equity and non-controlling interests			(55)		(201)
Total managed capitalization		$	44,009	$	38,172

* EBITDA is not a standardized financial measure under IFRS-IASB and might not be comparable to similar measures disclosed by other issuers; we define EBITDA as operating revenues and other income less goods and services purchased and employee benefits expense. We report EBITDA because it is a key measure that management uses to evaluate the performance of our business, and it is also utilized in measuring compliance with certain debt covenants.

2 EBITDA – excluding restructuring and other costs is calculated as follows:

					EBITDA –
			Restructuring		excluding
	EBITDA		and other costs		restructuring
	(Note 5)		(Note 16)		and other costs
Add
Six-month period ended June 30, 2023	$	3,209	$	274	$	3,483
Year ended December 31, 2022		6,406		240		6,646
Deduct
Six-month period ended June 30, 2022		(3,162)		(68)		(3,230)
EBITDA – excluding restructuring and other costs	$	6,453	$	446	$	6,899

3 Net interest cost is defined as financing costs, excluding employee defined benefit plans net interest, virtual power purchase agreements unrealized change in forward element, recoveries on long-term debt prepayment premium and repayment of debt, calculated on a 12-month trailing basis (expenses recorded for long-term debt prepayment premium, if any, are included in net interest cost) (see Note 9).

4 Our long-term objective range for this ratio is 2.20 – 2.70 times. The ratio as at June 30, 2023, is outside the long-term objective range. We may permit, and have permitted, this ratio to go outside the objective range (for long-term investment opportunities), but we will endeavour to return this ratio to within the objective range in the medium term (following the spectrum auction in 2021, and the spectrum auctions upcoming in 2023 and 2024), as we believe that this range is supportive of our long-term strategy. We are in compliance with the leverage ratio covenant in our credit facilities, which states that we may not permit our net debt to operating cash flow ratio to exceed 4.25:1.00 (see Note 26(d)); the calculation of the debt ratio is substantially similar to the calculation of the leverage ratio covenant in our credit facilities.

5 Earnings coverage is defined by Canadian Securities Administrators National Instrument 41-101 as net income before borrowing costs and income tax expense, divided by borrowing costs (interest on long-term debt; interest on short-term borrowings and other; long-term debt prepayment premium), and adding back capitalized interest, all such amounts excluding those attributable to non-controlling interests.

6 EBITDA – excluding restructuring and other costs interest coverage is defined as EBITDA – excluding restructuring and other costs, divided by net interest cost. This measure is substantially similar to the coverage ratio covenant in our credit facilities.

Net debt to EBITDA – excluding restructuring and other costs was 3.84 times as at June 30, 2023, as compared to 3.23 times one year earlier. The effect of the increase in net debt, primarily due to the acquisition of spectrum licences and business acquisitions, exceeded the effect of growth in EBITDA – excluding restructuring and other costs.

The earnings coverage ratio for the twelve-month period ended June 30, 2023, was 2.5 times, down from 4.2 times one year earlier. A decrease in income before borrowing costs and income taxes decreased the ratio by 0.8 and an increase in borrowing costs decreased the ratio by 0.9. The EBITDA – excluding restructuring and other costs interest coverage ratio for the twelve-month period ended June 30, 2023, was 6.4 times, down from 8.9 times one year earlier. Growth in EBITDA – excluding restructuring and other costs increased the ratio by 0.2 and an increase in net interest costs decreased the ratio by 2.7.

TELUS Corporation Common Share dividend payout ratio

So as to be consistent with the way we manage our business, our TELUS Corporation Common Share dividend payout ratio is presented as a historical measure calculated as the sum of the dividends declared in the most recent four quarters for TELUS Corporation Common Shares, as recorded in the financial statements net of dividend reinvestment plan effects (see Note 13), divided by the sum of free cash flow* amounts for the most recent four quarters for interim reporting periods (divided by annual free cash flow if the reported amount is in respect of a fiscal year). The historical measure for the 12-month period ended June 30, 2023, is presented for illustrative purposes in evaluating our target guideline.

For the 12-month periods ended June 30	Objective	2023		2022
Determined using most comparable IFRS-IASB measures
Ratio of TELUS Corporation Common Share dividends declared to cash provided by operating activities – less capital expenditures		168	%	224	%
Determined using management measures
TELUS Corporation Common Share dividend payout ratio – net of dividend reinvestment plan effects	60%–75% 1	87	%	133	%

1 Our objective range for the TELUS Corporation Common Share dividend payout ratio is 60%-75% of free cash flow on a prospective basis.

For the 12-month periods ended June 30 (millions)	2023		2022
TELUS Corporation Common Share dividends declared	$	2,014	$	1,796
Amount of TELUS Corporation Common Share dividends declared reinvested in TELUS Corporation Common Shares		(730)		(644)
TELUS Corporation Common Share dividends declared - net of dividend reinvestment plan effects	$	1,284	$	1,152

* Free cash flow is not a standardized financial measure under IFRS-IASB and might not be comparable to similar measures presented by other issuers; we define free cash flow as EBITDA (operating revenues and other income less goods and services purchased and employee benefits expense) excluding items that we consider to be of limited predictive value, including certain working capital changes (such as trade receivables and trade payables), proceeds from divested assets, and other sources and uses of cash, as found in the consolidated statements of cash flows. We have issued guidance on, and report, free cash flow because it is a key performance measure that management and investors use to evaluate the performance of our business.

Our calculation of free cash flow, and its reconciliation to cash provided by operating activities, is as follows:

For the 12-month periods ended June 30 (millions)	Note	2023		2022
EBITDA	5	$	6,453	$	6,540
Deduct gain on disposition of financial solutions business			—		(410)
Restructuring and other costs, net of disbursements			186		7
Effects of contract asset, acquisition and fulfilment and TELUS Easy Payment device financing			(173)		(3)
Effect of lease principal	31(b)		(506)		(503)
Items from the Consolidated statements of cash flows:
Share-based compensation, net	14		127		120
Net employee defined benefit plans expense	15		80		109
Employer contributions to employee defined benefit plans			(35)		(50)
Interest paid			(1,022)		(747)
Interest received			23		15
Capital expenditures	5		(3,105)		(3,787)
Free cash flow before income taxes			2,028		1,291
Income taxes paid, net of refunds			(560)		(486)
Effect of disposition of financial solutions business on income taxes paid			—		61
Free cash flow			1,468		866
Add (deduct):
Capital expenditures	5		3,105		3,787
Effects of lease principal			506		503
Gain on disposition of financial solutions business, net of effect on income taxes paid			—		(349)
Net change in non-cash operating working capital not included in preceding line items and other individually immaterial items included in net income neither providing nor using cash			(775)		(217)
Cash provided by operating activities		$	4,304	$	4,590