The 2003 Canadian Telecom Summit

1
The 2003 Canadian Telecom Summit

• Looking toward a
• brighter future

Toronto June 11, 2003
2
Surviving the perfect storm to reach a brighter
future

• Robert McFarlane
• EVP Chief Financial Officer

3
agenda

• the warm breeze - late 1990s
• the global perfect storm
• Canadas perfect storm
• the perfect storm strikes TELUS
• lessons learned for a brighter future

4
the warm breeze - late 1990s
5
the warm breeze - late 1990s

• Economic expansion
• strong GDP growth
• inflation contained
• low interest rates

6
the warm breeze - late 1990s
Source BMO Nesbitt Burns
7
the warm breeze - late 1990s

• Economic expansion
• strong GDP growth
• inflation contained
• low interest rates
• Emergence of e-enabled individual investor/trader

8
the warm breeze - late 1990semergence of
e-trading
TD Waterhouse
133 CAGR
40 CAGR
2000
2000
1994
1994
Active accounts
Avg. e-trades per day
Source TD Waterhouse 2000 Annual Report
9
the warm breeze - late 1990s

• Economic expansion
• strong GDP growth
• inflation contained
• low interest rates
• Emergence of e-enabled individual investor/trader
• Government surpluses
• reduced government debt issuance
• traditional fixed income investment into
  government bonds shifts to corporates
• Fixed income mandates shift to seeking more yield
• emergence of liquid corporate high yield market

10
the warm breeze - late 1990s

• Capital markets supported aggressive growth
• revenue growth key attribute
• historical revenue growth trend nice but not
  necessary
• potential revenue growth would suffice
• over 925 billion of equity debt issuance by
  telcos from 1995 to 2000

11
the warm breeze late 1990sNorth American IPOs
714
589
505
479
475
480
443
348
327
321
294
263
246
185
175
150
155
155
107
64
51
63
1991
1990
2000
1996
1993
1999
1998
1995
1992
1997
1994
Source J.P. Morgan Securities
12
the warm breeze - late 1990s

• Capital markets supported aggressive growth
• revenue growth key attribute
• historical revenue growth trend nice but not
  necessary
• potential revenue growth would suffice
• over 925 billion of equity debt issuance in
  1995 to 2000
• Capital market transitioned from efficient to
  excessive

13
the warm breeze - late 1990s
Source Bloomberg
14
the warm breeze - late 1990s

• Says Law and Moores Law became accepted dogma
  in telecom
• Says Law supply creates its own demand
• Moores Law data network traffic doubles every 2
  years
• Future value creation apparently a function of
  building capacity
• since market began valuing firms on asset
  multiples as proxy for future revenue growth

15
the warm breeze - late 1990s

• Resulting valuation metrics
• Wireless (POPs licensed, subscribers)
• CLECs (PPE, bldgs. connected)
• IXCs (fibre miles built)

16
wireless penetration outlook
Canadian wireless penetration 2006E Prior
expectation 40 Revised - Sept 991
50-70
1 September 1999 Clearnet Investor Forum
17
CLECs valued at multiples of PPE
18
the warm breeze - late 1990s

• Worldcom success fuels copycats
• high levels of capital investment
• ?high margins
• ?high growth
• ?high share price
• ?fuels growth by acquisition
• set new benchmarks for strategies of competitors

19
Worldcom vs. ATT capex intensity1
41
29
29
24
24
23
15
15
15
14
9.7
9.5
1999
1998
1995
1996
1997
2000
1 Ratio of capital expenditures to revenue
Source Company reports, Merrill Lynch
20
Worldcom vs. ATT EBITDA margin
34
33
32
32
29
26
27
27
25
24
22
18
2000
1999
1998
1995
1996
1997
1 Ratio of capital expenditures to revenue
Source Company reports, Merrill Lynch
21
Worldcom enterprise value
22
the warm breeze - late 1990s

• Result phenomenal capital investment in telecom
• build it and they shall come ideology became
  standard basis for telecom business plans

23
global telecom capital expenditures
(USB)
221
217
175
154
145
2002
2001
1999
2000
2003E
Source Merrill Lynch
24
the warm breeze late 1990sglobal telecom
services - capital raised
47 CAGR
Source Securities Data Corporation, RBC Capital
Markets
25
the global perfect storm
26
the global perfect storm North American
technology meltdown
27
the global perfect storm North American equity
issuance total
185
(USB)
119
94
2001
2002
2000
Source J.P. Morgan Securities
access to capital markets dries up
28
the global perfect storm North American equity
issuance - telecom
49
(USB)
38
18
16
14
10
10
8
2000
2001
1999
1998
1995
2002
1996
1997
Source J.P. Morgan Securities
telecom issuance peaks in 2000 then in free-fall
29
the global perfect storm global issuer public
debt default analysis
186
141
120
100
60
1998
1999
2000
2001
2002
Source Moodys Investors Services
number of defaults skyrocket
30
the global perfect storm global issuer public
debt default analysis
2001
1999
1998
2000
2002
20B
30B
30B
107B
Source Moodys Investors Services
US270B of public debt defaults in 2001/02
163B
31
the global perfect storm US CLEC1 value
destruction
103B
US98B destroyed
4.5B
1 Composite comprised of, Teligent, Winstar,
PSInet, McLeod and Global Crossing. Global
Crossing enterprise value is as of May-99
Source J.P. Morgan Securities Inc.
32
the global perfect storm corporate malfeasance

• Accounting irregularities surface
• Investor confidence shaken generally Worldcom/
  Qwest/Adelphia placed focus on telecom sector
• US political reaction passed Sarbanes-Oxley Act
  in 45 days
• Investor flight to safety, any telecom not
  considered safe

33
the global perfect storm cash becomes King again

• Credit agencies didnt see it coming ?investor
  backlash
• reacted by raising the bar becoming significantly
  more conservative
• Equity and debt market raised the bar cash is
  King!
• Capital markets closed to negative cash flow
  stories

34
the global perfect storm global credit rating
activity - telecom
783
611
173
123
121
129
97
49
58
56
45
31
13
30
35
12
2002
2001
2000
1995
1999
1998
1996
1997
Source Moodys Investors Services
35
the global perfect storm capital spending
ambitions scaled back
Capex Intensity Trend Analysis
2002
2001
Q1-03
2
US RBOCs
25
18
11
US Wireless
34
26
14
Sprint FON
14
31
10
ATT
10
13
7
Sources Company reports, Merrill Lynch
1 Ratio of capital expenditures to revenue 2
Composite comprised of SBC Communications,
Verizon, and BellSouth
36
the global perfect storm telecom meltdown

• . . . 24 of the nation's 29 top
  telecommunications companies that have not yet
  filed for bankruptcy are at risk of doing so in
  coming months. Only a few companies - among them
  Verizon, Cisco Systems, SBC and BellSouth - are
  relatively free from the risk of toppling into
  insolvency . . . - June 18, 2002

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Canadas perfect storm
38
Canadas perfect stormtelecom underperforms TSX
1 Adjusted to include companies previously
removed Call-Net, Microcell, 360networks, GT
Group Telecom, Microcell, and ATT Canada
39
Cdn alternate carrier revenue growth stagnates
(M)
ATT Canada
Call-Net
GT Group
1
2001
2000
2002
1Includes only Q1 and Q2 before GTs CCRA filing
40
Canadian alternate carrier debt value destruction
balance sheet debt before restructuring
balance sheet debt after restructuring
Call-Net
500M
Call-Net
ATT Canada
2.6B
0B
ATT Canada
GT
4.7B
1.6B
Microcell
Microcell
350M
2.0B
360 networks
360networks
215M
2.7B
1B
13.6B
41
Canadas perfect stormvalue destruction emulates
US experience

• Capital no longer available for telcos with no
  prospect of cash flow
• Liquidity crisis emerges in 2002
• Similar outcome as per US
• restructurings
• destruction of value
• Outcome was not regulatory induced but rather
  inevitable consequence of global perfect storm

42
TELUS/Bell West non-ILECssource of intense
competition
527M
368M
335M
182M
84M
58M
2001
2002
2001
2002
2000
2000
TELUS East (Non-ILEC)
Bell West
43
Regulatory impacts

• Contribution rebanding decisions significantly
  reduce subsidies to ILECs for below-cost rural
  service
• Announced in 2001, effective January 2002
• Decisions significantly benefit non-incumbent
  long distance carriers
• 2002 price cap decision on local rates further
  hurt ILECs also hurt CLECs

44
the perfect storm strikes TELUS
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strategic imperatives 2000-2003

• Provide integrated solutions
• Build national capabilities
• Partner, acquire divest as necessary
• Focus relentlessly on growth markets
• Go to market as one team
• Invest in internal capabilities

46
build national capabilitiesTELUS national
infrastructure 2000
Add ML map - network before expansion
47
build national capabilitiesTELUS national
infrastructure - 2003
Add ML map - network after expansion
48
regulatory tornado hits TELUS with little
warning

• TELUS Assessment

2003
2002
(268M)
(211M)
(211M)
(343M)
(57M)
(75M)
(75M)
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TELUS perfect storm arrives
TELUS Common Equity
(February 1, 2001 - July 26, 2002)
45
April 2001
CRTC Contribution Rebanding decision
40
35
Oct 25
Dividend reduced to 0.15 from 0.35
30
Mar 21
BCE earnings warning
25
Jun 25
WorldCom fraud
20
Aug-Nov 2001
Enron collapse
15
May 5
Annual General Meeting Q1 results
10
May 31
Jul 25
Initial reaction to CRTC price cap decision
Moody's downgrade
5
Jul-01
Jul-01
Jul-02
Mar-01
Apr-01
Jun-01
Oct-01
Jan-02
Mar-02
Apr-02
Jun-02
Feb-01
May-01
Aug-01
Sep-01
Nov-01
Dec-01
Feb-02
May-02
50
TELUS recovery plan

• Increased focus on cash flow generation
• reduced dividend by 57 offsetting cash impact of
  contribution decision Fall 2001
• Operational Efficiency Plan commenced
• focus on improved capital efficiency
• continued successful execution by Mobility

51
operational efficiency program (OEP)
Staff Reductions (net)
7,300
6,600
2003E
OEP leads to 29 reduction of wireline employee
base
52
invest where there is industry growth
8.5
6.9
LD
Local
Data
Wireless
(1.0)
(3.8)
Estimated 3-year industry revenue growth (CAGR
2003-2006)
Source TELUS estimates for Canadian industry
revenue growth
53
TELUS capex capex intensity1
Capex in billions
2
1 Ratio of capital expenditures to revenue 2
Includes 356 million for wireless spectrum
54
how does TELUS Mobility measure up?
Sources TELUS estimates. Cdn. Statistics -
Company Reports US Statistics - Company Reports
and Morgan Stanley 1 Projected capex as a of
forecast total revenue. 2 Projected EBITDA less
projected Capex divided by projected total
revenues 3 Projected wireless penetration gain
divided by of carriers in market. For TELUS,
projected net adds divided by projected covered
POPs
TELUS Mobility is a premium wireless provider
operating in rational Cdn wireless industry
55
wireless penetration outlook
Canadian wireless penetration 2006E Prior
expectation 40 Revised - Sept 99
50-70 Current expectation approx. 50
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brightest future ever for Cdn. wireless industry

• Rational industry structure supports competition
• Stable revenue per subscriber
• Among lowest churn rates in the world
• Producing positive free cash flow for the first
  time since inception in 1985
• Financial prospects very bright for those with
  good strategies, well-executed

57
TELUS free cash flow1
500 to 600M
2002
2001
2003E
(26)M
(1.35)B
1 EBITDA less capex, cash interest, cash taxes,
cash dividends excludes restructuring
workforce reduction costs
58
TELUS recovery plan

• Increased focus on cash flow generation
• reduced dividend by 57 offsetting cash impact of
  contribution decision Fall 2001
• Operational Efficiency Program commenced
• focus on improved capital efficiency
• continued successful execution by Mobility
• Enhanced public disclosure Summer 2002
• bank covenants disclosed
• increased Investor Relations communication
• issued 2004 cash flow guidance early

59
TELUS corporate governance

• Took comprehensive action in 2002
• Supports direction in US of Sarbanes-Oxley/SEC
• Supports Canadas proposed National Policy on
  disclosure Ontarios Bill 198

60
TELUS corporate governanceresponse to concerns
61
TELUS recovery plan

• Increased focus on cash flow generation
• reduced dividend by 57 Fall 2001 - offsetting
  cash impact of contribution rebanding decision
• Operational Efficiency Plan commenced
• focus on improved capital efficiency
• continued successful execution by Mobility
• Enhanced public disclosure Summer 2002
• bank covenants disclosed
• increased Investor Relations communication
• issued 2004 cash flow guidance early
• Debt buyback / equity issue Aug/Sept 2002
• Reduce leverage

62
strategy execution paying off
63
2003 outlookleading North American telecom
performance
64
2003 outlookleading North American telecom
performance
Projected EBITDA-Capex Growth Rates 2003E
52.3
18.4
11.5
8.5
7.0
SBC
1.5
Verizon
ATT
Sprint
Bell South
TELUS
Aliant
BCE
MTS
(0.6)
(4.6)
(19.9)
Note TELUS data based on 2002 actual results
average of 2003 targets Other 2003 estimates
provided by TD Securities, based on analysts
estimates
65
strategy execution paying off - equity
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Lessons learnedfor a brighter future
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lessons learned

• Customers investors should determine telecom
  winners and losers, not regulator
• Do not ask regulators to subsidize poor
  strategies, poorly executed
• CLEC/alternate carrier failures in Canada
  consistent with US experience, not due to CRTC
• Debt-free fallen angels source of rejuvenated
  competition
• Bell TELUS geographic expansions are source of
  increasingly intense competitive rivalry

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lessons learned

• TELUS has incurred 350M of reduced operating
  profit due to price cap and contribution/rebanding
  regulatory decisions
• Regulatory decisions should ideally be
  consistent, transparent and sensitive to capital
  market considerations
• Unlike US, Canada has evolved to correct wireless
  industry structure
• TELUS Mobility is producing best-in-class results
  and we are now experiencing the brightest future
  ever for Cdn. wireless industry despite
  moderating growth
• TELUS experience in past year shows that good
  telecom strategy consistently well-executed will
  be rewarded despite regulatory and other external
  adversity

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questions?