building on 08 strength financial review who we are TELUS is a leading national telecommunications company in Canada, with $9.7 billion of annual revenue and 11.6 million customer connections including 6.1 million wireless subscribers, 4.2 million wireline network access lines and 1.2 million Internet subscribers. As a result of our national growth strategy, in 2008, revenue grew by 6.4 per cent and total connections increased by 448,000. TELUS provides a wide range of communications products and services including data, Internet protocol (IP), voice, entertainment and video. For an overview of our financial and operating what’s inside highlights, goals and challenges, refer to the letter to investors 1 TELUS 2008 annual report − corporate review or visit commitment to corporate governance 4 telus.com/annualreport. financial and operating statistics 6 annual and quarterly consolidated financials 6 annual and quarterly operating statistics 8 For information on our commitment to economic, annual and quarterly segmented statistics 10 social and environmental caution regarding forward-looking statements 12 sustainability, refer to the TELUS 2008 corporate management’s discussion and analysis 13 social responsibility report 1. introduction, performance summary and targets 14 or visit telus.com/csr. 2. core business, vision and strategy 21 3. key performance drivers 23 Caution regarding forward-looking statements summary 4. capabilities 25 This document contains statements about expected future events and 5. results from operations 29 financial and operating results of TELUS that are forward-looking. By their nature, forward-looking statements require the Company to make 6. changes in financial position 37 assumptions and are subject to inherent risks and uncertainties. There 7. liquidity and capital resources 39 is significant risk that the assumptions, predictions and other forward- looking statements will not prove to be accurate. Readers are cautioned 8. critical accounting estimates and accounting not to place undue reliance on forward-looking statements as a number policy developments 46 of factors could cause assumptions, actual future results and events to differ materially from those expressed in the forward-looking statements. 9. general outlook 52 Accordingly this document is subject to the disclaimer and qualified in 10. risks and risk management 54 its entirety by the assumptions (including assumptions for 2009 targets), qualifications and risk factors referred to in the Management’s discussion 11. reconciliation of non-GAAP measures and and analysis starting on page 12 of the TELUS 2008 annual report − definition of key operating indicators 70 financial review and in other TELUS public disclosure documents and filings with securities commissions in Canada (on sedar.com) and in the consolidated financial statements 73 United States (on EDGAR at sec.gov). TELUS disclaims any intention management’s reports 73 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 auditors’ reports 74 discretion, its current practice of updating annual targets and guidance. consolidated financial statements 76 All financial information is reported in Canadian dollars unless notes to consolidated financial statements 80 otherwise specified. glossary 130 Copyright © 2009 TELUS Corporation. All rights reserved. Certain products and services named in this report are trademarks. The symbols ™ investor information 132 and ® indicate those owned by TELUS Corporation or its subsidiaries. environmental commitment back cover All other trademarks are the property of their respective owners. building on strength Dear investor, In 2008, TELUS’ solid operating performance and conservative financial policies resulted in sustainable cash flows, a strong balance sheet and ample liquidity. Operating in a dynamic growth industry, we are positioned to weather the volatile capital markets and weakening economy, while making strategic investments that are building strength for the future. Building on 2008 performance Over time, we anticipate meaningful profit contribution TELUS delivered solid financial performance in 2008. Revenue from these assets. In the meantime, we must focus on effi- increased by 6.4 per cent to $9.7 billion, largely due to wire- ciency initiatives to help offset the start-up costs during dilutive less and data growth. EBITDA (earnings before interest, taxes, stages of these investments. Managing costs in all areas of depreciation and amortization) of $3.8 billion was up only one our busi ness will also help mitigate the impacts of a recession, per cent, as growth in wireless and data was largely offset competition and technological substitution on business volumes. by erosion of traditional telecom services, short-term dilutive growth initiatives and higher restructuring costs in support of efficiency activities. Underlying earnings per share (EPS) increased one per cent to $3.37. Given the importance of communications to consumers and businesses and a high proportion of recurring sub- scription revenues, telecommunications is a resilient business, which has allowed us to continue generating healthy operating cash flow. As expected, capital expenditures increased by five per cent to $1.9 billion as we invested in strategic growth initiatives such as launching Koodo Mobile®, our new basic wireless service. We also con- tinued to make J-curve investments that are initially dilutive to earnings and cash flow. These include building a next generation national wireless network, implementing large enter- prise data contracts in Central Canada and continuing broadband service expansion that enables the further roll-out of TELUS TV®. TELUS 2008 financial review . 1 To that end, significant efficiency initiatives are underway Additionally, we have maintained a constructive relation- including a management salary freeze. Certain of these efforts ship with the four credit ratings agencies and retained are reflected in restructuring costs tripling in 2008 to $59 million investment grade ratings consistent with our policy objective and a forecast for 2009 of $50 million to $75 million. range of BBB+ to A–. We continue to provide clarity for our investors by setting If conditions become advantageous, TELUS in 2009 consolidated and segmented annual targets that we confirm may access the public debt markets for long-term financing or update quarterly. or establish new term credit facilities to refinance short-term financing sources or upcoming debt maturities. Consolidated 2009 targets1 Change over 2008 Revenue $10.025 to $10.275 billion 4 to 6% Using cash flow to fund core business EBITDA $3.75 to $3.9 billion (1) to 3% and create value TELUS is moving forward from a position of financial strength. EPS – basic2 $3.40 to $3.70 1 to 10% We are committed to maintaining our prudent financial policies, Capital expenditures Approx. $2.05 billion 10% which have positioned us well despite the turbulent markets, 1 See Caution regarding forward-looking statements on the inside front cover. and we plan to again operate within these guidelines for 2009. 2 EPS change is compared to $3.37, which is the 2008 EPS excluding income A new cash requirement for 2009 is the expected com- tax-related adjustments. mence ment of more than $320 million in net cash tax payments. Additionally, even though our defined benefit pension plans Maintaining financial and funding strength began 2008 in a strong surplus position, they have of course TELUS’ well-established financial policies are designed to experienced negative returns, although they continue to out- support our business through market cycles and enable the perform the average benchmarks. As a result, in 2009 we are Company to consistently deliver on our national growth strategy. expecting an additional non-cash impact on pension expenses Even with the 2008 purchases of Emergis and an increase of approximately $110 million in cash funding. for $743 million and wireless spectrum for Despite these developments, a combination of TELUS’ strong $882 million, net debt to EBITDA ended balance sheet and cash flow generation continues to allow the year at 1.9 times, within our long-term the Company to return capital to our shareholders, while also policy guideline of 1.5 to two times. We are reinvesting in our business. For example, capital expenditures in the fortunate position of having no size- are increasing by approximately $200 million in 2009, largely able long-term debt maturities until to fund the build of a national next generation wireless network mid-2011 and a $2 billion bank credit that is geared toward creating long-term growth and value. facility committed to 2012. At year- In keeping with our target dividend payout ratio guideline end, we also had more than of 45 to 55 per cent of sustainable net earnings, we declared $1 billion of available liquidity. a fifth consecutive annual increase in our quarterly dividend Notably, TELUS’ traditional to 47.5 cents per share commencing in January 2009 – sources of capital have been approximately $600 million on an annual basis. We also renewed consistently open and available to the our share repurchase program for a smaller amount, which Company throughout this extended will be a discretionary use of cash in 2009. period of capital market volatility. In April, we successfully issued Building on disclosure and governance leadership $500 million of debt at a reasonable At TELUS,