2009 financial review opportunity our what’s inside letter to investors 1 corporate governance and integrity 4 financial and operating statistics 6 annual and quarterly consolidated financials 6 annual and quarterly operating statistics 8 annual and quarterly segmented statistics 10 caution regarding forward-looking statements 12 management’s discussion and analysis 13 1. introduction, performance summary and targets 14 2. core business and strategy 20 3. key performance drivers 22 4. capabilities 23 5. discussion of operations 28 6. changes in financial position 37 7. liquidity and capital resources 39 8. critical accounting estimates and accounting policy developments 46 9. general outlook 53 10. risks and risk management 56 11. definitions and reconciliations 74 consolidated financial statements 77 management’s reports 77 auditors’ reports 78 consolidated financial statements 80 notes to consolidated financial statements 85 glossary 134 investor information 136 telus.com/investors 141 corporate social responsibility back cover For an overview of our y financial and operating it highlights, goals and 2009 corporate review un challenges, refer to the rt TELUS 2009 annual report − corporate review or visit po telus.com/annualreport. op our For information on our y it commitment to economic, 2009 corporate social responsibility report social and environmental un rt sustainability, refer to the TELUS 2009 corporate po social responsibility report op or visit telus.com/csr. our Caution regarding forward-looking statements summary This document contains statements about expected future events and financial and operating performance 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 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 assumptions, actual future performance and events to differ materially from those expressed in the forward-looking statements. Accordingly this document is subject to the disclaimer and qualified in its entirety by the assumptions (including assumptions for 2010 targets), qualifications and risk factors referred to in the Management’s discussion and analysis starting on page 12 of the TELUS 2009 annual report − financial review and in other TELUS public disclosure documents and filings with securities commissions in Canada (on SEDAR at sedar.com) and in the United States (on EDGAR at sec.gov). TELUS disclaims any intention or obligation to update or revise forward-looking statements, except as required by law, and reserves the right to change, at any time at its sole discretion, its current practice of updating annual targets and guidance. All financial information is reported in Canadian dollars unless otherwise specified. Copyright © 2010 TELUS Corporation. All rights reserved. Certain products and services named in this report are trademarks. The symbols ™ and ® indicate those owned by TELUS Corporation or its subsidiaries. All other trademarks are the property of their respective owners. TELUS’ strategic intent who we are To unleash the power of the Internet to deliver TELUS is a leading national telecommuni cations the best solutions to Canadians at home, in the company in Canada, with $9.6 billion of annual workplace and on the move. revenue and 12 million customer connections including 6.5 million wireless subscribers, 4.0 million wireline network access lines, strategic imperatives 1.2 million Internet subscribers and 170,000 TELUS TV ® customers. TELUS provides Building national capabilities across data, a wide range of communications products 1 Internet protocol (IP), voice and wireless and services including data, IP, voice, entertainment and video. Focusing relentlessly on growth markets 2 of data, IP and wireless Partnering, acquiring and divesting we give where we live to accelerate the implementation of our 3 In support of our philosophy to give where we strategy and focus our resources on live, TELUS, our team members and retirees core business have contributed $158 million to charitable and Providing integrated solutions that not-for-profit organizations and volunteered 4 differentiate TELUS from our competitors 3.1 million hours of service to local communities since 2000. Nine TELUS Community Boards Investing in internal capabilities to build from Victoria to Atlantic Canada lead our local 5 a high-performance culture and efficient philanthropic initiatives. TELUS was honoured to operation be named the most outstanding philanthropic corporation globally for 2010 by the Association Going to market as one team, under a of Fundraising Professionals, becoming the 6 common brand, executing a single strategy first Canadian company ever to receive this prestigious international recognition. our values .. We embrace change and initiate opportunity .. We have a passion for growth .. We believe in spirited teamwork .. We have the courage to innovate letter to investors Dear investor, Based on our solid financial foundation, in 2009 TELUS made major investments for the future while adapting to the recessionary economy in Canada. We now have the opportunity to generate revenue and earnings growth and create shareholder value as we start to realize the benefits of our strategic investments. Looking back at 2009 slightly to $9.6 billion and EBITDA (earn- Our solid financial foundation allowed ings before interest, taxes, depreciation and us to stay the course in 2009 and invest amortization) after restructuring decreased prudently in our core businesses, despite by almost eight per cent to $3.5 billion. the recessionary pressures we faced. Net income decreased by 11 per cent In 2009, economic and competitive to $1 billion. We did not achieve our 2009 challenges impacted our wireless revenue. revenue and earnings targets or realize While we expected downward pressure a positive total shareholder return. on average revenue per customer (ARPU), However, due to our strong financial we did not expect the magnitude of the position, we were able to complete decline. The trend worsened from negative our planned $2.1 billion strategic capital one per cent in 2008 to 6.8 per cent in spending program in 2009. This included opportunity 2009, which largely but not fully offset our reasonable wireless subscriber growth of 6.4 per cent. Meanwhile, we faced ongoing revenue declines in our traditional wireline services. In response, we accelerated our efforts to reduce costs and increase efficiency. For example, salaries, benefits (excluding defined benefit pension plan expenses) and employee expenses were $174 million lower in 2009, a reduction of seven per cent from 2008, while restruc- our turing costs climbed to $190 million, up from $59 million in 2008. As a result of these and other competitive pressures, TELUS’ financial performance in 2009 was disappointing. Revenue decreased TELUS 2009 financial review . 1 constructing and launching a national 3G+ wireless network Benefits of financial prudence ahead of schedule and on budget while making great TELUS continues to maintain a strong financial position progress in enhancing the speed and capabilities of our and reasonably conservative balance sheet, with sustainable wireline broadband network. cash flows and ample liquidity of more than $1 billion. Free cash flow was up $139 million in 2009 to This strength has enabled us to fund core strategic invest- $500 million. The increase was due primarily to having no ments despite the recession. wireless spectrum costs in 2009 ($882 million in 2008), Our decade-long track record of prudent financial policies which more than offset the $288 million lower EBITDA, is reflected in the strong investment grade credit ratings $256 million higher cash income taxes and $244 million (BBB+/A–, stable trend) that we currently hold. We remained increase in capital spending. in compliance with our long-term debt policies in 2009. We have established a solid relationship with the capital 2010 and future opportunities markets. This is evidenced by TELUS successfully accessing We now have the opportunity to realize the benefits the Canadian debt markets in the last two years despite the of our major strategic investments in capital and efficiency, recession. Notably, we have had a continuously active com- which fundamentally strengthened our competitive position mercial paper program and raised $1.7 billion of long-term and enhanced our customer service offerings. debt in 2009 at attractive rates of circa five per cent, allowing We are expecting higher growth in smartphones, which us to retire debt with rates as high as 8.5 per cent. We also typically are associated with higher ARPU levels, and growth extended the Company’s average debt maturity by an in TELUS TV service. The financial benefits are expected additional year to five years. to be more evident toward the latter part of 2010 and into In addition, TELUS has prudently managed obligations 2011, as we move through near-term dilution from increased to our pensioners and earned good returns in 2009. The device subsidies related to contracts from more smartphone result is that we enjoy one of the better pension funding sales and the installation and marketing costs from more positions in corporate Canada as the assets in our defined TELUS TV subscribers. Offsetting