TELUS
Annual Report 2020

Plain-text annual report

Leading the world when the world needs us most ANNUAL REPORT 2020 We are leading the world TELUS is a dynamic, world-leading communications technology company with $16 billion in annual revenue and 16 million customer connections spanning wireless, data, IP, voice, television, entertainment, video and security. We leverage our global-leading technology and compassion to enable remarkable human outcomes. Our long-standing commitment to putting our customers first fuels every aspect of our business, making us a distinct leader in customer service excellence and loyalty. TELUS Health is Canada’s leader in digital health technology, TELUS Agriculture provides innovative digital solutions throughout the agriculture value chain and TELUS International is a leading digital customer experience innovator that delivers next-generation AI and content management solutions for global brands. Driven by our passionate social purpose to connect all citizens for good, our deeply meaningful and enduring philosophy to give where we live has inspired TELUS, our team members and retirees to contribute more than $820 million and 1.6 million days of service since 2000. This unprecedented generosity and unparalleled volunteerism have made TELUS the most giving company in the world. Many photos within this report were taken prior to the COVID-19 pandemic. For those photos taken during 2020, all necessary precautions were strictly followed. TELUS is committed to ensuring the health and safety of our team members, customers and communities. All financial information is reported in Canadian dollars unless otherwise specified. Copyright © 2021 TELUS Corporation. All rights reserved. Certain products and services named in this report are trademarks. The symbols TM and ® indicate those owned by TELUS Corporation or its subsidiaries. All other trademarks are the property of their respective owners. 1–9 Corporate overview Supporting our stakeholders through an unprecedented year, results and highlights from 2020, and our 2021 targets 10 –15 CEO letter to investors Keeping our stakeholders connected to what matters most through our leadership in social capitalism 16–17 Our social purpose at a glance Leveraging technology to enable remarkable human outcomes 18 –21 Operations at a glance Reviewing our wireless and wireline operations 22– 29 Leadership Our Executive Team, questions and answers, Board of Directors and corporate governance 30 –196 Financial review Detailed financial disclosure, including a letter from our CFO and other investor resources Corporate Overview When things are at their worst, our team is at its best In 2020, our working, educational and social lives changed dramatically. As citizens, team members and employers, we have had to respond in unprecedented ways to keep our families, colleagues and fellow citizens safe, connected, healthy and productive. Driving meaningful change is core to our leadership in social capitalism. It’s more than just our commitment to give where we live to strengthen our communities, it’s how we leverage our innovative world-leading technology to help address the world’s most pressing social issues. Our ability to respond to the global pandemic – quickly and effectively – is a direct result of the successful strategy we have embraced for two decades. TELUS 2020 ANNUAL REPORT • 1 Celebrating the power of caring, innovation and spirited teamwork Donating care kits to those in need The TELUS Toronto Central Ambassador Club, including Asharaf Sheriff and his children, filled and donated 100 care kits to the Agincourt Community Services Association (ACSA) in Toronto. ACSA addresses a variety of issues including systemic poverty, hunger, inadequate housing, homelessness, unemployment, accessibility and social isolation. Each kit contained TELUS- branded masks, gloves and hand sanitizers, and were distributed to local residents in need to help keep them safe throughout the pandemic. Caring for critters Numerous dedicated team members, including Tania Stupavsky, visited an alpaca farm in Mont-Saint-Hilaire, Quebec, to help improve their habitat. The team wanted to support a small, family-run business as part of our TELUS #StandWithOwners campaign and were looking for an activity that was family-friendly, and where team members would be able to maintain safe physical distancing. Together, these team members cleared a forest of debris to provide more room for the alpacas, ensuring they could roam freely and enjoy the wilderness. •• • darren_entwistle In a true example of collaboration, members of our @TELUS team, together with TELUS retirees and local businesses, came together to support the Soowahlie First Nation community in British Columbia. The team delivered close to 3,000 lbs of goods including fresh produce, meat, and dry goods. Thank you to Kyle Tom at North American Produce (@napsvancouver) and Chris Les at Meadow Valley Meats for providing goods at-cost and donating a portion of the delivery; and to TELUS retiree Mark Ens of Big Box Outlets, who arranged our dry goods order, which included hundreds of pounds of non-perishable food items. Finally, a big thank you to all the TELUS team members who provided support including Andrew Marshall, Anne Zhong (@vancity_anne), Courtney Samson, Devin Campbell, Eric Nordgren, Neil Marshall, Norman Leffler, Sean, Tresson Marsh, and Rob Aiello for your enthusiasm and spirited teamwork. Bravo! #AllConnectedForGood #COVID19 #COVID19Canada #CoronavirusCanada #TELUS #CommunityGiving #GivingBack 2 • TELUS 2020 ANNUAL REPORT •• • Providing seniors with technology to stay connected The West Country Family Service Association in Alberta offers assistance with health and support services, as well as social activities, to individuals who may be isolated in their homes due to physical or emotional incapacity. TELUS was made aware that seniors in their care were in need of tablets and internet connectivity to support their learning and to better connect them to their families, particularly during the pandemic. Our team was quick to respond to their call for help. Team members secured a number of Smart Hubs to loan to the seniors’ homes and Technicians Jason Melanson (left) and Kevin Maxwell (right) installed them at West Country. Furthermore, the West Country team is now offering technology training to the seniors, with the hope that the program encourages them to permanently embrace the internet and technology in their homes to help them stay connected. darren_entwistle I am proud of our @TELUS team and their continuous efforts to support our communities, including 55 of our amazing @TELUSfr team members, led by Caroline, Nathalie, Stéphanie and Pierre, who went door to door in Saint-Georges in Beauce, Quebec, collecting food for @moissonbeauce. Helping nearly 350 people in need, they picked up more than 2,800 kg of groceries from the 600+ families who participated. Bravo, team! #WeWillGetThroughThisTogether #StayStrongStayConnected #AllConnectedForGood #COVID19 #COVID19Canada #CoronavirusCanada #TELUS •• • Demonstrating everyday innovation In September, team members from Montreal and Guatemala City participated in their first-ever Thoughtful Acts of Kindness Days, initiated to gain synergies between the two teams working across the globe. From preparing hot meals to be handed out to homeless people in Guatemala, to bringing groceries to elderly neighbours, there were over 250 acts of kindness that brightened the day for many citizens. The teams, including Aline Restikian (left) and Luis Zuleta, collaborated on various projects to give back to their respective communities in Canada and Guatemala. As a result of the success of the program, the teams have decided to make this an annual tradition. darren_entwistle Just in time for the holidays, our new @TELUS critter masks featuring our loveable snow leopard and penguin critters, will help to keep you, your families and our communities safe. Thanks to the support of our customers and team members, including Katie and her family, we’ve been able to raise hundreds of thousands of dollars to support COVID-19 relief efforts through the TELUS @friendlyfuturefoundation. Click the link in bio to see all of our critter mask designs. #WearAMask #TELUSCritterMasks #CritterMasks #TELUSCritters TELUS 2020 ANNUAL REPORT • 3 We are responding to unprecedented times in unprecedented ways $150 million commitment to COVID-19 relief efforts $10 million to support public healthcare $535,000 to TELUS Friendly Future Foundation™ through sale of TELUS-branded critter masks 4 • TELUS 2020 ANNUAL REPORT TELUS will stand with our communities, as we have always done, throughout the COVID-19 pandemic and beyond. From keeping families connected while loved ones are in hospital and enabling citizens to stay productive while working and learning remotely, to helping businesses pivot their operations to continue serving customers and harnessing technology to improve health outcomes, we are leading the world when the world needs us most. 14,200 devices donated to keep at-risk Canadians connected 360,000 masks sewn and donated 13,300 backpacks filled with school supplies and TELUS-branded critter masks 12,700 COVID-19 assessments done by TELUS mobile health clinics 1,250,000 virtual volunteer hours 29,000 healthcare practitioners enabled to conduct video visits with patients TELUS 2020 ANNUAL REPORT • 5 2020 PERFORMANCE AT A GLANCE Delivering solid results and keeping citizens connected Operations Financial resources Customer connections5 +5.5% +14% +535,000 Operating revenues and other income 2020: $15.5 billion 2019: $14.7 billion Total assets 2020: $43.3 billion 2019: $38.0 billion Wireless subscribers 2020: 10.7 million 2019: 10.2 million +0.2% Adjusted EBITDA1 2020: $5.7 billion 2019: $5.7 billion +17% +157,000 Cash from operations 2020: $4.6 billion 2019: $3.9 billion Internet subscribers 2020: 2.1 million 2019: 2.0 million −1.8 pts Adjusted EBITDA margin1 2020: 37.0% 2019: 38.8% +54% Free cash flow1 2020: $1.4 billion 2019: $0.9 billion +55,000 TV subscribers 2020: 1.2 million 2019: 1.2 million +5.2% Dividends declared per share2 2020: $1.18495 2019: $1.12625 −4.5% Capital expenditures (excluding spectrum licences) 2020: $2.8 billion 2019: $2.9 billion −40,000 Residential voice subscribers 2020: 1.2 million 2019: 1.2 million 48 pt improvement Dividend payout ratio1,3 2020: 67% 2019: 115% −6.6 pts Return on common equity4 2020: 10.1% 2019: 16.7% +99,000 Security subscribers 2020: 707,000 2019: 608,000 Operating revenues and other income ($ billions) Adjusted EBITDA1 2020 2019 15.5 14.7 2020 2019 ($ billions) 5.7 5.7 Dividends declared per share2 ($) Total customer connections5 (millions) 2020 2019 1.18495 1.12625 2020 2019 16.0 15.2 6 • TELUS 2020 ANNUAL REPORT 2020 financial and operating highlights ($ in millions except per share amounts) Operations Operating revenues and other income Earnings before interest, taxes, depreciation and amortization (EBITDA)1 EBITDA – excluding restructuring and other costs1 Adjusted EBITDA1 Adjusted EBITDA margin1 (%) Operating income Net income attributable to common shares Basic earnings per share (EPS)2 Adjusted basic EPS1,2 Dividends declared per share2 Dividend payout ratio1,3 (%) Wireless segment External operating revenues and other operating income Adjusted EBITDA1 Adjusted EBITDA margin1 (%) Wireline segment External operating revenues and other operating income Adjusted EBITDA1 Adjusted EBITDA margin1 (%) Financial position Total assets Net debt1 Return on common equity4 (%) Liquidity and capital resources Cash from operations Capital expenditures (excluding spectrum licences) Free cash flow1 Free cash flow before income taxes1 Net debt to EBITDA ratio1,6 Customer connections5 (in thousands) Wireless subscribers Internet subscribers TV subscribers Residential voice subscribers Security subscribers Total customer connections 2020 2019 % change $ 15,463 $ 5,494 $ 5,753 $ 5,701 37.0 $ 14,658 $ 5,554 $ 5,688 $ 5,693 38.8 $ 2,482 $ 2,977 $ $ $ 1,207 0.95 1.06 $ $ $ 1,746 1.45 1.43 $ 1.18495 $ 1.12625 67 115 $ 7,914 $ 3,689 46.2 $ 7,549 $ 2,012 26.0 $ 43,332 $ 19,826 10.1 $ 4,574 $ 2,775 $ $ 1,435 1,865 3.45 10,748 2,138 1,215 1,164 707 15,972 $ 8,149 $ 3,728 45.4 $ 6,509 $ 1,965 29.1 $ 37,985 $ 18,199 16.7 $ 3,927 $ 2,906 $ $ 932 1,576 3.20 10,213 1,981 1,160 1,204 608 15,166 5.5 (1.1) 1.1 0.2 – (16.6) (30.9) (34.5) (25.9) 5.2 – (2.9) (1.0) – 16.0 2.3 – 14.1 8.9 – 16.5 (4.5) 54.0 18.3 – 5.2 7.9 4.7 (3.3) 16.3 5.3 1 These are non-GAAP measures and do not have standardized meanings under IFRS-IASB. For more information, see Sections 1.3, 5.4, 5.5 and 11 of Management’s discussion and analysis (MD&A). 2 Adjusted to reflect the two-for-one share split effective March 17, 2020. 3 Commencing in 2020, and restated for comparability, we revised our dividend payout ratio calculation. See Note 3 of the Consolidated financial statements. 4 Net income attributed to equity shares for a 12-month trailing period, divided by the average common equity for the 12-month period. 5 Customer connections have been revised in 2020 and 2019 to account for acquisitions and other adjustments. For details, see Section 1.3 of the MD&A. 6 Excludes restructuring and other costs. TELUS 2020 ANNUAL REPORT • 7 2020 RESULTS AND 2021 TARGETS Driving to achieve outstanding performance 2020 results 2020 growth 2021 targets Revenues and other income $15.46 billion Adjusted EBITDA1 $5.70 billion Free cash flow1 $1.44 billion Capital expenditures (excluding spectrum licences) $2.78 billion 5.5% 0.2% 54% 4.5% Growth of 8 to 10% Growth of 6 to 8% Approximately $1.5 billion Approximately $2.75 billion 1 These are non-GAAP measures and do not have standardized meanings under IFRS-IASB. Therefore, they are unlikely to be comparable to similar measures presented by other companies. See Section 11 of the MD&A. 2020 results At TELUS, we believe in setting annual financial targets to provide clarity for investors and to help drive our performance. • We achieved Adjusted EBITDA growth, driven by higher revenue and a continued focus on cost efficiency and In May 2020, given the uncertain magnitude, duration and effectiveness, as we took steps to offset the financial potential outcomes of the COVID-19 pandemic, we withdrew headwinds from the pandemic. our 2020 financial targets, which were originally issued in February. As a result, we are not reporting against targets • Free cash flow growth was driven by lower income taxes paid, a decline in capital expenditures and cash impacts for the 2020 year-end. However, despite an unprecedented associated with contracted mobile phone loading. operating environment, we achieved solid results in 2020, including strong customer growth and leading loyalty results. • Our revenue growth reflected contributions from business acquisitions, expanded services and strong subscriber growth, partially offset by lower wireless roaming revenue due to reduced travel. • Capital expenditures were focused on strategic broadband investments, including our ongoing TELUS PureFibre® and 5G network build-out, as well as incremental capital spending to support business acquisitions. For more information, see Section 1.4 of the MD&A. Caution regarding forward-looking statements This annual report contains forward-looking statements including statements relating to our 2021 targets, expected performance and plans for powering our success, including our progression into agriculture in 2021, expected progression of the COVID-19 pandemic and multi-year dividend growth program. By their nature, forward- looking statements do not refer to historical facts and require the Company to make assumptions and predictions, and are subject to inherent risks. There is significant risk that the forward-looking statements will not prove to be accurate and there can be no assurance that TELUS will achieve its targets or performance goals or maintain its multi-year dividend growth program. Readers are cautioned not to place undue reliance on forward-looking statements, as a number of factors (such as the COVID-19 pandemic, regulatory developments and government decisions, the competitive environment, technological substitution, supply chain disruption and dependence on a limited number of suppliers, economic performance in Canada, our earnings and free cash flow, and our capital expenditures) could cause 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 by the assumptions (including assumptions on which our 2021 annual targets and guidance are based and regarding semi-annual dividend increases through 2022), qualifications and risk factors as set out in Management’s discussion and analysis in this report, especially Sections 9 and 10, 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). Except as required by law, TELUS disclaims any intention or obligation to update or revise forward-looking statements, and reserves the right to change, at any time at its sole discretion, its current practice of updating annual targets and guidance. Statements regarding our 2021 targets are presented for the purpose of assisting our investors and others in understanding certain key elements of our expected 2021 financial results, as well as our objectives, strategic priorities and business outlook. Such information may not be appropriate for other purposes. 8 • TELUS 2020 ANNUAL REPORT 2021 targets We are guided by a number of long-term financial objectives, will occur by the second half of 2021, which will allow for the policies and guidelines, which are detailed in Section 4.3 of gradual re-opening of the global economy and areas where we the MD&A. With these policies in mind, our consolidated financial conduct business. targets for 2021, as presented in the table, reflect our plans For more information and a complete set of 2021 financial to continue generating positive financial outcomes and strong targets and the assumptions on which they are based, see our subscriber growth. This growth is supported by our strategic fourth quarter 2020 results and 2021 targets news release investments in advanced broadband technologies, including issued on February 11, 2021. our TELUS PureFibre service and ongoing roll-out of 5G. Supporting our growth profile in 2021 are our unique and diversified growth assets – TELUS International, inclusive of the recently closed acquisition of Lionbridge AI; TELUS Health, including growing demand for digital health services and virtual care; and recently launched TELUS Agriculture, which is using technology to drive better food outcomes. Our growth profile is underpinned by a team member culture focused on delivering customer service excellence and our ongoing focus on operational effectiveness. In 2021, we expect the COVID-19 pandemic to continue to have significant impacts on our business, primarily in the first half of the year. We expect that the availability, distribution and effectiveness of COVID-19 vaccinations to the general population TELUS 2020 ANNUAL REPORT • 9 Connection Passion Opportunity Teamwork Innovation 10 • TELUS 2020 ANNUAL REPORT CEO LETTER TO INVESTORS Leading the world when the world needs us most In a year like no other, your Company provided the technology, and the human and social innovation, to keep all of our stakeholders – from our customers, investors and team members to our frontline healthcare workers and most vulnerable citizens – connected to the information, resources and people that matter most. As the global leader in social capitalism, TELUS responded in unprecedented and meaningful ways to ensure our fellow citizens remained safe, informed and productive throughout 2020. Leading the world by putting our customers first Your Company leveraged our long-standing customers first culture and directed this asset as the cornerstone to answering online when traditional channels were disrupted by lockdowns. This initiative supported 50 per cent growth in digital transactions by the close of the year. the challenges of the global health emergency. Our team prioritized the health and safety of our clients while redoubling our efforts to provide a reliable connected experience across Connecting Canadians with globally leading networks The TELUS team’s swift and thoughtful actions to support our portfolio of services. In this regard, the TELUS team Canadians throughout the pandemic were underpinned by our expeditiously pivoted our operations to keep our customers world-leading network technology. Indeed, since 2000, we have safe at home, in store and online. Notably, we enabled 95 per invested more than $200 billion in state-of-the-art network cent of our global team members to continue supporting infrastructure and operations, supporting the continued expansion our customers from their homes. In addition, our industry-first of our 5G and PureFibre networks. virtual installation and repair processes and in-store protocols This investment resulted in TELUS’ wireless network being created safe environments for our customers and team recognized in three major, independent network reports in 2020: members. Our pandemic planning framework was shared with UK-based Opensignal ranked TELUS as having the fastest over 500,000 business customers, enabling them to leverage network in the world and again in February 2021 for the ninth the processes and research completed by our team of business time, with Opensignal stating that “TELUS remains the operator and medical experts. We also empowered more than 6,400 to beat in Canada”; U.S.-based Ookla recognized our mobile businesses across Canada with virtual work solutions, and network as the fastest and most expansive on a national basis launched our award-winning #StandWithOwners campaign in 2020 and again in February 2021 for the seventh time; and to support and promote small businesses across Canada. Canada-based Tutela placed TELUS first in respect of quality, Our team worked around the clock to bolster our network latency and download throughput, nationally, for the second infrastructure to ensure we could support four times the amount consecutive year. At a time when social, economic, health and of network traffic compared to our busiest pre-COVID-19 day, educational connections have become more important than enabling Canadians to work, learn, socialize, access entertainment ever, this recognition has been particularly resonant. and transact online safely from their homes. To put this into Your Company is providing world-leading connectivity perspective, our team’s efforts to sustain our networks throughout to urban and rural communities alike. Indeed, in its May report, COVID-19 were akin to supporting Super Bowl-level traffic, Opensignal confirmed that the rural experience on TELUS’ every day. We also augmented our digital platform to support network is better and faster than in any location within G7 nations, 15 times the usual traffic, allowing people to access TELUS with the exception of Japan, a significantly smaller country than TELUS 2020 ANNUAL REPORT • 11 Leading the world through caring for our communities Our ability to do well and do good in our communities, thanks to the patronage of our customers, had a profound impact on the lives of citizens worldwide. Over the course of a challenging year, TELUS dedicated $150 million in support of COVID-19 relief efforts to build public healthcare capacity and assist vulnerable communities. I was privileged to provide further support by donating 25 per cent of my 2020 salary to essential hospitals, community health centres and critical COVID-19 research. A portion of my salary donation was matched by the Entwistle Family Foundation, through a $150,000 gift, to maximize the TELUS team’s commitment to supporting healthcare and helping those most impacted by the pandemic. This included Assisting families in need In the early days of the pandemic, volunteers at donations to: BC Women’s Hospital Foundation to support virtual the Moisson Rimouski-Neigette food bank in Quebec care technology; McGill University Health Centre Foundation were concerned they would not have enough food to support vulnerable families through the emergency. In response to those concerns, 75 team members and retirees coordinated the collection of food and essentials throughout their neighbourhoods. Thanks to the help of 3,000 families, our team donated over 28,000 kilograms of goods, supporting 950 families for more than a month. to enable ICU patients to connect virtually with loved ones; Covenant Health Foundation in Alberta to support vulnerable and isolated seniors; and Sunnybrook Hospital Foundation in Ontario to address the alarming increase in suicides during the pandemic. Our Connecting for Good programs enabled your Company to provide vital connections and care for over 142,000 vulnerable Canadians. Throughout the health emergency, we expanded our support, providing two months of free Internet for Good to low- income families, broadening the program to include low-income Canadians living with disabilities and expediting access to the Canada, which at 49 Mbps was only slightly faster than TELUS’ program for students in need. Similarly, we extended Mobility for 48 Mbps. Moreover, according to Opensignal: “If rural Canada Good nationally, making it available to 20,000 youth embarking were a country, it would rank 12th in our Download Speed on a difficult transition out of foster care. TELUS also expanded Experience ranking, with our rural Canadian users on average the program to 2.2 million low-income seniors disproportionately seeing faster 4G download speeds than our users in Sweden, impacted by COVID-19, and to frontline healthcare workers, New Zealand, France and 73 of the other countries we reported providing two months’ free access to their monthly rate plan. on.” In fact, wireless speeds available in rural Canada exceed In addition, our team donated more than 14,000 devices, those of any region in the entire United States. Clearly, Canadians tablets and prepaid SIM cards to help isolated seniors, hospital can count on TELUS – above anyone else, anywhere else – patients and vulnerable Canadians stay connected. Finally, to keep them connected. we unveiled seven new mobile Health for Good clinics, many Our award-winning wireless network is supported by globally of which were repurposed to support COVID-19 response leading fibre infrastructure that enables the vital connections efforts, including administering over 12,700 assessments required to keep our citizens and communities connected and and tests. productive, while also providing the backbone for our 5G-enabled In response to the health crisis, we evolved our TELUS Days world. By the end of 2020, 2.5 million households and businesses were connected to TELUS PureFibre across 137 communities in of Giving into a year-long giving campaign. The subsequent 1.2 million virtual and socially distanced acts of giving represented our broadband footprint. Like our wireless network, our PureFibre 1.25 million volunteer hours in support of our communities. network continues to receive international recognition. Notably, Throughout 2020, TELUS contributed $85 million, representing U.S.-based PCMag ranked our PureFibre network as Best for five per cent of 2020 pre-tax profits – more than any other Gaming in 2020 and recognized TELUS as the fastest internet Canadian company – to charitable and community organizations service provider, nationally. In addition, TELUS PureFibre is the worldwide. Since 2000, our TELUS family has contributed only internet service in Canada to receive a perfect performance $1.3 billion, including $820 million in financial support and 1.6 million score on the Netflix Speed Index for six consecutive months. days of volunteerism, to make the world a better place. 12 • TELUS 2020 ANNUAL REPORT In 2020, our team introduced critter masks to help keep Canadians safe while raising over half a million dollars for the TELUS Friendly Future Foundation to support pandemic- Leveraging innovation to keep people healthy and safe Our diverse and inclusive team leveraged our culture of caring related initiatives. Since its launch two years ago, the Foundation to support a healthier and more connected world in 2020. Guided has raised $16.5 million in support of 1,100 charitable projects. by the scientific, evidence-based advice of the TELUS Medical Similarly, our TELUS Community Boards continue to offer hope, Advisory Council, TELUS Health quickly scaled, augmented and care and support to two million young people in need each deployed our suite of virtual care offerings, enabling Canadians to year, with our 18 Boards investing $81 million in 7,600 grassroots receive personalized, quality physical and mental healthcare from organizations and initiatives, globally, since 2005. the safety of their homes, and helping to alleviate the pressure Complementing these efforts, your Company launched our on frontline care workers and health centres. TELUS Pollinator Fund for Good. At $100 million, it is one of the By way of example, we offered access to virtual care visits largest corporate social impact funds in the world. The Fund between patients and their doctors through our electronic medical offers early-stage financing to purpose-driven companies and record virtual visit solution; enabled healthcare providers to virtually entrepreneurs that require support to bring their socially observe and support patients living with, or at risk of, COVID-19 innovative, sustainable businesses to life. through our Home Health Monitoring solution; empowered patients The TELUS team’s exceptional efforts in helping our with access to one-on-one video consultations with a locally communities and fellow citizens surmount the challenges licensed doctor at no cost from their smartphone through Babylon presented by the pandemic earned your Company the by TELUS Health; provided personal emergency support for elderly first place ranking on the globally crowd-sourced “Did they citizens living independently with LivingWell Companion; helped Help” Heroes Leaderboard for 10 consecutive months employers support the well-being of their employees with Akira and counting. Progressing our growth businesses with the best team on the planet The TELUS team’s commitment to our customers and by TELUS Health; and offered frontline workers access to mental health resources through our Espri by TELUS Health app. In 2020, we also directed our human and technological innovation toward improving access to a nutritious food supply that is safe, sustainable, expansive and connected. TELUS communities underpins the high-performance culture we Agriculture, formed through the acquisition of eight trusted and have built together. In support of our team’s well-being as experienced companies across North America and Europe, we navigated the pandemic, we delivered a number of initiatives is supported by 1,200 skilled team members in 10 countries to promote mental and physical health, while keeping team dedicated to digitally transforming, protecting and improving members meaningfully connected. We introduced an Ask the global food system for people around the world. the Expert series, trained 2,000 leaders to support the mental Similarly, through our TELUS SmartHome Security and health of their teams, provided centralized access to specialty TELUS Secure Business solutions, we offered peace of mind mental health services, and gifted the meditation and sleep by protecting our customers’ homes and businesses during app, Calm, to all team members. lockdown periods and beyond. In 2020, TELUS welcomed In 2020, our team members also undertook a series of approximately 100,000 security customers, expanding our client initiatives to further enhance diversity and inclusion (D&I) at TELUS base to over 700,000 clients in three years. In addition, as young and reaffirm our commitment to equity, fairness and social justice. people spent more time online and in virtual classrooms, we Notably, we welcomed our Chief D&I Officer and D&I Advisory amplified access to our online digital safety and citizenship Board to support our ongoing journey. Moreover, our leadership program, TELUS Wise, and introduced digital support material in D&I extends to our Board of Directors, which is comprised for adults. By the close of 2020, we had reached more of 23 per cent of independent directors who represent a visible than 90,000 Canadians through TELUS Wise online or minority or are Indigenous, and 46 per cent who are female. virtual workshops. In a year when we evolved the way we work and connect, our team achieved our highest engagement level ever at 87 per cent, advancing our status within the top 10 per cent of Progressing TELUS International TELUS International (TI) finalized the acquisition of Lionbridge AI, all large employers, globally. The skill, passion and grit of our a global provider of data annotation services used in the team, underpinned by our award-winning culture, continues to development of artificial intelligence algorithms to train machine drive better customer outcomes, propelling our business learning models. Lionbridge AI will help accelerate the digital performance to new heights and empowering us to give back transformation and strategic growth of TI by adding key capabilities to the communities we serve. and diversity to its suite of next-generation digital solutions. TELUS 2020 ANNUAL REPORT • 13 TELUS ranked number one in the industry with 537,000 wireless customer additions, along with industry-leading subscriber growth across internet, TV and security of 157,000, 55,000, and 68,000, respectively. Consistent with our revised goal to deliver flat to slightly positive EBITDA growth in 2020, our consolidated operating revenues and EBITDA grew by 5.5 and 0.2 per cent, respectively, reflecting our strong resiliency and operational excellence, which helped to mitigate pandemic-related impacts. Notably, TELUS was the only national telecom provider to report positive EBITDA growth for the year. Similarly, we continued to drive strong free cash flow of $1.435 billion, up 54 per cent over 2019, and within the lower end of our original target range of $1.4 to $1.7 billion, set back in February 2020. Importantly, this free cash flow result was achieved while continuing to make astute capital investments in line with our original capex guidance for the year. Driving strong and leading wireless results Thanks to our team’s courage to innovate in leveraging the strength of our digital channels, coupled with our performance culture and the grit exemplified by our team in pivoting our retail sales personnel to outbound sales and service capabilities, we achieved industry-leading smartphone and total wireless net additions of 280,000 and 537,000, respectively. Your Company’s Keeping Indigenous communities safe Like many communities, Haisla Nation in Northern British Columbia was in need of personal protective equipment to keep their citizens safe. As one of the many Indigenous communities connected to TELUS PureFibre, Haisla Nation reached out to TELUS for assistance. Our team members responded by collecting 500 masks, as well as hand sanitizer and gloves from our local supply, which they delivered leading client growth was supported by our customer service to Haisla Nation to help keep the community safe excellence ethos, including our top ranked customer loyalty throughout the health emergency. results across key product lines, owing to our team’s dedication to delivering premium client experiences over the world’s best broadband wireless network. We finished the year with blended Importantly, in early 2021, TI undertook an initial public offering churn at less than one per cent for the first time. Underlying (IPO), establishing a market capitalization for TI of more than this result, our postpaid churn of 0.77 per cent represents our $10 billion and exceeding the $8 billion market cap of TELUS in seventh consecutive year of postpaid churn below one per cent, 2000, when we first embarked on our national growth strategy. a feat unmatched by our national and global peers. With total aggregate proceeds of $1.4 billion, the TI IPO was the Our consistent focus on profitable, high-quality smartphone- largest technology IPO in the history of the Toronto Stock Exchange centric subscriber growth was offset by impacts related to (TSX) and the fifth largest ever in Canadian capital markets. As a the pandemic, notably lower roaming revenues, driving a decline publicly traded company on both the TSX and the New York Stock in network revenues of 1.5 per cent. This revenue decline was Exchange, TI will continue elevating its world-leading customer partially mitigated by an ongoing and intense focus on cost experience and innovative technologies for its valued partners management. As a result, wireless EBITDA was down only around the world. This historic milestone will enable TI to continue one per cent and this result was industry-leading versus our scaling its operations rapidly and profitably, creating significant national peers. value from strong organic growth and strategic acquisitions. Delivering leading operational and financial results Our team’s dedication to our social purpose earned us the trust Generating historic wireline growth In wireline, TELUS once again delivered industry-leading revenue and EBITDA growth, as well as the best customer growth in our history. These results reflect the increased and loyalty of our customers and communities, while also driving contributions from internet and third-wave data service growth, industry-leading results. Facing unprecedented challenges, as well as: robust performance in TV customer additions; strong TELUS’ execution drove strong operational and financial results growth in our security customer base; and the continued in 2020, including industry-leading customer growth in both reduction of voice line losses. TELUS’ wireline financials were our wireless and wireline portfolios. driven by data revenue growth of 20 per cent, through a 14 • TELUS 2020 ANNUAL REPORT combination of higher revenues from our diverse portfolio of services and solutions, including: smart technology and security; resilient performance of TI; increased revenues from Providing leadership for our stakeholders in 2021 and beyond Your Company’s leadership in customer service, network the hyper-scaling of our virtual care solutions; and growing excellence, investor value creation and social capitalism scale of TELUS Agriculture. Deriving shareholder value from our leadership in social capitalism Even in challenging times, your Company has consistently returned significant capital to shareholders, while maintaining differentiates TELUS from our peers, globally. As we look ahead toward a period of economic and social recovery, and inspired by the TELUS team’s strong performance in 2020, we have established new community giving, social impact and financial targets for the year. a robust balance sheet, making generational investments in advanced broadband technologies and advancing our social Setting meaningful social and financial targets Socially, our 2021 targets include inspiring members of our purpose through community investment and philanthropy. TELUS family to engage in 1.25 million safe acts of giving, In the first quarter of 2020, after thoughtfully weighing the interests including contributing 175,000 days of volunteerism for the of our many stakeholders, alongside the countless initiatives we year. We will bridge digital divides for a cumulative 200,000 undertook in response to the health crisis, we decided to defer Canadians, by year-end, through continued expansion and our scheduled dividend increase. Thanks to the extraordinary amplification of our Connecting for Good programs. Collectively, efforts of the TELUS team, in November, we were able to resume our TELUS family will contribute over $85 million to charitable our multi-year dividend growth program with a seven per cent and community organizations and fundraise $3 million for increase to our annualized dividend, reflecting our confidence in the TELUS Friendly Future Foundation. We plan to disburse our strong and consistent performance and cash flow generation. $20 million in early-stage financing to purpose-driven companies This was our 19th dividend increase since the establishment of and entrepreneurs through our TELUS Pollinator Fund for Good. our first three-year program a decade ago. Notably, since 2004, In addition, having surpassed our 2020 goals in energy and we have returned over $19 billion to shareholders, including $14 billion in dividends, representing approximately $15 per share. greenhouse gas reduction in 2019, we will focus on procuring 100 per cent of our electricity requirements from renewable Your Company understands the importance of dividend income or non-emitting sources by 2025, enabling our operations to the millions of citizens who own TELUS shares, including to be net carbon neutral by 2030 and attaining a 50 per cent middle-income Canadians and pensioners who rely on this improvement in energy efficiency over 2020 levels by 2030. form of income for their livelihood, as these investments help Financially, our targets for 2021 include growth in revenue of consumers and businesses thrive. up to 10 per cent and EBITDA of up to eight per cent, while we In a world where tax morality is not always apparent, since also expect robust free cash flow of approximately $1.5 billion. 2000, your Company has paid approximately $46 billion in total tax and spectrum remittances to our federal, provincial and municipal governments. These funds support our roads and Thanking you for your ongoing support In a year when the world needed a leader in social capitalism, bridges, public education, healthcare, cultural pursuits and our TELUS family was able to leverage our award-winning culture national defence. Sustaining industry leadership relative to our global peers TELUS continues to deliver sustainable results for the benefit to deliver solutions, resources and care that made a meaningful difference in the lives of citizens, globally. In 2021, we will continue to bolster the robustness of our world-leading networks, enable critical connections and enhance our globally admired culture, while supporting the most vulnerable among us. Together, of the many stakeholders we serve. Since the end of 1999 let’s make the future friendly for everyone. through February 8, 2021, TELUS generated a total shareholder On behalf of the 100,000 TELUS team members and return of 600 per cent, 327 points higher than the return retirees, globally, thank you for your continued support. for the S&P/TSX Composite Index of 273 per cent and dramatically overshadowing the MSCI World Communication Services Index return of 56 per cent over the same period. Moreover, over the past one, three, five, 10 and 15 years, your Company has surpassed the TSX return by three per cent, Darren Entwistle seven per cent, 14 per cent, 183 per cent and 175 per cent, Proud member of the TELUS team for more than two decades respectively. February 19, 2021 TELUS 2020 ANNUAL REPORT • 15 OUR SOCIAL PURPOSE AT A GLANCE Supporting citizens when they need us most At TELUS, we are committed to leveraging our world-leading technology and compassion to drive positive social change and enable remarkable human outcomes. Reflecting on our team’s 20-year legacy of giving where we live, we accelerated our programs in 2020 to help those who need our support the most. Building stronger, healthier communities In response to the COVID-19 pandemic, we pivoted all of our For the first time, our TELUS Days of Giving® became a year-long giving campaign. Throughout the year, members of our extended philanthropic funding channels to focus on health initiatives and TELUS family volunteered 1.25 million hours of service, including con- supporting charities on the front line of the public health crisis. tributing 1.2 million virtual and socially distanced safe acts of giving. The TELUS Friendly Future Foundation and TELUS Community Boards contributed $8.9 million to 597 charitable health projects to support and enhance public healthcare capacity and initiatives Keeping citizens connected To keep Canada’s most vulnerable citizens connected, we donated across Canada. This included funding for new medical technology 14,200 mobile devices and free rate plans to 340 organizations, and equipment, critical research, food and outreach to isolated enabling hospitalized COVID-19 patients to virtually connect with seniors and other vulnerable Canadians, virtual education loved ones, and giving isolated seniors and other at-risk individuals a programs and mental health initiatives. lifeline to families, healthcare practitioners and vital social supports. To help Canadians stay safe during the pandemic, we We expanded our Mobility for Good® program nationally, distributed 289,000 TELUS-branded critter masks, helping providing free smartphones and data plans to young people to raise $535,000 for the Foundation. transitioning out of foster care so they can stay connected to vital 1.2 million safe acts of giving 142,000 Canadians positively impacted by our Connecting for Good® programs support networks. By the end of the year, more than 6,000 youth had participated in the program. In December, we launched Mobility for Good for Seniors, providing free phones and subsidized rate plans to low-income seniors across Canada to help them stay connected. Our Internet for Good® program was also expanded during the year, providing low-cost, high-speed internet access to more Canadians in need. In April, we partnered with school boards to expedite internet access for school-aged students in need in B.C. and Alberta. In July, we extended the program to support 180,000 Canadians living with disabilities in B.C., Alberta and Quebec. By the end of 2020, more than 72,000 Canadians had benefited from the program. $85 million contributed to charitable and community organizations 1.25 million Driving better healthcare access Our Health for Good® program was extended nationally, bringing primary healthcare and mental health support to homeless and other marginalized Canadians through 11 mobile health clinics in 10 cities. We supported more than 28,000 patient visits during the year, including having our mobile clinics assist in the pandemic response by conducting 12,700 COVID-19 assessments and volunteer hours tests. Since inception in 2014, our clinics have supported over 50,000 patient visits. 16 • TELUS 2020 ANNUAL REPORT As Canadians continued to seek healthcare from home, we expanded our innovative virtual care solutions, alleviating pressure on crowded hospitals and helping to preserve capacity for those with urgent healthcare needs. Babylon by TELUS Health was expanded to Alberta, Saskatchewan and Ontario, providing residents of those provinces, as well as B.C., with access to one-on-one video consultations with a doctor, at no cost, from their mobile devices. Babylon by TELUS Health is now available to millions of Canadians in multiple languages. Our employee-focused virtual care platforms enabled employers to support the health and well-being of their employees. At the end of 2020, two million Canadians had 24/7 bilingual access to services offered through Akira by TELUS Health and EQ Care. Investing in social change The TELUS Pollinator Fund for Good™, our new $100 million social impact investment fund, provides financing to entrepreneurs and socially responsible companies who are developing solutions aimed at improving healthcare, furthering social and economic inclusion, ensuring sustainable food production and reducing our environmental footprint. Advancing our global food system An integral part of our social purpose is a persistent focus on We also began offering access to virtual care visits between driving sustainable business practices and making a meaningful patients and doctors through our electronic medical record (EMR) social impact. That focus extends to improving production, platforms. During the year, 29,000 healthcare practitioners traceability, quality, sustainability and safety across the food supply. were enabled with our EMR Virtual Visit solution and 226,000 In November, we launched TELUS Agriculture, which will consultations were conducted. digitally transform the agriculture industry with connected Visit telus.com/community to learn more about our commitment to be there when it matters most. technology and help protect and improve the global food system. By leveraging our world-leading technology, TELUS Agriculture is helping farmers and ranchers produce food for the world’s ever-expanding population. TELUS 2020 ANNUAL REPORT • 17 WIRELESS OPERATIONS AT A GLANCE Operations at a Glance Keeping Canadians connected when connection matters most Fulfilling the wireless needs of Canadians The Canadian wireless industry – despite facing the unprecedented challenges of the global pandemic – added approximately 1.1 million new subscribers in 2020. More than ever, Canadians relied on their wireless devices to stay connected and informed, and demand for wireless services remained strong. However, reduced shopping habits lowered equipment revenue and restrictions on domestic and inter- national travel caused a significant decline in roaming revenue, impacting financial performance and profitability across the 2020 results – wireless -2.9% External operating revenues and other income 2020: $7.91 billion -1.0% Adjusted EBITDA 2020: $3.69 billion 2019: $8.15 billion 2019: $3.73 billion industry. Competition remained robust and carriers continued 280,000 new customers to our high-quality mobile phone making significant investments in their networks. During the subscriber base. During the pandemic, we leveraged our digital year, wireless operators started rolling out 5G in certain markets, capabilities to continue serving customers in a safe and efficient setting the stage for further deployment in 2021. manner. Once again, we were recognized for our superior Strengthening our leadership position Driven by our team’s resiliency and sustained focus on putting wireless network, earning the top spot in major independent reports. Building on our award-winning network, we launched our rapidly expanding next-generation 5G network as we customers first, we continued to lead the industry with an commit to offering a world-leading 5G experience across average mobile phone churn of 0.95 per cent, and we added Canada, from coast to coast, urban to rural. +2.5% Mobile phone subscribers 2020: 8.95 million 2019: 8.73 million +21% Mobile connected device subscribers 2020: 1.80 million 2019: 1.48 million +2.2% Mobile phone net additions 2020: 280,000 2019: 274,000 0.13 pt improvement Mobile phone churn 2020: 0.95% 2019: 1.08% We offer • World-leading 4G LTE network covering 99 per cent of Canadians, with exceptional coverage and reliability • Next-generation 5G network delivering lightning-fast speeds • The latest smartphones, connectable tech, mobile internet devices, wireless home phones, and Internet of Things (IoT) solutions for consumers and businesses • High-speed wireless internet access for video, social networking, messaging and mobile applications, including our Optik TV®, Pik TV® and Babylon by TELUS Health apps • International roaming to more than 225 destinations. 18 • TELUS 2020 ANNUAL REPORT In 2020, we achieved positive outcomes by: • Responding quickly and effectively to the unique circumstances of this year by leveraging our best-in-class customer service, In 2021, we are powering our success by: • Expanding and enhancing our 5G network, and providing more residents and businesses with access to blazing-fast simple and transparent service offerings, and advanced digital capabilities • Enhancing our award-winning network with the deployment speeds, and exceptional coverage and reliability • Elevating our customers’ experience through our world- leading network, superior products and services, and winning of our next-generation 5G technology, as well as the continued go-to-market strategy build-out of LTE-advanced technology • Continuing to focus on putting customers first, as reflected • Focusing on high-quality smartphone subscriber growth, while also driving growth in IoT connectivity to help by a record-high consumer likelihood-to-recommend score, consumers enhance their daily lives and to help businesses leading our national peers within each wireless tier (premium, improve efficiency and productivity flanker and value) • Offering greater device affordability and flexibility for • Strengthening our position in the national business space, including small and medium-sized businesses, Canadians through our Bring-It-Back™ certified pre-owned by utilizing our integrated service offerings and program and Mobile Klinik storefronts • Extending our Mobility for Good program nationally, providing subsidized smartphones and rate plans to more tailored solutions • Leveraging our leading technology and innovation to enable positive social outcomes and improve economic equality young people transitioning out of foster care and to in our digital world. low-income seniors. Visit telus.com/learn to find out how to get the most from your device. TELUS 2020 ANNUAL REPORT • 19 WIRELINE OPERATIONS AT A GLANCE Providing diverse solutions across Canada and beyond Performing well in a changing environment With more citizens working and learning from home in 2020, demand for broadband services grew stronger and network traffic reached record levels. Consumers increasingly adopted emerging services and products, such as home and business security and automation. In addition, companies around the world sought out next-generation digital customer experience solutions, leveraging the expertise of companies like TELUS International. As well, with technology continuing to evolve, customer demand 2020 results – wireline +16% External operating revenues and other income 2020: $7.55 billion +2.3% Adjusted EBITDA 2020: $2.01 billion 2019: $6.51 billion 2019: $1.97 billion grew for digital solutions, including virtual healthcare well during the pandemic, delivering high-quality service and agriculture technology. Growing through continued investment Driven by our commitment to provide leading networks to citizens when they needed it most. TELUS International achieved strong organic growth and expanded through recent strategic acquisitions. As well, TELUS Health saw accelerated adoption of its virtual care offerings while also growing its and customer service excellence, TELUS remains one operations through expanded services. In addition, we launched of the few telecoms in the world to consistently generate TELUS Agriculture, a business dedicated to leveraging positive wireline revenue, EBITDA and customer growth. information technology to improve the quality and safety Our TELUS PureFibre network performed exceedingly of our food supply. +20% Data revenue 2020: $6.11 billion 2019: $5.08 billion +7.9% Internet subscriber connections 2020: 2.14 million 2019: 1.98 million +4.7% TV subscriber connections 2020: 1.22 million 2019: 1.16 million +5.5% Wireline customer connections 2020: 5.22 million 2019: 4.95 million We offer • High-speed internet access with a growing fibre-optic network • Differentiated Optik TV 4K and Pik TV services • Reliable home phone service • Home and business security and automation • Leading IP networks and applications for businesses • Hosting, managed IT, security and cloud- based services • Innovative IT solutions through TELUS Health and TELUS Agriculture • Digital customer experience solutions through TELUS International for clients around the globe. 20 • TELUS 2020 ANNUAL REPORT In 2020, we achieved positive outcomes by: • Expanding our TELUS PureFibre network, now covering approximately 81 per cent of our broadband footprint • Growing our TV, internet and home security subscriber bases through attractive bundled offers • Offering virtual installations and repairs, along with extensive self-serve capabilities, helping to keep our customers and team members safe and connected • Building scale in TELUS Health by expanding offerings and delivering efficiencies across the healthcare continuum • Launching TELUS Agriculture, leveraging advanced data systems and artificial intelligence to improve the global food supply • Acquiring Lionbridge AI, a global artificial intelligence and data annotation business, through TELUS International, further diversifying its operations • Extending our Health for Good program nationally and In 2021, we are powering our success by: • Delivering exceptional customer experiences by simplifying our product and service offerings, while also improving our operational efficiency and effectiveness • Enhancing the capabilities, speed and reliability of our TELUS PureFibre network to elevate our network leadership position • Promoting our innovative product bundling, including home automation and security, to grow our whole home subscriber base • Driving sales and improving efficiency in the enterprise and business markets through enhanced connectivity, simple and targeted offers, tailored solutions and high-quality customer service • Advancing our innovative and technology-focused solutions across TELUS International, TELUS Health and TELUS Agriculture to drive strong financial growth and elevate repurposing our mobile health clinics to support COVID-19 our competitive differentiation versus our peers. assessments and tests. Visit telus.com/wholehome to learn how to keep your family connected, entertained and secure. TELUS 2020 ANNUAL REPORT • 21 Executive Team Leadership Our Executive Team has a long-standing commitment to help improve our communities. The photos below represent some of the ways they have given back over the years. Navin Arora President, TELUS Business Solutions Location: Calgary, AB Joined TELUS: 1999 TELUS shareholdings: 189,418 A strong supporter of TELUS’ commitment to give where we live, Navin (left) and his family proudly volunteer and support causes, including the Calgary Food Bank, Ronald McDonald House and programs within the South Asian community. Tony Geheran EVP and Chief Customer Officer Location: Vancouver, BC Joined TELUS: 2001 TELUS shareholdings: 347,803 Tony (right) is an ardent supporter of Vancouver General Hospital, serving on the Future of Surgery Board for four years with the goal to improve specialized healthcare and research for British Columbians. He is also passionate about ensuring all Canadians, including those living in rural and Indigenous communities, have access to fast and reliable internet service by driving critical conversations and programs to help bridge the digital divide. Zainul Mawji President, Home Solutions Location: Edmonton, AB Joined TELUS: 2001 TELUS shareholdings: 142,144 Raised by a family of entrepreneurs with strong community values, Zainul (centre) has always been passionate about giving back. In addition to mentoring leaders at TELUS and being actively involved in a variety of TELUS resource groups, she is Vice-Chair of the TELUS Edmonton Community Board and a national member for the Aga Khan Foundation for Canada. Doug French Executive Vice-President (EVP) and Chief Financial Officer Location: Whitby, ON Joined TELUS: 2000 (Clearnet: 1996) TELUS shareholdings: 309,911 Doug (left) is committed to putting customers first and caring for our planet. Through his leadership of the TELUS Sustainability team and membership in the Prince’s Accounting for Sustainability Project, he is passionate about our globally recognized sustainable models across our organization. François Gratton EVP, TELUS Health, TELUS Agriculture and TELUS Québec Location: Montreal, QC Joined TELUS: 2008 (Emergis: 2002) TELUS shareholdings: 268,461 Reflecting on his commitment to giving back to his community, François (right) chairs the Lighthouse, Children and Families, and continues to volunteer with the TELUS Montreal Community Board and with the team during TELUS Days of Giving. Sandy McIntosh EVP, People and Culture, and Chief Human Resources Officer Location: Toronto, ON Joined TELUS: 2007 TELUS shareholdings: 235,080 Sandy (left) has walked in the Weekend to Conquer Cancer for the last 10 years, and served as Honorary Co-Chair for eight years, to enable Princess Margaret’s talented medical team to realize better cancer outcomes for team members and all Canadians. 22 • TELUS 2020 ANNUAL REPORT Jeffrey Puritt TELUS EVP and TELUS International President and Chief Executive Officer Location: Las Vegas, NV Joined TELUS: 2001 Jeff (right) has participated in more than 100 TELUS Days of Giving events around the world, reflecting his passion for elevating lives and amplifying the opportunities for those in the communities where we operate. Jill Schnarr Chief Communications Officer Location: Vancouver, BC Joined TELUS: 1992 TELUS shareholdings: 57,847 Jill brings our social purpose to life, enabling TELUS to give $820 million and 1.6 million volunteer days since 2000. Jill leads our Team TELUS Cares and TELUS Community Ambassadors® programs, and serves as a board member of the TELUS Friendly Future Foundation. Jim Senko President, Mobility Solutions Location: Toronto, ON Joined TELUS: 2001 TELUS shareholdings: 159,691 Jim (centre) is the executive sponsor of our $1 million fundraising campaign for SickKids Hospital and works directly on the SickKids Foundation campaign to support improvement of children’s health and well-being. Andrea Wood Chief Legal and Governance Officer Location: Toronto, ON Joined TELUS: 2013 TELUS shareholdings: 94,062 Eros Spadotto EVP, Technology Strategy and Business Transformation Location: Toronto, ON Joined TELUS: 2000 (Clearnet: 1995) TELUS shareholdings: 339,996 Eros has volunteered with the Duke of Edinburgh’s International Award program for more than five years. He is passionate about empowering youth to develop confidence, realizing their full potential and building skills for the future. Darren Entwistle President and Chief Executive Officer More information can be found on page 27. TELUS shareholdings represent the total common shares and restricted stock units held as at December 31, 2020. Jeffrey Puritt’s shareholdings are not listed as he primarily holds shares in TELUS International. Andrea is passionate about supporting the small businesses and performing and visual artists who enrich our lives and make our cities more livable. She serves on the board of the Vancouver Opera, the executive committee of Legal Leaders for Diversity and the Greater Toronto Area Community Board. For further information, visit telus.com/executive. TELUS 2020 ANNUAL REPORT • 23 QUESTIONS AND ANSWERS Leading through unprecedented times We spoke with some of our senior leaders for their thoughts on how they navigated an extremely challenging year, while managing to drive new areas of the business, advance our social purpose, support small businesses and put our customers first. François Gratton Executive Vice-President, TELUS Health, TELUS Agriculture and TELUS Québec Jill Schnarr Chief Communications Officer Navin Arora President, TELUS Business Solutions Zainul Mawji President, TELUS Home Solutions Why is the agriculture sector important to TELUS? François enable grocers to dramatically reduce their perishable waste by 50 per cent through effectively tracking the temperature of their products across their supply chain. In addition, we are aiming to eradicate the food-borne illnesses that impact one Much like our foray into healthcare, our progression into in eight Canadians through enhanced digital tracking of food agriculture reflects our social purpose to use our technology sources and transportation. to create positive human and social outcomes. We are improving the lives of our fellow citizens and people around the world as we digitally transform, protect and improve the global food “Through TELUS Agriculture, we have system. Through TELUS Agriculture, we have made it our mission made it our mission to create better health to create better health and food outcomes. We are tackling one of the most significant social challenges of our generation by improving the efficient production, transportation, quality and food outcomes.” and safety of our food, from farm to fork. Importantly, we will provide innovative solutions to advance By leveraging our team’s technology innovation, artificial the agriculture sector on a worldwide basis, while positioning intelligence and human compassion, we are helping farmers Canada as a preferred global supplier of safe, sustainable and ranchers produce food for the world’s ever-expanding food. Concurrently, TELUS Agriculture will make a significant population more efficiently, safely and in a more environmentally contribution to our fast-growing portfolio of growth assets friendly manner. Our efforts to optimize food production will and will drive strong financial and operating performance, contribute to a better yield of food supply to meet the increasing as well as shareholder value creation. requirements of our planet. By evolving our food system, we can 24 • TELUS 2020 ANNUAL REPORT TELUS’ social purpose was key during the global health emergency. What role will it play in a post-pandemic world? Jill As a result of our relentless focus on social capitalism, our team continues to demonstrate that when things are at their worst, Canadians can rely on the TELUS team to be at its best. Throughout the health emergency and beyond, we are working tirelessly to ensure citizens remain connected to the people, information and resources that matter most during in responsible and sustainable for-profit businesses with the boldest ideas to answer the biggest challenges facing our communities. “We will continue to lend our support and resources in a post-pandemic world, ensuring that we deliver amazing human and social outcomes.” these challenging times, thanks to our world-leading networks, Importantly, our Company continues to embrace universally which in 2020 were recognized as the fastest globally. accepted principles regarding environmental, social and Building on our innumerable contributions in support of governance criteria, guided by the United Nations Global our communities, we will continue to lend our support and Compact. This commitment generates an additional dimension resources in a post-pandemic world, ensuring that we deliver of accountability that exemplifies our dedication to being a amazing human and social outcomes. For example, we will globally leading corporate citizen. We will continue to advance propel the incredible work of the TELUS Friendly Future our social endeavours in 2021 and beyond, as we make Foundation, global TELUS Community Boards and our culture the world a better place and deliver on our promise of a friendly of caring and volunteerism. Furthermore, we will leverage our future for all. newly established TELUS Pollinator Fund for Good to invest TELUS 2020 ANNUAL REPORT • 25 How has TELUS supported small businesses to help drive Canada’s economy? Navin What has the global pandemic taught TELUS about putting customers first? Zainul Reflecting our belief that small businesses are vital to our Throughout 2020, our team members rallied to keep Canadians communities and Canada’s economy, TELUS was there to connected, healthy and safe when they needed us most. support in a number of ways as businesses encountered From enabling the connectivity essential for working from home, significant hardships throughout this past year. learning virtually and keeping in touch with loved ones, to Recognizing this, we offered various measures such providing home and online security and making healthcare as reduced late payment fees, deferred payments, temporary more accessible than ever, we provided industry-leading disconnects and flexible contract terms. We also launched solutions to facilitate human connections and generate positive #StandWithOwners, a $500,000 commitment to promote outcomes for our communities. owners and give them the exposure they needed, which included The resiliency of our team was highlighted during the donating close to 10,000 TELUS-funded gift cards on behalf early days of the pandemic, when 95 per cent of our global of local small businesses. Additionally, we introduced our workforce pivoted to working from home in a matter of weeks. Owner’s Advantage Plan, and became the first Canadian carrier Even with this sudden change, we remained dedicated to to offer small business owners exclusive benefits, such as a putting our customers first, launching virtual installations and one-year trial of TELUS Health virtual care to keep employees safely delivering security equipment and other home automation and their families safe. “TELUS provided special offers for our virtual work and advanced security solutions to ensure employees could stay connected and collaborate remotely with each other, while ensuring businesses could be monitored remotely and kept safe.” To help them quickly transition to working remotely and move their businesses online, TELUS provided special offers for our virtual work and advanced security solutions to ensure employees could stay connected and collaborate remotely with each other, while ensuring businesses could be monitored remotely and kept safe. Finally, our world-leading networks have provided the capacity, coverage and reliability businesses need to stay connected to co-workers, customers and vital information. With the launch of 5G and the unparalleled speeds of our PureFibre network, we are laying the groundwork for businesses to fuel greater productivity, innovation and economic prosperity in a digital world. capabilities. As content consumption skyrocketed, we answered the rise in demand with some of the most entertainment options in Canada. We also advanced digital security solutions, safeguarding our customers with TELUS Online Security. Furthermore, we offered accessible healthcare solutions to Canadians via our virtual care solutions, including Babylon by TELUS Health. Even as we hyper-scaled this solution across Canada, the average rating by users for consultations remained an incredible 4.9 out of 5. “From enabling the connectivity essential for working from home, learning virtually and keeping in touch with loved ones... we provided industry-leading solutions to facilitate human connections and generate positive outcomes for our communities.” Ultimately, the global health emergency has demonstrated that when human connection and social good is at the heart of your team culture, innovation is always possible and no obstacle is insurmountable. As we progress through 2021, we will leverage the valuable learnings from the pandemic to further advance our leadership position and enhance our go-to-market strategy. 26 • TELUS 2020 ANNUAL REPORT Board of Directors 1 5 9 2 6 10 3 7 11 4 8 12 1 R.H. (Dick) Auchinleck, TELUS Chair 5 Thomas E. Flynn 9 John Manley Director since: 2003 TELUS shareholdings: 500,993 Director since: 2020 TELUS shareholdings: 18,769 2 Raymond T. Chan 6 Mary Jo Haddad Director since: 2013 TELUS Committees: Human Resources and Compensation; and Chair, Pension TELUS shareholdings: 98,543 Director since: 2014 TELUS Committees: Corporate Governance; and Chair, Human Resources and Compensation TELUS shareholdings: 74,710 3 Lisa de Wilde Director since: 2015 TELUS Committees: Corporate Governance and Pension TELUS shareholdings: 52,352 4 Darren Entwistle Director since: 2000 TELUS shareholdings: 1,164,718 7 Kathy Kinloch Director since: 2017 TELUS Committees: Corporate Governance, and Human Resources and Compensation TELUS shareholdings: 41,582 Director since: 2012 TELUS Committees: Human Resources and Compensation; and Chair, Corporate Governance TELUS shareholdings: 111,584 10 David Mowat Director since: 2016 TELUS Committee: Chair, Audit TELUS shareholdings: 56,927 11 Marc Parent Director since: 2017 TELUS Committees: Pension, and Human Resources and Compensation TELUS shareholdings: 40,108 8 Christine Magee 12 Denise Pickett Director since: 2018 TELUS Committee: Audit TELUS shareholdings: 27,563 Director since: 2018 TELUS Committee: Audit TELUS shareholdings: 24,715 For further information, visit telus.com/board. TELUS 2020 ANNUAL REPORT • 27 TELUS shareholdings represent the total common shares and deferred share units (restricted share units for Darren Entwistle) held as at December 31, 2020. CORPORATE GOVERNANCE Demonstrating good governance and integrity We have a long-standing commitment to high standards in corporate governance, and to full and fair disclosure. As we navigate the unprecedented environment associated with the COVID-19 pandemic, we continue to strive for greater transparency, seek ideas for improvement and ensure integrity in all that we do. Recognizing the value of diversity We are committed to fostering a diverse and inclusive of their privacy. We also recognize the potential of big data and believe it can be used for social good, when used culture across TELUS and to increasing the presence of under- responsibly, to help make better decisions. represented groups within key areas of our organization. In response to the pandemic, we launched our Data for This includes taking into account multiple aspects of diversity Good program in April to aid researchers in their efforts to to ensure our Board benefits from a broader range of stem the spread of COVID-19, while protecting the privacy perspectives and experiences. of Canadians. Data for Good leverages an advanced approach In 2020, we updated our Board diversity policy to confirm to de-identified and aggregated data analytics to help make the importance of diversity and the attributes the Board is more strategic and informed decisions based on real-world seeking for its composition. The policy now includes a new information. Through Data for Good, health authorities and target of having at least two directors who represent a researchers use de-identified and aggregated network mobility visible minority or are Indigenous by the annual meeting in data from TELUS to measure progress and assess opportunities 2023. Our gender diversity target was also updated to have women and men each represent at least 33⅓ per cent of to help flatten the COVID-19 curve and minimize its health and economic impacts, without compromising privacy. independent directors. At the end of 2020, one independent In recognition of our Data for Good program, TELUS received director identified as a member of a visible minority and the Privacy Innovation Award from the International Association 45 per cent were women. of Privacy Professionals. In July, we signed the BlackNorth Initiative pledge, committing to specific actions and targets designed to end anti-Black racism. The initiative includes a target of having a minimum Sustaining our strong ethical culture Creating and sustaining a culture of ethical behaviour is essential of 3.5 per cent of executive and board positions in Canada at TELUS. We value integrity and transparency, which ultimately held by Black leaders by 2025. shape the decisions we make as an organization and support Using data for social good We are dedicated to protecting the privacy of Canadians and In 2020, as many areas of our organization shifted priorities in response to the pandemic and to better support our continued to earning and maintaining their trust. This includes ensuring operations, we continually demonstrated our commitment to that our data handling practices are responsible and respectful integrity. All team members completed an integrity attestation, our focus on putting our customers first. For a full statement of TELUS’ corporate governance practices, refer to the TELUS 2021 information circular or visit telus.com/governance. confirming their understanding of our code of ethics and conduct, respectful workplace, security and privacy policies. We continue to provide an EthicsLine for anonymous and confidential questions or complaints on internal control and other issues related to integrity. Calls are handled by an independent agency, offering multi-language services to internal and external 28 • TELUS 2020 ANNUAL REPORT callers 24 hours a day. For the 18th consecutive year, none of the calls reported to the Ethics Office in 2020 involved officers or team members with a significant role in internal control over financial reporting. Keeping stakeholders informed, virtually We place great importance on communicating with our stakeholders, and recognize that timely and regular communication helps investors make sound, informed investment decisions. In May, we held our first-ever virtual annual general meeting, leveraging our technology to give shareholders an opportunity to participate online, while staying safe and healthy. We hosted four quarterly conference calls with simultaneous webcasts for investors to discuss our results and outlook. We also participated in a number of virtual industry-specific investor conferences and met, virtually and safely, with many institutional investors. To view past and upcoming events, visit telus.com/investors. To provide shareholder feedback or comments to our Board, email board@telus.com. Best practices in corporate governance • Say-on-pay vote • Majority voting policy • Clawback policy • Board diversity policy • Shareholder engagement policy • Insider trading policy • Code of ethics and conduct and EthicsLine • Privacy management program framework • Enterprise risk governance and oversight • Board recruitment process and orientation programs • Mandatory education sessions for the Board • Board and committee succession planning • CEO succession planning • Independent third-party evaluations of the Board • Director term limits • Share ownership guidelines for directors and executives. TELUS 2020 ANNUAL REPORT • 29 CFO LETTER TO INVESTORS Financial Review Upholding our commitment to drive outstanding sustainable value In 2020, our team demonstrated incredible resiliency and continued to deliver outstanding value for all our stakeholders, while reinforcing our commitment to improving the lives of citizens in the communities where we live, work and serve. Leading with strength and resiliency As the world came together to deal with the global pandemic, As we expanded our portfolio of unique growth assets and broadband networks, we simultaneously delivered strong TELUS was well positioned to respond to the needs of our team operational and financial performance throughout 2020. members, customers, communities and investors, due to our On a consolidated basis, operating revenues and other income strong balance sheet and our caring and collaborative culture. grew to $15.5 billion, an increase of 5.5 per cent. Despite Our robust financial and liquidity position was strengthened by the headwinds from COVID-19, we were the only national our equity offering of $1.5 billion in February 2020, enabling us operator to achieve positive Adjusted EBITDA growth, with an to navigate the economic uncertainty caused by the pandemic. increase of 0.2 per cent. Meanwhile, free cash flow increased Thanks to our team’s resiliency and commitment to delivering to $1.435 billion, up 54 per cent over last year, a notable exceptional customer experiences, we achieved leading accomplishment for our team. operational and financial results throughout 2020. Positioned for future success Driven by our leadership in social capitalism, we made several strategic investments in 2020 that advanced and diversified our business towards high-growth, technology-focused verticals. TELUS Health continued to enhance its suite of digital services and solutions, including through the acquisition of EQ Care, “We remain focused on maintaining a strong balance sheet to further support sustainable and long-term value creation for all our stakeholders.” a national virtual healthcare provider. We also launched TELUS In May, we paused our dividend growth program to Agriculture, utilizing our extensive expertise in connectivity, focus efforts on supporting citizens during the pandemic, software technology and data management to optimize the including undertaking a series of initiatives as part of our agri-business supply chain and improve the global food system. $150 million commitment to COVID-19 relief efforts and Through TELUS International (TI), we acquired Competence continuing to make significant investments to enhance our Call Center and Lionbridge AI, adding key capabilities and leading networks. Thanks to our team’s exceptional dedication diversity to TI’s suite of next-generation digital solutions. to support our customers, and underpinned by our strong Notably, in February 2021, TI achieved an important milestone liquidity and cash flow position, we were able to resume with the successful completion of its initial public offering, our dividend growth program in November, announcing our raising aggregate gross proceeds for TELUS International, 19th dividend increase since 2011. During the year, we returned TELUS and Baring Private Equity Asia of $1.36 billion, including approximately $1.5 billion in dividends to our shareholders, $627 million for TI. This significant value creation supports supporting those who participate in pension plans and mutual our efforts to reduce our leverage and enhances our ability funds, as well as smaller retail investors such as retirees to continue making strategic investments in our networks, and pensioners. digital capabilities and new growth areas. 30 • TELUS 2020 ANNUAL REPORT Creating sustainable value In 2021, we will continue to advance our proven growth strategy to generate outstanding value for all our stakeholders. The unwavering efforts of our engaged team have enabled us to set ambitious consolidated financial targets, including revenue and Adjusted EBITDA growth of up to 10 and eight per cent, respectively, and free cash flow of approximately $1.5 billion. Looking forward, our team will continue delivering the exceptional experiences that deepen customer loyalty, ensure the financial health of our organization and drive the economic growth and diversity that is key to Canada’s fiscal recovery. We remain focused on maintaining a strong balance sheet to further support sustainable and long-term value creation for all our stakeholders. Our commitment to social capitalism is the foundation on which we continue to build, ensuring our ongoing success in 2021 and beyond. Best regards, Doug French Executive Vice-President and Chief Financial Officer February 19, 2021 Financial review 32–37 Financial and operating statistics Annual and quarterly financial and operating information 38–126 Management’s discussion and analysis A discussion of our financial position and performance 127–190 Consolidated financial statements 2020 Consolidated financial statements and accompanying notes 191 – Back cover Additional investor resources Glossary, investor information and reasons to invest in TELUS TELUS 2020 ANNUAL REPORT • 31 Annual consolidated financial information Consolidated Statement of income (millions) Applying IFRS 9 and IFRS 15 Excluding IFRS 9 and IFRS 15 2020 2019 2018 2017 2016 2015 Operating revenues and Other income1 $ 15,463 $ 14,658 $ 14,368 $ 13,408 $ 12,799 $ 12,502 Applying IFRS 16 Excluding IFRS 16 Operating expenses before restructuring and other costs, depreciation and amortization2 EBITDA – excluding restructuring and other costs2 Restructuring and other costs3 EBITDA2 Depreciation and amortization Operating income Financing costs before long-term debt prepayment premium Long-term debt prepayment premium Income before income taxes Income taxes Net income Net income attributable to common shares 9,710 5,753 259 5,494 3,012 2,482 753 18 1,71 1 451 8,970 5,688 134 5,554 2,577 2,977 705 28 2,244 468 8,947 5,421 317 5,104 2,267 2,837 627 34 2,176 552 8,381 5,027 1 1 7 4,910 2,169 2,741 573 – 2,168 590 8,091 4,708 479 4,229 2,047 2,182 520 – 1,662 426 8,014 4,488 226 4,262 1,909 2,353 447 – 1,906 524 $ 1,260 $ 1,207 $ 1,776 $ 1,624 $ 1,578 $ 1,236 $ 1,382 $ 1,746 $ 1,600 $ 1,559 $ 1,223 $ 1,382 Share information4 Basic total weighted average shares outstanding (millions) Year-end shares outstanding (millions) Basic earnings per share (EPS) Dividends declared per share 2020 2019 2018 2017 2016 2015 1,275 1,291 $ 0.95 1.18495 1,204 1,209 $ 1.45 1.12625 1,193 1,197 1,186 1,189 1,185 1,181 1,206 1,189 $ 1.34 $ 1.31 $ 1.03 $ 1.15 1.05 0.99 0.92 0.84 Financial position (millions) 2020 2019 2018 2017 2016 2015 Total assets Net debt5 Total capitalization6 Long-term debt Owners’ equity $ 43,332 $ 37,985 $ 33,057 $ 31,053 $ 27,729 $ 26,406 19,826 32,31 1 18,856 12,602 18,199 28,739 17,142 10,659 13,770 24,099 13,265 10,341 13,422 22,833 12,256 9,458 12,652 20,546 1 1 ,604 7,936 1 1 ,953 19,566 1 1 ,182 7,672 EBITDA – excluding restructuring and other costs2 ($ millions) Dividends declared per share4 ($) 2020 2019 2018 2017 2016 2015 5,753 2020 5,688 5,421 5,027 4,708 4,488 2019 2018 2017 2016 2015 32 • TELUS 2020 ANNUAL REPORT 1.18495 1.12625 1.05 0.99 0.92 0.84 Quarterly consolidated financial information Consolidated Applying IFRS 16 Applying IFRS 9 and IFRS 15 Statement of income (millions) Q4 2020 Q3 2020 Q2 2020 Q1 2020 Q4 2019 Q3 2019 Q2 2019 Q1 2019 Operating revenues and Other income $ 4,060 $ 3,981 $ 3,728 $ 3,694 $ 3,858 $ 3,697 $ 3,597 $ 3,506 Operating expenses before restructuring and other costs, depreciation and amortization2 EBITDA – excluding restructuring and other costs2 Restructuring and other costs EBITDA2 Depreciation and amortization Operating income Financing costs before long-term debt prepayment premium Long-term debt prepayment premium Income before income taxes Income taxes Net income Net income attributable to common shares Share information4 Basic total weighted average shares outstanding (millions) Period-end shares outstanding (millions) 2,653 1,407 71 2,533 1,448 58 2,299 1,429 70 2,225 1,469 60 2,450 1,408 40 2,234 1,463 29 2,195 1,402 29 2,091 1,415 36 1,336 1,390 1,359 1,409 1,368 1,434 1,373 1,379 789 547 190 – 357 86 773 617 187 – 430 109 725 634 184 18 432 1 1 7 725 684 192 – 492 139 $ $ 271 $ 321 $ 315 $ 353 260 $ 307 $ 290 $ 350 $ $ 678 690 175 – 515 136 379 368 $ $ 649 785 173 28 584 144 440 433 633 740 189 – 551 31 617 762 168 – 594 157 $ $ 520 $ 437 517 $ 428 Q4 2020 Q3 2020 Q2 2020 Q1 2020 Q4 2019 Q3 2019 Q2 2019 Q1 2019 1,291 1,291 1,284 1,284 1,278 1,278 1,248 1,272 1,209 1,209 1,204 1,204 1,203 1,202 1,201 1,202 Basic EPS $ 0.20 $ 0.24 $ 0.23 $ 0.28 $ 0.30 $ 0.36 $ 0.43 $ 0.36 Dividends declared per share 0.31 1 20 0.29125 0.29125 0.29125 0.29125 0.28125 0.28125 0.27250 1 In 2018, as part of Operating revenues and Other income, we recorded equity income related to real estate joint ventures of $171 million arising from the sale of TELUS Garden. 2 These are non-GAAP measures and do not have standardized meanings under International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Therefore, they are unlikely to be comparable to similar measures presented by other companies. For definitions or more information, see Section 11 of the MD&A. In 2018, we recorded a donation to the TELUS Friendly Future Foundation of $118 million as part of other costs. In 2016, we recorded a $305 million compensation expense as part of other costs. 3 4 Adjusted to reflect the two-for-one share split effective March 17, 2020. 5 For a definition of Net debt, see Section 11 of the MD&A. 6 Net debt plus Owners’ equity excluding Accumulated other comprehensive income (loss). Note: Certain comparative information has been restated to conform with the 2020 presentation. Operating revenues and Other income ($ millions) EBITDA – excluding restructuring and other costs2 ($ millions) Q4 20 Q3 20 Q2 20 Q1 20 Q4 19 Q3 19 Q2 19 Q1 19 4,060 3,981 3,728 3,694 3,858 3,697 3,597 3,506 Q4 20 Q3 20 Q2 20 Q1 20 Q4 19 Q3 19 Q2 19 Q1 19 TELUS 2020 ANNUAL REPORT • 33 1,407 1,448 1,429 1,469 1,408 1,463 1,402 1,415 Annual operating statistics Consolidated Cash flow statement information Applying IFRS 16 Excluding IFRS 16 Applying IFRS 9 and IFRS 15 Excluding IFRS 9 and IFRS 15 2020 2019 2018 2017 2016 2015 Cash provided by operating activities (millions) $ 4,574 $ 3,927 $ 4,058 $ 3,947 $ 3,219 $ 3,556 Cash used by investing activities (millions) Cash provided (used) by financing activities (millions) Profitability ratios Dividend payout1 Return on common equity2 Debt and coverage ratios EBITDA interest coverage ratio3 Net debt to EBITDA ratio4 Other metrics Free cash flow5 (millions) Free cash flow before income taxes5 (millions) EBITDA6 less capital expenditures (millions) Capital expenditures (excluding spectrum licences) (millions) Capital expenditure intensity7 Cash payments for spectrum licences (millions) Total customer connections8 (000s) Employee-related information Total salaries and benefits6 (millions) Total active employees9 Full-time equivalent (FTE) employees (6,165) 1,904 67% 10.1% 7.3 3.45 (5,044) 1,238 1 1 5% 16.7% 7.5 3.20 (2,977) (1,176) 78% 16.4% 8.4 2.54 (3,643) (227) 80% 17.1% 8.9 2.67 (2,923) (87) 89% 15.4% 8.3 2.69 (4,477) 1,084 73% 18.3% 9.7 2.66 $ 1,435 $ 1,865 $ 2,978 $ 932 $ 1,576 $ 2,782 $ 1,207 $ 1,404 $ 2,507 $ 966 $ 1,157 $ 1,933 $ $ 141 741 $ 1,740 $ 1,078 $ 1,334 $ 1,91 1 $ 2,775 $ 2,906 $ 2,914 $ 3,094 $ 2,968 $ 2,577 18% – 20% 20% $ 942 $ 1 23% – 23% 21% $ 145 $ 2,048 15,972 15,166 13,947 13,050 12,673 12,495 $ 4,200 $ 3,493 $ 3,254 $ 3,036 $ 2,985 $ 3,007 78,100 77,200 65,600 64,600 58,000 56,900 53,600 52,900 51,300 50,500 47,700 46,600 Cash provided by operating activities ($ millions) Capital expenditures (excluding spectrum licences) ($ millions) 2020 2019 2018 2017 2016 2015 4,574 2020 3,927 4,058 3,947 3,219 3,556 2019 2018 2017 2016 2015 34 • TELUS 2020 ANNUAL REPORT 2,775 2,906 2,914 3,094 2,968 2,577 Quarterly operating statistics Applying IFRS 16 Applying IFRS 9 and IFRS 15 Consolidated Cash flow statement information Q4 2020 Q3 2020 Q2 2020 Q1 2020 Q4 2019 Q3 2019 Q2 2019 Q1 2019 Cash provided by operating activities (millions) $ 1,033 $ 902 $ 1,462 $ 1,177 $ 829 $ 1,148 $ 1,160 $ 790 Cash used by investing activities (millions) (2,207) (1,176) Cash provided (used) by financing activities (millions) 1,401 (76) (823) (726) (1,959) (1,61 1 ) 1,305 947 (871) (124) (1,600) 69 (962) 346 Profitability ratios Dividend payout1 Return on common equity2 Debt and coverage ratios EBITDA interest coverage ratio3 Net debt to EBITDA ratio4 Other metrics Free cash flow5 (millions) Free cash flow before income taxes5 (millions) EBITDA6 less capital expenditures (millions) Capital expenditures (excluding spectrum licences) (millions) Capital expenditure intensity7 Cash payments for spectrum licences (millions) Total customer connections8 (000s) Employee-related information Total salaries and benefits6 (millions) 67% 69% 61% 76% 10.1% 1 1 .3% 12.7% 15.2% 1 1 5% 16.7% 124% 16.8% 133% 17.2% 130% 16.3% 7.3 3.45 7.4 3.21 7.2 3.06 7.3 3.13 7.5 3.20 7.7 3.05 8.0 2.94 $ $ $ 218 $ 161 $ 51 1 $ 313 $ 359 $ 524 $ 794 $ 707 $ 673 $ 545 669 804 $ $ $ 135 209 666 $ $ $ 320 $ 417 $ 715 $ 324 446 632 $ $ $ $ 613 $ 741 $ 756 $ 665 $ 742 $ 748 $ 770 $ 15% – 19% – 20% – 18% – 19% 20% 21% – $ 1 1 $ 931 8.4 2.84 153 504 769 646 18% – 15,972 15,719 15,41 1 15,270 15,166 14,500 14,254 14,057 $ 1,090 $ 1,075 $ 1,035 $ 1,000 $ 925 $ 881 $ 871 $ 816 1 Commencing in 2020, we revised our dividend payout ratio to be calculated as a percentage of free cash flow. Periods prior to 2019 have not been restated. See Note 3 of the Consolidated financial statements. 2 Net income attributed to equity shares for a 12-month trailing period, divided by the average common equity for the 12-month period. 3 EBITDA – excluding restructuring and other costs, divided by Financing costs, excluding employee defined benefit plans net interest, recoveries on long-term debt prepayment premium and repayment of debt, calculated on a 12-month trailing basis. 4 Net debt at the end of the period, divided by 12-month trailing EBITDA – excluding restructuring and other costs. 5 For a definition of free cash flow, see Section 11 of the MD&A. 6 Excludes restructuring and other costs. 7 Capital expenditures (excluding spectrum licences), divided by Operating revenues and Other income. 8 The sum of mobile phone subscribers, mobile connected device subscribers, internet subscribers, residential voice subscribers, TV subscribers and security subscribers. Customer connections have been adjusted in certain years. For details on adjustments, see Section 1.3 of the MD&A. 9 Excluding employees in TELUS International, total active employees were 28,400 in 2020, 27,600 in 2019, 25,700 in 2018, 25,700 in 2017, 25,500 in 2016, and 27,000 in 2015. Note: Certain comparative information has been restated to conform with the 2020 presentation. Capital expenditure intensity7 (%) Total customer connections8 (000s) Q4 20 Q3 20 Q2 20 Q1 20 Q4 19 Q3 19 Q2 19 Q1 19 15 19 20 18 19 20 21 18 Q4 20 Q3 20 Q2 20 Q1 20 Q4 19 Q3 19 Q2 19 Q1 19 Wireless Wireline TELUS 2020 ANNUAL REPORT • 35 15,972 15,7 19 15,411 15,270 15,1 66 14,500 14,254 14,057 Annual segment statistics Wireless segment Network revenues (millions) Operating revenues and Other income1 (millions) Operating expenses before restructuring and other costs, depreciation and amortization (millions) EBITDA – excluding restructuring and other costs (millions) Restructuring and other costs2 (millions) EBITDA (millions) EBITDA margin3 Capital expenditures (excluding spectrum Applying IFRS 16 Excluding IFRS 16 Applying IFRS 9 and IFRS 15 Excluding IFRS 9 and IFRS 15 2020 2019 2018 2017 2016 2015 $ 6,030 $ 7,974 $ 6,124 $ 6,025 $ 5,867 $ 6,541 $ 6,298 $ 8,202 $ 8,182 $ 7,714 $ 7,173 $ 6,994 4,294 4,477 4,636 4,407 4,146 4,107 3,680 38 3,725 32 3,546 1 1 5 3,307 57 3,027 121 2,887 81 $ 3,642 $ 3,693 $ 3,431 $ 3,250 $ 2,906 $ 2,806 46.1% 45.4% 43.3% 42.9% 42.2% 41.3% licences) (millions) $ 810 $ 889 $ 896 $ 978 $ 982 $ 893 Subscriber gross additions4 (000s) Total subscriber net additions4 (000s) Total subscribers4,5,6,7 (000s) Blended monthly average billing per unit (ABPU)4 Blended monthly average revenue per unit (ARPU)4 Monthly blended churn rate4 Wireline segment Operating revenues and Other income1 (millions) Operating expenses before restructuring and other costs, depreciation and amortization (millions) EBITDA – excluding restructuring and other costs (millions) Restructuring and other costs2 (millions) EBITDA (millions) EBITDA margin3 Capital expenditures (millions) Internet subscribers5,8 (000s) TV subscribers8,9 (000s) Residential voice8 (000s) Security subscribers10 (000s) n/a - not applicable 1,277 537 10,748 $ 70.84 $ 57.81 0.95% 1,375 537 10,213 $ 73.37 $ 60.14 1.08% 1,289 457 9,676 $ 73.19 $ 60.98 1.06% 1,460 296 8,91 1 $ 67.05 $ 56.55 1.1 1% 1,399 173 8,585 1,443 176 8,457 $ 65.10 $ 63.45 n/a 1.21% n/a 1.26% $ 7,81 1 $ 6,760 $ 6,440 $ 5,943 $ 5,878 $ 5,743 5,738 4,797 4,565 4,223 4,197 4,142 2,073 221 $ 1,852 26.5% $ 1,965 2,138 1,215 1,164 707 1,963 102 1,875 202 1,720 60 1,681 358 1,601 145 $ 1,861 $ 1,673 $ 1,660 $ 1,323 $ 1,456 29.0% 29.1% 28.9% 28.6% 27.9% $ 2,017 $ 2,018 $ 2,1 1 6 $ 1,986 $ 1,684 1,981 1,160 1,204 608 1,858 1,093 1,248 72 1,743 1,098 1,298 n/a 1,655 1,059 1,374 n/a 1,566 1,005 1,467 n/a Wireless EBITDA – excluding restructuring and other costs ($ millions) Wireline EBITDA – excluding restructuring and other costs 2020 2019 2018 2017 2016 2015 3,680 3,725 3,546 3,307 3,027 2,887 2020 2019 2018 2017 2016 2015 36 • TELUS 2020 ANNUAL REPORT ($ millions) 2,073 1,963 1,875 1,720 1,681 1,601 Quarterly segment statistics Applying IFRS 16 Applying IFRS 9 and IFRS 15 Wireless segment Network revenues (millions) $ 1,515 $ 1,532 $ 1,472 $ 1,51 1 $ 1,531 $ 1,578 $ 1,523 $ 1,492 Operating revenues and Other income1 (millions) $ 2,130 $ 2,100 $ 1,846 $ 1,898 $ 2,169 $ 2,099 $ 1,997 $ 1,937 Q4 2020 Q3 2020 Q2 2020 Q1 2020 Q4 2019 Q3 2019 Q2 2019 Q1 2019 Operating expenses before restructuring and other costs, depreciation and amortization (millions) EBITDA – excluding restructuring and other costs (millions) Restructuring and other costs (millions) EBITDA (millions) EBITDA margin3 Capital expenditures (excluding spectrum 1,233 1,143 957 961 1,261 1,123 1,073 1,020 897 4 957 12 889 19 937 3 908 12 976 6 924 5 917 9 $ 893 $ 945 $ 870 $ 934 $ 896 $ 970 $ 919 $ 908 42.1% 45.6% 48.2% 49.4% 41.9% 46.5% 46.3% 47.4% licences) (millions) $ 170 $ 212 $ 234 $ 194 $ 238 $ 251 $ 223 $ 177 Subscriber gross additions4 (000s) Total subscriber net additions4 (000s) Total subscribers4 (000s) Blended monthly ABPU4 Blended monthly ARPU4 Monthly blended churn rate4 374 175 370 198 268 94 265 70 382 130 388 193 336 154 269 60 10,748 10,573 10,375 10,281 10,213 10,083 9,890 9,736 $ 70.07 $ 71.39 $ 69.65 $ 72.30 $ 72.79 $ 75.06 $ 73.43 $ 72.19 $ 57.29 $ 58.54 $ 56.82 $ 58.60 $ 59.29 $ 61.64 $ 60.30 $ 59.33 1.09% 0.99% 0.80% 0.94% 1.20% 1.09% 1.01% 1.02% Wireline segment Operating revenues and Other income1 (millions) Operating expenses before restructuring and other costs, depreciation and amortization (millions) EBITDA – excluding restructuring and other costs (millions) Restructuring and other costs (millions) EBITDA (millions) EBITDA margin3 Capital expenditures (millions) Internet subscribers (000s) TV subscribers (000s) Residential voice (000s) Security subscribers10 (000s) $ 2,014 $ 1,963 $ 1,961 $ 1,873 $ 1,770 $ 1,678 $ 1,674 $ 1,638 1,504 1,472 1,421 1,341 1,270 1,191 1,196 1,140 510 67 491 46 540 51 532 57 500 28 487 23 478 24 498 27 $ 443 $ 445 $ 489 $ 475 $ 472 $ 464 $ 454 $ 471 25.3% 25.0% 27.5% 28.4% 28.2% 29.0% 28.6% 30.4% $ 443 $ 529 $ 522 $ 471 $ 504 $ 497 $ 547 $ 469 2,138 1,215 1,164 707 2,094 1,195 1,173 684 2,044 1,176 1,181 635 2,007 1,168 1,191 623 1,981 1,160 1,204 608 1,953 1,145 1,216 103 1,921 1,126 1,228 89 1,896 1,1 1 0 1,237 78 1 2 Includes intersegment revenue for all years; in 2018, as part of Operating revenues and Other income, we recorded equity income related to real estate joint ventures of $171 million arising from the sale of TELUS Garden, where 50% was allocated to each of our segments. In 2018, we recorded a donation to the TELUS Friendly Future Foundation of $118 million as part of other costs, where 50% was allocated to each of our segments. In 2016, we recorded a $305 million compensation expense as part of other costs ($70 million in wireless and $235 million in wireline). 3 Excludes restructuring and other costs. 4 Effective for the first quarter of 2019, with retrospective application to January 1, 2018, we revised our definition of a wireless subscriber and now report mobile phones and mobile connected devices as separate subscriber bases. For 2020, 2019 and 2018, subscriber gross additions, blended monthly ABPU, blended monthly ARPU and monthly blended churn rate reflect mobile phones only. For details, see Section 5.4 of the MD&A. 5 Due to a review of our subscriber base in 2016, our opening wireless postpaid subscribers decreased by 45,000 and our opening internet subscribers increased by 21,000. 6 Our subscriber base in 2017 was adjusted to include a migration of 74,000 subscribers related to the acquisition of certain assets of Manitoba Telecom Services Inc. and to remove 44,000 subscribers primarily due to our CDMA network shutdown. In 2018, our mobile phone subscribers were adjusted to exclude 23,000 subscribers impacted by the CRTC’s final pro-rating ruling. 7 8 Our 2017 opening residential voice, internet and TV subscriber balances were increased by a net 1,000, 6,000 and 5,000, respectively, due to an acquisition and a divestiture. 9 10 Our security subscriber connections at December 31, 2019 were adjusted to add approximately 490,000 subscribers related to our acquisition of ADT Canada In 2018, we removed approximately 68,000 TV subscribers, as we ceased marketing our Satellite TV product. on November 5, 2019. During the third quarter of 2020, our cumulative subscriber connections were adjusted to add approximately 31,000 security subscribers related to a business acquisition. Note: Certain comparative information has been restated to conform with the 2020 presentation. TELUS 2020 ANNUAL REPORT • 37 Management’s discussion and analysis Caution regarding forward-looking statements The terms TELUS, the Company, we, us and our refer to TELUS Corporation and, where the context of the narrative permits or requires, its subsidiaries. This document contains forward-looking statements about expected events and our financial and operating performance. Forward-looking statements include any statements that do not refer to historical facts. They include, but are not limited to, statements relating to our objectives and our strategies to achieve those objectives, our targets, outlook, updates, our plans and expectations regarding the impact of the COVID-19 pandemic and responses to it, and our multi-year dividend growth program. Forward-looking statements are typically identified by the words assump- tion, goal, guidance, objective, outlook, strategy, target and other similar expressions, or future or conditional verbs such as aim, anticipate, believe, could, expect, intend, may, plan, predict, seek, should, strive and will. These statements are made pursuant to the “safe harbour” provisions of applicable securities laws in Canada and the United States Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are subject to inherent risks and uncertainties and are based on assumptions, including assumptions about future economic conditions and courses of action. These assumptions may ultimately prove to have been inaccurate and, as a result, our actual results or events may differ materially from expectations expressed in or implied by the forward-looking statements. Our general outlook and assumptions for 2021 are presented in Section 9 General trends, outlook and assumptions, and regulatory developments and proceedings in this Management’s discussion and analysis (MD&A). Risks and uncertainties that could cause actual performance or events to differ materially from the forward-looking statements made herein and in other TELUS filings include, but are not limited to, the following: • The COVID-19 pandemic including its impacts on our customers, suppliers and vendors, our team members and our communities, as well as changes resulting from the pandemic to our business and operations including to the demand for and supply of the products and services that we offer and the channels through which we offer them. • Regulatory decisions and developments including: changes to our regulatory regime (the timing of announcement or implementation of which are uncertain) or the outcomes of proceedings, cases or inquiries relating to its application, including but not limited to those set out in Section 9.4 Communications industry regulatory developments and proceedings in this MD&A, such as the potential for government intervention to further increase competition, for example, through mandated wholesale access; the potential for additional government intervention on pricing, including the March 2020 announcement by the federal goverment (reiterated in June 2020) targeting a 25% price reduction over a two-year period by the national wireless carriers in wireless plans using between two to six GB of data; federal and provincial consumer protection legislation and regulation including the introduction by the federal government of Bill C-11, the Digital Charter Implementation Act, 2020, which, aims to give consumers new rights and imposes new monetary penalties for non-compliance; amendments to existing federal legislation; potential threats to unitary federal regulatory authority over communications in Canada; potential threats to the CRTC’s ability to enforce the Wholesale Code, which aims to ensure the fair treatment by vertically integrated firms of rival broadcasting distributors and programming services; regulatory action by the Competition Bureau or other regulatory agencies; spectrum and compliance with licences, including our compliance with licence conditions, changes to spectrum licence fees, spectrum policy determinations such as restrictions on the purchase, sale, subordination and transfer of spectrum licences, the cost, availability and timing of spectrum, and ongoing and future consultations and decisions on spectrum licensing and policy frameworks, auctions and allocation; the impact on us and other Canadian telecommunications carriers of government or regulatory actions with respect to certain countries or suppliers, including U.S. federal regulations pertaining to certain technology transactions deemed to constitute national security risks and the imposition of additional licence requirements on the export, re-export and transfer of goods, services and technology to Huawei Technologies Co. Ltd. and its non-U.S. affili- ates, and decisions of other foreign governments, which could result in a general shortage of chip sets and other equipment; restrictions on non-Canadian ownership and control of the common shares of TELUS Corporation (Common Shares) and the ongoing monitoring of and compliance with such restrictions; unanticipated changes to the current copyright regime; and our ability to comply with complex and changing regulation of the healthcare and medical devices industry in the jurisdictions in which we operate, including as an operator of health clinics. The jurisdictions in which we operate, as well as the contracts that we enter into (particularly those of TELUS International (Cda) Inc.’s (TELUS International or TI) business), require us to comply with or facilitate our clients’ compliance with numerous, complex and sometimes conflicting legal regimes, both domestically and internationally. See TELUS International’s financial performance which impacts our financial performance. • Competitive environment including: our ability to continue to retain customers through an enhanced customer service experience that is differentiated from our competitors, including through the deployment and operation of evolving wireless and wireline infrastructure; intense wireless competition, including the ability of industry competitors to successfully combine a mix of internet services and, in some cases, wireless services under one bundled and/or discounted monthly rate, along with their existing broadcast or satellite-based TV services; the success of new products, services and supporting systems, such as home automation security and Internet of Things (IoT) services for internet-connected devices; wireline voice and data competition, including continued intense rivalry across all services among wireless and wireline telecommunications companies, cable companies, other communications companies and over-the-top (OTT) services, which, among other things, places pressures on current and future mobile phone average billing per subscriber per month (ABPU), mobile phone average revenue per subscriber per month (ARPU), cost of acquisition, cost of retention and churn rate for all services, as do customer usage patterns, increased data bucket sizes or flat-rate pricing trends for voice and data, such as our Peace of Mind™ plans and comparable plans, inclusive rate plans for voice and data and availability of Wi-Fi networks for data; mergers and acquisi- tions of industry competitors; pressures on internet and TV ARPU and churn rate resulting from market conditions, government actions and customer usage patterns; residential voice and business network access line losses; subscriber additions and retention volumes, and associated costs for wireless, TV and internet services; our ability to obtain and offer content on a timely basis across multiple devices on wireless and TV platforms at a reasonable cost as content costs per unit continue to grow; vertical integration in the broadcasting industry resulting in competitors owning broadcast content services, and timely and effective enforcement of related regulatory safeguards; TI’s ability to compete with professional services companies that offer consulting services, information technology companies with digital capabilities, and traditional contact centre and business process outsourcing companies that are expanding their capabil- ities to offer higher-margin and higher-growth digital services; in our TELUS Health business, our ability to compete with other providers of electronic medical records and pharmacy management products, claims adjudicators, systems integrators and health service providers including those that own a vertically integrated mix of health services delivery, IT solutions, and related services, global providers that could achieve expanded Canadian footprints, and in the provision of virtual healthcare services, preventative health services and personal emergency response services; and in our TELUS Agriculture business, while we maintain a broad solution set as compared to other agriculture technology providers, our ability to compete with focused software and IoT competitors. • Technological substitution including: reduced utilization and increased commoditization of traditional wireline voice services (local and long distance) resulting from impacts of OTT applications and wireless substitution; a declining overall market for TV services, including as a result of content piracy and signal theft, a rise in OTT direct-to-consumer video offerings and virtual multi- channel video programming distribution platforms; the increasing number of households that have only wireless and/or internet-based telephone services; potential declines in mobile phone ABPU and ARPU as a result of, among other factors, substitution by messaging and OTT applications; substitution by increasingly available Wi-Fi services; and disruptive technologies, such as OTT IP services, including software-defined networks in the business market, that may displace or cause us to reprice our existing data services. • Challenges to our ability to deploy technology including: high subscriber demand for data that challenges wireless networks and spectrum capacity levels and may be accompanied by increases in delivery cost; our reliance on infor- mation technology and our ability to streamline our legacy systems; the roll-out and evolution of wireless broadband technologies and systems, including video distribution platforms and telecommunications network technologies (broadband initiatives, such as fibre-to-the-premises (FTTP), wireless small-cell deployment, 5G wireless and availability of resources and our ability to build out adequate broadband capacity); our reliance on wireless network access agreements, which have facilitated our deployment of wireless technologies; our choice of suppliers and those suppliers’ ability to maintain and service their product lines, which could affect the success of upgrades to, and evolution of, technology that we offer; supplier limitations and concentration and market power for products such as network equipment, TELUS TV® and wireless handsets; our expected long-term need to acquire additional spectrum capacity through future spectrum auctions and from third parties to address increasing demand for data and our ability to utilize spectrum we acquire; deployment and operation of new wireline broad- band network technologies at a reasonable cost and the availability and success of new products and services to be rolled out using such network technologies; network reliability and change management; and our deployment of self-learning tools and automation that may change the way we interact with customers. • Capital expenditure levels and potential outlays for spectrum licences in auctions or purchases from third parties, affect and are affected by: our broad- band initiatives, including connecting more homes and businesses directly to fibre; our ongoing deployment of newer wireless technologies, including wireless small cells to improve coverage and capacity; investments in network resiliency and reliability, including to address changes in usage resulting from restrictions imposed in response to COVID-19; the allocation of resources to acquisitions and future wireless spectrum auctions held by Innovation, Science and Economic Development Canada (ISED), including the 3500 MHz spectrum auction scheduled to take place in June 2021 and the millimetre wave spectrum auction, which the Minister of Innovation, Science and Industry stated is expected to 38 • TELUS 2020 ANNUAL REPORT commence in 2021, but we believe may not take place until 2022 or later, and the announcement of a formal consultation on the auctioning of the 3800 MHz spectrum, expected to take place in 2023. Our capital expenditure levels could be impacted if we do not achieve our targeted operational and financial results or by changes to our regulatory environment. • Operational performance and business combination risks including: our reli- ance on legacy systems and ability to implement and support new products and services and business operations in a timely manner; our ability to manage the requirements of large enterprise deals; our ability to implement effective change management for system replacements and upgrades, process redesigns and business integrations (such as our ability to successfully complete and integrate acquisitions into our operations and culture, complete divestitures or establish partnerships in a timely manner and realize expected strategic benefits, including those following compliance with any regulatory orders); our ability to identify and manage new risks inherent in new service offerings that we may provide, including as a result of acquisitions, which could result in damage to our brand, our business in the relevant area or as a whole, and additional exposure to litigation or regulatory proceedings; and our ability to effectively manage our infrastructure and team member expansion. • Data protection including risks that malfunctions or unlawful acts could result in unauthorized access to, change, loss, or distribution of data, which may compromise the privacy of individuals and could result in financial loss and harm to our reputation and brand. • Security threats including intentional damage or unauthorized access or attempted access to our physical assets or our IT systems and networks, which could prevent us from providing reliable service or result in unauthorized access to our information or that of our customers. • Ability to successfully implement cost reduction initiatives and realize planned savings, net of restructuring and other costs, without losing customer service focus or negatively affecting business operations. Examples of these initiatives are: our operating efficiency and effectiveness program to drive improvements in financial results; business integrations; business product simplification; business process automation and outsourcing; offshoring and reorganizations; procure- ment initiatives; and real estate rationalization. • Foreign operations and our ability to successfully manage operations in foreign jurisdictions, including managing risks such as currency fluctuations and exposure to various economic, international trade, political and other risks of doing business globally. • Business continuity events including: our ability to maintain customer service and operate our network in the event of human error or human-caused threats, such as cyberattacks and equipment failures that could cause various degrees of network outages; technical disruptions and infrastructure breakdowns; supply chain disruptions, delays and economics, including as a result of government restrictions or trade actions; natural disaster threats; extreme weather events; epidemics; pandemics (including the ongoing COVID-19 pandemic); political instability in certain international locations; information security and privacy breaches, including data loss or theft of data; and the completeness and effec- tiveness of business continuity and disaster recovery plans and responses. • TELUS International’s financial performance which impacts our financial performance. Factors that may affect TI’s financial performance are described in TI’s public filings available on SEDAR and EDGAR and may include: intense competition from companies offering similar services; TI’s ability to grow and maintain its profitability as changes in technology and client expectations outpace service offerings and internal tools and processes; TI maintaining its culture as it grows; effects of economic and geopolitical conditions on its clients’ businesses and demand for its services; a significant portion of TI’s revenue being depen- dent on a limited number of large clients; continued consolidation in many of the verticals in which TI offers services could result in the loss of a client; attracting and retaining qualified team members to support its operations; adverse impacts of COVID-19 on TI’s business and financial results; TI’s acquisition of Lionbridge AI remaining subject to review by the Committee on Foreign Investment in the United States; TI’s business being adversely affected if certain independent con- tractors were classified as employees, and the costs associated with defending, settling or resolving any future lawsuits (including demands for arbitration) relating to the independent contractor classification; TI’s ability to successfully identify, complete, integrate and realize the benefits of acquisitions and manage associated risks; cyberattacks or unauthorized disclosure resulting in access to sensitive or confidential information and data of its clients or their end customers could have a negative impact on its reputation and client confidence; business development not developing in ways it currently anticipates due to negative public reaction to offshore outsourcing, proposed legislation or otherwise; ability to meet client expectations regarding its content moderation services being adversely impacted due to factors beyond its control and its content moderation team members may suffer adverse emotional or cognitive effects in the course of performing their work; and TI’s lack of history operating as a separate, publicly traded company. The price of the subordinate voting shares of TI (TI Subordinate Voting Shares) may be volatile and is likely to fluctuate due to a number of factors beyond its control, including actual or anticipated changes in profitability; general economic, social or political developments; changes in industry conditions; changes in governance regulation; inflation; the general state of the securities markets; and other material events. TI may choose to publicize targets or provide other guidance regarding its business and it may not achieve such targets. Failure to do so could also result in a reduction in the trading price of the TI Subordinate Voting Shares. A reduction in the trading price of the TI Subordinate Voting Shares due to these or other factors could result in a reduction in the fair value of TI multiple voting shares held by TELUS. MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A) • Human resource matters including: recruitment, retention and appropriate training in a highly competitive industry (including retention of team members leading recent acquisitions in emerging areas of our business), the level of our employee engagement, our ability to maintain our unique culture as we grow, the risk that certain independent contractors of TI’s Lionbridge AI business could be classified as employees, and the health of our team. • Financing and debt requirements including: our ability to carry out financing activities, refinance our maturing debt, lower our net debt to EBITDA ratio to our objective range given the cash demands of spectrum auctions and/or maintain investment grade credit ratings in the range of BBB+ or the equivalent. Our business plans and growth could be negatively affected if existing financing is not sufficient to cover our funding requirements. • Lower than planned free cash flow could constrain our ability to invest in operations, reduce leverage or return capital to shareholders, and could affect our ability to sustain our dividend growth program through 2022. This program may be affected by factors such as the competitive environment, economic performance in Canada, our earnings and free cash flow, our levels of capital expenditures and spectrum licence purchases, acquisitions, the management of our capital structure, regulatory decisions and developments, and business continuity events. Quarterly dividend decisions are subject to assessment and determination by our Board of Directors based on our financial position and outlook. Common Shares may be purchased under a normal course issuer bid (NCIB) if and when we implement one and if we consider it opportun- istic, based on our financial position and outlook, and the market price of our Common Shares. There can be no assurance that our dividend growth program or that any NCIB will be implemented, maintained, unchanged and/or completed. • Taxation matters including: interpretation of complex domestic and foreign tax laws by the relevant tax authorities that may differ from our interpretations; the timing and character of income and deductions, such as tax depreciation and operating expenses; tax credits or other attributes; changes in tax laws, including tax rates; tax expenses being materially different than anticipated, including the taxability of income and deductibility of tax attributes; elimination of income tax deferrals through the use of different tax year-ends for operating partnerships and corporate partners; and changes to the interpretation of tax laws, including those resulting from changes to applicable accounting standards or the adoption of more aggressive auditing practices by tax authorities, tax reassessments or adverse court decisions impacting the tax payable by us. • Litigation and legal matters including: our ability to successfully respond to investigations and regulatory proceedings; our ability to defend against existing and potential claims and lawsuits (including intellectual property infringement claims and class actions based on consumer claims, data, privacy or security breaches and secondary market liability), or to negotiate and execute upon indemnity rights or other protections in respect of such claims and lawsuits; and the complexity of legal compliance in domestic and foreign jurisdictions, including compliance with competition, anti-bribery and foreign corrupt practices laws. • Health, safety and the environment including: lost employee work time resulting from illness or injury; public concerns related to radio frequency emissions; environmental issues affecting our business, including climate-related risk (such as extreme weather events and other natural hazards), waste and waste recycling, risks relating to fuel systems on our properties, changing government and public expectations regarding environmental matters and our responses; and challenges associated with epidemics or pandemics, including the COVID-19 pandemic and our response to it, which may add to or accentuate these factors. • Economic growth and fluctuations including: the state of the economy in Canada, which may be influenced by economic and other developments outside of Canada, including potential outcomes of yet unknown policies and actions of foreign governments and the ongoing COVID-19 pandemic, as well as public and private sector responses to the pandemic; expectations of future interest rates; inflation; unemployment levels; effects of fluctuating oil prices; effects of low business spending (such as reducing investments and cost structure); pension investment returns, funding and solvency discount rates; fluctuations in foreign exchange rates of the currencies in the regions in which we operate; sovereign credit ratings and effects on the cost of borrowing; the impact of tariffs on trade between Canada and the U.S.; and global implications of the trade dynamic between major world economies. These risks are described in additional detail in Section 9 General trends, outlook and assumptions, and regulatory developments and proceedings and Section 10 Risks and risk management in this MD&A. Those descriptions are incorporated by reference in this cautionary statement but are not intended to be a complete list of the risks that could affect the Company. Many of these factors are beyond our control or our current expectations or knowledge. Additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial may also have a material adverse effect on our financial position, financial performance, cash flows, business or reputation. Except as otherwise indicated in this document, the forward-looking statements made herein do not reflect the potential impact of any non-recurring or special items or any mergers, acquisitions, dispositions or other business combinations or trans- actions that may be announced or that may occur after the date of this document. Readers are cautioned not to place undue reliance on forward-looking state- ments. Forward-looking statements in this document describe our expectations, and are based on our assumptions, as at the date of this document and are subject to change after this date. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements. This cautionary statement qualifies all of the forward-looking statements in this MD&A. TELUS 2020 ANNUAL REPORT • 39 February 11, 2021 Section 1 Introduction 1.1 1.2 1.3 1.4 Preparation of the MD&A The environment in which we operate Highlights of 2020 Performance targets (key performance measures) 2 Core business and strategy Core business 2.1 2.2 Strategic imperatives 3 Corporate priorities 4 Capabilities 4.1 Principal markets addressed and competition 4.2 Operational resources 4.3 4.4 Liquidity and capital resources Disclosure controls and procedures and changes in internal control over financial reporting 5 Discussion of operations General 5.1 5.2 Summary of consolidated quarterly results, trends and fourth quarter recap 5.3 Consolidated operations 5.4 Wireless segment 5.5 Wireline segment 6 Changes in financial position 7 Liquidity and capital resources Overview 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 Cash provided by operating activities Cash used by investing activities Cash provided by financing activities Liquidity and capital resource measures Credit facilities Sale of trade receivables Credit ratings Financial instruments, commitments and contingent liabilities 7.10 Outstanding share information 7.11 Transactions between related parties Page 88 88 91 92 92 94 97 98 102 102 102 105 107 109 111 112 113 114 115 117 118 120 121 121 122 123 123 126 Page Section 8 Accounting matters 8.1 Critical accounting estimates and judgments 8.2 Accounting policy developments 9 General trends, outlook and assumptions, and regulatory developments and proceedings 9.1 9.2 Telecommunications industry in 2020 Telecommunications industry general outlook and trends 9.3 TELUS assumptions for 2021 9.4 Communications industry regulatory developments and proceedings 10 Risks and risk management 10.1 Overview 10.2 Principal risks and uncertainties 10.3 Regulatory matters 10.4 Competitive environment 10.5 Technology 10.6 Suppliers 10.7 Organizational change 10.8 Customer service excellence 10.9 Our systems and processes 10.10 Security and data protection 10.11 Our team 10.12 Our environment 10.13 Financing, debt and dividends 10.14 Tax matters 10.15 The economy 10.16 Litigation and legal matters 11 Definitions and reconciliations Non-GAAP and other financial measures 11.1 11.2 Operating indicators 41 41 41 45 50 50 50 50 51 56 56 58 62 64 65 65 66 69 72 75 78 80 80 80 81 82 83 85 85 86 86 87 88 40 • TELUS 2020 ANNUAL REPORT MD&A: INTRODUCTION 1 Introduction The forward-looking statements in this section, including, for example, statements relating to the expected impact of the COVID-19 pandemic on our operations and financial condition, on demand for our products and services and subscriber growth, and on our assets, are qualified by the Caution regarding forward-looking statements at the beginning of this Management’s discussion and analysis (MD&A). 1.1 Preparation of the MD&A The following sections are a discussion of our consolidated financial position and financial performance for the year ended December 31, 2020, and should be read together with our December 31, 2020 audited consolidated statements of income and other comprehensive income, statements of financial position, statements of changes in owners’ equity and statements of cash flows, and the related notes (collectively referred to as the Consolidated financial statements). The generally accepted accounting principles (GAAP) that we use are International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and Canadian GAAP. In this MD&A, the term IFRS refers to these standards. In our discussion, we also use certain non-GAAP financial measures to evaluate our performance, monitor compliance with debt covenants and manage our capital structure. These measures are defined, qualified and reconciled with their nearest GAAP measures in Section 11.1. All currency amounts are in Canadian dollars, unless otherwise specified. Additional information relating to the Company, including our annual information form and other filings with securities commissions or similar regulatory authorities in Canada, is available on SEDAR (sedar.com). Our filings with the Securities and Exchange Commission in the United States, including Form 40-F, are available on EDGAR (sec.gov). Additional information about our TELUS International (Cda) Inc. (TELUS International or TI) subsidiary, including discussion of its business and results, can be found in its public filings available on SEDAR and EDGAR. Our disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management on a timely basis, so that appropriate decisions can be made regarding public disclosure. This MD&A and the Consolidated financial statements were reviewed by our Audit Committee and authorized by our Board of Directors (Board) for issuance on February 11, 2021. In this MD&A, unless otherwise indicated, results for the year ended December 31, 2020 are compared with results for the year ended December 31, 2019. All information pertaining to shares and per-share amounts in this MD&A for periods before March 17, 2020 reflects retrospective treatment of the share split as further described in Section 1.3 Highlights of 2020 – Two-for-one share split completed. 1.2 The environment in which we operate The success of our business and the challenges we face can best be understood with reference to the environment in which we operate, including broader economic factors that affect our customers and us, and the competitive nature of our operations. 2020 Canadian telecom industry decline Est. 2% $15.5 billion TELUS 2020 revenues and other income 16.0 million TELUS subscriber connections $1.5 billion / 5.2% TELUS Corporation Common Share 2020 dividends declared and growth per share Canadian telecommunications industry We believe that the COVID-19 pandemic made apparent that connectivity is no longer a luxury but a basic necessity in order for Canadians to participate in the digital economy. The pandemic placed overwhelming pressures on the Canadian economy and we believe that the economic impact of the pandemic would have been much more severe if not for Canada’s robust telecommunications networks. We estimate that Canadian telecommunications industry revenues (including TV revenue and excluding media revenue) declined by approximately 2% in 2020 (growth of 2% in 2019) and experienced network revenue declines of approximately 4.4%. We attribute these declines to the pandemic. Wireless revenues continued to account for the largest portion of telecommunications sector revenues. We estimate that the Canadian wireless industry added approximately 1.1 million subscribers in 2020. With respect to the wireline industry, the Canadian consumer high- speed internet penetration rate grew by approximately 1 percentage point to 88% in 2020 and subscriber growth is expected to continue. More Canadians are subscribing to internet services, as they continued to use more data, and subscribe to faster and larger packages while the percentage of households that have pay TV subscriptions declined. Competitive pressures continued in both the wireline consumer and business markets, while declines in higher-margin legacy voice services were ongoing, partially attributable to technological substitution. (See Section 9 General trends, outlook and assumptions, and regulatory developments and proceedings, Section 10.4 Competitive environment and Section 10.15 The economy.) TELUS 2020 ANNUAL REPORT • 41 COVID-19 On December 9, 2020, Health Canada authorized the first COVID-19 support. We shared our pandemic planning framework, as well as our contact tracing playbook, with 500,000 of our business customers vaccine. Health authorities began administering the vaccine the following at private and public sector organizations. This allowed them to leverage week. However, on December 26, 2020, Canada’s first known case of the effort and research completed by our team and medical experts. a coronavirus variant, which was first detected in the United Kingdom, We also extended the advice and guidance of our dedicated TELUS MAC was confirmed. Since the beginning of the pandemic, we have focused to our business customers. In addition, we introduced an offer for small relentlessly on keeping Canadians connected and on the health, safety business customers through our TELUS Secure Business security solu- and well-being of our team members, our customers and our commun- tion. Under the offer, these customers were given a $1,000 equipment ities. Our Executive Team continues to be guided by advice from our credit and three months of free service. In May, our Business Solutions Emergency Management Operating Committee (EMOC) and the TELUS team launched the #StandWithOwners initiative in support of Canadian Medical Advisory Council (MAC). Impacts to our financial condition and results of operations Throughout the COVID-19 pandemic, we have seen unprecedented volumes of traffic on our network, including an increase in wireless voice calls, short message service (SMS) traffic, multimedia message service (MMS) traffic, home internet usage, video calls, voice network traffic, and usage of 1-800 phone numbers and teleconference bridges, compared to the same periods one year prior. Many workers are continuing their telecommuting arrangements, while some students began the new school year with online learning as part of their education plans, leading to added network demand. Despite the increased traffic volumes, we are keeping our customers connected and providing them with a reliable, fast and consistent experience on our leading wireless and wireline broadband networks, in both urban and rural communities across the country. We are committed to supporting Canadians throughout the pandemic, as demonstrated by our measures to help consumers and small and medium-sized business (SMB) customers financially affected by the pandemic. To assist our customers with the initial adaptation to COVID-19 pandemic norms and impacts, we waived wireless roaming fees through April 30, 2020. Up to June 30, 2020, we deferred planned price increases, extended promotional periods, delayed suspensions, cancellations and write-offs for our customers who were in collections, accepted payment arrangements and waived home internet overage charges for customers without unlimited data plans. In December 2020, we delayed suspensions and account cancellations for customers who were in collections during the holiday season. Through our Mobility for Good program, we provided a credit for two months of free wireless service to frontline healthcare workers at select hospitals across the country, and we donated over 14,000 devices, many with $0 rate small businesses. Through this social media campaign, we committed $500,000 in direct revenue, marketing and expert advice, exceeding our target in just four days. We launched a voluntary suspension-of-service offer for the hard-hit hospitality sector. The offer allows hotels to tempor- arily suspend TV and Wi-Fi service, thereby reducing the cash flow impact on their business. The pandemic has impacted our operations and financial condition and we expect this to continue into 2021. Both operating revenue and earnings before interest, income taxes, depreciation and amortization (EBITDA), in addition to certain operational metrics, have been negatively impacted. This is expected to continue well into 2021. We continue to take steps to mitigate the negative effects of the pandemic, including on cash flow. We have experienced decreases in wireless roaming revenues with the closure of borders and corresponding decline in customer travel. We expect declines in roaming revenue to persist throughout the health crisis as the closure of land borders, including those between Canada and the U.S., and declines in customer travel continue. With respect to SMBs, we expect lower contributions from our business customers as we anticipate that many SMBs will be forced to reduce the scope of their operations and/or close. In our health business, by the end of the first quarter, to keep our customers and team members safe, we had tempor- arily closed certain TELUS Health Care Centres. We saw a financial improvement as our health clinics re-opened in July, but due to restric- tions in place to protect patients during the pandemic, the clinics are still unable to offer their full suite of core services. Our TI business was also financially impacted by temporary operating restrictions of certain centres. TI’s ability to quickly enable team members to work and support customers from home and in other modified work locations has helped to mostly mitigate these impacts. plans, to over 340 organizations, enabling isolated seniors, hospitalized patients and vulnerable Canadians to stay connected. Families who Operational challenges The federal government has categorized all telecommunications providers, were enrolled in our Internet for Good program as of March 31, 2020 including TELUS, as essential services for purposes of the COVID-19 were provided with a credit for two months of free service. The program pandemic. In addition, emergency measures taken by most provincial and provides low-cost high-speed internet access to citizens in need. territorial governments also recognize telecommunications providers as In September, we expedited access to our Internet for Good program essential service providers that must continue operations. We anticipate to provide students in need, from kindergarten to grade 12 in B.C. and this to continue for the duration of the health crisis. As a result, we should Alberta, by partnering with schools, teachers and principals to support be permitted to continue operations during these times, although subject virtual learning. In response to the strict quarantines imposed at long- to some restrictions (such as the number of people permitted in our term care homes for seniors, we piloted our Local Camera Mobile service retail stores). at 29 facilities across B.C. and Alberta by December 31, 2020. The service allows facility operators to share important information with residents via a live video broadcast, improving the communication stream for over 3,500 residents. Additionally, we continue to offer free channel previews on Optik TV and Pik TV and free educational content for youth in partner- ship with Microsoft, which integrates our TELUS Wise® program into its free online learning platform Learn, Do and Share. Our TELUS Business Solutions team continues to support businesses as they transition to providing their customers with virtual Health and safety of our customers and team members For more than a decade, our Work Styles® program has provided employees with flexible work options to accommodate their work pref- erences. As a result, when the pandemic struck, we were well prepared, with a substantial portion of our domestic team already equipped to work from home. At December 31, 2020, over 95% of domestic employees (excluding field technicians and retail store representatives) were working from home. With these team members continuing to work productively 42 • TELUS 2020 ANNUAL REPORT MD&A: INTRODUCTION from home, we made the decision to extend this remote working arrange- our associated domestic greenhouse gas emissions compared to the ment until September 2021 at a minimum, providing team members pre-pandemic period. These initiatives are being evaluated for long-term with clarity on their working arrangements so they could manage the application and contribute to our target of having our operations become logistics and responsibilities of their professional and personal lives. net carbon neutral by 2030 (see Section 3). For team members experiencing difficulties balancing pandemic-related impacts such as school closures, we are providing alternative arrange- ments that may include: allowing normal weekly hours of work to be spread over the entire calendar week; supporting hours of work outside of traditional business hours; and/or allowing the workday to be split into multiple, shorter segments. In our second quarter 2020 MD&A, we reported that a limited number of team members were invited to return to our buildings. These were employees who we had determined required access to one of our buildings to be fully productive, such as employees requiring access to specialized equipment. We continue to take proactive steps to ensure those working in our buildings and in the field are protected, including enhanced safety measures to ensure physical distancing, daily health self- assessments, thermal screening, and reminders about the importance of personal protective equipment. Throughout the health crisis, we have utilized our virtual technician model, enabling technicians to perform their work without entering a customer’s premises. This new process was developed in under 72 hours and we were the first in the industry to create this capability across our Scorecard We simplified our 2020 corporate scorecard, including targets, in May 2020 and re-prioritized our objectives to better reflect the new operating environment in response to the COVID-19 pandemic, representative of our culture and brand, customer growth as well as cash flow. Our decision to adjust the scorecard was consistent with past practices when cir- cumstances changed significantly from those considered by the Human Resources and Compensation Committee (HRCC) of our Board and when the original performance measures were approved and were in alignment with our governance practices and timelines. Concurrent with the review and approval of the first quarter of 2020 corporate score- card results, the HRCC and Board reviewed and approved the revised scorecard targets for the second quarter of 2020 to fourth quarter of 2020, which will include the metrics: TELUS engagement, brand and reputation, net client additions, customer experience and simple cash flow. The revised 2020 corporate scorecard metrics and targets formed the baseline for the business unit scorecards, which were also revised in the second quarter of 2020. future friendly home services. The technician pre-provisions the equip- ment, leaves the sanitized equipment at the customer’s door and then Impacts to demand for our products and services As previously described, our network traffic has significantly increased walks the customer through the installation process via a smartphone since the start of the pandemic and through the fourth quarter of 2020, video interaction. As the pandemic has evolved, we now activate this and higher volumes of traffic are expected to continue. capability in a geo-specific manner as epidemiological situations change At the end of the first quarter of 2020, we made the decision to throughout Canada. When we do offer professional technician driven temporarily close approximately 90% of our retail stores in an effort to installations, upon agreement from the customer and technician, our reduce the transmission of COVID-19 and to keep our customers and technician follows medically driven safety protocols while performing team members safe. The remaining 10% of stores were kept open the complex installations and repairs that cannot be done virtually. for essential customer support and we added many enhanced safety We recognize the mental health challenges the pandemic has protocols. For example, store capacity was kept to less than 25%, we generated. We continue to maintain our internal online COVID-19 hub, created distancing rules, installed plexiglass barriers, added team mem- which is a virtual gathering place for team members to learn, connect, ber and customer masking rules before they were mandated by health work and be well together. Additionally, we share information with authorities and created virtual line-ups so customers need not stand and team members through our internal blog and frequently asked questions wait. Frontline team members, including those directly impacted by store on our intranet. Team members also receive regular communications closures, were redeployed to other areas of the business that required from our Chief Neuroscience Officer (CNO) on topics related to mental additional support and to keep them actively employed. Late in the second well-being, and are invited to attend virtual town halls with our CNO to quarter of 2020, we commenced re-opening those retail stores that ask questions related to mental and physical health, as well as receiving were previously closed, and by July 31, 2020, the majority had been regular communications from the Chair of the TELUS MAC focused on medical information such as vaccine safety and deployment. Starting re-opened. As of the end of 2020, almost all stores were open and they have continued operating with the same safety protocols. in October, leaders have been taking part in a new Leading a mentally While the health crisis has had a negative impact on customer loading healthy workplace training program to help support the well-being and overall store traffic, our wireless gross additions have been resilient and mental health of our team members. and only marginally lower over prior periods as we successfully leveraged For TI, over 90% of our team members are continuing to support our digital assets to support customer growth and retention activities. customers from home and in other modified work locations. While some Wireless industry retail stores had re-opened by the end of the third quar- delivery locations have begun to welcome back more team members, ter of 2020 and the typical fourth quarter seasonal promotional intensity TI is planning for the majority of its team to make a gradual return to its was exacerbated by pent-up demand resulting from retail closures and centres provided it has been deemed safe to do so by local government lockdowns from the second quarter of 2020. This led to industry churn and health authorities, in addition to guidance from the TELUS MAC starting to gravitate to pre-pandemic levels. Despite these pressures, and its own best practices. Sustainability impacts Through initiatives taken during the pandemic such as: (i) the hibernation of most floors in our administrative office buildings; and (ii) the increased utilization of our Work Styles program, in which team members do not have to commute to an office building, we have observed a decrease in in the fourth quarter of 2020, mobile phone net additions improved year- over-year notwithstanding lower gross additions, and connected device net additions increased year-over-year (see Section 5.4 Wireless segment for additional details). With fewer traditional wireline installations being performed, there was the possibility of lower corresponding wireline net additions. TELUS 2020 ANNUAL REPORT • 43 Notwithstanding these challenges, our fourth quarter of 2020 internet, Impacts to our capital and financial resources, TV and security subscriber connection net additions all experienced year-over-year improvements and we continue to evolve our operations overall liquidity position and outlook We have a strong liquidity position with a robust outlook and are not and support our customers virtually (see Section 5.5 Wireline segment relying on COVID-19-related supplier finance programs to manage our for additional details). cash flow. Our access to capital has not been materially impacted by We continued to attract and retain high-quality subscribers, including the COVID-19 pandemic, as evidenced by our long-term debt issuances through our TELUS Peace of Mind offerings, and to create value for described in Section 1.3. Our credit facilities have not changed and are our customers by leading with our strengths: our leading network, not reasonably likely to change due to the pandemic. We had available superior customer service and product offerings, flexibility and simplifi- liquidity of approximately $2.8 billion at December 31, 2020, composed cation including through digital capabilities, as well as effective bundling. of cash and temporary investments of $848 million, a TELUS Corporation We experienced increased utilization of our digital assets in both our wireless and wireline segments, including telus.com and the My TELUS mobile app – for example, to support the purchase of new devices, credit facility of $1.5 billion inclusive of commercial paper backstop and our trade receivables securitization program of $400 million. Also at December 31, 2020, we could offer $2.0 billion of debt or equity securities the addition of new services, migrations to electronic billing and to pursuant to a shelf prospectus that is in effect until June 2022. Following facilitate payments – making transactions easier for customers. the June 2021 maturity of our TELUS Communications Inc. 10.65% In our health business, we saw increased demand for virtual care debentures, Series 3 totalling $175 million, our next TELUS Corporation solutions carried into the fourth quarter of 2020. With the introduction notes mature in March 2022. of virtual fee codes by every provincial government to enable remote As set out in Note 28(d) of the Consolidated financial statements, patient care during the pandemic, TELUS Health launched its pre-built in February 2021, TELUS International made an initial public offering (IPO) video visit functionality integrated with our electronic medical records of subordinate voting shares (TI Subordinate Voting Shares); both TELUS (EMR). As of December 31, 2020, more than 226,000 consultations had Corporation and a TELUS International non-controlling shareholder been conducted through the TELUS EMR Virtual Visit solution. We are individually also offered TI Subordinate Voting Shares in conjunction seeing continued demand for our one-on-one virtual health solutions, with the IPO. Through February 11, 2021, net proceeds of approximately with accelerated adoption of Akira by TELUS Health by publicly funded $0.6 billion from the offering were used to reduce the amount of out­ and business customers, as well as increased demand for Babylon standing TELUS International (Cda) Inc. credit facility (TI credit facility) by TELUS Health. Our virtual care offerings were augmented by the indebtedness and $0.2 billion (comprised of net proceeds on disposition fourth-quarter acquisition of EQ Care. We are also seeing increased of TI Subordinate Voting Shares by TELUS Corporation) from the offering demand for Home Health Monitoring (HHM) solutions with certain was included in Cash and temporary investments, net; had such reduction, provinces, as well as increased demand for our LivingWell Companion™ and inclusion, respectively, been made at December 31, 2020, the pro by TELUS Health, enabling Canadian seniors to access 24/7 emergency forma net debt to EBITDA – excluding restructuring and other costs ratio support. In addition, certain TELUS Health Care Centres re-opened in would have been 3.30 times. July for in-clinic services while maintaining virtual consultation offerings to clients; prior to that, they had re-opened with restricted capacity to protect patients during the health crisis. Virtual consultations were launched as part of a COVID-19 business impact assessment strategy and, as a result of their successful client adoption, virtual consultations will be maintained in a post-pandemic environment. For our TI subsidiary’s customer care and business services (CCBS) business, operations have been impacted by government announce- ments that resulted in the temporary closure of certain centres. Despite these closures, our TI subsidiary’s teams managed to enable more than 90% of its team members to provide remote support from home and in other modified work locations. While some team members have begun to return to those TI delivery locations that are deemed safe, the majority of TI team members continue to work effectively from home. Certain TI clients (in particular those clients in travel and hospitality-related businesses) continue to experience challenges; however, the decline in business from these clients was offset by increases in business from clients in the games, media and e-commerce food delivery industries. In the second half of 2020, cash receipts from customers steadily recovered from declines experienced in the second quarter of 2020. We believe government assistance programs designed to support individ- uals and businesses, as well as the resumption of collections activities, were key contributing factors to the improvement in cash receipts in the second half of 2020. In addition, to help mitigate cash flow impacts, we deferred planned Canadian management professional salary increases for one quarter and paused our employer matching portion of our employee share plan for management professionals for that same period. Funding sources, covenants, debt and other obligations COVID-19 pandemic-related impacts have not affected our ability to access traditional funding sources that were available to us in recent periods. As described in Section 1.3, we undertook two debt offerings in 2020. Notably, at the time of the announcement of the Series CAD debt issuance, this debt offering represented the lowest coupon on record in the Canadian market for a BBB 10-year corporate issuance. We have not provided additional collateral, guarantees or equity to obtain funding, nor have we experienced material changes to our cost of capital due to the COVID-19 pandemic. As described in Section 7.8, there have been no changes to our credit ratings during the health crisis. There is no material uncertainty about our ongoing ability to meet the covenants of our TELUS Corporation credit agreements. Our TI subsidiary continues to forecast remaining in compliance with its leverage ratio under the TI credit facility and will take appropriate mitigating actions if necessary. We have been able to service our debt and other obligations on a regular basis without material changes compared to pre-COVID-19 levels. We have taken advantage of some payment deferrals that several government jurisdictions have provided. For example, corporate income tax instalments, property tax payments of certain jurisdictions and spectrum licence remittances were deferred until September 2020. However, we did not experience any liquidity challenges once those accommodations ended. 44 • TELUS 2020 ANNUAL REPORT MD&A: INTRODUCTION COVID-19 effect on assets Due to the widespread, pre-COVID-19 adoption of our Work Styles declare a fourth quarter dividend for 2020 as we continued supporting our Canadian and other shareholders. This decision is described in greater program, our finance operations have not been significantly impacted by the pandemic. We expect to experience delays in collection of accounts receivable as the health crisis has created financial hardships detail in Section 4.3 under Report on financing and capital structure management plans. We have not ceased any material business operations or reduced our human capital resource expenditures beyond normal for many of our customers. Throughout 2020, we have experienced operational efficiency programs. an increase in bad debt expense compared to pre-pandemic periods, as we have provided for the financial and operational impacts of these considerations and concessions to our customers. We will continue to work with our customers who require hardship assistance in addition to receiving government programs that are intended to support those financially impacted. We do not expect significant changes in judgments in determining the fair value of assets. Business continuity plans For many years, we have had, and continue to have, business continuity plans in place, including an established EMOC that includes repre- sentatives of all of our business units. The EMOC had been monitoring COVID-19 prior to it being characterized as a pandemic. As COVID-19 progressed, in early March 2020, the EMOC was activated to a heightened state of readiness. The EMOC continues to meet regularly and leverages the expertise of the TELUS MAC, which is composed of five doctors specializing in infectious diseases, public health, occupational health and family practice. We do not foresee requiring material expenditures to implement our business continuity plans relating to the health crisis and do not face any material resource constraints in implementing those plans. (See Section 10.12 Our environment for additional details.) Supply chain and methods of distribution We continue to leverage our digital capabilities as a key sales channel to supplement sales in our bricks and mortar retail stores. Given the continuing challenges that our suppliers may have in sourcing their own materials, and their historic disposition to launch next-generation devices at certain times of the year, there may be delays to the launches of their latest devices causing a ripple effect with associated equipment revenues. The pandemic has not materially changed the relationship between our costs and revenues. Capital expenditures, other capital resources and social capitalism Keeping Canadians connected during the pandemic is of utmost import- ance to our team. Some planned capital expenditure activity has been deferred in response to customer requests and/or our inability to access work sites. However, we have redirected other capital expenditures to ensure our networks continue to operate at leading levels, as well as to Travel restrictions and border closure impacts Given the effectiveness of our technology in bridging geographic divides, travel restrictions and border closures are not expected to have a material impact on our ability to operate or achieve business goals. For example, we were able to hold our 2020 annual general meeting of shareholders using a virtual-only format for the first time ever via a live webcast. 1.3 Highlights of 2020 Competence Call Center acquisition On January 31, 2020, TI completed the acquisition of 100% of Competence Call Center (CCC) for approximately $1.3 billion (€915 million), less debt assumed. CCC is a provider of higher-value-added business services with a focus on customer relationship management and content moderation through 28 languages. CCC offers its services across 11 European countries and partners with industry-leading global brands primarily from fast-growing technology, media and telecommunications, retail, and travel and hospitality sectors. Two-for-one share split completed On February 13, 2020, we announced a subdivision of the common shares of TELUS Corporation (Common Shares) on a two-for-one basis. On March 17, 2020, TELUS shareholders received one additional share for each share owned on the record date of March 13, 2020. All information pertaining to shares and per-share amounts in this MD&A for periods before March 17, 2020 reflects retrospective treatment of the share split. Equity offering On February 26, 2020, we issued 57.5 million Common Shares at a price of $26.00 for total gross proceeds of $1.5 billion. Proceeds of the offering were used for general corporate purposes, including funding growth opportunities, capital expenditures and the reduction of indebtedness. 5G launch In June 2020, we launched the first wave of our 5G network in Vancouver, Montreal, Calgary, Edmonton and the Greater Toronto Area. By Decem- ber 31, 2020, we had expanded our 5G network to over 75 communities. facilitate millions of Canadians now working and learning from home TELUS 5G is being made available at no additional cost to customers and the resultant increased demand for services such as online activity, on our Peace of Mind plans. video streaming, 1-800 phone numbers and teleconference bridges. Other capital expenditures have been expedited to take advantage of equipment and deployment cost opportunities, including network upgrades and expanding our next-generation 5G network. We continued to make contributions and investments in the com- munities where team members live, work and serve and to the Canadian Mobile Klinik acquisition On July 1, 2020, we acquired 100% of Mobile Klinik, a storefront wireless device repair and sales business complementary to our existing wireless lines of business. The investment was made with a view to growing our wireless business. economy on behalf of customers, shareholders and team members. This included paying, collecting and remitting more than $2.1 billion in TELUS Agriculture On November 12, 2020, we announced TELUS Agriculture, which is taxes in 2020 to federal, provincial and municipal governments in Canada. dedicated to providing innovative solutions to support the agriculture and During the course of the year, we did not reduce or suspend dividend related industry with connected technology. Our agriculture business payments. On May 6, 2020, the Board elected to declare a dividend optimizes the food value chain by leveraging data in new ways to increase of $0.29125 per share, the same amount per share first declared on efficiency, production and yields, delivering better food outcomes for November 6, 2019, thereby deferring the targeted semi-annual dividend businesses and the end consumer. Connecting each piece of the agri- increase under our dividend growth program. The Board has elected to culture value chain empowers farmers and ranchers, the agri-business TELUS 2020 ANNUAL REPORT • 45 industry, and agri-food, consumer goods and retail companies to leverage Section 721 of the Defense Production Act, which triggered an addi- advanced data systems and artificial intelligence (AI) to streamline tional 45-day review period. The statutory review period for the joint operations, improve food traceability, and provide consumers with voluntary notice expires in March 2021. Based on our discussions fresher and healthier food. with CFIUS staff, we determined we could close the acquisition of At launch, one of our acquired companies was AFS Technologies Inc. Lionbridge AI before the expiry of the 45-day period. (AFS). The acquisition of AFS was completed in the third quarter of 2020. AFS provides trade promotion and supply chain software solutions to consumer packaged goods companies, food distributors and food manufacturers. Other companies acquired over the course of 2019 to 2020 prior to announcement include: • AGIntegrated – Seamless API integration for agri-businesses (Pennsylvania, U.S.) • Agrian – Unified management platform for precision, agronomy, sustainability, analytics, and compliance (California, U.S.) • Decisive Farming – Precision agronomy and farm management expertise (Alberta) • Farm At Hand – Simplified farm management software (B.C.) • Feedlot Health Management Solutions – Critical insights and data-based knowledge (Alberta) • Muddy Boots – Farm-to-food traceability and supply chain management (Ross-on-Wye, United Kingdom) • TKXS – Custom data and program management (North Carolina, U.S.) TELUS Pollinator Fund for Good On November 24, 2020, we announced the launch of our TELUS Long-term debt issues and early redemptions of 2021 Notes On May 29, 2020, we issued $400 million through the re-opening of our 3.95% Notes, Series CAB, maturing on February 16, 2050, and $600 million of senior unsecured 2.35% Notes, Series CAC, maturing on January 27, 2028. The net proceeds were used for the early redemption of notes described in the following paragraph and for general corporate purposes. On June 23, 2020, we early redeemed all of our $400 million 3.60% Notes, Series CM, due January 26, 2021, and all of our $500 million 3.20% Notes, Series CO, due April 5, 2021. The long-term debt prepay- ment premium for both redemptions was $18 million before income taxes ($0.01 per share after income taxes). As a result of this early redemption, we no longer have any TELUS Corporation notes maturing in 2021. On October 5, 2020, we issued $500 million of senior unsecured 2.05% Notes, Series CAD, which will mature on October 7, 2030. The net proceeds from this offering were used for general corporate purposes, including investing in our broadband network and other capital invest- ment consistent with our growth strategy, and repayment of commercial paper. This offering was our second lowest coupon ever, and at the Pollinator Fund for Good, a $100 million social impact investment fund time of announcement, represented the lowest coupon on record in the created to power ideas in new responsible and sustainable start-up Canadian market for a BBB 10-year corporate issuance. businesses. The fund will invest in early stage (Seed and Series A) for-profit, purpose-driven companies with exceptional and diverse leadership. These companies’ goals must align with our goals and should already have a product or service in-market, and demonstrated an ability to grow their customer base and generate revenue. TELUS Health In the fourth quarter of 2020, we relaunched our national network of Our Board of Directors At our 2020 annual general meeting held on May 7, 2020, the nominees listed in the TELUS 2020 information circular were elected as directors of TELUS, including a new nominee, Thomas Flynn. Tom is Vice-Chair, BMO Financial Group, and served as BMO Financial Group’s Chief Financial Officer from 2011 to 2020. Prior to that, he held several leadership pos- itions at the Bank of Montreal, including Executive Vice-President and Chief medical centres to align our Medisys, Copeman Healthcare, Horizon Risk Officer, Executive Vice-President Finance and Treasurer, and Head of Occupational Health Solutions, Union Health and Plexico clinics under the Financial Services Corporate and Investment Banking Group in BMO the same name – TELUS Health Care Centres – with the same goal, Capital Markets. using digital technology to provide advanced health and wellness care During the second quarter of 2020, Stockwell Day stepped down and putting patients at the centre of their health journey. from our Board. On December 16, 2020, we acquired 100% of EQ Care, a national virtual healthcare provider offering convenient and confidential bilingual access to doctors and specialists via secure text and video chat from anywhere at any time. This acquisition strengthens our virtual care offerings in Canada. Lionbridge AI acquisition On December 31, 2020, TI acquired Lionbridge AI, the data annotation TELUS International IPO – Subsequent to 2020 On February 5, 2021, TELUS Corporation and our TELUS International subsidiary announced the closing of the upsized TELUS International IPO of 42.55 million TI Subordinate Voting Shares at a price of US$25.00 per share, which includes 5.55 million TI Subordinate Voting Shares purchased upon the full exercise of the underwriters’ over-allotment option to purchase additional TI Subordinate Voting Shares from TELUS business of Lionbridge Technologies, Inc. for approximately $1.2 billion Corporation and Baring Private Equity Asia (Baring), the selling share- (US$939 million). Lionbridge AI is a global provider of crowd-based holders. The offering generated aggregate gross proceeds to TELUS training data and annotation platform solutions used in the development International, TELUS Corporation and Baring of approximately $1.4 billion of AI algorithms to power machine learning. Lionbridge AI annotates (US$1.1 billion), including the exercise of the over-allotment option in full. data in text, images, videos and audio in more than 300 languages and The net proceeds to TELUS International totalled approximately $0.6 billion dialects for some of the world’s largest technology companies such (US$0.5 billion), which will be used to repay outstanding borrowings as Google, Inc. in social media, search, retail and mobile. In connection under its revolving credit facilities. TELUS International will not receive with the acquisition, we, along with Lionbridge AI, submitted a declaration any proceeds from the TI Subordinate Voting Shares sold by the selling filing with the Committee on Foreign Investment in the United States shareholders. The TI Subordinate Voting Shares began trading on (CFIUS). At the end of its 30-day assessment of the declaration filing, the New York Stock Exchange and the Toronto Stock Exchange on CFIUS requested that we file a joint voluntary notice pursuant to February 3, 2021 under the ticker “TIXT.” 46 • TELUS 2020 ANNUAL REPORT Consolidated highlights Years ended December 31 ($ millions, except footnotes and unless noted otherwise) 2020 2019 Change MD&A: INTRODUCTION Consolidated statements of income Operating revenues and Other income Operating income Income before income taxes Net income Net income attributable to Common Shares Adjusted Net income1 Earnings per share (EPS) ($) Basic EPS Adjusted basic EPS1 Diluted EPS Dividends declared per Common Share ($) Basic weighted-average Common Shares outstanding (millions) Consolidated statements of cash flows Cash provided by operating activities Cash used by investing activities Acquisitions Capital expenditures2 Cash provided by financing activities Other highlights Subscriber connections3 (thousands) EBITDA1 EBITDA margin1 (%) Restructuring and other costs1 Adjusted EBITDA1,4 Adjusted EBITDA margin1 (%) Free cash flow1 Net debt to EBITDA – excluding restructuring and other costs1 (times) Notations used in MD&A: n/m – not meaningful; pts. – percentage points. 15,463 2,482 1,71 1 1,260 1,207 1,361 0.95 1.06 0.94 14,658 2,977 2,244 1,776 1,746 1,727 1.45 1.43 1.45 1.18495 1.12625 1,275 1,204 4,574 (6,165) (3,205) (2,775) 1,904 15,972 5,494 35.5 259 5,701 37.0 1,435 3.45 3,927 (5,044) (1,105) (2,906) 1,238 15,166 5,554 37.9 134 5,693 38.8 932 3.20 5.5% (16.6)% (23.8)% (29.1)% (30.9)% (21.2)% (34.5)% (25.9)% (35.2)% 5.2% 5.9% 16.5% 22.2% n/m (4.5)% 53.8% 5.3% (1.1)% (2.4) pts. 93.3% 0.2% (1.8) pts. 54.0% 0.25 These are non-GAAP and other financial measures. See Section 11.1 Non-GAAP and other financial measures. 1 2 Capital expenditures include assets purchased, excluding right-of-use lease assets, but not yet paid for, and consequently differ from Cash payments for capital assets, excluding spectrum licences, as reported in the Consolidated financial statements. Refer to Note 31 of the Consolidated financial statements for further information. 3 The sum of active mobile phone subscribers, mobile connected device subscribers, internet subscribers, residential voice subscribers, TV subscribers and security subscribers, measured at the end of the respective periods based on information in billing and other source systems. December 31, 2019 security subscriber connections have been increased to include approximately 490,000 subscribers related to our acquisition of ADT Security Services Canada, Inc. (ADT Canada) (acquired on November 5, 2019). During the third quarter of 2020, we adjusted cumulative subscriber connections to add approximately 31,000 security subscribers as a result of a business acquisition. 4 Adjusted EBITDA excludes restructuring and other costs (see Section 11.1 for restructuring and other costs amounts), other equity losses related to real estate joint ventures, as well as retirement of a provision arising from business acquisition-related written put options within TI. Operating highlights • Consolidated Operating revenues and Other income increased by $805 million in 2020. customers reducing their general shopping habits in retail outlets since the beginning of the pandemic along with mandated capacity restrictions, which resulted in lower wireless contracted volume Service revenues increased by $877 million in 2020, due to and accessory sales. growth in wireline data services revenues from business acquisitions, Other income increased by $53 million in 2020, largely reflecting expanded services and subscriber base growth, including from TI, an increase in net gains resulting from a decrease in, and subsequent as well as growth in our wireless subscriber base, partly offset by the retirement of, provisions arising from business acquisition-related impacts of the COVID-19 pandemic in both the wireless and wireline written put options within TI, partly offset by higher other equity losses segments, and the ongoing declines in wireline legacy voice and related to real estate joint ventures. These other equity losses include legacy data services revenues. lease-up period losses related to our investment in the TELUS Sky Equipment revenues decreased by $125 million in 2020, primarily real estate joint venture. attributable to the impacts of the pandemic, including the temporary For additional details on Operating revenues and Other closure of a significant number of sales channels from March 2020 income, see Section 5.4 Wireless segment and Section 5.5 through the majority of the second quarter of 2020, as well as Wireline segment. TELUS 2020 ANNUAL REPORT • 47 • During 2020, our total subscriber connections increased by 806,000. This reflected an increase of 2.5% in mobile phone subscribers, 21.4% EBITDA, which includes restructuring and other costs and other equity losses related to real estate joint ventures, decreased in mobile connected device subscribers, 7.9% in internet subscribers, by $60 million or 1.1% in 2020. 4.7% in TV subscribers and 16.3% in security subscribers, partly Adjusted EBITDA, which excludes restructuring and other costs, offset by a decline of 3.3% in residential voice subscribers. other equity losses related to real estate joint ventures and a gain on Our mobile phone net additions were 280,000 in 2020, up 6,000, a retirement of a provision arising from business acquisition-related driven by strong execution in our digital sales channels and our suc- written put options within TI, increased by $8 million or 0.2% in 2020, cessful efforts to drive high-value customer additions and lower churn, reflecting: growth in wireline data service margins resulting from busi- which more than offset the impacts of the pandemic. Our mobile phone ness acquisitions, expanded services and subscriber base growth; churn rate was 0.95% in 2020, down from 1.08% in 2019, reflecting growth in our wireless subscriber base; an increased organic and pandemic impacts, including changing customer behaviour due to inorganic contribution from TI; and a larger decrease in a provision travel restrictions, reduced switching activity between carriers due to arising from business acquisition-related written put options within TI. the temporary closure of approximately 90% of our retail stores from This growth was mostly offset by multiple impacts from the COVID-19 March 2020 through most of the second quarter, customers reducing pandemic, declines in wireline legacy voice and legacy data services, their general shopping habits in retail outlets since the start of the pan- and higher employee benefits expense and other costs largely resulting demic, along with mandated capacity restrictions, and our successful from an increase in the number of employees from business acquisi- bundling of mobility and home services. Mobile connected device net additions were 257,000 in 2020, down 6,000, primarily due to higher tablet net losses, partly offset by increased demand for IoT solutions. tions. (See Section 5.3 Consolidated operations for additional details.) • Income before income taxes decreased by $533 million in 2020 as a result of lower Operating income, as noted above, and increased (See Section 5.4 Wireless segment for additional details.) Financing costs. The increase in Financing costs resulted from higher Internet net additions were 157,000 in 2020, up 50,000, due average long-term debt outstanding, in part attributable to business to continued net new demand for our leading TELUS PureFibre acquisitions. (See Financing costs in Section 5.3.) services from consumers and businesses, as we keep our customers connected, as well as lower customer churn. TV net additions were • Income tax expense decreased by $17 million in 2020. The effective income tax rate increased from 20.8 to 26.3%, predominantly attrib- 55,000 in 2020, down 12,000, mainly due to lower gross additions as uted to the prior year revaluation of the deferred income tax liability a result of the pandemic and the changing landscape of increased for the multi-year reduction in the Alberta provincial corporate tax rate streaming services, partly offset by lower churn. Security net additions were 68,000 in 2020, up 22,000, reflecting strong growth as we keep our customers connected and protected and demand from our that was substantively enacted in the second quarter of 2019. • Net income attributable to Common Shares decreased by $539 mil- lion in 2020, resulting from the after-tax impacts of lower Operating bundled product offerings including the adoption of the TELUS Whole income and higher Financing costs. Home bundle and our bundling of mobility and home services. Our Adjusted Net income excludes the effects of restructuring and continued focus on expanding our addressable high-speed internet other costs, income tax-related adjustments, other equity losses and Optik TV footprint, connecting more homes and businesses related to real estate joint ventures, long-term debt prepayment directly to fibre, diversifying our product offerings, and bundling these premium and a gain on a retirement of a provision arising from products and services together, as well as our ongoing focus on our business acquisition-related written put options within TI. Adjusted customer service and reliability, contributed to combined internet, Net income decreased by $111 million or 27.8% in 2020. TV and security subscriber growth of 311,000 or 8.3% over the past 12 months. We had made TELUS PureFibre available to approximately 81% of our broadband footprint by December 31, 2020. TI expanded its customer base in 2020 through acquisitions and organic growth, with Tech and Games experiencing its fastest growth among verticals. (See Section 5.5 Wireline segment for additional details.) • Operating income decreased by $495 million in 2020. Excluding the effects of a gain on a retirement of a provision arising from busi- ness acquisition-related written put options within TI of $71 million, Operating income decreased by $566 million in 2020. This decline reflects multiple impacts from the COVID-19 pandemic, increased depreciation and amortization, lower wireline legacy voice and legacy data services, higher non-labour-related restructuring and other costs, higher employee benefits expense including support for business acquisitions, and other equity losses related to real estate joint ventures. (See Section 5.3 Consolidated operations for additional details.) Reconciliation of adjusted Net income Years ended December 31 ($ millions) 2020 2019 Change Net income attributable to Common Shares Add (deduct): Restructuring and other costs, after income taxes Income tax-related adjustments Other equity losses related to real estate joint ventures Long-term debt prepayment premium, after income taxes Retirement of a provision arising from business acquisition- related written put options within TI, after income taxes Adjusted Net income 1,207 1,746 (539) 182 (26) 98 (142) 19 14 5 20 84 1 1 6 14 (6) (35) – 1,361 1,727 (35) (366) 48 • TELUS 2020 ANNUAL REPORT MD&A: INTRODUCTION • Basic EPS decreased by $0.50 or 34.5% in 2020 as a result of the after-tax impacts of lower Operating income and higher Financing costs, as well as the effect of a higher number of Common Shares outstanding. Adjusted basic EPS excludes the effects of restructuring and As set out in Note 28(d) of the Consolidated financial statements, in February 2021, TELUS International made an IPO of TI Subordinate Voting Shares; both TELUS Corporation and a TELUS International non-controlling shareholder individually also offered TI Subordinate Voting Shares in conjunction with the IPO. Through February 11, 2021, other costs, income tax-related adjustments, other equity losses net proceeds of approximately $0.6 billion from the offering were related to real estate joint ventures, long-term debt prepayment used to reduce the amount of outstanding TI credit facility indebted- premium and a gain on a retirement of a provision arising from ness and $0.2 billion (comprised of net proceeds on disposition of business acquisition-related written put options within TI. Adjusted TI Subordinate Voting Shares by TELUS Corporation) from the offering basic EPS decreased by $0.37 or 25.9% in 2020. was included in Cash and temporary investments, net; had such Reconciliation of adjusted basic EPS Years ended December 31 ($) Basic EPS Add (deduct): 2020 0.95 2019 Change 1.45 (0.50) Restructuring and other costs, after income taxes, per share 0.14 0.08 0.06 Income tax-related adjustments, per share (0.02) (0.12) 0.10 Other equity losses related to real estate joint ventures, per share Long-term debt prepayment premium, after income taxes, per share Retirement of a provision arising from business acquisition- related written put options within TI, after income taxes, per share Adjusted basic EPS 0.01 – 0.01 0.01 0.02 (0.01) (0.03) 1.06 – 1.43 (0.03) (0.37) • Dividends declared per Common Share were $1.18495 in 2020, reflecting an increase of 5.2% from 2019. Consistent with our target of increasing dividends between 7 to 10% in the near term, the Board declared a first quarter dividend of $0.3112 per share on our issued and outstanding Common Shares, payable on April 1, 2021, to share- holders of record at the close of business on March 11, 2021. The first quarter dividend increased by $0.01995 per share or 6.8% from the $0.29125 per share dividend declared one year earlier, consistent with our multi-year dividend growth program described in Section 4.3 Liquidity and capital resources. Liquidity and capital resource highlights • Net debt to EBITDA – excluding restructuring and other costs ratio was 3.45 times at December 31, 2020, up from 3.20 times at December 31, 2019, as the increase in net debt, partly attributable to business acquisitions, exceeded the effect of the increase in EBITDA – excluding restructuring and other costs as the COVID-19 pandemic impacts reduced EBITDA. As at December 31, 2020, business acqui- sitions over the past 12 months increased the ratio by approximately 0.45 and the acquisition of spectrum licences increased the ratio by approximately 0.20. (See Section 4.3 Liquidity and capital resources and Section 7.5 Liquidity and capital resource measures.) reduction, and inclusion, respectively, been made at December 31, 2020, the pro forma net debt to EBITDA – excluding restructuring and other costs ratio would have been 3.30 times. • Cash provided by operating activities increased by $647 million in 2020, largely attributable to other working capital changes and decreased income tax payments, which mainly reflected a higher final income tax payment of $270 million in the first quarter of 2019 for the 2018 income tax year and which did not recur in 2020, as well as lower restructuring and other costs disburse- ments, net of expense. (See Section 7.2 Cash provided by operating activities.) • Cash used by investing activities increased by $1,121 million in 2020, primarily attributable to increased acquisitions, partially offset by the impact of the $931 million cash payments for the 600 MHz spectrum auction in the second quarter of 2019. Acquisitions increased by $2,100 million in 2020, as we made larger cash payments for business acquisitions, including CCC, Mobile Klinik, AFS, EQ Care and Lionbridge AI. Capital expenditures decreased by $131 million in 2020 due to the timing of our fibre build activities and efficiencies in our 4G network expenditures. We had made TELUS PureFibre available to approximately 81% of our broadband footprint by December 31, 2020. (See Section 7.3 Cash used by investing activities.) • Cash provided by financing activities increased by $666 million in 2020, resulting from our February 26, 2020 equity issue, shares of a subsidiary issued to non-controlling interests and lower cash payments for dividends, partly offset by less long-term debt issued, net of redemptions and repayment. (See Section 7.4 Cash provided by financing activities.) • Free cash flow increased by $503 million in 2020, resulting primarily from: decreased income tax payments, as there was a higher final income tax payment of $270 million in the first quarter of 2019 for the 2018 income tax year; the timing related to device subsidy repayments and associated revenue recognition and our TELUS Easy Payment® device financing program; lower capital expenditures; and lower restructuring and other costs disbursements, partly offset by lower EBITDA attributable to pandemic impacts. Our definition of free cash flow, for which there is no industry alignment, is unaffected by accounting changes that do not impact cash, such as IFRS 15 and IFRS 16. (See calculation in Section 11.1 Non-GAAP and other financial measures.) TELUS 2020 ANNUAL REPORT • 49 1.4 Performance targets (key performance measures) On May 7, 2020, given the uncertain magnitude, duration and potential outcomes of the COVID-19 pandemic, we withdrew our 2020 financial guidance targets, which were originally announced on February 13, 2020. As a result, we do not have 2020 financial guidance targets to report against for 2020 revenues and Other income, Adjusted EBITDA, free cash flow or capital expenditures. • Adjusted EBITDA was $5.701 billion in 2020, an increase of $8 million compared to 2019. Despite numerous pandemic pressures including: (i) reduced roaming revenue from changing customer behaviour related to travel restrictions; (ii) the temporary closure of approximately 90% of our retail stores from March 2020 through most of the second quarter, as well as customers reducing their general shopping habits in retail outlets since the start of the pandemic along with mandated capacity restrictions, which hindered customer opportunities for device upgrades and the upgrade or selection of higher-tier plans; (iii) decreases in chargeable data usage as more people work from home and offload their mobile device traffic onto Wi-Fi networks; (iv) the temporary disruption of the TI business due to government- mandated site closures; (v) lower revenue from our business customers as they redeploy their resources; (vi) the temporary closures of our TELUS Health Care Centres and reduced health benefit claims from the lingering pandemic impacts on business recovery, which partly offset growth in virtual care solutions; (vii) increased bad debt expense; and (viii) initiatives to support customers, including temporary overage waives, we were able to successfully execute numerous customers first initiatives, such as the enhanced capabilities of our digital footprint and our virtual technician model. In addition to executing on our high- quality customer growth strategy, we also implemented cost initiatives and were able to attain a flat Adjusted EBITDA performance. • Free cash flow was $1.435 billion, an increase of $503 million com- pared to 2019. We implemented cash preservation initiatives during 2020 to help offset the previously described pandemic pressures with our effective cash management measures. • Capital expenditures were $2.775 billion in 2020, a decrease of $131 million compared to 2019. Our capital expenditures allowed us to achieve strong internet, TV and security subscriber growth, and enabled us to deliver greater resiliency, scalability, and efficiency in IT infrastructure and remote work capabilities in response to the COVID-19 pandemic. We advanced numerous capital expenditures initiatives, such as supporting increased TELUS PureFibre broad- band coverage in Alberta during the pandemic. See Section 4.2 Our technology, systems and properties and Section 7.3 Cash used by investing activities for additional details. 2 Core business and strategy 2.1 Core business 2.2 Strategic imperatives We provide a wide range of telecommunications products and services. Since 2000, we have maintained a proven national growth strategy. Wireless products and services include network revenue (data and Our strategic intent is to unleash the power of the internet to deliver the voice) and equipment sales arising from mobile technologies. Wireline best solutions to Canadians at home, in the workplace and on the move. products and services include data revenues (which include revenues We also developed six strategic imperatives in 2000 that remain from internet protocol; television; hosting, managed information technol- relevant for future growth, despite changing regulatory, technological ogy and cloud-based services; home and business smart technology and competitive environments. We believe that a consistent focus on (including security and agriculture); and certain healthcare solutions), these imperatives guides our actions and contributes to the achievement voice revenues, and other telecommunications services and equipment of our financial goals. To advance these long-term strategic imperatives revenues. Our TELUS International (TI) subsidiary provides customer and address near-term opportunities and challenges, we confirm or set experience and digital enablement transformation through its customer care and business services (CCBS) business and designs, builds and delivers next-generation digital solutions to enhance the customer experience for clients across high-growth industry verticals. We currently new corporate priorities each year, as further described in Section 3. Our six strategic imperatives are listed below. • Focusing relentlessly on growth markets of data, IP and wireless • Providing integrated solutions that differentiate TELUS from earn the majority of our revenue from access to, and usage of, our our competitors telecommunications infrastructure, and from providing services and products that facilitate access to, and usage of, our infrastructure. • Building national capabilities across data, IP, voice and wireless • Partnering, acquiring and divesting to accelerate the implementation of our strategy and focus our resources on core business • Going to market as one team under a common brand, executing a single strategy • Investing in internal capabilities to build a high-performance culture and efficient operation. 50 • TELUS 2020 ANNUAL REPORT MD&A: CORE BUSINESS AND STRATEGY & CORPORATE PRIORITIES 3 Corporate priorities We confirm or set new corporate priorities each year to advance our long-term strategic imperatives (see Section 2.2) and address near-term opportunities and challenges. These priorities have been affected by the COVID-19 pandemic as we have focused on keeping Canadians connected and on the safety and well-being of our customers, team members, and communities (see Section 1.2 for further discussion of pandemic impacts). The following table provides a discussion of activities and initiatives that relate to our 2020 corporate priorities. Honouring our customers, communities and social purpose by our team delivering on our brand promise • In November 2020, the Commission for Complaints for Telecom-television Services (CCTS) issued its annual report for the 12-month period ended July 31, 2020, which determined that TELUS was again the subject of the fewest customer complaints among national carriers and Koodo® was again the subject of the fewest complaints among the national flanker brands. TELUS, Koodo and Public Mobile® each saw year-over-year reductions in the total customer complaints accepted by the CCTS with improvements of (27.6)%, (9.0)% and (41.4)%, respectively. Total industry complaints decreased year-over-year by 18.8%. • Each year, we conduct an employee Pulsecheck engagement survey to gather confidential team member feedback about TELUS as a place to work in order to measure our progress in creating a high-performance culture. Following each survey, leaders share results with team members and use fair process to build and refine action plans focused on high-priority areas where improvement is required based on Pulsecheck results. In 2020, we achieved an engagement score of 87% (a 3 percentage point increase over 2019) – our highest engagement score achieved to date (tied with 2015) amidst a year like no other given the numerous COVID-19 pandemic impacts. This result continues to place TELUS within the top 10% of employers worldwide according to our survey provider, Kincentric. • Throughout 2020, we continued to leverage our Connecting for Good programs to support marginalized Canadians through the global pandemic and also expanded program eligibility to support those who need it most. • We expedited access to our Internet for Good program to kindergarten to grade 12 students in need through partnerships with school boards and principals and expanded the program to include low-income people with disabilities. Now over 400,000 vulnerable Canadians are eligible to receive low cost, high-speed internet in B.C., Alberta and Quebec. During the year, we supported nearly 33,000 Canadians, bringing the number of Canadians benefiting from our Internet for Good program since its launch close to 72,000. • In partnership with the Children’s Aid Foundation of Canada, we expanded our Mobility for Good program nationally to all youth aging out of foster care. In December, we expanded the program to include low-income seniors across Canada who are receiving the guaranteed income supplement (GIS), providing access to the technology they need to stay connected to loved ones and address feelings of isolation, enjoy their favourite online games and books, and obtain important healthcare resources and information. Including both youth and seniors, we added close to 2,500 Canadians to the program in 2020, providing them with a free smartphone and a free or subsidized wireless plan. Since its inception, more than 6,300 marginalized Canadians have benefited from our Mobility for Good program. • Through our Mobility for Good COVID-19 Emergency Response program, we distributed 14,200 devices and rate plans to more than 340 organizations. This enabled at­risk individuals to keep in contact with health practitioners and social workers, while helping hospitalized patients and vulnerable seniors stay connected with family. The free rate plans will be supported until June 30, 2021. • We expanded our Health for Good program and launched seven new mobile health clinics in 2020. This year, our 11 mobile clinics offered health services to homeless and other marginalized Canadians from coast to coast and supported more than 28,000 patient visits, including assisting in the pandemic response by supporting 12,700 COVID-19 assessments and tests. Since inception in 2014, our Health for Good program has supported over 50,000 patient visits. • We continued to evolve our TELUS Wise program during 2020 to build digital literacy and safety in our connected world. • More than 90,000 Canadians participated in our online TELUS Wise workshops this year. These workshops are free of charge and help foster the safe and responsible use of technology in our digital world. Approximately 85% of participants felt more empowered to stay safe online as a result of attending a workshop. • In line with our commitment to keep Canadians safe online, we launched two new online TELUS Wise workshops, Empowering you to stay safe in our digital world for adults and Supporting youth in our digital world for parents. Available at telus.com/WiseWorkshops, the first workshop offers important tips about protecting one’s online safety and privacy, while the second workshop shares tips and guidance on navigating screen time, gaming, sexting, cyberbullying and helping youth stay safe in our digital world. • We continued to make contributions and investments in the communities where team members live, work and serve and to the Canadian economy on behalf of customers, shareholders and team members. This included paying, collecting and remitting more than $2.1 billion in taxes in 2020 to federal, provincial and municipal governments in Canada consisting of corporate income taxes, sales taxes, property taxes, employer portion of payroll taxes and various regulatory fees. When including spectrum remittances, we have remitted approximately $34 billion in taxes and spectrum since 2000. • In February 2020 and in November 2020, we were named one of Canada’s Best Diversity Employers (2020) and one of Canada’s Top 100 Employers (2021), respectively, by Mediacorp Canada Inc. • In March 2020, the arm’s-length TELUS Friendly Future Foundation, which we capitalized in 2018 with an initial $100 million donation, together with the TELUS Community Boards, announced a $10 million commitment to help build public healthcare capacity throughout the COVID-19 pandemic and beyond, including funding for new technology and equipment, such as ventilators, as well as increased support for food banks, elderly Canadians and mental health programs. As of December 2020, the Foundation had contributed $8.9 million to 597 charitable health projects, including $6.5 million through TELUS Community Board grants and $2.4 million through Foundation national and provincial response grants. • We donated $500,000 to a research team from the Vancouver General Hospital and University of British Columbia Hospital Foundation to assist in the search for therapeutic antiviral treatments for COVID-19. TELUS 2020 ANNUAL REPORT • 51 Honouring our customers, communities and social purpose by our team delivering on our brand promise (continued) • In the first quarter of 2020, we launched our #StayStrongStayConnected video in English and French on our social media handles, intended to help share positive messages and keep citizens connected during the COVID-19 pandemic. • In March 2020, we introduced our TELUS Talks podcast. We produced 49 podcast episodes throughout the year, including episodes with guests Dr. Bonnie Henry, Dr. Michael Osterholm, Dr. Gabor Maté and Carol Todd. We garnered more than 118,000 listens, helping to support Canadians with information and insights to manage through a most unprecedented year. • For the first time, our annual TELUS Days of Giving became a year-long virtual event in 2020, with TELUS team members, retirees and fellow Canadians volunteering – safely and virtually – to support our local communities. As of December 31, 2020, our TELUS family had participated in 1.2 million safe acts of giving, including more than 1.25 million volunteer hours of service, sewing 150,000 masks and donating 210,000 TELUS-branded masks. • Commencing in the second quarter of 2020, TELUS-branded, non-medical masks were made available in adult and youth sizes to help keep Canadians safe, with all proceeds going to the TELUS Friendly Future Foundation to support COVID-19 pandemic relief efforts. As of December 31, 2020, we had sold 79,000 masks, raising more than $535,000 to support the work of our Foundation. • Through a partnership with Alberta’s science centres (TELUS World of Science – Edmonton and TELUS Spark in Calgary) and Microsoft, we collaborated to bring science camps online with the launch of Virtual Summer Camps powered by TELUS. • In 2011, we initiated our first set of long-term energy and greenhouse gas emission reduction goals and surpassed them in early 2019, ahead of our 2020 target. As such, in our 2019 sustainability report issued during the second quarter of 2020, we released our new transformational climate action targets, including having our operations become net carbon neutral by 2030. • In April 2020, we announced that we had been recognized by the Business Continuity Institute Americas with the Most Effective Recovery award for our response to the 2019 wildfires in Northern Alberta. • In April 2020, we launched our broadband push-to-talk service for business and government customers, which includes secure push-to-talk, live location tracking and mapping, and secure group multimedia messaging. • In May 2020, both TELUS and Koodo launched a free optional Call Control feature that helps screen out unwanted robo-callers. • In May 2020, we launched our #StandWithOwners program in support of Canadian small businesses through the pandemic, committing $500,000 in direct revenue, marketing and expert advice to support, promote and celebrate small business owners. • As part of our Data for Good program, which launched in the second quarter of 2020, we partnered with 24 public sector and/or research organizations to provide de-identified and aggregated network mobility data free of charge in support of COVID-19 research. In November 2020, we were awarded the Privacy Innovation Award by the International Association of Privacy Professionals in recognition of our Data for Good program. • In June 2020, we ranked 20th on the Corporate Knights Best 50 Corporate Citizens in Canada list for 2020, up from 38th in 2019. • As part of our annual Kits for Kids program, we donated 13,000 backpacks filled with essential school supplies and reusable youth-sized face masks to support a successful return to learning. • We offered our Optik TV customers in B.C. and Alberta who have four or more theme packs the flexibility to choose Amazon Prime as a benefit in their Optik TV package. • We donated close to $20,000 in video-on-demand proceeds from Black Panther and more than 60 other films by Black creators to Canada’s Black Health Alliance, supporting the health and well-being of Black Canadians. • On World Mental Health Day in October, we premiered our latest TELUS Originals documentary, Dark Cloud, which spotlights the stories and life-altering impacts of cyberbullying in Canada. As of year-end, we achieved 709,000 documentary views across Optik TV and YouTube. With Canadians spending more time than ever online during the COVID-19 pandemic, from socializing to schooling, this film is relevant for parents, youth and all Canadians, as it shares insights into what causes cyberbullying and how we can stop it. • In October 2020, we launched TELUS Presents, a curated collection of hard-to-find shows from abroad, including the U.K. and Australia, and made it available to all Optik TV and Pik TV subscribers at no additional charge. • In October 2020, we were recognized as Canada’s leading global workplace in the Forbes World’s Best Employers 2020 report. TELUS, including TELUS International (TI), was ranked first among 25 Canadian companies recognized by Forbes and 40th globally, listed alongside 750 leading worldwide brands. • We introduced our Owner’s Advantage plan in October 2020 to meet the specific needs of small business owners, offering them exclusive benefits designed to provide greater value and more flexibility. • As described in Section 1.3, in November 2020, we launched the TELUS Pollinator Fund for Good, a $100 million social impact investment fund, to power ideas in new responsible and sustainable start-up businesses. The fund will invest in entrepreneurs and innovative companies who are developing solutions aimed at improving healthcare, furthering social and economic inclusion, ensuring sustainable food production and reducing humanity’s environmental footprint. • In the fourth quarter of 2020, we were recognized by the Wall Street Journal as the only telecommunications company in the world named to its Top 100 Most Sustainably Managed Companies, ranking 29th overall and 15th in respect of social capitalism. We were one of only three Canadian companies named to this global list. This worldwide recognition reinforces our global leadership in corporate citizenship and philanthropy, environmental and business innovation. • In November 2020, we were recognized for corporate social responsibility by being named to the Dow Jones Sustainability World Index for the fifth consecutive year and to the North American Index for the 20th year in a row, ranking at the 90th percentile in the telecommunications industry for our leadership in sustainability. Notably, we were the only North American telecommunications company and one of only five Canadian companies recognized on the World Index across 24 industries. This ranking demonstrates our global leadership in key categories including corporate citizenship and philanthropy, innovation management, and environmental and social reporting. • Our Connecting for Good initiatives won Gold for Most Innovative Corporate Social Responsibility Program of the Year by the Best in Biz Awards International. The program has a unique status of being the only global business awards program that is judged by diverse panels composed solely of members of the press from all over the world. 52 • TELUS 2020 ANNUAL REPORT MD&A: CORPORATE PRIORITIES Honouring our customers, communities and social purpose by our team delivering on our brand promise (continued) • From April to December 2020, we maintained the number one global position on the Didtheyhelp.com COVID-19 Heroes Leaderboard for nine consecutive months. We ranked first internationally as a leading corporate citizen for our efforts to support Canadians during the COVID-19 pandemic. The Heroes Leaderboard ranks global brands and individuals by awarding a point for each positive action and good deed they perform. • We received the BEST Award for excellence in employee learning and development from the Association for Talent Development for the 15th consecutive year. • We ended the year with record-high consumer likelihood-to-recommend (L2R) by leading our national peers within each wireless tier (premium, flanker and value). Our L2R was also ahead of our largest Western Canadian cable competitor for TV and internet. Additionally, our Business Solutions L2R increased by four points compared to 2019 and continues to lead among national telecom companies. • In January 2021, we were named to the Corporate Knights 2021 Global 100 Most Sustainable Corporations in the World for the ninth time since inception of the recognition in 2005. Leveraging our broadband networks to drive TELUS’ growth and fuel our future • We continued to invest in our leading-edge broadband technology, which has enabled the success of our internet, Optik TV and Pik TV offerings and business services, as well as our Mobility solutions, and has helped allow us to deploy our 5G technology in 2020. • Our 4G LTE infrastructure covered 99% of Canada’s population at December 31, 2020. • Approximately 2.5 million households and businesses in B.C., Alberta and Eastern Quebec were connected with fibre-optic cable (representing approximately 81% of our total high-speed broadband footprint), which provides these premises with immediate access to our fibre-optic infrastructure. This is up from approximately 2.2 million households and businesses at December 31, 2019. • Our 5G network, launched in the second quarter of 2020, connected over 10.5 million Canadians, representing more than 28% of the population at December 31, 2020. • We were recognized with various accolades from U.K.-based Opensignal throughout 2020. • In the Mobile Network Experience Canada report released in February 2020, we were recognized as being number one for Video Experience, Download Speed Experience, Upload Speed Experience, Latency Experience and 4G Availability, and we tied for number one for Voice App Experience. Additionally, according to the Mobile Experience during the COVID-19 pandemic: 4G Download Speed report issued on April 8, 2020, Canada’s speeds held up extremely well under the demands of the COVID-19 pandemic. • In the report entitled The State of Mobile Network Experience 2020: One Year into the 5G Era, released in May 2020, Canada tied with South Korea for the fastest Download Speed Experience in the world and Canada continued to have the fastest Download Speed Experience among the G7 countries. • According to the report entitled State of Rural Canada’s Mobile Network Experience, dated May 2020, we were recognized as having the fastest network in rural Canada. If Canada’s rural networks were categorized as a stand-alone country, rural Canada would rank second only to Japan among the G7 countries, which is notable given Canada’s vast geography and population dispersion. • In the Mobile Network Experience: Canada Report (August 2020), we won the top spot in four awards (Download Speed Experience, Upload Speed Experience, Video Experience and Voice App Experience), and tied for first in two awards (Games Experience and 4G Coverage Experience). Our speed in the Download Speed Experience category was 72.7 Mbps, which is 5.2 Mbps faster than the second place finisher. This Opensignal recognition for fastest download speed experience marks our seventh consecutive win in this category since January 2017. • The Global Mobile Network Experience Awards 2020 (September 2020) report recognized us as having the world’s fastest network. We were the global winner for Download Speed Experience as our 4G LTE download speeds achieved a score of 75.8 Mbps and won the highest average overall download speeds in the world. The second fastest country in the world was South Korea’s average of 59 Mbps on their 5G networks, which were launched nationally in 2019. • In February 2020, we were named the Best Gaming Internet Service Provider (ISP) for Canada 2020 according to the U.S.-based PCMag Gaming Quality Index. Additionally, in the PCMag report entitled The Fastest ISPs of 2020: Canada released in June 2020, we were ranked as the fastest internet service provider in Canada among major ISPs. • We won two Speedtest Awards from U.S.-based Ookla for Canada’s Fastest Mobile Network and Canada’s Best Mobile Coverage. • In its 2020 Canada Wireless Network Quality Study released in April 2020, U.S.-based J.D. Power ranked TELUS first in network quality in the East region and in Ontario. This achievement marks six consecutive years that we have won a J.D. Power Award for our network quality across one or more of the regions evaluated. • In Canada-based Tutela’s report entitled Canada: State of Mobile Networks April 2020, TELUS was awarded three of the national awards for Core Consistent Quality, Download Throughput and Latency, and tied for Excellent Consistent Quality, based on data from September 1, 2019 to February 29, 2020. Additionally, in Tutela’s report Canada: Mobile Experience Report June 2020, based on data from March 1 to May 31, 2020, our wireless network was rated as best in consistent quality, lowest latency and fastest download speeds. • In January 2020, we acquired a 28% basic equity interest in Miovision Technologies Incorporated (Miovision), with a view to advancing our Internet of Things (IoT) and smart cities strategy. Miovision is a developer of intelligent mobility systems and traffic management solutions for municipalities worldwide. • In February 2020, we announced that we had succeeded in bringing wireless connectivity to every community in B.C. with a population of 1,000 people or more. This significant milestone aligns with the federal government’s rural connectivity goals. • We reinforced our commitment to supporting Alberta and its economy by expediting capital investments in 2020. • In June 2020, we launched TELUS PureFibre 1.5 Gigabit Internet with up to 1,500 Mbps download and 940 Mbps upload speeds for homes and businesses in B.C. and Alberta. • Building on our November 2019 announcement that we had provided several communities in Quebec’s Lower North Shore region with access to high-speed internet and wireless phone services for the first time, we continued this deployment in June 2020 to the communities of Kegaska and La Romaine. TELUS 2020 ANNUAL REPORT • 53 Leveraging our broadband networks to drive TELUS’ growth and fuel our future (continued) • We have enhanced and automated our processes to better support the hiring and remote onboarding for new team members, including recent graduates and co-op students. • In September 2020, we officially unveiled GoCo™, simplifying access to robust and flexible business communications technologies for Canadian businesses. Combining the collective strengths and expertise of bluArc, BroadConnect Canada, Infra-Solutions, Netrium, Radiant and Ubity (all previously acquired by TELUS), GoCo provides businesses with simple and scalable solutions for unified communications, managed connectivity and network security. • In September 2020, along with the Government of Canada, we announced a $15 million investment for the deployment of a submarine fibre-optic cable between Sept-Îles and the Gaspésie region, which will improve the reliability and security of telecommunications services in Quebec’s North Shore region, ensuring we keep Canadians connected and reach as many rural Canadians as we can. • In September 2020, we announced that we are expanding our high-speed internet and wireless services to reach an additional 25,000 homes and businesses in 45 remote, low-density communities in the Quebec City region and in Eastern Quebec by early 2021, bridging the digital divide in remote communities. • We partnered with the University of Windsor and St. Clair College to make each institution a 5G-connected campus. Fully funded by us, both institutions will receive a TELUS-designed, 5G-enabled wireless network. We will operate these networks at no cost to the institutions, provide complementary connectivity to students, faculty and researchers, and collaborate on research projects to further the understanding and use cases of 5G technologies. • In September 2020, we announced a new partnership with BlackBerry Limited to provide secure emergency management and crisis communications to organizations across Canada. We will offer BlackBerry AtHoc to organizations, helping to ensure that emergency personnel, first responders and government officials are provided with the technology and connectivity that enable better outcomes in crisis scenarios. Edmonton Police Service was also announced as an early client. • Our 2020 Indigenous Connectivity Report, released in November 2020, highlighted the transformative benefits of connectivity that have resulted from partnerships between us and Indigenous communities throughout B.C. In partnership with Indigenous governments, we have brought high-speed internet to approximately 18,500 premises across 56 Indigenous communities (87 Indigenous Lands) across our footprint. • We accelerated our commitment to Smart City solutions that empower municipalities to leverage technology and data in new ways to benefit residents’ health and safety, meet sustainability goals, and increase operational efficiencies. • At the 2020 World Procurement Awards, we were recognized as a global supply chain leader with the Supply Chain Initiative Award, for our efforts to transform and improve our network spares supply chain. Additionally, we were the only Canadian organization to be shortlisted for the Innovation Award for the development of a robotic process automation (RPA) Centre of Excellence, and the Internal Transformation Award, in recognition of our procurement transformation journey. Driving emerging opportunities to build scale in TELUS Health and TELUS Agriculture • During the ongoing COVID-19 pandemic, both our Akira by TELUS Health and Babylon by TELUS Health virtual care offerings have benefited from significant adoption. These offerings have helped Canadians stay safe at home and avoid higher-risk environments such as clinics and emergency rooms wherever possible and, in turn, freed up healthcare system capacity to respond to the viral outbreak. Combined, Akira by TELUS Health and Babylon by TELUS Health provide millions of Canadians with the opportunity to seek primary care, virtually, across the country. In the fourth quarter of 2020, we also augmented our virtual care offerings through the acquisition of EQ Care, a national virtual healthcare provider offering convenient and confidential bilingual access to doctors and specialists. • Our LivingWell Companion personal emergency response service (PERS) continues to support the health and well-being of seniors across Canada. With COVID-19 disproportionately impacting the elderly, LivingWell Companion helps seniors stay connected to emergency support and offers a remote caregiving solution to those who may be unable to physically support their elderly loved ones during the pandemic. • Throughout the pandemic, the TELUS Healthy Living Network® has been providing Optik TV customers with informative and compelling content related to COVID-19 prevention and well-being, and helping them to stay active and healthy at home with leading fitness, yoga, nutrition and mental health content available for free, rent or to Own-on-Optik. In October 2020, we announced a global-first partnership with Calm to offer leading mental health content on the TELUS Healthy Living Network, providing support to Canadians as they deal with the stresses brought on by the COVID-19 pandemic. We offer free content for all Optik TV and Pik TV subscribers and additional premium content via our Calm Optik TV theme pack, that includes guided meditations, breathing exercises and Calm’s Sleep Stories (bedtime stories for adults). • In the second quarter of 2020, TELUS Health announced that it was enabling Canadian clinicians to conduct virtual visits with their patients by integrating patient videoconferencing into its electronic medical records (EMR) across Canada. This new feature allows clinicians to virtually support their own roster of patients while maintaining continuity of care and fully up-to-date health records. As of December 31, 2020, more than 226,000 consultations have been conducted through the TELUS EMR Virtual Visit solution. • In response to the pandemic, TELUS Health has been working to deploy our Home Health Monitoring (HHM) platform across the country to urgently equip healthcare professionals with vital digital tools to provide supportive care to Canadians. With initiatives in progress in B.C., Alberta, Saskatchewan and Nova Scotia, our HHM solution enables clinicians to remotely manage, track and care for people diagnosed with or exposed to COVID-19, relieving pressure from hospitals, driving efficiencies and decreasing exposure to the virus. Additional programs supporting chronic disease, acute, specialty and primary care have been deployed to support patients in a clinically supportive environment from the comfort of their home. As of December 31, 2020, more than 14,000 patients have been monitored. • In the fourth quarter of 2020, we launched our new Espri™ by TELUS Health app, which is designed to deliver mental health and wellness resources for Canada’s frontline workers. The app aims to provide timely access to features and tools for mental wellness, while also providing support for crisis and prevention to physicians, nurses, care workers, emergency medical services, firefighters, police, correctional officers and their family members. 54 • TELUS 2020 ANNUAL REPORT MD&A: CORPORATE PRIORITIES Driving emerging opportunities to build scale in TELUS Health and TELUS Agriculture (continued) • In the fourth quarter of 2020, TELUS Health, along with Canada Life and Innomar Strategies, launched Canada’s first electronic drug prior authorization solution. The TELUS Health ePrior Authorization solution offers an end-to-end digital experience with the ability to save time and accelerate access to specialty medicines. While the current prior authorization process leverages paper-based forms, sent by fax or regular mail to be completed and reviewed by various stakeholders, the new TELUS Health ePrior Authorization will enable key players to complete required forms and provide electronic signatures all through a web-based platform. • As noted in Section 1.3, we relaunched our TELUS Health Care Centres. In addition, these centres have been complemented by two new public Babylon by TELUS Health clinics in B.C., with more planned across Canada in 2021. • We continue to build scale in TELUS Health through expanded services for existing customers, as well as through business acquisitions and strategic partnerships to strengthen our collaborative health ecosystem. • As described in Section 1.3, in November 2020, we announced the launch of TELUS Agriculture, which aims to digitally transform the global food system. By empowering our food system through technology, we can, for example, enable grocers to dramatically reduce their perishable waste through effectively tracking the temperature of their products across the supply chain, also resulting in a reduction of food-borne illnesses. Through TELUS Agriculture, we support sustainable production practices that promote a more resilient and environmentally friendly food supply. • By the launch of TELUS Agriculture, we had acquired eight trusted and experienced agricultural companies with footprints across the globe, with expertise that spans the entire agricultural value chain, from “seed to the fork.” These companies include AFS Technologies, AGIntegrated, Agrian, Decisive Farming, Farm At Hand, Feedlot Health Management Solutions, Muddy Boots and TKXS. • TELUS Agriculture is investing $1 million in the Olds College Smart Farm in Olds, Alberta. The Olds College Smart Farm will act as TELUS Agriculture’s living lab to conduct applied research and test the real-world application of new technology in a commercial-scale agriculture setting. Driving growth in TELUS International to fuel further scaling opportunities • As noted in Section 1.3, in January 2020, we completed the acquisition of 100% of Competence Call Center, a provider of higher-value-added business services with a focus on customer relationship management and content moderation. CCC added significant scale to TI and resulted in a sizeable diversification of its operations and client base in Europe. CCC partners with industry-leading global brands such as Google, Inc. primarily from the fast-growing technology, media and telecommunications, retail, and travel and hospitality sectors. • In response to the pandemic, TI was able to rapidly enable more than 90% team members to provide remote support from home and in other modified work locations, leveraging this capability in new ways to serve its clients. TI has successfully trained and equipped teams to support new clients through 100% virtual training and remote servicing, forgoing the traditional in-person training at a brick and mortar facility. • As described in Section 1.3, TI completed the acquisition of 100% of Lionbridge AI, a leading global provider of crowd-based training data and annotation platform solutions. Lionbridge AI is one of only two globally scaled managed data annotation service providers in the world, preparing high-quality data that is critical for the development and training of AI algorithms for some of the world’s largest technology companies in social media, search, retail and mobile, such as Google, Inc. • TI has furthered its leadership in digital solutions and customer experience with a range of industry recognition. In 2020, TI was: • Named a Leader and Star Performer in the Everest Group PEAK Matrix. • Instrumental in helping TELUS win the 2020 Digital Transformation Award under the category of AI-fueled Digital Transformation from IT World Canada. • A 2020 Stevie Winner in the following categories: • Business Intelligence Solution category for Customer Journey Analytics • Customer Service Outsourcing Provider of the Year category at the 2020 Stevie Awards for Sales & Customer Service • Most Innovative Use of HR Technology During the Pandemic – United States • Internationally recognized in the Exemplary Employer category for demonstrating extra commitment to keeping its employees working, paid and safe during the COVID-19 pandemic • Internationally recognized in the Valuable Corporate Response category for ensuring the well-being of its employees, customers, and communities • Recognized as one of the world’s best outsourcing providers across size and growth, customer references, awards, and certifications, programs for innovation and corporate social responsibility by being named on the International Association of Outsourcing Professionals Global Outsourcing 100 list in the Leader category with an All-Star ranking for 2020. • Named to Silicon Valley-based Constellation Research’s Constellation ShortList for Customer Experience Operations Services: Global in Q3 2020. • TI has continued to scale effectively, supporting new digital opportunities with leading social media customers, leveraging its deep experience serving fast-growing technology companies. • As noted in Section 1.3, in February 2021, TI successfully completed its IPO, further positioning the organization for years of continued growth. Our 2021 corporate priorities are provided in the table below. 2021 CORPORATE PRIORITIES • Elevating our customers, communities and social purpose by honouring our brand promise, Let’s make the future friendly • Leveraging TELUS’ world-leading technology to drive superior growth across mobile, home and business services • Scaling our innovative digital capabilities in TELUS International, TELUS Health and TELUS Agriculture to build assets of consequence. TELUS 2020 ANNUAL REPORT • 55 4 Capabilities The forward-looking statements in this section, including statements regarding our dividend growth program and our financial objectives in Section 4.3, are qualified by the Caution regarding forward-looking statements at the beginning of this MD&A. 4.1 Principal markets addressed and competition WIRELESS PRODUCTS AND SERVICES FOR CONSUMERS AND BUSINESSES ACROSS CANADA Our products and services • Data and voice – Fast internet access (via our 4G and 5G network available to over 99% and 28% of Canadians, respectively) for video, social networking, messaging and mobile applications, such as My TELUS, TELUS SmartHome, Optik TV, Pik TV and virtual care apps; mobile voice service with features such as Call Control, which helps subscribers avoid nuisance calls; clear and reliable voice services, including TELUS Business Connect®; and international roaming. • Devices – The latest smartphones, tablets, mobile internet keys, mobile Wi-Fi devices, M2M modems, digital life devices and wearable technology, such as smart watches and our LivingWell Companion. • Suite of Internet of Things (IoT) solutions, including machine-to-machine (M2M) connectivity, to support Canadian businesses locally and internationally, including asset tracking, fleet management, remote monitoring, digital signage, security, smart hospital solutions, intelligent traffic solutions, contact tracing and data analytics. Our capabilities • Licensed gross national mobile spectrum holdings averaging 172 MHz. • Coast-to-coast digital 4G LTE access technology and growing 5G deployment: • Overall coverage of 99% of Canada’s population, with LTE advanced (LTE-A) technology covering more than 97% of Canada’s population and 5G covering 28% of Canada’s population at December 31, 2020. Coverage includes domestic roaming agreements. • Manufacturer’s rated download speeds: 5G, up to 1.7 Gbps; LTE-A, up to 1.5 Gbps; LTE, up to 150 Mbps; HSPA+, up to 42 Mbps. Average expected speeds: LTE-A, 12–250 Mbps; LTE, 12–45 Mbps; HSPA+, 4–14 Mbps.1 • Reverts to LTE technology and speeds when customers are outside 5G coverage areas. • International voice and data roaming capabilities in more than 225 destinations, including voice over LTE (VoLTE) roaming, which is available with three major U.S. carriers and in 15 international destinations as of the date of this MD&A. • IoT technology: • LTE-machine (LTE-M) technology across Canada, which supports large numbers of devices that transmit infrequent short bursts of data. • Multi-service multi-billing capabilities provide the ability to separately classify, rate and bill data traffic across IoT devices. • Specialized automated vehicle location IoT solutions that support municipalities, construction, utilities and speciality transport. • Our leading customer service generates increased customer loyalty and reduced wireless churn. Having our TELUS International (TI) team members assist with performing customer-serving activities strengthens our ability to continue delivering exceptional customer service. Competition overview • Facilities-based national competitors Rogers Wireless and Bell Mobility, as well as provincial or regionally focused telecommunications companies Shaw, Quebecor, SaskTel, Eastlink, Tbaytel and Xplornet. • Fixed wireless services. • Resellers of competitors’ wireless networks. • Services offered by cable and wireless competitors over wireless and metropolitan Wi-Fi networks. • Competition for our IoT solutions include other providers of LTE-M low-power wide-area network capabilities, IoT connectivity tools and platforms, and automated vehicle location and transportation solutions. 1 Network speeds vary with location, signal and customer device. Compatible device required. 56 • TELUS 2020 ANNUAL REPORT WIRELINE PRODUCTS AND SERVICES: RESIDENTIAL SERVICES IN BRITISH COLUMBIA, ALBERTA AND EASTERN QUEBEC; BUSINESS SERVICES ACROSS CANADA; AUTOMATION AND SECURITY SOLUTIONS; CUSTOMER CARE AND BUSINESS SERVICES (CCBS) SOLUTIONS OFFERED INTERNATIONALLY; HEALTHCARE SOLUTIONS; AND GLOBAL AGRICULTURE SOLUTIONS Our products and services • Internet – Comprehensive high-speed internet access with TELUS PureFibre, which covers approximately 81% of our broadband footprint at MD&A: CAPABILITIES December 31, 2020; fixed high-speed internet access (HSIA) service, with email and a comprehensive suite of security solutions; and wireless HSIA, with reliable Wi-Fi and cloud storage. TELUS offers multiple plans, including 940 Mbps symmetrical download and upload speeds. • Television – High-definition entertainment service with Optik TV and Pik TV. Optik TV offers extensive content options, including 4K and 4K HDR live TV, On Demand content and streaming services such as Prime Video (included in the Amazon Prime membership), Netflix, YouTube and hayu. Optik TV also delivers innovative features, including a voice assistant that allows customers to control their TV, a wireless digital box, large PVR capacity and the ability to restart live TV in progress or from the past 30 hours. In addition, our Optik TV app allows customers to watch live TV, set recordings and access On Demand content from a smartphone, tablet or computer. Pik TV delivers a streamlined offer for customers through our Pik TV media box, Apple TV or NVIDIA SHIELD TV and SHIELD TV Pro. It is also accessible through an internet browser or our Android or iOS mobile applications. Pik TV embraces the changing environment, where content is increasingly available from over-the-top (OTT) services. • Voice – Reliable fixed phone service with long distance and calling features such as Call Control; voice over IP (VoIP) supporting voice services into the future. • Home and business security and automation – Real-time 24/7 central monitoring station, guard response service (where available), and wireless and hard-wired security technology, integrated with smart internet-connected devices. These services are enabling smart homes and smart businesses by allowing customers to remotely monitor and manage their premises via cameras, smoke detectors, lights, door locks, environmental controls, appliances and other systems for enhanced security, comfort, convenience and energy efficiency. • Fixed wireless services – Wireless HSIA and wireless home phone. • IP connectivity for businesses – Converged voice, video and data services and internet access, offered on a high-performing network. Also includes software-defined wide area network (SD-WAN) offerings. • Cloud and managed information technology (IT) services – Suite of hybrid IT solutions provides traditional and cloud technologies, network connectivity, security, managed IT and cloud advisory services. • Security consulting and managed services – Cloud and on-premises solutions ensuring security for data, email, websites, networks and applications. • Unified Communications conferencing and collaboration – Full range of equipment and application solutions, including Unified Communications as a Service (UCaaS), to support meetings and webcasts by means of phone, video and internet. Recent acquisitions are bolstering our capabilities in the small and mid-market business segments. • Customer care and business services (CCBS) – With the acquisition of Competence Call Center (CCC) and Lionbridge AI in 2020, TI, a digital customer experience (CX) innovator that designs, builds and delivers next-generation digital solutions for some of the world’s most established and disruptive brands, has almost 50,000 team members, providing services in almost 50 languages from 50 delivery locations across over 20 countries in North and Central America, Europe and Asia. TI’s integrated solutions and capabilities span digital strategy, innovation, consulting and design, digital transformation and IT lifecycle solutions, data annotation and intelligent automation, and CX solutions that include content moderation, trust and safety solutions and other managed solutions. TI partners with brands across high-growth industry verticals, including tech and games, communications and media, e-commerce and fintech, healthcare, and travel and hospitality. • Healthcare – TELUS Health’s services, including virtual care, pharmacy management, electronic medical records (EMR) and mobile EMR, electronic health records, drug information systems, regional clinical information systems, personal health record systems, remote patient monitoring, online settlement claims management solutions, e-prescribing services, TELUS Health Exchange Platform and MedDialog®, as well as employee wellness, comprehensive primary care, and workplace health and well-being services via TELUS Health Care Centres. • Agriculture – TELUS Agriculture’s solutions include farm management, precision agronomy, feedlot health management, application programming interface (API) and application integration services, compliance management, food traceability and quality assurance, data management solutions and software solutions for trade promotion management and retail execution. Our capabilities • Ongoing connection of households and businesses directly to fibre-optic cable; approximately 2.5 million households and businesses connected with TELUS PureFibre in B.C., Alberta and Eastern Quebec at December 31, 2020, and we have reached approximately 81% of our total high-speed broadband footprint. • Broadcasting distribution licences allowing us to offer digital television services in incumbent territories, as well as a licence to offer commercial video- on-demand services. • Security technology to support central monitoring and guard response service (where available), integrated with automated smart devices. Field services capabilities to install, upgrade and repair security technology at customers’ premises. • An IP-based national network overlaying an extensive switched network in B.C., Alberta and Eastern Quebec, as well as global interconnection arrangements. • Seven data centres in six communities directly connected to the national TELUS IP network, creating an advanced and regionally diverse computing infrastructure in Canada. • Provide access for businesses across Canada through our extensive network, and product capabilities bolstered by our national delivery teams. • CCBS solutions, next-generation IT and digital business services with global delivery capabilities through our multinational, multi-language programs, supported by almost 50,000 employees across North and Central America, Europe and Asia, as at December 31, 2020, along with a crowdsourced community of data annotation professionals through our recent acquisition of Lionbridge AI. TELUS 2020 ANNUAL REPORT • 57 WIRELINE PRODUCTS AND SERVICES: RESIDENTIAL SERVICES IN BRITISH COLUMBIA, ALBERTA AND EASTERN QUEBEC; BUSINESS SERVICES ACROSS CANADA; AUTOMATION AND SECURITY SOLUTIONS; CUSTOMER CARE AND BUSINESS SERVICES (CCBS) SOLUTIONS OFFERED INTERNATIONALLY; HEALTHCARE SOLUTIONS; AND GLOBAL AGRICULTURE SOLUTIONS Our capabilities (continued) • Technology solutions to assist regional health authorities, hospitals, insurers, consumers and employers; as well as solutions to improve connectivity and collaboration among healthcare providers, including physicians, nurses, pharmacists and physiotherapists. • Technology solutions to assist agribusinesses, farmers, ranchers, commodity aggregators, processors, distributors, retailers and consumer packaged goods companies in sustainably improving the efficiency, traceability and responsiveness of the food system. • Our leading customer service generates increased customer loyalty and reduced wireline churn. Having our TI team members assist with performing customer-serving activities strengthens our ability to continue delivering exceptional customer service. Competition overview • Cable competitors for internet, telephone and entertainment services, such as Shaw Communications (in B.C. and Alberta) and Cogeco Cable and Videotron (in Eastern Quebec). • Substitution of wireless services, including our own wireless offerings, for residential local and long distance services. The percentage of households with wireless-only telephone services (among all providers, including TELUS) is estimated to be 56% in B.C. and Alberta, and 20% in Eastern Quebec in 2020, compared to 52% and 20%, respectively, in 2019. • Our national telecommunications competitors Rogers Communications Inc. and BCE Inc. also offer telecommunications services for business and enterprise customers, as do various suppliers that are increasingly selling directly to customers. • Competitors for home and business security range from local to national companies, such as BCE Inc., Rogers Communications Inc., Chubb-Edwards, Stanley Security and Fluent Home. • Various other small, non-traditional companies offering OTT business solutions, including SD-WAN and UCaaS solutions. These competitors are more prevalent in the small and medium-sized business segments. • Various others offering VoIP-based local and long distance, as well as internet and data services, or reselling those services. • OTT and direct-to-consumer voice and/or entertainment services. • Satellite-based entertainment and internet services offered by BCE Inc., Shaw Communications and Xplornet. • Competitors for TI include in-house technology and customer experience management teams; digital transformation services providers, such as Endava, EPAM and Globant; globally diversified IT and business process outsourcing service providers, such as Accenture, Cognizant, Genpact and WNS; and customer experience providers such as 24-7 Intouch, TaskUs, Teleperformance S.A. and Webhelp. • Competitors for TELUS Health include providers of EMR and pharmacy management products, such as Omnimed, Familiprix, Medfar, Fillware, ARI and Logipharm. Competitors also include systems integrators; health service providers, such as Loblaws, McKesson and the Jean Coutu Group, that have also become vertically integrated and own a mix of health services delivery, IT solutions and related services; and potentially, global providers, such as EPIC and Cerner, that could achieve expanded Canadian footprints. Competitors for TELUS Health’s corporate and preventative health service offerings include Medcan, Cleveland Clinic, Dialogue and Wellpoint. • Competitors for TELUS Agriculture range from local to global companies, such as AgData, Proagrica, Farmers Edge and Food LogiQ. 4.2 Operational resources RESOURCES Our team • We had approximately 78,100 employees at December 31, 2020 including 49,700 from TI. Of our 78,100 employees, 27,900 were located in Canada and 50,200 were located internationally. We also use external consultants and contractors, including crowdsourced providers through TI’s recent acquisition of Lionbridge AI. • Approximately 8,630 of our employees are covered by collective agreements. The agreement with the Telecommunications Workers Union (TWU), United SteelWorkers Local 1944, which covers approximately 6,985 employees, expires on December 31, 2021. The agreement with the Syndicat québécois des employés de TELUS (SQET), which covers approximately 735 employees, expires on December 31, 2022. The agreement with the Syndicat des agents de maîtrise de TELUS (SAMT), which covers approximately 575 employees in the TELUS Québec region, expires on March 31, 2022. Our TELUS Employer Solutions Inc. subsidiary is signatory to a collective agreement with the B.C. Government and Services Employees’ Union, which covers fewer than 100 employees and expires on July 31, 2023. • Approximately 280 employees acquired through the 2019 acquisition of ADT Security Services Canada, Inc. (ADT Canada) are unionized. These employees are covered by 10 separate collective agreements between ADT Canada and a number of different unions in multiple provinces. The expiry dates of these collective agreements vary. ADT Canada is in the process of negotiating a renewal agreement for one expired collective agreement in Quebec and is engaged in a first contract arbitration for a group of newly unionized Quebec-based employees. • Our operations at Canadian and international locations support CCBS solutions for external customers, as well as for certain internal functions. Additionally, for our CCBS solutions, we have ready access to labour in the United States for management and support positions, and in various international locations for digital business services. • Our objective is to attract, develop and retain talented employees in Canada and internationally. We achieve this objective by investing in our people throughout their careers, and by offering diverse and inclusive employment prospects and development opportunities. 58 • TELUS 2020 ANNUAL REPORT MD&A: CAPABILITIES RESOURCES Our team (continued) • In May 2020, we launched a team member survey to assess our team’s health and wellness, as well as their feelings about our new work environment in light of changes due to the COVID-19 pandemic. Key highlights included team members feeling that their safety is a priority for their leaders; communication is timely, transparent and informative; and they have the support they need during this extraordinary time. Team member engagement was measured again through our annual fall Pulsecheck survey resulting in an 87% score, a three percentage point increase over the 2019 result and the highest engagement score achieved, matched only in 2015. The score places TELUS within the top 10% of employers surveyed worldwide according to our survey provider, Kincentric. • Having one of the most engaged teams worldwide leads to a better team member experience, which in turn drives an improved customer service experience – our customers are more satisfied resulting in a lower churn rate with our products and services. • In 2020, we continued to reach out to our team members to share TELUS’ stance against all forms of systemic bias, including racism; reaffirming our commitment to standing united in our pursuit of equity, fairness, social justice and systemic change. Consistent with TELUS’ culture and use of our fair process engagement model, our Diversity and Inclusiveness team invited all team members to participate in open and meaningful dialogue on how to best combat racial inequity, and to use these “Share, listen, learn and reflect” sessions to apply a wider lens and increase inclusiveness and help remediate social injustice for all of our team members and the communities where we live, work and serve. • We aim to attract and retain key team members through both monetary and non-monetary approaches. Our compensation and benefits program is designed to support our high-performance culture and is both market-driven and performance-based. Where required, we implement targeted retention solutions for team members with critical skills or talents that are scarce in the marketplace, and we have a succession planning process to identify top talent for senior-level positions. • For further details related to our team, see description under Mitigation in Section 10.11 Our team. Our major brands and distribution channels • TELUS – A national communications and information technology company serving customers across wireless, data, IP, voice, television, entertainment, video and security, driven by a social purpose to connect all Canadians for good. • Koodo Mobile® – A national provider of postpaid and prepaid wireless voice and data services with a broad distribution network, including TELUS-owned stores, dealers and third-party electronics retailers. • Public Mobile – A prepaid wireless service provider with web-based and physical distribution, providing customers with a SIM-only service. • Optik TV, launched in 2010. Pik TV, launched in 2017. • TELUS PureFibre – Our next-generation fibre-optic network, which delivers fast internet and provides the backbone for our 5G network. • TELUS SmartHome Security and TELUS Secure Business – Full-service security offerings for residential and business customers. • TELUS International – A digital customer experience innovator that designs, builds and delivers digital next-generation solutions for global and disruptive brands. • TELUS Health – A national provider of electronic medical and personal health records, home health monitoring, benefits and pharmacy management solutions, preventive healthcare services and virtual care solutions for consumers, employers and insurers. We are improving health outcomes for all Canadians, including those in rural and Indigenous communities, through our TELUS Health Care Centres, virtual care offerings, including Babylon by TELUS Health and Akira by TELUS Health, LivingWell Companion personal emergency response service, the TELUS Healthy Living Network and Health for Good mobile health clinics. • TELUS Agriculture – A global provider of agriculture and food technology and data solutions, serving customers across the food value chain. • TELUS Ventures – A corporate venture capital fund that has invested in more than 70 market-transforming companies since 2001. • GoCo – An agile entity that brings next-generation unified communications and managed network solutions to the business market in a highly differentiated and entrepreneurial manner. • Our sales and support distribution channels: • Wireless services are supported through a broad network of TELUS-owned and branded stores, including our 50% ownership of the kiosk channel WOW! Mobile, and an extensive distribution network of exclusive dealers and large third-party national retail partners (e.g. Best Buy, Walmart and London Drugs), as well as online self-serve applications, intuitive virtual-assistant chatbots, mass marketing campaigns and customer care telephone agents. With the 2020 acquisition of Mobile Klinik, we offer on-site professional smartphone and tablet repair services and sales. • Wireline residential services are supported through TELUS-owned and branded stores, customer care telephone agents, digital home technicians and partners and online and TV-based self-serve applications. • Through telus.com, we sell wireless (including digital accessories), wireline, SmartHome Security and Secure Business, health and business products and services. We provide online account management tools (e.g. My TELUS), enabling wireless and wireline customers to manage their accounts through our website or mobile applications, as well as online chats for customer support. We also provide video calling solutions to enable installations without having technicians enter a customer’s premises. • Dedicated direct-to-consumer channel with approximately 500 field sales agents throughout B.C., Alberta, Saskatchewan, Manitoba and Ontario; safety protocols are maintained at all times when team members interact with customers. • In areas where it was decided not to proceed with field activity due to the pandemic, our teams were mobilized to make proactive outbound calls. • Business services, including healthcare and security, across wireless and wireline are supported through certain dedicated stores for business, TELUS sales representatives, product specialists, independent dealers, direct business channels and online self-serve applications for small and medium-sized businesses. • CCBS solutions are supported through sales representatives and client relationship management teams. • TELUS Health provides some of its services – personal health records and home health monitoring – in partnership with provincial governments. • TELUS Agriculture solutions are supported through online self-serve applications, sales representatives and client relationship management teams. TELUS 2020 ANNUAL REPORT • 59 RESOURCES Our technology, systems and properties • We are a technology-enabled company with a multitude of IT systems and processes. We are focused on driving innovation and making generational investments to deliver state-of-the-art broadband solutions in an increasingly digital society. • Broadband consumer and business networks • In 2012, we launched our 4G LTE wireless technology capable of speeds of up to 110 Mbps, and today, our wireless technology covers 99% of Canada’s population. Our LTE technology allows customers to take advantage of the newest mobile devices and enjoy a seamless experience across multiple devices. In 2015, we launched the newest LTE advanced (LTE-A) network technology, and we have been working to expand our LTE capabilities with this technology since then. In April 2016, we enhanced our LTE-A technology with the first global implementation of frequency division duplex (FDD) 4x4 multiple-input-multiple-output (MIMO) technology. We implemented another key enhancement to our LTE-A infrastructure in June 2017 by introducing quad-band LTE-A carrier aggregation technology – this technology covers 97% of Canada’s population and enables theoretical peak speeds of 1.5 Gbps. Our LTE CAT-M1 IoT network now covers 97.9% of Canada’s population. See Leveraging our broadband networks to drive TELUS’ growth and fuel our future in Section 3 Corporate priorities for additional information. • In 2014, we deployed a centralized radio access network technology (C-RAN) in Vancouver, and in 2016, launched VoLTE service in B.C. and Alberta communities. Both deployments were key transformations in our wireless capabilities. We were also the first national operator to provide high-speed internet service over our LTE infrastructure for rural customers in B.C., Alberta and Quebec through our Smart Hub wireless internet solution. Today, we serve over 100,000 households in rural Canada that do not have the same level of access to broad- band service that urban Canadians have, continuing to make progress toward our objective of providing broadband internet access to all Canadians. • We have made significant investments in heterogeneous network (HetNet) technology, one of the key building blocks for 5G. HetNet combines multiple types of cells, such as outdoor macro cells and microcells, as well as indoor pico cells, to enhance coverage and capacity in crowded urban areas and inside buildings. By taking continuous strides to evolve our small-cell technology concurrent with the evolution of network technologies to LTE-A pro (i.e. 4.5G), in 2017, we became the first operator in Canada to introduce licensed assisted access (LAA) small cells for both outdoor and indoor environments, capable of speeds of up to 970 Mbps. In 2019, we continued advancing LAA technology with speeds of up to 1.2 Gbps, and we have deployed more than 400 LAA sites to date. • In 2018, we became the first operator globally to introduce LTE FDD Massive MIMO 32TRx technology on the 2600 MHz band as part of the LTE-A pro technology evolution, and in 2020, we introduced dual-band massive MIMO technology in the 1900 MHz and AWS bands, also a global first. This technology will further enhance the capacity of our wireless infrastructure, enable a stronger customer experience and help to sustain our long-term wireless leadership. • In 2019, we progressed the virtualization of our core network infrastructure with the voice core, providing a stepping stone into 5G service readiness. The network virtualization improves our network scalability, resiliency and cost efficiency. • Our investments to deploy our gigabit-enabled TELUS PureFibre technology have brought fibre-optic connectivity further into our infrastructure and directly to homes and businesses. At the end of 2020, approximately 2.5 million homes and businesses in communities across B.C., Alberta and Quebec had access to ultra-fast, symmetrical 150/150 and 750/750 internet download and upload speeds with TELUS PureFibre. Recognizing the need for highly reliable, high-capacity connectivity with low latency to support emerging services such as virtualized networks and IoT applications, we have also begun rolling out a next-generation nationwide optical backbone network. • We started the next evolution of our wireline IP and optical core/edge technology, smart Edge architecture. This architecture enables significant per-port cost improvement to support network growth and evolution. • We continue to roll out our third-generation national dense wavelength division multiplexing (DWDM) transport backbone (packet transport 3.0) CDC (colourless, directionless and contentionless) network overlay that will connect from B.C. to Quebec and into the U.S. This architecture will allow network growth without the need for costly re-generation, enable optimal optical rerouting during a fibre cut and improve network growth costs. • In 2020, we continued evolving our PureFibre and HSIA technologies to deliver a superior customer experience, propelling our market leader- ship in wireline home and business services by launching 1.5 Gbps HSIA service to customers in B.C. and Alberta while continuing to bring broadband network speeds to thousands of homes in rural areas in B.C., Alberta and Quebec. • We are evolving our world-class emergency services to harness the power of IP through our implementation of Next-gen 9-1-1. • As Canada’s primary provider, we delivered on our regulatory commitment to upgrade our Message Relay and IP Relay service, enhancing customer experience for the deaf and hard of hearing community with improved smartphone-friendly operator services. • We have continued to innovate for our customers through our Optik TV and Pik TV platforms. In 2018, we introduced HDR (high dynamic range) colour capability to our 4K Optik TV customers, making us the first operator in Canada to deliver 4K HDR video across live TV, video-on-demand and Netflix services. We also launched an Apple TV application for Pik TV and gave customers the option to purchase Pik TV using only a web browser. By investing in the cloudification of video infrastructure and innovative applications, we will continue to advance our priority of enabling “anytime, everywhere” access to content and entertainment, thereby continuing to deliver an exceptional customer experience. • In 2018, we also launched TELUS Boost Wi-Fi, a network of boosters that extends the reach of strong and reliable in-home Wi-Fi signals. • We are enhancing our TV offerings by launching innovative Optik TV enhancements, including a new home screen, Amazon Prime and integrated Nanocasting, along with new Apple TV and iOS clients for Optik TV, driving several improvements to the Pik and Optik TV customer experience across iPhone, iPad, Apple TV, Android STB and Android Mobile platforms, and deploying advanced Cujo-based parental controls for Optik TV. 60 • TELUS 2020 ANNUAL REPORT MD&A: CAPABILITIES RESOURCES Our technology, systems and properties (continued) • We are accommodating dramatic increases in network traffic during the COVID-19 pandemic by investing in our network and rapidly pivoting to maintain service and support to Canadians: • Re-engineering and increasing core voice network capacity nationally to support a 50% traffic increase, adding approximately 1,000 additional trunks, enabling the ability to process two million additional calls per hour. • Upgrading internet peering links by 20% to support home internet data usage increases of up to 40% as customers spend more time online, streaming, gaming, accessing essential information and working remotely. • Expanding capacity for Optik video-on-demand and new solutions to enable scaling to support a 40% increase in video-on-demand consumption and a 25% increase in broadcast viewing at peak levels. • Re-dimensioning part of the LTE voice network to increase capacity by 20% in response to wireless voice calls demand, improving customer experience with faster connections and fewer dropped calls. • Doubling virtual private network (VPN) and DefensePro capacities by 50% to 12 Gbps to support a 60% growth in VPN daily usage to approximately 19,000 users per day. • Doubling virtual desktop infrastructure (VDI) gateway capacity and adding 40% more TELUS Authentication Services (TAS) tokens (10,000) to support 21 times growth in VDI peak connections from home. • Deploying Mission Critical Environment Pods (a self-containing unit with HVAC and power supply) to support our critical network equipment and reduce the risk of equipment outages. • Real estate – Our network facilities are constructed under or along streets and highways, pursuant to rights-of-way granted by the owners of land, including municipalities and the Crown, or on freehold land we own. • Our real estate properties (owned or leased) also include administrative office spaces, mixed-use office, commercial and residential properties, all of which may be developed through joint ventures, as well as other real estate development projects that advance our social purpose, work centres and space for telecommunications equipment. Some buildings are constructed on leasehold land and the majority of wireless radio antennae are on towers that are situated on lands or are on buildings held under leases or licences with varying terms. We currently participate in two real estate joint ventures. (See Section 7.11.) • Intangible assets – Our intangible assets include wireless spectrum licences from Innovation, Science and Economic Development Canada (ISED), which are essential to providing wireless services. We have assets averaging 172 MHz nationally. We have deployed 700 MHz, 2300 MHz, 2500 MHz, 1900 MHz, AWS and 850 MHz spectrum to evolve our wireless infrastructure, and we are looking to the introduction of new bands that will enable the realization of 5G technology, including the 600 MHz spectrum acquired in the 2019 auction. We intend to continue acquiring spectrum within the rules set out by ISED to meet our future capacity requirements. • Intellectual property, which we own or which we have been granted the right to use, is an essential asset for us. Intellectual property enables us to be known and recognized in the marketplace through our brand style, trade dress, domain names and trademarks. It protects our know-how and software, systems, processes and method of doing business through copyrights, patents and information treated as confidential. It also helps us to improve our competitiveness by fostering an innovative work environment. Each form of intellectual property is important to our success. For instance, the TELUS brand plays a key role in product positioning and our Company’s reputation. We aim to maximize the value of our intangible assets in the areas of innovation and invention by ensuring that they are appropriately used, protected and valued. To protect our intellectual property assets, we rely on a combination of legal protections afforded under copyright, trademark, patent and other intellectual property laws, as well as contractual provisions under licensing arrangements. Further information on recognized tangible and intangible assets can be found in Section 8.1 Critical accounting estimates and judgments. • Our broadcasting distribution licences enable us to provide entertainment services. See Broadcasting-related issues in Section 9.4, which discusses developments relating to these licences. • Future technologies – In addition to evolving our existing wireless and wireline infrastructure, we are investing in the technologies of the future that will serve as the foundation to provide next-generation services to Canadians. • We continue to invest in enabling systems such as our Jasper connected device platform (CDP) and our dedicated machine-to-machine virtual evolved packet core (M2M vEPC) to support IoT applications, where the ease of onboarding partners is crucial for emerging services such as connected vehicles, fleet management and more. • In 2018, we deployed our LTE-M technology across Canada. LTE-M is a low-power wide-area network (LPWAN) technology, which is ideal for IoT because it supports large numbers of devices that transmit infrequent short bursts of data, like IoT sensors. It will enable a plethora of IoT applications through long-range connectivity, extended battery life and carrier-grade security and quality of service. • In 2020, our focus was on enabling the digitization of TELUS through modernizing our technology and continuing our journey to the cloud, foundational to our ability to deliver value to our customers by onboarding new applications, supporting projects/environments onto the cloud, and driving and delivering a cross-company integrated cloud transformation strategy. • Advancing our drive to simplify and consolidate systems across several fronts, such as unlocking customer relationship management (CRM)/billing systems in Quebec with LivingWell Companion and SmartHome products now supported for Quebec incumbent local exchange carrier (ILEC) and new fibre customers, opening new Quebec territory growth opportunities, automating copper to fibre (C2F) FIFA processes to create a one-click C2F order, reducing call handling time and billing errors, and completing copper on CRM/billing system trials, each paving the way for consolidating consumer wireline ordering into one system stack. • Modernizing our enterprise communication platform to be fully cloud-enabled and to improve system redundancy while processing millions of messages, including wireless eBill SMS reminders, Koodo data threshold SMS and upsell messages, and wireless number portability messages. TELUS 2020 ANNUAL REPORT • 61 RESOURCES Our technology, systems and properties (continued) • Converting customers to our new cloud-based email platform, improving reliability and mailbox storage capacity. • Reducing manual work through automation and advancing Agile and DevOps capabilities: • Leading to improved agility, cost to serve and speed to market, while also driving reliability, including expanding test automation capabilities • Scaling deploy-on-demand release frameworks, enabling faster speed to market and mitigating risks early in the release cycle, expanding automated software development and self-serve test data management capabilities to improve quality of software • Standardizing test case and defect management toolset, mitigating reliability risk related to unsupported tools. • Improving our data analytics and telemetry capabilities to deliver business outcomes through enhanced customer targeting, visualization and business intelligence tools while also making significant accuracy, reliability and enhancements to our geo-analytics platform to support new and personalized/targeted market campaigns. • Through TI, we continue to design, build and deliver next-generation digital solutions to enhance the CX for global and disruptive brands, as described in Section 4.1. These services are provided from facilities located in North and Central America, Europe and Asia. • Through TELUS Health’s services – such as pharmacy management, electronic medical records (EMRs) (including mobile EMRs), electronic health records, personal health records, clinical information systems, remote patient monitoring, virtual care offerings and online claims settlement management software solutions, including the online renewal of prescriptions, e-prescribing services and MedDialog – TELUS Health facilitates the integration of electronic health records from the home to the doctor’s office to the hospital, making critical health information available to healthcare providers over our wireless and wireline broadband network. • Through its TELUS Health Care Centres, TELUS Health also provides executive benefits, occupational health, employee health and wellness services, and individual preventive health services. With its preventive health assessments, 24/7 virtual care support and health specialists, TELUS Health Care Centres provide proactive health services to individuals and their families. • Through TELUS Agriculture, we now provide solutions, as described in Section 4.1. 4.3 Liquidity and capital resources Capital structure financial policies Our objective when managing capital is to maintain a flexible We manage our capital structure and make adjustments to it in light of changes in economic conditions and the risk charac- teristics of our business. In order to maintain or adjust our capital structure, we may adjust the amount of dividends paid to holders capital structure that optimizes the cost and availability of capital of Common Shares, purchase Common Shares for cancellation at acceptable risk. pursuant to normal course issuer bid (NCIB) programs (if and when In the management of capital and in its definition, we include implemented), issue new shares, issue new debt, issue new debt Common equity (excluding Accumulated other comprehensive income), to replace existing debt with different characteristics, and/or increase Long-term debt (including long-term credit facilities, commercial paper or decrease the amount of trade receivables sold to an arm’s-length backstopped by long-term credit facilities and any hedging assets or securitization trust. liabilities associated with Long-term debt items, net of amounts recog- We monitor capital utilizing a number of measures, including nized in Accumulated other comprehensive income), Cash and temporary our net debt to EBITDA – excluding restructuring and other costs investments, and Short-term borrowings arising from securitized ratio, coverage ratios and dividend payout ratios. (See definitions trade receivables. in Section 11.1 Non-GAAP and other financial measures.) Financing and capital structure management plans REPORT ON FINANCING AND CAPITAL STRUCTURE MANAGEMENT PLANS Pay dividends to the holders of the common shares of TELUS Corporation (Common Shares) under our multi-year dividend growth program • In May 2019, we announced our intention to target ongoing semi-annual dividend increases, with the annual increase in the range of 7 to 10% from 2020 through to the end of 2022, thereby extending the policy first announced in May 2011. In May 2020, given the uncertain magnitude, duration and potential outcomes of the COVID-19 pandemic, the Board determined to sustain the current dividend per share and defer any dividend increase until the release of our third quarter 2020 results on November 6, 2020. On November 5, 2020, the Board elected to declare a fourth quarter dividend of $0.3112 per share payable on January 4, 2021. The fourth quarter dividend for 2020 reflected a cumulative increase of $0.01995 per share or 6.8% from the $0.29125 per share dividend declared one year earlier. Dividends declared in 2020 totalled $1.18495 per share, an increase of $0.0587 per share or 5.2% compared to the dividends declared in 2019. On February 10, 2021, the Board elected to declare a first quarter dividend of $0.3112 per share, payable on April 1, 2021, to shareholders of record at the close of business on March 11, 2021. The first quarter dividend for 2021 reflects a cumulative increase of $0.01995 per share or 6.8% from the $0.29125 per share dividend declared one year earlier. Notwithstanding this target, dividend decisions will continue to be subject to our Board’s assessment and the determination of our financial position and outlook on a quarterly basis. Our long-term Common Share dividend payout ratio guideline is 60 to 75% of free cash flow on a prospective basis. (See Section 7.5 Liquidity and capital resource measures.) There can be no assurance that we will maintain a dividend growth program or that it will be unchanged through 2022. (See Caution regarding forward-looking statements – Ability to sustain our dividend growth program through 2022 and Section 10.13 Financing, debt and dividends.) 62 • TELUS 2020 ANNUAL REPORT MD&A: CAPABILITIES REPORT ON FINANCING AND CAPITAL STRUCTURE MANAGEMENT PLANS Pay dividends to the holders of the common shares of TELUS Corporation (Common Shares) under our multi-year dividend growth program (continued) • TELUS International intends to retain all available funds and any future earnings to support operations and to finance the growth and development of its business. As such, TELUS International does not intend to declare or pay cash dividends on its subordinate voting shares in the foreseeable future. • Our dividend reinvestment and share purchase (DRISP) plan trustee acquired shares from Treasury for the DRISP plan, rather than acquiring Common Shares in the stock market. We may, at our discretion, offer Common Shares at a discount of up to 5% from the market price under the plan. Effective with the dividends paid beginning on October 1, 2019, we offered Common Shares from Treasury at a discount of 2%. During 2020, our DRISP plan trustee acquired from Treasury approximately 24 million dividend reinvestment Common Shares for $539 million. For the dividends paid on January 4, 2021, the DRISP participation rate, calculated as the DRISP investment of $152 million (including the employee share purchase plan) as a percentage of gross dividends, was approximately 38%. Purchase Common Shares • In December 2019, we received approval from the Toronto Stock Exchange (TSX) for a 2020 NCIB to purchase and cancel up to 8 million Common Shares for an aggregate purchase price of up to $250 million over a 12-month period, from January 2, 2020 to January 1, 2021, through the facilities of the TSX, the New York Stock Exchange and alternative trading platforms, or as otherwise permitted by applicable securities laws. We did not purchase any shares pursuant to the 2020 NCIB. Use proceeds from securitized trade receivables (Short-term borrowings), bank facilities and commercial paper as needed, to supplement free cash flow and meet other cash requirements • Our issued and outstanding commercial paper was $731 million at December 31, 2020, all of which was denominated in U.S. dollars (US$574 million), compared to $1,015 million (US$781 million) at December 31, 2019. • Net draws due to a syndicate of financial institutions (excluding TELUS Corporation) on the TELUS International (Cda) Inc. credit facility (TI credit facility) were US$1,428 million at December 31, 2020, compared to US$336 million at December 31, 2019. The TI credit facility is non-recourse to TELUS Corporation. • Proceeds from securitized trade receivables were $100 million at December 31, 2020, unchanged from December 31, 2019. Maintain compliance with financial objectives • Maintain investment grade credit ratings in the range of BBB+ or the equivalent – On February 11, 2021, investment grade credit ratings from the four rating agencies that cover TELUS were in the desired range. (See Section 7.8 Credit ratings.) • Net debt to EBITDA – excluding restructuring and other costs ratio of 2.20 to 2.70 times – As measured at December 31, 2020, this ratio was 3.45 times, outside of the objective range, primarily due to the reduction of EBITDA caused by the COVID-19 pandemic, as well as business acquisitions and the acquisition of spectrum licences. Given the cash demands of the 2019 600 MHz and upcoming spectrum auctions and the inability to predict impacts of the COVID-19 pandemic, the assessment of the guideline and return to the objective range remains to be determined; however, it is our intent to return to a ratio below 2.70 times in the medium term (following upcoming 2021, 2022 and 2023 spectrum auctions), consistent with our long-term strategy. (See Section 7.5 Liquidity and capital resource measures.) • Common Share dividend payout ratio of 60 to 75% of free cash flow on a prospective basis – Our objective range is on a prospective basis. The Common Share dividend payout ratio we present in this MD&A is a historical measure utilizing the most recent four quarters of dividends declared, net of dividend reinvestment plan effects, and free cash flow, and is disclosed for illustrative purposes in evaluating our target guideline. As at December 31, 2020, the ratio was 67%. During 2020, the historical measure of our Common Share dividend payout ratio was within the range due to the discounted DRISP participation level. (See Section 7.5 Liquidity and capital resource measures.) • Generally maintain a minimum of $1 billion in available liquidity – As at December 31, 2020, our available liquidity on a consolidated basis was approximately $2.8 billion. (See Section 7.6 Credit facilities.) Financing and capital structure management plans for 2021 At the end of 2020, our senior unsecured debt (excluding unamortized the TI credit facility, lease liabilities and other long-term debt) was 3.80% at December 31, 2020, down from 3.94% one year ago. discount) was $16.5 billion. For our long-term debt, the weighted average Aside from Short-term borrowings of $100 million, commercial paper term to maturity was approximately 12.2 years (excluding commercial of $731 million (US$574 million), the utilized revolving component of paper, the revolving component of the TI credit facility, lease liabilities the TI credit facility (excluding TELUS Corporation) of $831 million and other long-term debt). Our weighted average interest rate on long- (US$653 million) and lease liabilities of $1,837 million, all of our debt term debt (excluding commercial paper, the revolving component of was on a fixed-rate basis. TELUS 2020 ANNUAL REPORT • 63 During 2021, we may use proceeds from the TELUS International IPO directly received by TELUS Corporation or we may issue notes to fund spectrum purchases, to accelerate future debt reduction by prepaying certain notes or to use for general corporate purposes. Anticipated free cash flow and sources of capital are expected to be more than sufficient to meet requirements. For the related risk discussion, see Section 10.13 Financing, debt and dividends. Senior unsecured debt principal maturities as at December 31, 2020 ($ millions) 2050 2049 2048 2046 2045 2044 2043 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 800 637 1,430 500 400 900 1,000 1,100 1,000 1,200 1,000 1,100 1,401 1,400 500 1,249 906 • Other senior unsecured debt • Commercial paper 4.4 Disclosure controls and procedures and changes in internal control over financial reporting Disclosure controls and procedures Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the President and Chief Executive Officer (CEO) and the Executive Vice-President and Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure. The CEO and the CFO have assessed the effectiveness of our disclosure controls and procedures related to the preparation of this MD&A and the December 31, 2020, Consolidated financial statements. They have concluded that our disclosure controls and procedures were effective, at a reasonable assurance level, in ensuring that material information relating to TELUS and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which the MD&A and the Consolidated financial statements were being prepared. Internal control over financial reporting Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS-IASB and the requirements of the Securities and Exchange Commission in the United States, as applicable. TELUS’ CEO and CFO have assessed the effectiveness of our internal control over financial reporting as of December 31, 2020, in accordance with the criteria established in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, TELUS’ CEO and CFO have concluded that our internal control over financial reporting is effective as of December 31, 2020, and have certified TELUS’ annual filings within our annual report on Form 40-F, as required by the United States’ Sarbanes-Oxley Act of 2002, and TELUS’ Annual Information Form, as required by National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings. Deloitte LLP, our auditor, has audited our internal control over financial reporting as of December 31, 2020. Changes in internal control over financial reporting There were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting in 2020. 64 • TELUS 2020 ANNUAL REPORT MD&A: DISCUSSION OF OPERATIONS 5 Discussion of operations This section contains forward-looking statements, including those with respect to mobile phone average billing per subscriber per month (ABPU) and mobile phone average revenue per subscriber per month (ARPU) growth, wireless trends regarding loading and retention spending, equipment margins, subscriber growth and various future trends. There can be no assurance that we have accurately identified these trends based on past results or that these trends will continue, in particular given uncertainty with regard to the COVID-19 pandemic and associated economic impacts. See Caution regarding forward-looking statements at the beginning of this MD&A. 5.1 General A significant judgment we make is in respect of distinguishing between our wireless and wireline operations and cash flows (and this extends to allocations of both direct and indirect expenses and capital expenditures). The clarity of this distinction has been increasingly affected by the convergence and integration of our wireless and wireline telecommuni- cations infrastructure technology and operations. Recently, our judgment was that our wireless and wireline telecommunications infrastructure technology and operations had not experienced sufficient convergence to objectively make their respective operations and cash flows practically indistinguishable. The continued build-out of our access-technology- agnostic fibre-optic infrastructure, in combination with converged edge network technology, has significantly affected this judgment, as have the commercialization of fixed-wireless telecommunications solutions for customers and the consolidation of our non-customer facing oper- ations. As a result, it has become increasingly difficult and impractical to objectively and clearly distinguish between our wireless and wireline operations and cash flows, and the assets from which those cash flows arise. Our judgment as to whether these operations can continue to be judged to be individual components of the business and discrete operat- ing segments has changed. Effective January 1, 2020, we embarked upon modifying our internal and external reporting processes, systems and internal controls to accommodate the technology convergence- driven cessation of the historical distinction between our wireless and wireline operations at the level of regularly reported discrete performance measures that are provided to our Chief Executive Officer (CEO) (our chief operating decision-maker). Prior to the World Health Organization characterizing COVID-19 as a pandemic, we had anticipated transitioning to a new segment reporting structure during 2020 but did not, and do not, anticipate a substantive change to our products and services revenue and related performance indicator reporting from such transition; such transition is now anticipated in the first quarter of 2021. Segmented information in Note 5 of the Consolidated financial statements is regularly reported to our CEO. Selected annual information Years ended December 31 ($ in millions, except per share amounts) Operating revenues and Other income Net income Net income attributable to TELUS Corporation Common Shares (Common Shares) Net income per Common Share Basic earnings per share Diluted earnings per share Dividends declared per Common Share At December 31 ($ millions) Total assets Current maturities of long-term debt Non-current financial liabilities1 Provisions Long-term debt Other long-term financial liabilities Total non-current financial liabilities Deferred income taxes Common equity 2020 15,463 1,260 1,207 0.95 0.94 2019 14,658 1,776 1,746 1.45 1.45 2018 14,368 1,624 1,600 1.34 1.34 1.18495 1.12625 1.05000 2020 43,332 1,432 54 18,856 225 19,135 3,776 12,074 2019 37,985 1,332 43 17,142 1 1 3 17,298 3,214 10,548 2018 33,057 836 395 13,265 162 13,822 3,148 10,259 1 In our specific current instance, financial liabilities do not include liabilities that are excluded by definition (e.g. employee benefits and share-based compensation liabilities) or liabilities that do not involve a future outlay of economic resources (e.g. deferred recognition of customer activation and connection fees; deferred gains on sale-leaseback of buildings). TELUS 2020 ANNUAL REPORT • 65 2020 revenue mix – 92% wireless and data Operating revenues and Other income: Combined wireless revenue and wireline data revenue represented approximately 92% of consolidated Operating revenues and Other income in 2020, approximately 91% 8% in 2019 and approximately 90% in 2018. Total assets: Growth in Total assets includes increases in Property, plant and equipment and Intangible assets, which increased by a combined $2,962 million in 2020 and $4,053 million in 2019. These increases resulted primarily from business acquisitions, our ongoing investments in broadband infrastructure, connecting addi- 51% tional homes and businesses directly to our fibre-optic technology and supporting the capacity, expansion and evolution of our wireless network. See Section 7.3 Cash used by investing activities. For changes in Long-term debt, see Section 6 Changes in financial position and Section 7.4 Cash provided by financing activities. 41% • • • Wireless Wireline data Wireline voice and other 5.2 Summary of consolidated quarterly results, trends and fourth quarter recap Summary of quarterly results ($ millions, except per share amounts) 2020 Q4 2020 Q3 2020 Q2 2020 Q1 2019 Q4 2019 Q3 2019 Q2 2019 Q1 Operating revenues and Other income 4,060 3,981 3,728 3,694 3,858 3,697 3,597 3,506 Operating expenses Goods and services purchased1 Employee benefits expense1 Depreciation and amortization Total operating expenses Operating income Financing costs before long-term debt prepayment premium Long-term debt prepayment premium Income before income taxes Income taxes Net income Net income attributable to Common Shares Net income per Common Share: Basic earnings per share (EPS) Adjusted basic EPS2 Diluted EPS 1,766 1,632 1,458 1,412 1,681 1,502 1,466 1,421 958 789 3,513 547 190 – 357 86 271 959 773 3,364 617 187 – 430 109 321 91 1 725 3,094 634 184 18 432 1 1 7 315 873 725 3,010 684 192 – 492 139 353 809 678 3,168 690 175 – 515 136 379 761 649 2,912 785 173 28 584 144 440 758 633 2,857 740 189 – 551 31 520 706 617 2,744 762 168 – 594 157 437 260 307 290 350 368 433 517 428 0.20 0.22 0.20 0.24 0.28 0.24 0.23 0.25 0.23 0.28 0.32 0.23 0.30 0.32 0.30 0.36 0.39 0.36 0.43 0.35 0.43 0.36 0.38 0.36 Dividends declared per Common Share 0.31 1 20 0.29125 0.29125 0.29125 0.29125 0.28125 0.28125 0.27250 Additional information: EBITDA2 Restructuring and other costs2 Other equity losses related to real estate joint ventures Retirement of a provision arising from business acquisition-related written put options within TI Adjusted EBITDA2 Cash provided by operating activities Free cash flow2 1,336 71 1,390 58 2 – 1,409 1,033 218 8 – 1,456 902 161 1,359 70 3 71 1,361 1,462 51 1 1,409 60 1,368 40 1,434 29 1,373 29 1,379 36 6 – 1,475 1,177 545 5 – 1,413 829 135 – – 1,463 1,148 320 – – 1,402 1,160 324 – – 1,415 790 153 1 Goods and services purchased and Employee benefits expense amounts include restructuring and other costs. 2 See Section 11.1 Non-GAAP and other financial measures. Trends COVID-19 was characterized as a pandemic in March 2020 and has the first quarter of 2020 and described below may not be indicative of had significant impacts on our business. The nature of the pandemic trends effective from the first quarter of 2020 onwards, as the COVID-19 and the uncertainty of its magnitude, length and the time to recovery are pandemic prevents us and our customers from operating in the normal not currently able to be estimated. Therefore, trends identified prior to course of business in certain areas. 66 • TELUS 2020 ANNUAL REPORT MD&A: DISCUSSION OF OPERATIONS The trend of year-over-year increases in consolidated revenue reflects: higher-value smartphones in the sales mix, partly offset by a general (i) wireless network revenue generated from growth in our subscriber decrease in new wireless contracts; and increased wireline product base, partially reduced by COVID-19 pandemic impacts such as reduced costs of sales associated with a growing subscriber base. roaming revenue related to travel restrictions; and (ii) growth in wireline The trend of year-over-year increases in net Employee benefits service revenue – this segment includes TELUS International (Cda) Inc. expense reflects increases in the number of employees related to business (TELUS International or TI) revenues, internet and third wave data services acquisitions, including those supporting the growth of TI revenue, our revenues, health revenues, TV revenues, home and business smart tech- health offerings, our agriculture business and our other complementary nology (including security and agriculture) revenues, and other advanced businesses. This was partly offset by moderating salaries expense resulting application offerings; partly offset by declining equipment revenue growth, from reductions in the number of full-time equivalent (FTE) domestic as well as COVID-19 pandemic impacts such as the temporary closure employees, excluding business acquisitions, related to cost efficiency of TELUS Health Care Centres and the centres being unable to offer their and effectiveness programs. We experienced year-over-year increases in full suite of core services upon re-opening, and business customers net Employee benefits expense in the first quarter of 2020 and through faced with reduced and/or closed operations. most of 2019 related to April 2019 compensation increases. Additionally, Increased wireline data services revenues also include revenues we expect year-over-year increases in net Employee benefits expense from business acquisitions, including our acquisitions of ADT Security related to compensation increases. Services Canada, Inc. (ADT Canada) on November 5, 2019 (where there The trend of year-over-year increases in Depreciation and amortization were significant integration and customer retention costs in 2019 and reflects increases due to business acquisitions, growth in capital assets, 2020, which are expected to continue into early 2022, with the full in support of the expansion of our broadband footprint, including our expected operations rate anticipated after that time), and Competence generational investment to connect homes and businesses to TELUS Call Center (CCC) on January 31, 2020. Increased internet and third PureFibre and enhanced LTE technology coverage, and growth in internet, wave data services and TV service revenues are being generated by TV and security subscriber loading. The investments in our fibre-optic subscriber growth and higher internet revenue per customer, and there technology also support our technology strategy to improve coverage and has been increased customer adoption of our home and business capacity, which helped us prepare for a more efficient and timely evolution smart technology (including security and agriculture). For additional to 5G as we launched the first wave of our 5G network in June 2020. information on wireless and wireline revenue and subscriber trends, The trend of year-over-year increases in Financing costs reflects see Section 5.4 Wireless segment and Section 5.5 Wireline segment. an increase in long-term debt outstanding, mainly associated with Operating revenues and Other income ($ millions) our business acquisitions. Financing costs include a long-term debt our investments in spectrum, fibre and wireless technology, as well as Q4 20 Q3 20 Q2 20 Q1 20 Q4 19 Q3 19 Q2 19 Q1 19 prepayment premium of $18 million in the second quarter of 2020 and 4,060 $28 million in the third quarter of 2019. Moreover, Financing costs are 3,981 3,728 3,694 3,858 3,697 3,597 3,506 net of capitalized interest related to spectrum licences acquired during the 600 MHz wireless spectrum auction, which we expect to deploy into our existing network in 2021. Financing costs also include Interest accretion on provisions (asset retirement obligations and written put options) and Employee defined benefit plans net interest. Additionally, for the eight periods shown, Financing costs include varying amounts of foreign exchange gains or losses and varying amounts of interest income. The trend in Net income reflects the items noted above, as well as non-cash adjustments arising from substantively enacted changes in income tax and adjustments recognized in the current periods for income Adjusted EBITDA ($ millions) taxes of prior periods. Historically, the trend in basic EPS has reflected Q4 20 Q3 20 Q2 20 Q1 20 Q4 19 Q3 19 Q2 19 Q1 19 trends in Net income. 1,409 The general trend of year-over-year increases in Cash provided 1,456 by operating activities reflects lower year-over-year income taxes paid, 1,361 1,475 1,413 1,463 1,402 1,415 partly offset by higher interest payments arising from increases in debt outstanding and year-over-year variations in fixed-term interest rates. The general trend of year-over-year increases in free cash flow reflects the factors affecting Cash provided by operating activities, except that accounting policies that do not impact cash (IFRS 15 and IFRS 16) do not affect the determination of free cash flow. For further discussion of these trends, see Section 5.4 Wireless segment and Section 5.5 Adjusted EBITDA is a non-GAAP measure. Wireline segment. The trend of year-over-year increases in Goods and services purchased reflects increases in external labour, administrative and other expenses to support growth in our TI business, our subscriber base and business acquisitions; higher wireless equipment expenses associated with Fourth quarter recap Results for the fourth quarter of 2020 (three-month period ended December 31, 2020) are discussed in our February 11, 2021 news release and are compared with results from the fourth quarter of 2019 (three-month period ended December 31, 2019). TELUS 2020 ANNUAL REPORT • 67 • Consolidated operating revenues and other income were $4,060 million in the fourth quarter of 2020, an increase of $202 million. • Service revenues were $3,409 million in the fourth quarter of 2020, an increase of $253 million, reflecting growth in wireline • Gross interest on long-term debt, excluding lease liabilities was $168 million in the fourth quarter of 2020, an increase of $5 million, driven by an increase in average long-term debt balances outstanding in part attributable to the acquisition of spectrum licences data services revenues resulting from business acquisitions, and business acquisitions (including ADT Canada, CCC, expanded services and subscriber base growth, as well as growth Mobile Klinik and AFS Technologies Inc.), partially offset in our wireless subscriber base, partly offset by the impacts of the COVID-19 pandemic in both the wireless and wireline segments, and continued declines in wireline legacy voice and legacy data service revenues. • Equipment revenues were $652 million in the fourth quarter of 2020, a decrease of $18 million, reflecting the impacts of the pandemic, including customers reducing their general shopping habits in retail outlets, which resulted in lower wireless contracted by a decrease in the effective interest rate. • Capitalized long-term debt interest, excluding lease liabilities was $9 million in the fourth quarter of 2020, compared to $10 million in the fourth quarter of 2019. (See Financing Costs in Section 5.3 Consolidated operations for further details.) • Employee defined benefit plans net interest was $4 million in the fourth quarter of 2020, an increase of $4 million, volume and accessory sales, partly offset by higher-value wireless primarily due to the change in the defined benefit plan deficit devices in the sales mix. • Other loss was $1 million in the fourth quarter of 2020 compared to other income of $32 million in the fourth quarter of 2019, mainly as at December 31, 2019 to $425 million (net of the plan asset ceiling limit of $121 million), compared to a defined benefit plan surplus of $57 million (net of the plan asset ceiling limit attributable to the 2019 decrease in a provision related to written of $263 million) one year earlier, partly offset by a decrease put options in respect of non-controlling interests, as well as lower in the discount rate. net gains from the sale of certain assets, partly offset by lower other equity losses related to real estate joint ventures. • Consolidated operating expenses were $3,513 million in the fourth quarter of 2020, an increase of $345 million. • Goods and services purchased were $1,766 million in the fourth quarter of 2020, an increase of $85 million, due to higher operating • Foreign exchange losses were $8 million in the fourth quarter of 2020, compared to $2 million in the fourth quarter of 2019, primarily reflecting changes in the value of the Canadian dollar relative to the U.S. dollar. • Income tax expense was $86 million in the fourth quarter of 2020, a decrease of $50 million. The effective tax rate decreased from and administrative costs associated with business acquisitions, in 26.3 to 24.1% in the fourth quarter of 2020, due to the reduction addition to supporting organic TI revenue growth, higher non-labour in corporate income tax rates implemented in Alberta and Nova restructuring and other costs related to the pandemic, and higher Scotia, in addition to an increased portion of income earned in product costs in support of our growing wireline subscriber base. non-Canadian jurisdictions with lower statutory income tax rates These increases were partly offset by enhanced cost-savings than in Canada. initiatives in response to the economic impacts of the COVID-19 • EBITDA, which includes restructuring and other costs, and other pandemic and lower wireless equipment expenses resulting from equity losses related to real estate joint ventures, was $1,336 million lower contracted volumes and accessory sales, which were moder- ated by higher-value devices in the sales mix, as described above. • Employee benefits expense was $958 million in the fourth quarter of 2020, an increase of $149 million, largely due to higher compen- in the fourth quarter of 2020, a decrease of $32 million or 2.3%. • Adjusted EBITDA, which excludes restructuring and other costs, and other equity losses related to real estate joint ventures, was $1,409 million in the fourth quarter of 2020, a decrease of $4 million sation and benefit costs resulting from an increase in the number or 0.2%. This reflects multiple impacts of the COVID-19 pandemic, of employees related to business acquisitions; higher offshore lower wireline legacy voice and data services revenues, and higher FTEs supporting organic TI revenue growth; and compensation employee benefits and other costs including support for business increases. These employee benefits expense increases were acquisitions. This was partly offset by: growth in wireline data service partly offset by a decrease in the number of domestic FTEs, margins resulting from business acquisitions, expanded services and excluding business acquisitions, higher capitalized labour costs subscriber base growth; growth in our wireless subscriber base; an and lower labour-related restructuring and other costs. • Depreciation was $539 million in the fourth quarter of 2020, an increase of $39 million, primarily due to growth in capital assets increased organic and inorganic contribution from TI; and enhanced cost efficiency programs. • Net income attributable to Common Shares was $260 million over the past 12 months, including our expanded broadband in the fourth quarter of 2020, a decrease of $108 million, resulting footprint and business acquisitions. • Amortization of intangible assets was $250 million in the fourth quarter of 2020, an increase of $72 million arising from business from the after-tax impacts of lower Operating income and higher Financing costs. Adjusted Net income excludes the effects of restruc- turing and other costs, income tax-related adjustments, and other acquisitions and higher expenditures associated with the intangible equity losses related to real estate joint ventures. Adjusted Net income asset base over the past 12 months, including customer experi- in the fourth quarter of 2020 was $289 million, a decrease of ence service delivery systems. • Financing costs were $190 million in the fourth quarter of 2020, an increase of $15 million, mainly due to the following factors: • Interest expense was $180 million in the fourth quarter of 2020, $111 million or 27.8%. • Basic EPS was $0.20 in the fourth quarter of 2020, a decrease of $0.10 or 33.3%, as a result of the after-tax impacts of lower Operating income and higher Financing costs. Adjusted basic EPS excludes an increase of $6 million, largely resulting from: the effects of restructuring and other costs, income tax-related 68 • TELUS 2020 ANNUAL REPORT MD&A: DISCUSSION OF OPERATIONS adjustments, and other equity losses related to real estate joint the success of our bundled product offerings and reduced ventures. Adjusted basic EPS was $0.22 in the fourth quarter of switching activity between providers due to the COVID-19 2020, a decrease of $0.10 or 31.3%. pandemic. • Cash provided by operating activities was $1,033 million in the fourth quarter of 2020, an increase of $204 million, largely attributable to • TV net additions were 20,000 in the fourth quarter of 2020, an increase of 5,000, mainly due to a lower customer churn rate other working capital changes, partly offset by increased income tax from strong retention efforts, the success of our bundled product payments and lower EBITDA. • Cash used by investing activities was $2,207 million in the fourth offerings and reduced switching activity due to the pandemic. • Residential voice net losses were limited to 9,000 in the fourth quarter of 2020, an increase of $596 million, primarily attributable to quarter of 2020, representing our lowest fourth quarter net losses increased business acquisitions, including EQ Care and Lionbridge AI. since 2002, as compared to residential voice net losses of 12,000 Capital expenditures were $613 million in the fourth quarter of 2020, in the fourth quarter of 2019. The residential voice subscriber a decrease of $129 million, due to the timing of our fibre build activities, losses continue to reflect the trend of substitution by wireless and efficiencies in our 4G network expenditures, as well as lower invest- internet-based services, partially mitigated by our expanding fibre ments in IT infrastructure and systems development. These decreases footprint and bundled product offerings, as well as our strong were partially offset by increased investments in our 5G network and retention efforts, including lower-priced offerings. investments to support subscriber growth. • Cash provided by financing activities was $1,401 million in the fourth quarter of 2020, an increase of $454 million, primarily reflecting less • Security net additions were 23,000 in the fourth quarter of 2020, an increase of 8,000, driven by strong growth as we continued to keep our customers connected and protected by offering a long-term debt issued, net of redemptions and repayments, and range of installation options, and demand for our bundled shares of a subsidiary issued to non-controlling interests. • Free cash flow was $218 million in the fourth quarter of 2020, an increase of $83 million, largely reflecting lower capital expenditures, partly offset by lower EBITDA attributed to pandemic impacts. • In the fourth quarter of 2020, we had wireless subscriber net additions of 175,000. • Mobile phone gross additions were 374,000 in the fourth quarter of 2020, a decrease of 8,000, as the impacts of the pandemic, including fewer activations from travellers due to border restrictions and customers reducing their general shopping habits in retail outlets since the start of the pandemic, more than offset growth in high-value customer additions, successful promotions and expanded channels. • Our mobile phone churn rate was 1.09% in the fourth quarter of 2020, compared to 1.20% in the fourth quarter of 2019. The decrease reflects the impacts of the pandemic, including changing customer behaviour due to travel restrictions and customers reducing their general shopping habits in retail outlets. This was in addition to the utilization of our TELUS Easy Payment device financing program, Peace of Mind endless data plans, Bring-It-Back and TELUS Family Discount offerings, as well as our focus on executing customers first initiatives and retention programs, and our leading network quality. • Mobile phone net additions were 87,000 in the fourth quarter of 2020, reflecting an increase of 17,000 compared to the prior year as strong execution in our digital sales channels, successful efforts to drive high-value customer additions and lower mobile churn more than offset the impacts of the pandemic. • Mobile connected device net additions were 88,000 in the fourth quarter of 2020, reflecting an increase of 28,000 due to increased product offerings. 5.3 Consolidated operations The following is a discussion of our consolidated financial performance. Segment information in Note 5 of the Consolidated financial statements is regularly reported to our CEO. We discuss the performance of our segments in Section 5.4 Wireless segment and Section 5.5 Wireline segment. Refer to Section 1.2 for further discussion of the COVID-19 pandemic and its impacts on our consolidated operations. Operating revenues and Other income ($ millions) 2020 2019 2018 15,463 14,658 14,368 Operating revenues and Other income Years ended December 31 ($ in millions) 2020 2019 Change Operating revenues Service Equipment Operating revenues (arising from contracts with customers) Other income 13,277 2,064 15,341 122 12,400 2,189 7.1% (5.7)% 14,589 5.2% 69 76.8% Operating revenues and Other income 15,463 14,658 5.5% demand for IoT solutions, partly offset by lower tablet net additions. • In the fourth quarter of 2020, we had wireline subscriber connection net additions of 78,000. • Internet net additions were 44,000 in the fourth quarter of 2020, an increase of 16,000, reflecting continued net new demand from consumers and businesses for our TELUS PureFibre service as we continued to keep our customers connected through a range of installation options, as well as lower customer churn resulting from our customers first initiatives and retention programs, Consolidated Operating revenues and Other income increased by $805 million in 2020. • Service revenues increased by $877 million in 2020, reflecting growth in wireline data services revenues resulting from business acquisitions, expanded services and subscriber base growth, including from TI, as well as growth in our wireless subscriber base, partly offset by the impacts of the COVID-19 pandemic in both the wireless and wireline segments, and continued declines in wireline legacy voice and legacy data service revenues. TELUS 2020 ANNUAL REPORT • 69 • Equipment revenues decreased by $125 million in 2020, reflecting the impacts of the pandemic, including the temporary closure of a significant number of sales channels from March 2020 through the majority of the second quarter of 2020, as well as customers reducing their general shopping habits in retail outlets since the beginning Operating income Years ended December 31 ($ in millions) Wireless EBITDA1 (see Section 5.4) Wireline EBITDA1 (see Section 5.5) of the pandemic, along with mandated capacity restrictions, which EBITDA1 resulted in lower wireless contracted volumes and accessory sales. Depreciation and amortization Device financing programs, which provide transparency of full device (discussed above) costs resulting in customers deferring device upgrade purchases, Operating income 2020 3,642 1,852 5,494 2019 Change 3,693 1,861 5,554 (1.4)% (0.5)% (1.1)% (3,012) 2,482 (2,577) 16.9% 2,977 (16.6)% also contributed to the decrease. These impacts were partly offset by higher-value smartphones in the sales mix for both gross adds and 1 See Section 11.1 Non-GAAP and other financial measures. retention units. • Other income increased by $53 million in 2020, largely related to increased net gains resulting from a decrease and subsequent Operating income decreased by $495 million in 2020, while EBITDA decreased by $60 million in 2020. Excluding the second quarter 2020 effects of a gain on a retirement of a provision arising from business retirement of provisions arising from business acquisition-related acquisition-related written put options of $71 million within TI, Operating written put options within TI, partly offset by higher other equity income decreased by $566 million in 2020, while EBITDA decreased by losses related to real estate joint ventures. Operating expenses Years ended December 31 ($ in millions) Goods and services purchased Employee benefits expense Depreciation Amortization of intangible assets 2020 6,268 3,701 2,107 905 2019 Change 6,070 3,034 1,929 648 3.3% 22.0% 9.2% 39.7% 1 1 .1% Operating expenses 12,981 1 1 ,681 Consolidated operating expenses increased by $1,300 million in 2020. • Goods and services purchased increased by $198 million in 2020 due to higher operating and administrative costs associated with $131 million in 2020. These declines reflect the impacts of the COVID-19 pandemic, including: (i) the decline in roaming revenues attributable to travel restrictions; (ii) the temporary closure of approximately 90% of our retail stores from March through most of the second quarter, as well as custom- ers reducing their shopping habits in retail outlets since the beginning of the pandemic, along with mandated capacity restrictions; (iii) lower revenue from our business customers as they redeploy their resources; (iv) the temporary disruptions to our TI business due to government-mandated site closures; (v) the temporary closure of our TELUS Health Care Centres and reduced health benefit claims processing; (vi) increases to our bad debt expense; (vii) higher non-labour-related restructuring and other costs; and (viii) an increase in deferred vacation related to the pandemic. EBITDA also declined from lower wireline legacy voice and legacy business acquisitions, in addition to supporting organic TI revenue data services, higher non-labour-related restructuring and other costs growth, higher non-labour restructuring and other costs related related to efficiency initiatives, higher employee benefits expense and to the pandemic, higher product costs in support of our growing other costs, including support for business acquisitions, and other equity wireline subscriber base, and increases to our bad debt expense. losses related to real estate joint ventures. EBITDA declines were partly These increases were partly offset by enhanced cost-savings offset by growth in wireline data service margins resulting from business initiatives in response to the economic impacts of the COVID-19 acquisitions, expanded services and subscriber base growth, growth in pandemic and lower wireless equipment expenses from lower our wireless subscriber base, an increased contribution from our organic contracted volumes and accessory sales, which were moderated and inorganic TI business, enhanced cost efficiency programs, and a by higher-value devices in the sales mix, as described above. • Employee benefits expense increased by $667 million in 2020, largely due to higher compensation and benefit costs resulting from an increase in the number of employees related to business acqui- sitions; higher offshore FTEs supporting organic TI revenue growth; compensation increases; and an increase in deferred vacation related to the pandemic. These employee benefits expense increases were partly offset by a decrease in the number of domestic FTEs, excluding business acquisitions, lower labour-related restructuring and other costs and higher capitalized labour costs. • Depreciation increased by $178 million in 2020, primarily due to growth in capital assets over the past 12 months, including our expanded broadband footprint and business acquisitions, partly offset by the impact of our continuing program of asset life studies. • Amortization of intangible assets increased by $257 million in 2020 arising from business acquisitions and higher expenditures associated with the intangible asset base over the past 12 months, including customer experience service delivery systems. decrease and subsequent retirement of a provision arising from business acquisition-related written put options within TI. Adjusted EBITDA Years ended December 31 ($ in millions) 2020 2019 Change Wireless Adjusted EBITDA1 (see Section 5.4) Wireline Adjusted EBITDA1 (see Section 5.5) Adjusted EBITDA1 3,689 3,728 (1.0)% 2,012 5,701 1,965 5,693 2.3% 0.2% 1 See Section 11.1 Non-GAAP and other financial measures. Adjusted EBITDA increased by $8 million or 0.2% in 2020, reflecting: growth in wireline data service margins resulting from business acqui- sitions, expanded services, and subscriber base growth; growth in our wireless subscriber base; an increased organic and inorganic contribution from TI; enhanced cost efficiency programs; and a greater decrease in a provision arising from business acquisition-related written put options within TI. Adjusted EBITDA growth was mostly offset by the impacts of the COVID-19 pandemic as described above, lower wireline legacy voice and legacy data services, and higher employee benefits expense and other costs including support for business acquisitions. 70 • TELUS 2020 ANNUAL REPORT Financing costs Interest expense ($ millions) Years ended December 31 ($ in millions) 2020 2019 Change MD&A: DISCUSSION OF OPERATIONS Interest on long-term debt, excluding lease liabilities – gross Interest on long-term debt, excluding lease liabilities – capitalized Interest on lease liabilities Interest on short-term borrowings and other Interest accretion on provisions Long-term debt prepayment premium 676 634 6.6% (37) 70 5 16 18 (23) 67 8 22 28 60.9% 4.5% (37.5)% (27.3)% (35.7)% Interest expense 748 736 1.6% 2020 2019 2018 Income taxes Years ended December 31 ($ in millions, except tax rates) Income taxes computed at 74 8 736 659 2020 2019 Change applicable statutory rates (%) 26.1 26.9 (0.8) pts. Employee defined benefit plans net interest Foreign exchange losses Interest income Financing costs 16 14 (7) 1 3 (7) n/m n/m – 771 733 5.2% Other (%) Revaluation of deferred income tax liability to reflect future income tax rates (%) Adjustments recognized in the current period for income taxes of prior periods (%) Effective tax rate (%) Income tax computed at (0.4) (5.5) 5.1 pts. (1.3) 1.9 26.3 (0.8) (0.5) pts. 0.2 1.7 pts. 20.8 5.5 pts. applicable statutory rates 446 604 (26.2)% Revaluation of deferred income tax liability to reflect future income tax rates Adjustments recognized in the current period for income taxes of prior periods Other Income taxes (6) (124) (95.2)% (20) 31 451 (17) 17.6% 5 n/m 468 (3.6)% Total income tax expense decreased by $17 million in 2020. The effective tax rate increased from 20.8 to 26.3% in 2020, predominantly attributable to the prior-year revaluation of the deferred income tax liability for the multi-year reduction in the Alberta provincial corporate tax rate that was substantively enacted in the second quarter of 2019. Comprehensive income ($ millions) 2020 2019 2018 964 1,554 1,908 Comprehensive income Years ended December 31 ($ in millions) Net income Other comprehensive income (net of income taxes): Items that may be subsequently 2020 1,260 2019 Change 1,776 (29.1)% reclassified to income 2 104 (98.1)% Items never subsequently reclassified to income Comprehensive income (298) 964 (326) (8.6)% 1,554 (38.0)% Financing costs increased by $38 million in 2020, mainly due to the following factors: • Interest expense increased by $12 million in 2020, resulting from: • Gross interest on long-term debt, excluding lease liabilities, increased by $42 million in 2020, driven by an increase in average long-term debt balances outstanding in part attributable to business acquisitions (including ADT Canada, CCC, Mobile Klinik and AFS Technologies Inc.), partially offset by a decrease in the effective interest rate. Our weighted average interest rate on long- term debt (excluding commercial paper, the revolving component of the TELUS International (Cda) Inc. credit facility, lease liabilities and other long-term debt) was 3.80% at December 31, 2020, compared to 3.94% one year earlier. (See Long-term debt issues, redemptions and repayments in Section 7.4.) • Capitalized long-term debt interest, excluding lease liabilities, is in respect of debt incurred for the purchase of spectrum licences during the 600 MHz wireless spectrum auction held in April 2019 by Innovation, Science and Economic Development Canada (ISED), which we expect to deploy in our existing network in 2021. • Interest accretion on provisions decreased by $6 million due to a decrease in the provision related to written put options in respect of non-controlling interest. • In the second quarter of 2020, we recorded a long-term debt prepayment premium of $18 million before income taxes related to the early redemption of all our $400 million Series CM Notes and all our $500 million Series CO Notes. In the third quarter of 2019, we recorded a long-term debt prepayment premium of $28 million before income taxes related to the early redemption of all our $1.0 billion of senior unsecured 5.05% Notes, Series CH. • Employee defined benefit plans net interest increased by $15 million in 2020, primarily due to the change in the defined benefit plan deficit as at December 31, 2019 to $425 million (net of the plan asset ceiling limit of $121 million), compared to a defined benefit plan surplus of $57 million (net of the plan asset ceiling limit of $263 million) one year earlier, partly offset by a decrease in the discount rate. • Foreign exchange losses have fluctuated, primarily reflecting changes in the value of the Canadian dollar relative to the U.S. dollar. TELUS 2020 ANNUAL REPORT • 71 Comprehensive income decreased by $590 million in 2020, mainly growth has been declining as an increase of higher-value smartphones attributable to lower Net income, in addition to changes in unrealized in the sales mix has been more than offset by a lower volume of new fair value of derivatives classified as cash flow hedges. Items that may contracts due to: (i) the improving quality and increasing cost of popular subsequently be reclassified to income are composed of changes in devices that result in customers deferring upgrades; (ii) the industry the unrealized fair value of derivatives designated as cash flow hedges introduction of device financing programs, which provide transparency and foreign currency translation adjustments arising from translating of full device costs and result in customers deferring device upgrades; financial statements of foreign operations. Items never subsequently and (iii) most recently, the effects of the pandemic on customers, reclassified to income are composed of employee defined benefit plans the industry, our supply chain and methods of distribution, and re-measurement amounts. the Canadian economy. Impacts directly associated with the pandemic, 5.4 Wireless segment +2.5% Mobile phone subscribers 2020: 8,952,000 2019: 8,733,000 −3.4% Mobile phone ABPU 2020: $70.84 2019: $73.37 −0.13 pts. Mobile phone blended churn 2020: 0.95 2019: 1.08 +21.4% Mobile connected device subscribers 2020: 1,796,000 2019: 1,480,000 Wireless trends and seasonality The nature of the COVID-19 pandemic has had significant impacts on our business and the uncertainty of its magnitude, length and the time to recovery are not currently able to be estimated. Therefore, trends identified prior to the first quarter of 2020 and described below may not be indicative of trends effective from the first quarter of 2020 onwards, as the COVID-19 pandemic prevents us and our customers from oper- ating in the normal course of business in certain areas. For example, with government and land border restrictions, consumer and business travel levels are uncertain. As well, our business customers who use our wireless services are faced with reduced and/or closed operations. Refer to Section 1.2 for further discussion of the COVID-19 pandemic and its impacts on our wireless operations. The historical trend over the past eight quarters in wireless network revenue reflects growth in our subscriber base, partly offset by declines in chargeable data usage revenue, and more recently, the effects of the pandemic on reduced roaming revenue. Equipment revenue such as the reduction of roaming revenue, a portion of the decline in churn, and lower gross and net addition volumes, may be temporary in nature and have the potential to return to pre-pandemic levels once the pandemic has subsided or ended. The general trend of year-over- year increases in mobile phone subscriber net additions resulted from: (i) the success of our promotions and the leveraging of our digital sales channels; (ii) the effects of market growth arising from a growing population, changing population demographics and an increasing number of customers with multiple devices; (iii) continuous improve- ments in the speed and quality of our network, combined with our low churn rate, which reflects our focus on customers first initiatives, and more recently, reduced switching activity between carriers due to the pandemic; and (iv) customer behaviour of using additional devices while travelling, however, this trend has been altered by the pandemic. Our capital expenditures on network improvements increase capacity and coverage, allowing us to grow revenue through net additions of wireless subscribers. Prior to the pandemic, mobile phone ABPU growth had been moderating, primarily due to: (i) carriers offering larger allotments of data, as well as rate plans that include plans with bonus data and unlimited data plans, data sharing and, prior to the pandemic and the significant impact to travel, international roaming features; and (ii) consumer behavioural response to more frequent customer data usage notifications and offloading of data traffic to increasingly available Wi-Fi hotspots; partly offset by (iii) an increased mix of higher-value rate plans, in addition to an increase in higher-value smartphones in the sales mix, including the effects of customers financing more of the cost of these devices through our TELUS Easy Payment program, launched in the third quarter of 2019, and an increased proportion of higher-value customers in the subscriber mix. As a result of changing industry dynamics, customers have been able to gain access to higher network speeds and larger allotments of data included for a given price point, further limiting mobile phone ABPU expansion, as customers are continuing to obtain plans with a lower cost per megabyte. The trend of our comparatively low mobile phone blended churn rate reflects our customers first efforts, retention programs and our focus on building, maintaining and enhancing our high-quality network. Additionally, the pandemic has caused customers to change their behaviour, such as making fewer visits to retail outlets, thereby reducing churn. Our connected device subscriber base has been growing primarily as a result of our expanded Internet of Things (IoT) offerings, partly offset by our strategic decision to reduce loading of low or negative- margin tablets. 72 • TELUS 2020 ANNUAL REPORT Wireless operating indicators As at December 31 Subscribers1 (000s): Mobile phones Mobile connected devices Total LTE population coverage2 (millions) 5G population coverage2 (millions) 2020 2019 Change 8,952 1,796 8,733 1,480 10,748 10,213 37.0 10.5 36.9 – 2.5% 21.4% 5.2% 0.3% n/m Years ended December 31 2020 2019 Change Mobile phones gross additions (000s): 1,277 1,375 (7.1)% Subscriber net additions (000s): Mobile phones Mobile connected devices Total Mobile phones ABPU, per month3 ($) Mobile phones ARPU, per month3 ($) Mobile phones churn, per month3 (%) 280 257 537 70.84 57.81 0.95 274 263 537 73.37 60.14 2.2% (2.3)% – (3.4)% (3.9)% 1.08 (0.13) pts. 1 Effective January 1, 2020 on a prospective basis, as a result of subscribers substantially loaded prior to 2019 and were identified as having limited or no cellular voice capability through an in-depth review of our mobile phone subscriber base, we made an adjustment to transfer approximately 60,000 mobile phone subscribers to our mobile connected devices subscriber base. Including network access agreements with other Canadian carriers. 2 3 See Section 11.2 Operating indicators. These are industry measures useful in assessing operating performance of a wireless company, but are not measures defined under IFRS-IASB. Operating revenues and Other income – Wireless segment Years ended December 31 ($ in millions) Network revenue Equipment and other service revenues 2020 6,030 1,875 2019 Change 6,124 2,005 (1.5)% (6.5)% MD&A: DISCUSSION OF OPERATIONS Mobile phone ABPU was $70.84 in 2020, a decrease of $2.53 or 3.4%. This decrease reflects the impacts caused by the COVID-19 pandemic including: (i) significantly reduced roaming revenue from changing cus- tomer behaviour related to travel restrictions; (ii) the temporary closure of approximately 90% of our retail stores from March 2020 through most of the second quarter, as well as customers reducing their general shop- ping habits in retail outlets since the start of the pandemic, along with mandated capacity restrictions, which hindered customer opportunities for device upgrades and the upgrade or selection of higher-tier plans; and (iii) decreases in chargeable data usage, as more people work from home and offload their mobile device traffic onto Wi-Fi networks. Mobile phone ABPU was also impacted by continued declines in chargeable data usage and the impact of the competitive environment putting pressure on base rate plan prices in the current and prior periods. The decline in mobile phone ABPU was partly offset by growth resulting from our combined TELUS Easy Payment device financing, Peace of Mind endless data plans and TELUS Family Discount offerings, with customers selecting plans with endless data or larger data buckets, and higher-value smartphones in the sales mix in the current and prior periods. Mobile phone ARPU was $57.81 in 2020, a decrease of $2.33 or 3.9%. Mobile phone ARPU was impacted by the same items noted above for mobile phone ABPU, with the exception of: (i) our TELUS Easy Payment device financing program; (ii) prior to the launch of TELUS Easy Payment, devices with subsidies; and (iii) contracted device upgrades. • Mobile phone gross additions were 1,277,000 in 2020, a decrease of 98,000, as the impacts of the pandemic, including fewer activations from travellers due to border restrictions, the temporary closure of approximately 90% of our retail stores from March 2020 through most of the second quarter, and customers reducing their general shopping habits in retail outlets since the start of the pandemic, along with mandated capacity restrictions, more than offset growth in high-value customer additions, successful promotions and expanded channels. Operating revenues (arising from contracts with customers) 7,905 8,129 (2.8)% During the year, as we adapted to various public health restrictions to Other income 9 20 (55.0)% ensure the safety of our customers and team members by not having External Operating revenues and Other income Intersegment revenues Wireless Operating revenues 7,914 60 8,149 (2.9)% 53 13.2% and Other income 7,974 8,202 (2.8)% Wireless Operating revenues and Other income decreased by $228 million in 2020. them enter a physical premises, we successfully executed our customers first initiatives including the enhanced capabilities of our digital footprint. • Our mobile phone churn rate was 0.95% in 2020, compared to 1.08% in 2019. The decrease reflects the impacts of the pandemic, including changing customer behaviour due to travel restrictions, reduced switching activity between carriers due to the temporary closure of approximately 90% of our retail stores from March 2020 through most of the second quarter, and customers reducing their general shopping habits in retail outlets since the start of the pandemic, along with man- Wireless network revenue ($ millions) dated capacity restrictions. This was in addition to the utilization of our 2020 2019 2018 6,030 6,124 6,025 TELUS Easy Payment device financing program, Peace of Mind endless data plans, Bring-It-Back and TELUS Family Discount offerings, our successful bundling of mobility and home services, and our focus on executing customers first initiatives and retention programs, as well as our leading network quality. • Mobile phone net additions were 280,000 in 2020, an increase of 6,000 compared to the prior year as our strong execution in our digital Network revenue decreased by $94 million or 1.5% in 2020, due to declin- ing mobile phone ARPU primarily from reduced roaming related to travel restrictions and chargeable data usage revenue, as discussed below, partly offset by growth of 5.2% in the subscriber base over the past 12 months, sales channels, successful efforts to drive high-value customer addi- tions and lower churn more than offset the impacts of the pandemic. • Mobile connected device net additions were 257,000 in 2020, inclusive of approximately 40,000 tablet net losses in 2020 and in addition to growth in monthly recurring charges reflecting a greater mix reflecting a decrease of 6,000, primarily due to higher tablet net of high-value customer additions and selection of higher-tier plans. losses, partly offset by increased demand for IoT solutions. TELUS 2020 ANNUAL REPORT • 73 Subscriber loading results discussed above were impacted at times cost efficiency programs, including the suspension of corporate travel throughout 2020 by the COVID-19 pandemic and by the restrictions put and lower external labour costs. Higher costs related to the scaling in place to protect our customers and team members, including the tem- of our digital capabilities also contributed to this increase. porary closure of certain stores in shopping malls and other retail outlets. Our digital sales channels are well equipped to handle the additional traffic left unaddressed by physical sales. Employee benefits expense decreased by $31 million in 2020, primarily due to increased capitalized labour costs, lower labour-related restructur- ing and other costs and the Canada Emergency Wage Subsidy (CEWS) Equipment and other service revenues decreased by $130 million in 2020, reflecting the impacts of the pandemic, including the temporary program, a federal government initiative offered to eligible employers during the COVID-19 pandemic. These factors were partly offset by an closure of approximately 90% of our retail stores from March 2020 increase in deferred vacation related to the pandemic, and compensation through most of the second quarter, and customers reducing their general increases committed prior to the declaration of the pandemic. shopping habits in retail outlets since the start of the pandemic, which resulted in lower contracted volume and accessory sales. Device finan- cing programs, which provide transparency of full device costs resulting in customers deferring device upgrade purchases, also contributed to the decrease, predominantly in the first half of the year. These impacts were partly offset by higher-value smartphones in the sales mix for gross adds and retention units. Other income decreased by $11 million in 2020, attributable to higher other equity losses related to real estate joint ventures and lower net gains from the sale of certain assets. Intersegment revenues represent network services that are eliminated upon consolidation, along with the associated wireline expenses. Operating expenses – Wireless segment Years ended December 31 ($ in millions) 2020 2019 Change Goods and services purchased: Equipment sales expenses 1,800 1,959 Network operating expenses Marketing expenses Other1 Employee benefits expense1 787 343 768 634 789 394 702 665 (8.1)% (0.3)% (12.9)% 9.4% (4.7)% Wireless operating expenses 4,332 4,509 (3.9)% 1 Includes restructuring and other costs. See Section 11.1 Non-GAAP and other financial measures. Wireless operating expenses decreased by $177 million in 2020. Equipment sales expenses decreased by $159 million in 2020, largely due to lower contracted volumes and accessory sales, partly offset by higher-value devices in the sales mix, as discussed above. EBITDA – Wireless segment Years ended December 31 ($ in millions, except margins) EBITDA1 Add restructuring and other costs included in EBITDA Add other equity losses related to real estate joint ventures Adjusted EBITDA1 EBITDA margin1 (%) Adjusted EBITDA margin1,2 (%) 2020 3,642 2019 Change 3,693 (1.4)% 38 9 32 3 n/m n/m 3,689 3,728 (1.0)% 45.7 46.2 45.0 45.4 0.7 pts. 0.8 pts. 1 See description under EBITDA in Section 11.1 Non-GAAP and other financial measures. 2 Adjusted EBITDA margin is Adjusted EBITDA divided by Operating revenues and Other income, where the calculation of Operating revenues and Other income excludes other equity losses related to real estate joint ventures. Wireless EBITDA decreased by $51 million or 1.4% in 2020. Wireless Adjusted EBITDA decreased by $39 million or 1.0%, reflecting the impacts of the COVID-19 pandemic, including lower roaming revenue resulting from restricted travel, the temporary closure of approximately 90% of our retail stores from March through most of the second quarter, customers reducing their general shopping habits in retail outlets since the begin- ning of the pandemic, along with mandated capacity restrictions, and decreases in chargeable usage as more people work from home and offload their mobile device traffic onto Wi-Fi networks. This was partially offset by higher equipment margins, enhanced cost efficiency programs, and increases in our subscriber base. Wireless EBITDA – excluding restructuring and other costs Network operating expenses decreased by $2 million in 2020, mainly due to increased costs resulting from our larger subscriber base and increased expenses related to the Canadian Radio-television and Telecommunications Commission (CRTC) Broadband Fund, partly offset by network site utilities savings and lower roaming expense resulting 2020 2019 2018 from decreased travel. ($ millions) 3,680 3,725 3,546 Marketing expenses decreased by $51 million in 2020, driven by lower commissions expense associated with lower volumes and an increased mix of digital sales, as well as a reduction in advertising and promotional activities in response to the pandemic. Other goods and services purchased increased by $66 million in 2020, primarily as a result of the economic impacts and response to the COVID-19 pandemic, including higher bad debt expense and non- labour-related restructuring and other costs, partly offset by enhanced Wireless Adjusted EBITDA ($ millions) 2020 2019 2018 3,689 3,728 3,461 74 • TELUS 2020 ANNUAL REPORT 5.5 Wireline segment +46.7% Internet subscriber net additions 2020: 157,000 2019: 107,000 −17.9% TV subscriber net additions 2020: 55,000 2019: 67,000 +47.8% Security subscriber net additions 2020: 68,000 2019: 46,000 +36.4% Total wireline subscriber net additions 2020: 240,000 2019: 176,000 Wireline trends The nature of the COVID-19 pandemic has had significant impacts on our business and the uncertainty of its magnitude, length and the time to recovery are not currently able to be estimated. Therefore, trends identified prior to the first quarter of 2020 and described below may not be indicative of trends effective from the first quarter of 2020 onwards, as the COVID-19 pandemic prevents us and our customers from oper- ating in the normal course of business in certain areas. For example, the COVID-19 pandemic has constrained our ability to complete instal- lations in the traditional manner. As well, our business customers are faced with reduced and/or closed operations. Refer to Section 1.2 for further discussion of the COVID-19 pandemic and its impacts on our wireline operations. The trend over the plast eight quarters of increases in wireline service revenue reflects growth in internet and third wave data services, TI revenues, TV revenues, health revenues, and home and business smart technology (including security and agriculture) revenues, and is partly offset by declining wireline legacy voice and legacy data revenues, as well as pandemic impacts such as the temporary closure of TELUS Health Care Centres and the centres being unable to offer their full suite of core services upon re-opening. The trend of increased TI revenues reflects growth in both business volumes from external customers and internal services provided to the wireless segment. Our business MD&A: DISCUSSION OF OPERATIONS TV service revenues are being generated by subscriber growth and higher internet revenue per customer resulting from upgrades to faster speeds, larger data usage rate plans, diverse bundled product offerings, and the ongoing expansion of our fibre footprint. We expect ongoing internet subscriber base growth as we continue our investments in expanding our fibre-optic infrastructure, supplemented with our low customer churn rate. The total number of TV subscribers has increased (in contrast to market-reported declines in traditional tele- vision viewing habits) as a result of stable net additions in response to our diverse and flexible product offerings, combined with our low customer churn rate. Security subscriber base growth is increasing as a result of business acquisitions and organic growth. The COVID-19 pandemic and physical distancing requirements impacted security installations as access to homes and businesses was restricted; however, this was partly miti- gated as we adapted our processes for keeping our customers connected and protected by offering a range of installation options, including virtually. Wireline growth has also been attributed to the adoption of the TELUS Whole Home bundle and bundling of our mobility and home services to meet the demand of multiple services per home where adoption increases our services per home and possibly impacts churn for most products. Residential voice subscriber losses continue to reflect the ongoing trend of substitution by wireless and internet-based services, but were partly miti- gated by the success of our bundled service offerings and lower-priced offerings. The trend of declining legacy wireline voice revenues is due to technological substitution, greater use of inclusive long distance coupled with lower long distance minutes used, and intensification of competition in the small and medium-sized business market; however, our rate of decline has been moderating with our utilization of bundled product offerings and successful retention efforts. The migration of business product and service offerings to IP services and the introduction of new competitors have yielded inherently lower margins compared to some legacy business product and service offerings; however, we are continually refining and diversifying our innovative suite of business offerings, including our Software as a Service (SaaS)-based solutions. Wireline operating indicators At December 31 (000s) 2020 2019 Change Subscriber connections: Internet TV Residential voice Security1 Total wireline subscriber connections1 2,138 1,215 1,164 707 5,224 1,981 1,160 1,204 7.9% 4.7% (3.3)% 608 16.3% 4,953 5.5% Years ended December 31 (000s) 2020 2019 Change Subscriber connection net additions (losses): smart technology (including agriculture) offers the ability to improve the efficient production, transportation, quality and safety of food by Internet TV leveraging our technology innovation, while also driving strong financial Residential voice and operating performance. As well, increased wireline data services Security 157 55 (40) 68 107 67 (44) 46 46.7% (17.9)% 9.1% 47.8% revenues reflect revenues from business acquisitions, including our acquisitions of ADT Canada on November 5, 2019 (where there were significant integration and customer retention costs in 2019 and 2020, which are expected to continue into early 2022, with the full expected operations rate anticipated after that time), and CCC acquired on January 31, 2020. The increases in year-over-year internet and Total wireline subscriber connection net additions 240 176 36.4% 1 December 31, 2019 security subscriber connections have been increased to include approximately 490,000 subscribers related to our acquisition of ADT Canada (acquired on November 5, 2019). During the third quarter of 2020, we adjusted cumulative subscriber connections to add approximately 31,000 subscribers as a result of a business acquisition. TELUS 2020 ANNUAL REPORT • 75 Operating revenues and Other income – Wireline segment decline in residential voice subscribers for the 12-month period 2019 Change ended December 31, 2019. Years ended December 31 ($ in millions) Data services Voice services Other services and equipment Operating revenues (arising from contracts with customers) Other income External Operating revenues and Other income Intersegment revenues Wireline Operating revenues and 2020 6,1 1 1 912 413 7,436 1 1 3 7,549 262 5,080 20.3% 986 394 (7.5)% 4.8% 6,460 15.1% 49 130.6% 6,509 251 16.0% 4.4% Other income 7,81 1 6,760 15.5% Wireline Operating revenues and Other income increased by $1,051 million in 2020. Wireline external Operating revenues and Other income 2020 2019 2018 ($ millions) 7, 549 6,509 6,233 • Data services revenues increased by $1,031 million in 2020. The increase was driven by: (i) growth in TI revenues primarily driven by the acquisition of CCC, growth in business volumes resulting from expanded services for existing customers and customer growth, partly offset by temporary disruptions due to government-mandated site closures in response to the COVID-19 pandemic; (ii) increased internet and third wave data service revenues, reflecting a 7.9% increase in our internet subscribers over the past 12 months and higher revenue per customer resulting from internet speed upgrades, larger data usage internet rate plans and rate changes, partly offset by ongoing initiatives to assist customers during the pandemic; (iii) increased revenues from home and business smart technology (including security), driven by business acquisitions, including ADT Canada, expanded services and customer growth; (iv) higher TV revenues, reflecting subscriber growth of 4.7% over the past 12 months; and (v) increased revenues from our virtual care solutions. This growth was partly offset by other impacts caused by the pandemic, including a decline in health revenue mainly from the temporary closures of our TELUS Health Care Centres for all non-essential services and reduced health benefit claims, in addition to lower revenue from our business customers as they redeploy their resources. Additionally, data services revenue growth was partially offset by the ongoing decline in legacy data service revenues. • Voice services revenues decreased by $74 million in 2020, reflecting the ongoing decline in legacy voice revenues resulting from techno- logical substitution, greater use of inclusive long distance plans and price plan changes. Declines were moderated with our utilization of bundled product offerings, successful retention efforts and the migration from legacy to IP services offerings, as well as a temporary increase in long distance usage, as customers remained connected during the pandemic. We experienced a 3.3% decline in residential voice subscribers over the past 12 months, compared to a 3.5% • Other services and equipment revenues increased by $19 million in 2020, mainly as a result of smart technology equipment sales primarily attributable to business acquisitions. • Wireline subscriber connection net additions were 240,000 in 2020, an increase of 64,000. • Internet net additions were 157,000 in 2020, an increase of 50,000, reflecting continued net new demand from consumers and businesses for our TELUS PureFibre service as we continued to keep our customers connected through a range of installation options, as well as lower customer churn resulting from our customers first initiatives and retention programs, the success of our bundled product offerings, including the adoption of the TELUS Whole Home bundle and our bundling of mobility and home services, and reduced switching activity between providers due to the COVID-19 pandemic. Our continued focus on connecting more homes and businesses directly to fibre (with TELUS PureFibre available to approximately 81% of our broadband footprint at the end of 2020), expanding and enhan- cing our addressable high-speed internet and Optik TV footprint, and bundling these services together, contributed to combined internet, TV and security subscriber growth of 212,000 over the past 12 months. • TV net additions were 55,000 in 2020, a decrease of 12,000, mainly due to lower gross additions as a result of the impact of the pandemic and the changing landscape of increased streaming services, partly offset by a lower customer churn rate from strong retention efforts, the success of our bundled product offerings and reduced switching activity due to the pandemic. • Residential voice net losses were limited to 40,000 in 2020, compared to residential voice net losses of 44,000 in 2019. The residential voice subscriber losses continue to reflect the trend of substitution by wireless and internet-based services, partially mitigated by our expanding fibre footprint and bundled product offerings, as well as our strong retention efforts, including lower-priced offerings. • Security net additions were 68,000 in 2020, an increase of 22,000, driven by strong growth as we continued to keep our customers connected and protected by offering a range of installation options and demand for our bundled product offerings. Subscriber loading results discussed above were impacted at times throughout 2020 by the COVID-19 pandemic and by the restrictions put in place to protect our customers and our team members, including physical distancing, which had impacted our ability to enter homes and businesses to complete installations. Where possible, we have successfully evolved our processes to permit customers to install their own equipment with the support of our technicians via a smartphone. Other income increased $64 million in 2020, primarily due to a decrease and subsequent retirement of a provision arising from business acquisition-related written put options within TI and the reversal of a provision arising from a business combination, partly offset by the non-recurrence of 2019 gains on sale of certain assets and other equity losses related to real estate joint ventures. 76 • TELUS 2020 ANNUAL REPORT MD&A: DISCUSSION OF OPERATIONS Intersegment revenues represent services provided to the wireless segment, including those from TI. Such revenue is eliminated upon Wireline EBITDA decreased by $9 million or 0.5% in 2020. Excluding the second quarter of 2020 effects of a gain on a retirement of a consolidation, together with the associated expenses in wireless. provision arising from business acquisition-related written put options Operating expenses – Wireline segment Years ended December 31 ($ in millions) Goods and services purchased1 Employee benefits expense1 Wireline operating expenses 2020 2,892 3,067 5,959 2019 Change 2,530 2,369 4,899 14.3% 29.5% 21.6% 1 Includes restructuring and other costs. See Section 11.1 Non-GAAP and other financial measures. Wireline operating expenses increased by $1,060 million in 2020. Goods and services purchased increased by $362 million in 2020, mainly due to higher operating and administrative costs associated with business acquisitions, growth in TI revenue, growth in business operations, increases in non-labour related restructuring and other costs related to efficiency initiatives and the COVID-19 pandemic, higher product costs in support of our growing subscriber base, including TV and virtual care health subscribers, increasing rates for TV content and an increase in our bad debt expense resulting from the pandemic. These factors were partly offset by savings achieved from the enhanced cost-savings initiatives in response to the economic impacts of the pandemic and higher capitalized labour costs. Employee benefits expense increased by $698 million in 2020, primarily due to an increase in compensation and benefits costs resulting from an increase in the number of employees related to business acquisitions and supporting organic TI revenue growth, compensation rate increases and an increase in deferred vacation related to the pandemic. These factors were partly offset by lower labour-related restructuring and other costs, and higher capitalized labour costs. within TI of $71 million, wireline EBITDA decreased by $184 million or 9.4% in 2020. Wireline Adjusted EBITDA increased by $47 million or 2.3% in 2020. The increase reflected an increased contribution from TI as a result of the acquisition of CCC and expanded services for existing customers and customer growth; improved internet margins; growth from our home and business smart technology (including security), driven by business acquisitions and expanded services; and savings achieved from the enhanced cost-savings initiatives in response to the economic impacts of the pandemic. These factors were partly offset by COVID-19 pandemic impacts including: (i) the temporary disruption of TI business due to government-mandated site closures, (ii) lower revenue from our business customers as they redeploy their resources, (iii) customers first initiatives including temporary overage waives, (iv) the temporary closures of our TELUS Health Care Centres and reduced health benefit claims from the lingering pandemic impacts on business recovery, which partly offset growth in virtual care solutions, and (v) increased bad debt expense; the continued decline of legacy voice and legacy data services; higher employee benefits expense; and other costs related to business acquisitions and growth in business operations. Wireline EBITDA – excluding restructuring and other costs 2020 2019 2018 ($ millions) 2,073 1,963 1,875 EBITDA – Wireline segment Years ended December 31 ($ in millions, except margins) EBITDA1 Add restructuring and other costs included in EBITDA Add other equity losses related to real estate joint ventures Deduct retirement of a provision arising from business acquisition- related written put options within TI Adjusted EBITDA1 EBITDA margin1 (%) Adjusted EBITDA margin1,2 (%) 2020 1,852 2019 Change 1,861 (0.5)% Wireline Adjusted EBITDA ($ millions) 221 102 10 2 n/m n/m 2020 2019 2018 (71) – n/m 2,012 1,965 2.3% 23.7 26.0 27.5 (3.8) pts. 29.1 (3.1) pts. 2,012 1,965 1,789 See description under EBITDA in Section 11.1 Non-GAAP and other financial measures. 1 2 Adjusted EBITDA margin is Adjusted EBITDA divided by Operating revenues and Other income, where the calculation of Operating revenues and Other income excludes other equity losses related to real estate joint ventures and a retirement of a provision arising from business acquisition-related written put options within TI. TELUS 2020 ANNUAL REPORT • 77 6 Changes in financial position Financial position at December 31 ($ millions) 2020 2019 Change Change includes: Current assets Cash and temporary investments, net 848 535 313 See Section 7 Liquidity and capital resources Accounts receivable 2,355 1,962 393 Increases due to unbilled customer finance receivables from our Bring-It-Back program and TELUS Easy Payment device financing program, as well as an increase driven by the acquisition of Competence Call Center (CCC) and business process optimization receivables, partly offset by the timing of wireless wholesale customer receipts and an increase in our allowance for doubtful accounts Income and other taxes receivable Inventories Contract assets Prepaid expenses 148 407 439 484 127 437 737 547 21 Instalments to date are greater than the expense (30) A decrease in the volume of handsets (298) Refer to description in non-current contract assets (63) A decrease in prepayment of maintenance contracts net of amortization and prepaid rent Current derivative assets 2 8 (6) A decrease in the notional amount of U.S. currency hedging items. Current liabilities Short-term borrowings 100 100 — See Section 7.7 Sale of trade receivables Accounts payable and accrued liabilities 2,962 2,749 213 Income and other taxes payable 135 55 80 Increases in accrued liabilities, payroll and other employee- related liabilities, interest payable and commodity taxes, partly offset by decreases in restricted share units liability and the timing of accounts payable. See Note 23 of the Consolidated financial statements Increase mainly due to the acquisition activity in the period partially offset by instalments to date being greater than the expense Dividends payable 403 352 Advance billings and customer deposits 772 675 51 97 Effects of increases in the dividend rate as well as the number of shares outstanding An increase in advance billings and customer deposits, reflecting increased wireless subscriber growth during the period. See Note 24 of the Consolidated financial statements Provisions 73 288 (215) Current maturities of long-term debt 1,432 1,332 100 A retirement of a written put provision and disbursements exceeding new provisions An increase from reclassification of long-term debt relating to the upcoming 2021 maturity of $175 million of our 10.65% debentures, Series 3, in June 2021, partly offset by a decrease in outstanding commercial paper Current derivative liabilities 32 23 Working capital (Current assets subtracting Current liabilities) (1,226) (1,221) 9 (5) An increase in the notional amount of U.S. currency hedging items. TELUS normally has a negative working capital position. See Financing and capital structure management plans in Section 4.3 and Note 4(c) of the Consolidated financial statements. 78 • TELUS 2020 ANNUAL REPORT Financial position at December 31 ($ millions) 2020 2019 Change Change includes: MD&A: CHANGES IN FINANCIAL POSITION Non-current assets Property, plant and equipment, net 15,014 14,232 782 Intangible assets, net 15,026 12,846 2,180 Goodwill, net 7,235 5,307 1,928 Contract assets 268 328 (60) Other long-term assets 1,106 919 187 See Capital expenditures in Section 7.3 Cash used by investing activities and Depreciation in Section 5.3 Consolidated operations See Capital expenditures in Section 7.3 Cash used by investing activities and Amortization of intangible assets in Section 5.3 Consolidated operations An increase primarily driven by the acquisitions of CCC, Lionbridge AI, AFS Technologies Inc., EQ Care and Mobile Klinik. See Note 18 of the Consolidated financial statements Primarily driven by lower subsidized devices from the introduction of our TELUS Easy Payment device financing program. Additionally, there was a higher proportion of customers who brought their own device, as well as fewer contract additions attributable to the pandemic An increase in unbilled customer finance receivables and portfolio investments partly offset by a decrease in pension assets resulting from financial assumption re-measurements exceeding the effects of pension plan returns greater than the discount rate. See Note 20 of the Consolidated financial statements. Non-current liabilities Provisions 924 590 334 A net increase in asset retirement obligations due to discount rate change and restructuring provisions, combined with increases in business acquisition-related provisions Long-term debt 18,856 17,142 1,714 See Section 7.4 Cash provided by financing activities Other long-term liabilities 1,265 806 459 Deferred income taxes 3,776 3,214 562 An increase in pension liabilities resulting from losses arising from financial assumption re-measurements exceeding the effects of pension plan returns greater than the discount rate, as well as an increase in the nominal amounts of U.S. currency hedging items and an unfavourable change in the spread between the hedging rate and the actual rate at the balance sheet date. See Note 27 of the Consolidated financial statements An overall increase in temporary differences between the accounting and tax basis of assets and liabilities, including those from acquisition activity, partially offset by the decrease in employee benefit plan re-measurements recorded in Other comprehensive income. Owners’ equity Common equity 12,074 10,548 1,526 See Consolidated statements of changes in owners’ equity in the Consolidated financial statements Non-controlling interests 528 1 1 1 417 See Consolidated statements of changes in owners’ equity in the Consolidated financial statements. TELUS 2020 ANNUAL REPORT • 79 7 Liquidity and capital resources This section contains forward-looking statements, including those with respect to our TELUS Corporation Common Share (Common Share) dividend payout ratio and net debt to EBITDA – excluding restructuring and other costs ratio. See Caution regarding forward-looking statements at the beginning of this MD&A. Refer to Section 1.2 for further discussion of the COVID-19 pandemic and its impacts on our liquidity and capital resources. 7.1 Overview Our capital structure financial policies and financing and capital structure management plans are described in Section 4.3. Cash flows Years ended December 31 ($ millions) Cash provided by operating activities Cash used by investing activities Cash provided by financing activities 2020 4,574 (6,165) 1,904 Increase in Cash and temporary investments, net Cash and temporary investments, net, beginning of period Cash and temporary investments, net, end of period 313 535 848 3,927 647 (5,044) (1,121) 1,238 666 121 192 414 121 535 313 7.2 Cash provided by operating activities Analysis of changes in cash provided by operating activities Years ended December 31 ($ millions) 2020 2019 Change Cash provided by operating activities increased by $647 million in 2020. • Restructuring and other costs, net of disbursements, represented a net change of $71 million in 2020. We incurred lower restructuring and other costs disbursements net of expense, related to improving our overall cost structure and operational effectiveness, as well 2019 Change as incurring restructuring and other costs related to the COVID-19 pandemic. Additionally, we incurred restructuring and other costs in connection with our acquisitions of Competence Call Center (CCC) and Lionbridge AI. • Interest paid, net of interest received, increased by $20 million in 2020, largely due to an increase in the average long-term debt balance, which was partially offset by a lower weighted-average interest rate on long-term debt and a lower long-term debt prepayment premium. • Income taxes paid, net of recoveries received, decreased by $214 million in 2020, primarily due to a final income tax payment of $270 million in the first quarter of 2019 for the 2018 income tax year, which did not recur in 2020. • For a discussion of Other operating working capital changes, see Section 6 Changes in financial position and Note 31(a) of the Consolidated financial statements. EBITDA1 (see Section 5.4 and Section 5.5) Restructuring and other costs, net of disbursements Employee defined benefit plans expense, net of employer contributions Share-based compensation expense, net of payments Interest paid, net of interest received Income taxes paid, net of recoveries received Other operating working capital changes Cash provided by operating activities 5,494 5,554 (60) Cash provided by operating activities ($ millions) 35 (36) 71 2020 2019 2018 51 27 37 (2) 14 29 Cash used by investing activities (727) (707) (20) (430) (644) 214 124 (275) 399 2020 2019 2018 4,574 3,927 647 4,574 3,927 4,058 ($ millions) 6,165 5,044 2,977 1 See description under EBITDA in Section 11.1 Non-GAAP and other financial measures. 80 • TELUS 2020 ANNUAL REPORT 7.3 Cash used by investing activities Analysis of changes in cash used by investing activities Years ended December 31 ($ millions) 2020 2019 Change Cash payments for capital assets, excluding spectrum licences Cash payments for spectrum licences (2,822) – (2,952) (942) 130 942 Cash payments for acquisitions, net (3,205) (1,105) (2,100) Capital expenditures (excluding spectrum licences) 2020 2019 2018 Advances to, and investment in, real estate joint ventures and associate, net of real estate joint venture receipts Proceeds on disposition Investment in portfolio investments (95) 86 (28) 16 (67) 70 and other (129) (33) (96) Capital expenditure measures Years ended December 31 ($ millions, except capital intensity) Capital expenditures1 Wireless segment Wireline segment Cash used by investing activities (6,165) (5,044) (1,121) Consolidated MD&A: LIQUIDITY AND CAPITAL RESOURCES ($ millions) 2,775 2,906 2,914 2020 2019 Change 810 1,965 2,775 889 2,017 2,906 (8.9)% (2.6)% (4.5)% 10 25 18 1 1 (1) pt. 30 (5) pts. 20 (2) pts. Cash used by investing activities increased by $1,121 million in 2020. • The decrease in Cash payments for capital assets, excluding spectrum licences in 2020 was primarily composed of: • A decrease in capital expenditures of $131 million (see Capital expenditure measures table and discussion below). • Higher capital expenditure payments with respect to payment timing differences, as the change in associated Accounts payable and accrued liabilities decreased by $19 million. • Cash payments for spectrum licences in the second quarter of 2019 relate to the 600 MHz spectrum auction. • In 2020, we made cash payments for multiple business acquisitions, including CCC, Mobile Klinik, AFS Technologies Inc. (AFS), EQ Care and Lionbridge AI, all as noted in Section 1.3, and other individually immaterial acquisitions complementary to our existing lines of business. This is compared to business acquisition activity in 2019 that included the acquisition of a company providing managed network, cloud, security and voice services, a company providing custom data and program management solutions, ADT Security Services Canada, Inc. (ADT Canada) and other individually immaterial acquisitions complementary to our existing lines of business. • Advances to, and investment in, real estate joint ventures and associate, net of real estate joint venture receipts increased by $67 million in 2020, predominantly related to our acquisition of a 28% basic equity interest in Miovision Technologies Incorporated. • Proceeds on disposition increased by $70 million in 2020, primarily attributed to the sale of certain assets. • Investment in portfolio investments and other increased by $96 million in 2020, and was related to strategic portfolio investments that have the potential to drive significant growth, impact and scale in product development and customer service opportunities. Wireless segment capital expenditure intensity (%) Wireline segment capital expenditure intensity (%) Consolidated capital expenditure intensity2 (%) 1 Capital expenditures include assets purchased, excluding right-of-use lease assets, but not yet paid for, and therefore differ from Cash payments for capital assets, excluding spectrum licences, as reported in the Consolidated statements of cash flows. Refer to Note 31 of the Consolidated financial statements for further information. 2 See Section 11.1 Non-GAAP and other financial measures. Consolidated capital expenditures decreased by $131 million in 2020, due to the timing of our fibre build activities and efficiencies in our 4G network expenditures. These decreases were partially offset by increased investments in our 5G network, higher capital expenditures to support subscriber growth and additional investments to increase system capacity and reliability during the pandemic. With our ongoing investments, we are advancing wireless speeds and coverage that enabled our 5G network launch, continuing to connect additional homes and businesses directly to our fibre-optic technology, and supporting systems reliability and operational efficiency and effectiveness efforts. These investments also support our internet, TV and security subscriber growth, address our customers’ demand for faster internet speeds, and extend the reach and functionality of our business, healthcare and agriculture solutions. By December 31, 2020, we had made TELUS PureFibre available to approximately 81% of our broadband footprint. Furthermore, at December 31, 2020, our 5G network covered more than 10.5 million Canadians, representing over 28% of the population in more than 75 communities. TELUS 2020 ANNUAL REPORT • 81 7.4 Cash provided by financing activities Analysis of changes in cash provided by financing activities Years ended December 31 ($ millions) Common Shares issued Dividends paid to holders of Common Shares Issue (repayment) of short-term 2020 1,495 2019 Change – 1,495 (930) (1,149) 219 Issue (repayment) of short-term borrowings, net In the first quarter of 2020, we drew down and repaid $200 million advanced to us from an arm’s-length securitization trust. In the third quarter of 2020, we issued short-term borrowings of $15 million and repaid $8 million in connection with business combination activity. In the fourth quarter of 2020, TELUS International (Cda) Inc. (TELUS International or TI) repaid its swingline draw of US$11 million. borrowings, net (8) (1) (7) Long-term debt issued, net of Long-term debt issues, redemptions and repayment In 2020, long-term debt redemptions and repayment, net of issues, redemptions and repayment 1,019 2,444 (1,425) were $1,019 million, a change of $1,425 million compared to long-term Shares of subsidiary issued to non-controlling interests Other 400 (72) (9) (47) Cash provided by financing activities 1,904 1,238 debt issues, net of redemptions and repayment, of $2,444 million in 409 (25) 666 2019, primarily composed of: • A net decrease in commercial paper outstanding, including foreign exchange effects, of $284 million to a balance of $731 million Cash provided by financing activities increased by $666 million in 2020. Dividends paid to holders of Common Shares ($ millions) 2020 2019 2018 930 1,149 1,141 Common Shares issued Common Shares issued reflect 57.5 million Common Shares issued in (US$574 million) at December 31, 2020, from a balance of $1,015 million (US$781 million) at December 31, 2019. Our commercial paper pro- gram, when utilized, provides low-cost funds and is fully backstopped by the revolving credit facility (see Section 7.6 Credit facilities). • An increase in net draws on the TELUS International (Cda) Inc. credit facility (TI credit facility), including foreign exchange effects, of $1,373 million. As at December 31, 2020, net draws due to a syndicate of financial institutions (excluding TELUS Corporation) were US$1,428 million, whereas as at December 31, 2019, net draws were US$336 million. The increase in net draws on the TI credit facility was used to fund the acquisitions of CCC and Lionbridge AI. As set out in Note 28(d) of the Consolidated financial statements, in February 2021, TELUS International made an initial public offering the first quarter of 2020, as described in Section 1.3 Equity offering. (IPO) of subordinate voting shares (TI Subordinate Voting Shares); Dividends paid to holders of Common Shares Our dividend reinvestment and share purchase (DRISP) plan trustee acquired shares from Treasury for the DRISP plan, rather than acquiring Common Shares in the stock market. Effective with the dividends paid on October 1, 2019, we offered Common Shares from Treasury at a discount of 2%. Cash payments for dividends decreased by $219 million in 2020, which reflected the DRISP plan trustee acquiring an increased number of Common Shares from Treasury for the DRISP plan. This was partly offset by an increase in the number of shares outstanding and higher dividend rates under our dividend growth program (see Section 4.3). During 2020, our DRISP plan trustee acquired Common Shares for $539 million. In January 2021, we paid dividends of $251 million to the holders of Common Shares and the trustee acquired dividend reinvestment Common Shares from Treasury for $152 million, totalling $403 million. both TELUS Corporation and a TELUS International non-controlling shareholder individually also offered TI Subordinate Voting Shares in conjunction with the IPO. Through February 11, 2021, net proceeds of approximately $0.6 billion (US$0.5 billion) from the offering were used to reduce the amount of outstanding TI credit facility indebted- ness. The TI credit facility is non-recourse to TELUS Corporation. • The May 29, 2020 issues of $600 million of senior unsecured 2.35% Notes, Series CAC, due January 27, 2028, and $400 million through the re-opening of the 3.95% Notes, Series CAB, due February 16, 2050. The net proceeds of this offering were used for the early full redemption of $400 million 3.60% Notes, Series CM, due January 26, 2021, and the early full redemption of $500 million 3.20% Notes, Series CO, due April 5, 2021, and for general corporate purposes. The long-term debt prepayment premium for the entire $400 million Series CM and $500 million Series CO notes redemp- tions was $18 million before income taxes. • The October 5, 2020 issue of $500 million of senior unsecured 2.05% Notes, Series CAD, due October 7, 2030. The net proceeds of this offering were used for general corporate purposes, including investing in our broadband network and other capital investment consistent with our growth strategy, and repayment of commercial paper. • In connection with our acquisitions of CCC and AFS, we repaid other long-term debt acquired of $185 million and $118 million, respectively. 82 • TELUS 2020 ANNUAL REPORT MD&A: LIQUIDITY AND CAPITAL RESOURCES In comparison, in 2019, long-term debt issues, net of redemptions and repayment, were $2,444 million and were primarily composed of: • A net increase in commercial paper outstanding, including foreign exchange effects, of $241 million from a balance of $774 million (US$569 million) at December 31, 2018. • An increase in net draws on the TI credit facility, including foreign exchange effects, of $12 million. As at December 31, 2018, net draws were US$313 million. • The April 3, 2019 issue of $1.0 billion of senior unsecured 3.30% Notes, Series CY, due May 2, 2029. • The May 28, 2019 issue of US$500 million of senior unsecured 4.30% Notes, due June 15, 2049. • The July 2, 2019 issue of $800 million of senior unsecured 2.75% 7.5 Liquidity and capital resource measures Net debt was $19.8 billion at December 31, 2020, an increase of $1.6 billion compared to one year earlier, resulting mainly from an increase in net draws due to a syndicate of financial institutions (excluding TELUS Corporation) on the TI credit facility, the May 2020 issuances of $600 million of Series CAC notes and the re-opening of $400 million of Series CAB notes, and the October 2020 issuance of $500 million of Series CAD notes, all as described in Section 7.4. These factors were partially offset by the early redemptions of Series CM notes and Series CO notes described in Section 7.4, a decrease in commercial paper outstanding and higher Cash and temporary investments. Notes, Series CZ, due July 8, 2026. • The December 16, 2019 issues of $600 million of senior unsecured 3.15% Notes, Series CAA, due February 19, 2030 and $400 million of Fixed-rate debt as a proportion of total indebtedness excludes lease lia- bilities and other long-term debt, and was 89% as at December 31, 2020, down from 92% one year earlier, mainly due to: (i) an increase in net draws senior unsecured 3.95% Notes, Series CAB, due February 16, 2050. due to a syndicate of financial institutions (excluding TELUS Corporation) • The early full redemption of $1 billion of 5.05% Notes, Series CH, due July 23, 2020. The long-term debt prepayment premium was $28 million before income taxes. The average term to maturity of our long-term debt (excluding com- mercial paper, the revolving component of the TI credit facility, lease liabilities and other long-term debt) was approximately 12.2 years as at December 31, 2020, decreasing from approximately 12.8 years as at December 31, 2019. Additionally, the weighted average cost of our long- term debt (excluding commercial paper, the revolving component of the TI credit facility, lease liabilities and other long-term debt) was 3.80% as on the TI credit facility, which is non-recourse to TELUS Corporation; and (ii) the early redemptions of Series CM notes and Series CO notes described in Section 7.4. These factors were partly offset by: (i) the May 2020 issuances of $600 million of Series CAC notes and the re-opening of $400 million of Series CAB notes, and the October 2020 issuance of $500 million of Series CAD notes, all as described in Section 7.4; and (ii) a decrease in commercial paper outstanding, which is classified as floating-rate debt in this calculation. Net debt to EBITDA – excluding restructuring and other costs ratio was 3.45 times, as measured at December 31, 2020, up from 3.20 times at December 31, 2020, a decrease from 3.94% as at December 31, 2019. one year earlier. Our long-term objective for this measure is within a range Net increase in long-term debt ($ millions) investment grade credit ratings in the range of BBB+, or the equivalent, of 2.20 to 2.70 times, which we believe is consistent with maintaining 2020 2019 2018 123 1,019 and providing reasonable access to capital. As at December 31, 2020, this ratio remains outside of the long-term objective range due to prior 2,444 issuances of incremental debt, primarily due to business acquisitions, partially offset by growth in EBITDA – excluding restructuring and other Average term to maturity of long-term debt (years) 2020 2019 2018 12.2 12.8 12.2 Shares of subsidiary issued to non-controlling interests In 2020, our TI subsidiary issued shares to non-controlling interests related to our acquisitions of CCC and Lionbridge AI. Other In 2020, we incurred certain debt issuance costs in connection with our issues of $600 million of Series CAC notes, $400 million of Series CAB notes and $500 million of Series CAD notes. Additionally, in connection with our issue of 57.5 million Common Shares in the first quarter of 2020, we incurred certain equity issuance costs. TI also incurred certain costs for amending and expanding the TI credit facility. costs. EBITDA growth was reduced by impacts from the COVID-19 pandemic. As at December 31, 2020, business acquisitions over the past 12 months increased the ratio by approximately 0.45 and the acquisi- tion of spectrum licences increased the ratio by approximately 0.20. Our recent acquisitions of spectrum licences have more than doubled our national spectrum holdings and represent an investment to extend our network capacity to support continuing data consumption growth, as well as growth in our wireless subscriber base. Given the cash demands of the 2019 600 MHz and upcoming spectrum auctions and the inability to predict impacts of the COVID-19 pandemic, the assessment of the guideline and return to the objective range remains to be determined; however, it is our intent to return to a ratio below 2.70 times in the medium term (following upcoming 2021, 2022 and 2023 spectrum auctions), consistent with our long-term strategy. While this ratio exceeds our long-term objective range, we are well in compliance with the leverage ratio covenant in our credit facilities, which states that we may not permit our leverage ratio to exceed 4.25 to 1.00 at December 31, 2020 (see Section 7.6 Credit facilities). As set out in Note 28(d) of the Consolidated financial statements, in February 2021, TELUS International made an IPO of TI Subordinate Voting Shares; both TELUS Corporation and a TELUS International non-controlling shareholder individually also offered TI Subordinate Voting Shares in conjunction with the IPO. TELUS 2020 ANNUAL REPORT • 83 Through February 11, 2021, net proceeds of approximately $0.6 billion from the offering was included in Cash and temporary investments, from the offering were used to reduce the amount of outstanding TI net; had such reduction, and inclusion, respectively, been made at credit facility indebtedness and $0.2 billion (comprised of net proceeds December 31, 2020, the pro forma net debt to EBITDA – excluding on disposition of TI Subordinate Voting Shares by TELUS Corporation) restructuring and other costs ratio would have been 3.30 times. EBITDA – excluding restructuring and other costs ($ millions) EBITDA – excluding restructuring and other costs interest coverage 2020 2019 2018 EBITDA is a non-GAAP measure. 5,753 5,688 5,421 2020 2019 2018 (times) 7.3 7.5 8.4 Liquidity and capital resource measures As at, or years ended, December 31 Components of debt and coverage ratios1 ($ millions) Net debt EBITDA – excluding restructuring and other costs Net interest cost Debt ratios Fixed-rate debt as a proportion of total indebtedness (excluding lease liabilities and other long-term debt) (%) Average term to maturity of long-term debt (excluding commercial paper, the revolving component of the TI credit facility, lease liabilities and other long-term debt) (years) Weighted average interest rate on long-term debt (excluding commercial paper, the revolving component of the TI credit facility, lease liabilities and other long-term debt) (%) Net debt to EBITDA – excluding restructuring and other costs1 (times) Coverage ratios1 (times) Earnings coverage EBITDA – excluding restructuring and other costs interest coverage Other measures1 (%) Determined using management measures Common Share dividend payout ratio – net of dividend reinvestment plan effects Determined using most comparable IFRS-IASB measures Ratio of Common Share dividends declared to cash provided by operating activities less capital expenditures (excluding spectrum licences) 1 See Section 11.1 Non-GAAP and other financial measures. 2020 2019 Change 19,826 5,753 792 18,199 5,688 755 1,627 65 37 89 92 (3) pts. 12.2 12.8 (0.6) 3.80 3.45 3.2 7.3 67 84 3.94 3.20 4.0 7.5 (0.14) pts. 0.25 (0.8) (0.2) 1 1 5 (48) pts. 133 (49) pts. Earnings coverage ratio for 2020 was 3.2 times, down from 4.0 times one year earlier. A decrease in income before borrowing costs and the sum of the most recent four quarters’ dividends declared for Common Shares, as recorded in the financial statements, net of divi- income taxes reduced the ratio by 0.7, while an increase in borrowing dend reinvestment plan effects, divided by the sum of the most recent costs reduced the ratio by 0.1. EBITDA – excluding restructuring and other costs interest coverage ratio for 2020 was 7.3 times, down from 7.5 times one year earlier. Growth in EBITDA – excluding restructuring and other costs increased the ratio by 0.1, while an increase in net interest costs reduced the ratio by 0.3. Common Share dividend payout ratios: Actual Common Share dividend payout decisions will continue to be subject to our Board’s assessment four quarters’ free cash flow amounts for interim reporting periods. For fiscal years, the denominator is annual free cash flow (free cash flow is a non-GAAP measure, see Section 11.1). The historical measure for the 12-month period ended December 31, 2020 is presented for illustrative purposes in evaluating our target guideline. During the year ended December 31, 2020, the historical measure of our Common Share dividend payout ratio was within the objective range as a result of the discounted DRISP participation level. of our financial position and outlook, as well as our long-term Common TELUS International intends to retain all available funds and any future Share dividend payout objective range of 60 to 75% of prospective free earnings to support operations and to finance the growth and develop- cash flow. Commencing in 2020, so as to be consistent with the way ment of its business. As such, TELUS International does not intend to we manage our business, we updated our revised Common Share divi- declare or pay cash dividends on the TI Subordinate Voting Shares in the dend payout ratio presented to be a historical measure calculated as foreseeable future. 84 • TELUS 2020 ANNUAL REPORT MD&A: LIQUIDITY AND CAPITAL RESOURCES 7.6 Credit facilities At December 31, 2020, we had over $1.5 billion of liquidity available from the TELUS revolving credit facility and $155 million of liquidity available from the TI credit facility with a syndicate of financial institutions (excluding TELUS Corporation). In addition, we had $400 million available under our trade receivables securitization program (see Section 7.7 Sale of trade receivables). We are well within our objective of generally maintaining at least $1.0 billion of available liquidity. TELUS revolving credit facility We have a $2.25 billion (or U.S. dollar equivalent) unsecured revolving credit facility with a syndicate of financial institutions, expiring May 31, 2023. The revolving credit facility is used for general corporate purposes, including the backstop of commercial paper, as required. TELUS revolving credit facility at December 31, 2020 ($ millions) Revolving credit facility1 1 Canadian dollars or U.S. dollar equivalent. Expiry Size May 31, 2023 2,250 Drawn – Outstanding undrawn letters of credit Backstop for commercial paper program – (731) Available liquidity 1,519 Our revolving credit facility contains customary covenants, including a requirement that we not permit our consolidated leverage ratio to facility is non-recourse to TELUS Corporation. The outstanding revolving components and term loan components had a weighted average exceed 4.25 to 1.00 and that we not permit our consolidated coverage interest rate of 2.90% as at December 31, 2020. ratio to be less than 2.00 to 1.00 at the end of any financial quarter. As set out in Note 28(d) of the Consolidated financial statements, As at December 31, 2020, our consolidated leverage ratio was 3.45 to in February 2021, TELUS International made an IPO of TI Subordinate 1.00 and our consolidated coverage ratio was 7.26 to 1.00. These ratios Voting Shares; both TELUS Corporation and a TELUS International are expected to remain well within the covenants. There are certain minor non-controlling shareholder individually also offered TI Subordinate differences in the calculation of the leverage ratio and coverage ratio Voting Shares in conjunction with the IPO. Through February 11, 2021, under the revolving credit facility, as compared with the calculation of Net net proceeds of approximately $0.6 billion (US$0.5 billion) from debt to EBITDA – excluding restructuring and other costs and EBITDA – the offering were used to reduce the amount of outstanding TI credit excluding restructuring and other costs interest coverage. Historically, facility indebtedness. the calculations have not been materially different. The covenants are not impacted by revaluation, if any, of Property, plant and equipment, Intangible assets or Goodwill for accounting purposes. Continued access to our credit facilities is not contingent on maintaining a specific credit rating. Commercial paper TELUS Corporation has an unsecured commercial paper program, which is backstopped by our revolving credit facility, enabling us to issue commercial paper up to a maximum aggregate amount at any one time of $1.4 billion as at December 31, 2020. Foreign currency forward contracts are used to manage currency risk arising from issuing commercial paper denominated in U.S. dollars. The commercial paper program is to be used for general corporate purposes, including, but not limited to, capital expenditures and investments. Our ability to reasonably access the commercial paper market in the U.S. is dependent on our credit ratings (see Section 7.8 Credit ratings). TELUS International credit facility As at December 31, 2020, TELUS International (Cda) Inc. had a Other letter of credit facilities At December 31, 2020, we had $190 million of letters of credit outstanding issued under various uncommitted facilities; such letter of credit facilities are in addition to the ability to provide letters of credit pursuant to our committed bank credit facility. Available liquidity under various uncommitted letters of credit facilities was $131 million at December 31, 2020. 7.7 Sale of trade receivables TELUS Communications Inc., a wholly owned subsidiary of TELUS, is a party to an agreement with an arm’s-length securitization trust asso- ciated with a major Schedule I Canadian bank, under which it is able to sell an interest in certain trade receivables for an amount up to a maximum of $500 million. The agreement is in effect until December 31, 2021, and available liquidity was $400 million as at December 31, 2020. (See Note 22 of the Consolidated financial statements.) Sales of trade receivables in securitization transactions are recognized as collateralized credit facility, secured by its assets, expiring on January 28, 2025, Short-term borrowings and thus do not result in our de-recognition with a syndicate of financial institutions and, joined in 2020, by TELUS of the trade receivables sold. Corporation. The TI credit facility is comprised of US$620 million TELUS Communications Inc. is required to maintain a credit rating (TELUS Corporation up to a 12.5% lender) and US$230 million revolving of at least a BB by DBRS Ltd. or the securitization trust may require components and amortizing US$600 million (TELUS Corporation as the sale program to be wound down prior to the end of the term. 12.5% lender) and US$250 million term loan components. The TI credit The minimum credit rating was exceeded as of February 11, 2021. TELUS 2020 ANNUAL REPORT • 85 7.8 Credit ratings There were no changes to our investment grade credit ratings during 2020 or as of February 11, 2021. We believe adherence to most of our stated financial policies (see Section 4.3), coupled with our efforts to maintain a constructive relationship with banks, investors and credit rating agencies, continue to provide reasonable access to capital markets. (See discussion of risks in Section 10.13 Financing, debt and dividends.) 7.9 Financial instruments, commitments and contingent liabilities Financial instruments Our financial instruments, their accounting classification and the nature of certain risks that they may be subject to are described in Note 4 of the Consolidated financial statements. Our policies in respect of the recognition and measurement of financial instruments are described in Note 1(c) of the Consolidated financial statements. Financial instrument Accounting classification Credit Liquidity Currency Interest rate Other price Risks Market risks Measured at amortized cost Accounts receivable Contract assets Construction credit facilities advances to real estate joint venture Short-term borrowings Accounts payable Provisions (including restructuring accounts payable) Long-term debt Measured at fair value AC1 AC1 AC1 AC1 AC1 AC1 AC1 Cash and temporary investments FVTPL2 Long-term investments (not subject to significant influence)3 FVTPL/FVOCI3 Foreign exchange derivatives4 Share-based compensation derivatives4 FVTPL2 FVTPL2 X X X X X X X X X X X X X X X X X X X X X X X X X X For accounting recognition and measurement purposes, classified as amortized cost (AC). 1 2 For accounting recognition and measurement purposes, classified as fair value through net income (FVTPL). Unrealized changes in the fair values of financial instruments are 3 included in net income unless the instrument is part of a cash flow hedging relationship. The effective portions of unrealized changes in the fair values of financial instruments held for hedging are included in other comprehensive income. Long-term investments over which we do not have significant influence are measured at fair value if those fair values can be reliably measured. For accounting recognition and measurement purposes, on an investment-by-investment basis, long-term investments are classified as either fair value through net income or fair value through other comprehensive income (FVOCI). 4 Use of derivative financial instruments is subject to a policy which requires that no derivative transaction is to be entered into for the purpose of establishing a speculative or leveraged position (the corollary being that all derivative transactions are to be entered into for risk management purposes only) and sets criteria for the creditworthiness of the transaction counterparties. Derivatives that are part of an established and documented cash flow hedging relationship are accounted for as held for hedging. We believe that classification as held for hedging results in a better matching of the change in the fair value of the derivative financial instrument with the risk exposure being hedged. In respect of hedges of anticipated transactions, hedge gains/losses are included with the related expenditure and are expensed when the transaction is recognized in our results of operations. We have selected this method as we believe that it results in a better matching of the hedge gains/losses with the risk exposure being hedged. Derivatives that are not part of a documented cash flow hedging relationship are accounted for as held for trading and thus are measured at fair value through net income. Refer to Note 4 of the Consolidated financial statements for further information regarding our financial instruments. 86 • TELUS 2020 ANNUAL REPORT MD&A: LIQUIDITY AND CAPITAL RESOURCES Commitments and contingent liabilities Contractual obligations as at December 31, 2020 ($ millions) 2021 2022 2023 2024 2025 2026–2030 Thereafter Total Short-term borrowings Interest obligations Principal obligations1 Long-term debt Interest obligations Principal maturities Leases Interest obligations Principal maturities Construction credit facilities commitment2 Occupancy costs2 Purchase obligations3 Operating expenditures Property, plant and equipment, and Intangible assets Non-interest bearing financial liabilities Other obligations Total 1 100 101 677 991 1,658 71 467 538 – 124 1,435 273 1,708 2,669 65 – – – 627 1,577 2,204 54 317 371 – 1 1 4 459 8 467 74 2 – – – 586 563 1,149 47 183 230 – 106 153 6 159 8 8 – – – 558 1,148 1,706 40 151 191 – 92 172 4 176 8 1 – – – 486 2,382 2,868 33 1 1 2 145 – 72 200 – 200 9 50 – – – 1,763 6,190 7,953 109 308 417 – 166 969 – 969 12 62 – – – 1 100 101 4,1 1 7 5,760 9,877 8,804 18,61 1 27,415 91 288 379 – 80 445 1,826 2,271 – 754 177 3,565 – 177 – 60 291 3,856 2,780 248 6,863 3,232 1,660 2,174 3,344 9,579 10,573 37,425 See Section 7.7 Sale of trade receivables. 1 2 Construction credit facilities reflect loan amounts for a real estate joint venture, a related party. Occupancy costs include transactions with real estate joint ventures. See Section 7.11 Transactions between related parties. 3 Where applicable, purchase obligations reflect foreign exchange rates at December 31, 2020. Purchase obligations include future operating and capital expenditures that have been contracted for at the current year-end and include the most likely estimates of prices and volumes, where necessary. As purchase obligations reflect market conditions at the time the obligation was incurred for the items being purchased, they may not be representative of future years. Obligations from personnel supply contracts and other such labour agreements have been excluded. Claims and lawsuits A number of claims and lawsuits (including class actions and intellectual Indemnification obligations In the normal course of operations, we provide indemnification in property infringement claims) seeking damages and other relief are conjunction with certain transactions. The terms of these indemnification pending against us and, in some cases, other wireless carriers and tele- obligations range in duration. These indemnifications would require us communications service providers. As well, we have received notice of, to compensate the indemnified parties for costs incurred as a result or are aware of, certain possible claims (including intellectual property infringement claims) against us and, in some cases, other wireless carriers of failure to comply with contractual obligations, or litigation claims or statutory sanctions, or damages that may be suffered by an indemnified and telecommunications service providers. (See the related risk discus- party. In some cases, there is no maximum limit on these indemnification sion in Section 10.16 Litigation and legal matters.) obligations. The overall maximum amount of an indemnification obligation It is not currently possible for us to predict the outcome of such will depend on future events and conditions and therefore cannot be claims, possible claims and lawsuits due to various factors, including: reasonably estimated. Where appropriate, an indemnification obligation the preliminary nature of some claims; uncertain damage theories and is recorded as a liability. Other than obligations recorded as liabilities demands; an incomplete factual record; uncertainty concerning legal at the time of the related transactions, historically we have not made theories and procedures and their resolution by the courts, at both the significant payments under these indemnifications. trial and the appeal levels; and the unpredictable nature of opposing As at December 31, 2020, we had no liability recorded in respect parties and their demands. of our indemnification obligations. However, subject to the foregoing limitations, management is of the opinion, based upon legal assessments and information presently available, that it is unlikely that any liability, to the extent not provided for through insurance or otherwise, would have a material effect on our financial position and the results of our operations, including cash flows, with the exception of the items disclosed in Note 29(a) of the Consolidated financial statements. This is a significant judgment for us 7.10 Outstanding share information Outstanding shares (millions) Common Shares Common Share options December 31, 2020 January 31, 2021 1,291 1,297 3 8 3 8 (see Section 8.1 Critical accounting estimates and judgments). Restricted share units – equity-settled TELUS 2020 ANNUAL REPORT • 87 7.11 Transactions between related parties Transactions with key management personnel Our key management personnel have authority and responsibility for overseeing, planning, directing and controlling our activities and consist of our Board of Directors and our Executive Leadership Team. Total compensation expense for key management personnel was $40 million in 2020, compared to $53 million in 2019. The decrease in compensation expense for key management personnel was due to greater share-based compensation in 2019. See Note 30(a) of the Consolidated financial statements for additional details. Transactions with defined benefit pension plans We provided management and administrative services to our defined benefit pension plans. Charges for these services were on a cost recovery basis and were immaterial. 8 Accounting matters 8.1 Critical accounting estimates and judgments Our significant accounting policies are described in Note 1 of the Consolidated financial statements for the year ended December 31, 2020. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates, assumptions and judgments that affect: the reported amounts of assets and liabilities at the date of the financial statements; the dis- closure of contingent assets and liabilities at the date of the financial statements; and the reported amounts and classification of income and expense during the reporting period. Actual results could differ from those estimates. Our critical accounting estimates and significant judg- ments are generally discussed with the Audit Committee each quarter. Refer to Note 1 of the Consolidated financial statements for further information on our critical accounting estimates, including examples of the significant estimates and judgments that we make, and their relative significance and degree of difficulty, as illustrated in the graphic included in Note 1. Transactions with real estate joint ventures and associates In 2020, we had transactions with the TELUS Sky real estate joint venture, which is a related party to us, as set out in Note 21 of the Consolidated financial statements. For the TELUS Sky real estate joint venture, commitments and contingent liabilities include construction-related contractual commit- ments through to 2021 (approximately $17 million at December 31, 2020) and construction financing ($342 million, with Canadian financial institutions as 66⅔% lender and TELUS as 33⅓% lender) under a credit agreement maturing August 31, 2021. We have entered into a lease agreement with the TELUS Sky real estate joint venture; for lease accounting purposes, the lease commenced during the three-month period ended March 31, 2019. General • In determining our critical accounting estimates, we consider trends, commitments, events or uncertainties that we reasonably expect to materially affect our methodology or assumptions. Our statements in this MD&A regarding such consideration are made subject to the Caution regarding forward-looking statements. • In the normal course, we make changes to assumptions underlying all critical accounting estimates so that they reflect current economic conditions, updated historical information used to develop the assump- tions, and changes in our credit ratings, where applicable. Unless indicated otherwise in the discussion below, we expect that no material changes in overall financial performance and financial statement line items would arise either from reasonably likely changes in material assumptions underlying the estimate or from selection of a different estimate from within a range of valid estimates. • Our critical accounting estimates affect the Consolidated statements of income and other comprehensive income, and the Consolidated statements of financial position, as follows: Consolidated statements of financial position Intangible assets, net, and Goodwill, net Employee defined benefit pension plans Property, plant and equipment, net Provisions for asset retirement obligations Provisions related to business combinations Investments Accounts receivable Contract assets Inventories Consolidated statements of income and other comprehensive income Operating expenses Operating revenues and other income Goods and services purchased Employee benefits expense Depreciation Amortization of intangible assets Financing costs Employee defined benefit plans re-measurements1 X2 X3 X X3 X X X X X X X X X X X X X 1 Other comprehensive income – Item never subsequently reclassified to income. 2 Accounting estimate, as applicable to Intangible assets with indefinite lives and Goodwill, primarily relates to spectrum holdings and accordingly affects our wireless cash-generating unit. 3 Accounting estimate impact due to internal labour capitalization rates. 88 • TELUS 2020 ANNUAL REPORT MD&A: ACCOUNTING MATTERS • All critical accounting estimates are uncertain at the time an • See Note 18(f) of the Consolidated financial statements for further estimate is made and affect the following Consolidated statements discussion of methodology and sensitivity testing. of income and other comprehensive income line items: Income taxes (except for estimates about Goodwill) and Net income. Similarly, all critical accounting estimates affect the following Consolidated state- ments of financial position line items: Current assets (Income and other taxes receivable), Current liabilities (Income and other taxes payable), Deferred income taxes and Common equity (retained earnings) and Non-controlling interests. The discussion of each critical accounting estimate does not differ between our two segments, wireless and wireline, unless explicitly noted. Intangible assets, net; Goodwill, net; and Property, plant and equipment, net General • The Intangible assets, net, line item represents approximately 35% of Total assets as at December 31, 2020 (34% as at December 31, 2019). Included in Intangible assets are spectrum licences, which represent approximately 23% of Total assets as at December 31, 2020 (26% as at December 31, 2019). • The Goodwill, net, line item represents approximately 17% of Total assets as at December 31, 2020 and approximately 14% of Total assets as at December 31, 2019. • The Property, plant and equipment, net, line item on our Consolidated statements of financial position represents approximately 35% of Total assets as at December 31, 2020 and approximately 37% of Total assets as at December 31, 2019. • If our estimates of the useful lives of assets were incorrect and/or our estimates of the acquisition-date fair value of property, plant, equipment and intangible assets acquired in business combinations were incorrect, we could experience increased or decreased charges for amortization or depreciation in the future. If the future were to differ adversely from our best estimate of key economic assumptions and associated cash flows were to materially decrease, we could potentially experience future material impairment charges in respect of our Property, plant and equipment assets, Intangible assets or Goodwill. If Intangible assets with indefinite lives were determined to have finite lives at some point in the future, we could experience increased charges for amortization of Intangible assets. Such charges in and of themselves do not result in a cash outflow and would not immediately affect our liquidity. The recoverability of Intangible assets with indefinite lives; the recoverability of Goodwill • The carrying values of Intangible assets with indefinite lives and Goodwill are periodically tested for impairment, and this test represents a significant estimate for us. • The recoverable amounts of the cash-generating units’ assets have been determined based on a fair value less costs of disposal calculation. There is a material degree of uncertainty with respect The estimated useful lives of assets; the recoverability of tangible assets • The estimated useful lives of assets are determined by a continuing program of asset life studies. The recoverability of assets with finite lives is significantly impacted by the estimated useful lives of assets. • Assumptions underlying the estimated useful lives of assets include the timing of technological obsolescence, competitive pressures and future infrastructure utilization plans. Employee defined benefit pension plans Certain actuarial and economic assumptions used in determining defined benefit pension costs, accrued pension benefit obligations and pension plan assets • We review industry practices, trends, economic conditions and data provided by actuaries when developing assumptions used in the determination of defined benefit pension costs and accrued pension benefit obligations. Pension plan assets are generally valued using market prices; however, some assets are valued using market estimates when market prices are not readily available. Actuarial support is obtained for interpolations of experience gains and losses that affect the employee defined benefit plan actuarial gains and losses and accrued pension benefit obligations. The dis- count rate used to determine the accrued benefit obligation is based upon the yield on long-term, high-quality, fixed-term investments. The discount rate is set annually at the end of each calendar year, at a minimum, based upon yields on long-term corporate bond indices in consultation with actuaries. Future increases in compensation are based upon the current benefits policies and economic forecasts. We have examined our respective pension obligation and current service cost durations and observed an approximate 10-year difference in duration. As individual discount rates more accurately reflect the obligation and current service cost, commencing in 2016, we applied a dual discount rate methodology. • On an annual basis, at a minimum, the defined benefit pension plan assumptions are assessed and revised as appropriate. Assumptions used in determining defined benefit pension costs, accrued pension benefit obligations and pension plan assets include life expectancy, discount rates, market estimates and rates of future compensation increases. Material changes in overall financial performance and financial statement line items would arise from reasonably likely changes in the material assumptions under- lying this estimate, since certain assumptions may have been revised to reflect updated historical information and updated economic conditions. See Note 15 of the Consolidated financial statements for further analysis. • This accounting estimate related to employee defined benefit pension plans is in respect of components of the Operating expenses line to the estimates of the recoverable amounts of the cash-generating item, Financing costs line item and Other comprehensive income line units’ assets, given the necessity of making key economic assump- item on our Consolidated statements of income and other compre- tions about the future. The fair value less costs of disposal calculation hensive income. If the future were to adversely differ from our best uses future cash flows and growth projections (including judgments estimate of assumptions used in determining defined benefit pension about the allocation of future capital expenditures to support both costs, defined benefit obligations accrued and pension plan assets, wireless and wireline operations); associated economic risk assump- we could experience future increased (or decreased) defined tions and estimates of the likelihood of achieving key operating metrics benefit pension expense, financing costs and charges to Other and drivers; estimates of future generational infrastructure capital comprehensive income. expenditures; and the future weighted average cost of capital. TELUS 2020 ANNUAL REPORT • 89 Income tax assets and liabilities The amount and composition of income tax assets and income tax liabilities, including the amount of unrecognized tax benefits • Assumptions underlying the composition of income tax assets and liabilities are based upon an assessment of the technical merits of tax positions. Income tax benefits on uncertain tax positions are recognized only when it is more likely than not that the ultimate deter- mination of the tax treatment of a position will result in the related benefit being realizable; however, this does not mean that tax author- ities cannot challenge these positions. Income tax assets and liabilities are measured at the amount that is expected to be realized or incurred upon ultimate settlement with taxation authorities. Such assessments are based upon the applicable income tax legislation, regulations, interpretations and jurisprudence, all of which in turn are subject to change and interpretation. • Current income tax assets and liabilities are estimated based upon the amount of income tax that is calculated as being owed to taxation authorities, net of periodic instalment payments. Deferred income tax liabilities are composed of the tax effect of temporary differences between the carrying amount and tax basis of assets and liabilities, as well as the income tax effect of undeducted income tax losses. The timing of the reversal of temporary differences is estimated and the income tax rate substantively enacted for the periods of reversal is applied to the temporary differences. The carrying amounts of assets and liabilities are based upon the amounts recorded in the financial statements and are, therefore, subject to accounting estimates that are obligations result from the acquisition, construction, development and/or normal operation of the assets. The obligations are measured initially at fair value, determined using present value methodology, and the resulting costs are capitalized as a part of the carrying value of the related asset. • On an annual basis, at a minimum, assumptions underlying the provisions for asset retirement obligations include expectations about inflation, discount rates and any changes in the amount or timing of the underlying future cash flows, which may span numerous decades. Material changes in financial position would arise from reasonably likely changes in the material assumptions underlying this estimate, since certain assumptions may have been revised to reflect updated historical information and updated economic conditions. The capitalized asset retirement cost is depreciated on the same basis as the related asset, and the discount accretion is included in the Consolidated statements of income and other comprehensive income as a component of Financing costs. • This accounting estimate is in respect of the asset retirement obli- gations component of the Provisions line item on our Consolidated statements of financial position, and this component comprises approximately 2% of Total liabilities and owners’ equity as at December 31, 2020 (1% as at December 31, 2019). If the provisions for asset retirement obligations were to be inadequate, we could experience a charge to Goods and services purchased in the future. A charge for an inadequate asset retirement obligation provision would result in a cash outflow proximate to the time that the asset retirement obligation is satisfied. inherent in those balances. The tax basis of assets and liabilities, as well Provisions related to business combinations as the amount of undeducted income tax losses, are based upon the assessment and measurement of tax positions, as noted above. Assumptions as to the timing of reversal of temporary differences include expectations about the future results of operations and future cash flows. The composition of income tax liabilities is reasonably likely to change from period to period because of changes in the estimation of these significant uncertainties. • This accounting estimate is in respect of material asset and liability line items on our Consolidated statements of financial position comprising less than 1% of Total assets as at December 31, 2020 and 2019, and approximately 9% of Total liabilities and owners’ equity as at December 31, 2020 and 2019. If the future were to adversely differ from our best estimate of the likelihood of tax positions being sustained, the amount of tax expected to be incurred, the future results of operations, the timing of reversal of deductible temporary differences and taxable temporary differences, and the tax rates applicable to future years, we could experience material current income tax adjustments and deferred income tax adjustments. Such current and deferred income tax adjustments could result in an increase or acceleration of cash outflows at an earlier time than might otherwise be expected. Provisions for asset retirement obligations Certain economic assumptions used in provisioning for asset retirement obligations • Asset retirement obligation provisions are recognized for statutory, contractual or legal obligations, normally when incurred, associated with the retirement of Property, plant and equipment (primarily cer- tain items of outside plant and wireless site equipment) when those Provisions for written put options • In connection with certain business acquisitions, we have estab- lished provisions for written put options in respect of non-controlling interests. We provide written put options to the remaining selling shareholders under which they could put the remaining non-controlling interests at, or after, a specified date. The acquisition-date fair values of the puttable shares held by the non-controlling shareholders are recorded as provisions. • On an annual basis, at a minimum, the provisions for written put options are assessed and revised as appropriate. The provi- sions for written put options have been determined based on the net present values of estimated future earnings results; there is a material degree of uncertainty with respect to the estimates of future earnings results, given the necessity of making significant economic assumptions about the future. The amounts of provisions for written put options are reasonably likely to change from period to period because of changes in the estimation of future earnings and foreign exchange rate movements. • This accounting estimate is in respect of the provisions for written put options related to the non-controlling interests component of the Provisions line item on our Consolidated statements of financial position, and this component comprises less than 1% of Total liabil- ities and owners’ equity as at December 31, 2020 (approximately 1% as at December 31, 2019). If the provisions for written put options were to be inadequate, we could experience a charge to Other income in the future. A charge for an inadequate written put option provision would result in a cash outflow proximate to the time that the written put option is exercised. 90 • TELUS 2020 ANNUAL REPORT MD&A: ACCOUNTING MATTERS Investments Contract assets The recoverability of long-term investments • We assess the recoverability of our long-term investments on a regular, recurring basis. The recoverability of investments is assessed on a specific-identification basis, taking into consideration expecta- General • We maintain allowances for lifetime expected credit losses related to contract assets. Current economic conditions, historical information (including credit agency reports, if available), and the line of business tions about future performance of the investments and comparison from which the contract asset arose are all considered when deter- of historical results to past expectations. • The most significant assumptions underlying the recoverability mining impairment allowances. The same factors are considered when determining whether to write off amounts charged to the impairment of long-term investments are related to the achievement of future allowance for contract assets against contract assets. cash flow and operating expectations. Our estimate of the recover- ability of long-term investments could change from period to period due to the recurring nature of the recoverability assessment and due to the nature of long-term investments (we do not control the investees). • Investments are included in the Other long-term assets line item on our Consolidated statements of financial position, which itself comprises approximately 3% of Total assets as at December 31, 2020 (2019 – 2%). If the allowance for recoverability of long-term invest- ments were to be inadequate, we could experience an increased charge to Other income or Other comprehensive income depending The impairment allowance • These accounting estimates are in respect of the Contract assets line items on our Consolidated statements of financial position, which comprise approximately 2% of Total assets as at December 31, 2020 (2019 – 3%). If the future were to differ adversely from our best esti- mates of the fair value of the residual cash flows and the impairment allowance for contract assets, we could experience an increase in the impairment allowance for contract assets against contract assets in the future. Such impairment allowance in and of itself does not result in a cash outflow. on the financial asset classification. Such a provision for recoverability Inventories of long-term investments does not result in a cash outflow. Accounts receivable General • When determining our allowance for doubtful accounts, we consider the business area that gave rise to the Accounts receivable, conduct a statistical analysis of portfolio delinquency trends and perform specific account identification. • These accounting estimates are in respect of the Accounts receivable line item and the Unbilled customer finance receivables line within the Other long-term assets line item on our Consolidated statements of financial position, which together comprise approximately 6% of Total assets as at December 31, 2020 and 2019. If the future were to differ adversely from our best estimates of the fair value of the residual cash flows and the allowance for doubtful accounts, we could experience an increase in doubtful accounts expense in the future. Such doubtful accounts expense in and of itself does not result in a cash outflow. The allowance for doubtful accounts • The estimate of our allowance for doubtful accounts could materially change from period to period because the allowance is a function of the balance and composition of Accounts receivable, which can vary on a month-to-month basis. The variability of the balance of Accounts receivable arises from the variability of the amount and composition of Operating revenues and Other income and from the variability of Accounts receivable collection performance. The allowance for inventory obsolescence • We determine our allowance for inventory obsolescence based upon expected inventory turnover, inventory aging, and current and future expectations with respect to product offerings. • Assumptions underlying the allowance for inventory obsolescence include future sales trends and offerings and the expected inventory requirements and inventory composition necessary to support these future offerings. Our estimate of the allowance for inventory obsolescence could change materially from period to period due to changes in product offerings and the level of consumer acceptance of those products. • This accounting estimate is in respect of the Inventories line item on our Consolidated statements of financial position, which comprises approximately 1% of Total assets as at December 31, 2020 and 2019. If the allowance for inventory obsolescence were to be inadequate, we could experience a charge to Goods and services purchased in the future. Such an inventory obsolescence charge does not result in a cash outflow. 8.2 Accounting policy developments Refer to Note 2 of the Consolidated financial statements for a description of current and future changes in accounting policies, including: • Initial application of standards, interpretations and amendments to standards and interpretations in the reporting period. • Standards, interpretations and amendments to standards and interpretations in the reporting period not yet effective and not yet applied. TELUS 2020 ANNUAL REPORT • 91 9 General trends, outlook and assumptions, and regulatory developments and proceedings This section contains forward-looking statements, which should be Additionally, with large numbers of the workforce working from home read together with the Caution regarding forward-looking statements during the pandemic, there were associated declines in chargeable at the beginning of this MD&A. 9.1 Telecommunications industry in 2020 We estimate that Canadian telecommunications industry revenues (including TV revenue and excluding media revenue) declined by approximately 2%. Wireless and data services continue to drive ongoing industry growth. Additionally, consumer communications and data con- sumption behaviours continue to demonstrate a strong preference for data-rich applications and data-intensive devices, including smartphones and tablets. However, this year, revenue growth across the telecommuni- cations industry was limited by the impacts of the global pandemic. TELUS reported Operating revenues and Other income of $15.5 billion, with wireless products and services representing 51% of our total Operating revenues and Other income. In our wireline business, growth in customer care and business services (CCBS) solutions, internet and third wave data services, home and business security, and TV, all inclusive of acquisitions, more than offset the decline in demand for legacy voice and legacy data services. usage from workers offloading their mobile device traffic onto Wi-Fi. The Canadian wireless market also experienced increased levels of competition nationally. This high level of competition has led to continued declines in chargeable data usage and larger allotments of data, in addition to other factors, such as: the popularity of data sharing plans; more frequent customer-friendly data usage notifications; and an evolving customer mix shift towards non-traditional wireless devices and tools such as video chats. These factors, combined with increases in overall data usage, which is expected to increase dramatically with the ongoing commercialization of 5G, led to widespread adoption and promotion of unlimited data plans and device financing plans by all national players. Our ongoing multi-year investments in technology and infrastructure have proven foundational to the robust connectivity supporting more Canadians, as usage patterns evolved due to the pandemic. Our long-standing commitment to network excellence is reflected in multiple independent third-party awards and recognitions in 2020, including U.K.-based Opensignal, and U.S.-based Ookla, each received for four consecutive years, and Canadian-based Tutela, won two years in a row. We continue to work diligently to better monetize robust growth in Wireless We estimate that in 2020, the Canadian wireless industry experienced data services, while simultaneously delivering a strong value-for-money proposition and leading customer service to our customers. To this end, network revenue declines of approximately 4.4% and adjusted EBITDA we are focusing intensely on profitable customer growth and strong declines of approximately 3.7% which we believe were attributed to ABPU performance through our consistent strategic execution of pre- the pandemic. TELUS wireless network revenue reduction was 1.5%, mium smartphone loading, which includes driving higher-value data and TELUS wireless Adjusted EBITDA declined by 1.0%. and share plan adoption, as well as flexible product offerings including We estimate that the Canadian wireless industry added approximately bundling our mobility and home services. Moreover, we are also focusing 1.1 million new subscribers in 2020, inclusive of TELUS’ mobile phone on the other levers available to us in an environment of moderating net additions of 280,000, compared to approximately 1.9 million in 2019. ABPU growth to ensure we continue to deliver on our wireless EBITDA This was supported by immigration and population growth; the trend toward multiple devices, including tablets; the expanding functionality of data and related applications; and the adoption of mobile devices and growth objectives, including: • Evolving our approach to wireless plans and device sales, through the simultaneous launch of our Peace of Mind endless data rate services by both younger and older generations. However, various forms plans, TELUS Easy Payment device financing and TELUS Family of public health measures during the global health crisis, including the Discount offerings, which have resulted in simplification for both temporary closure of retail stores, hampered the growth of new wireless customers and team members, while supporting growth in digital subscribers. The wireless penetration rate increased to approximately transactions and more recovery of handset costs 94% in Canada in 2020, with further increases in penetration expected • Continuing to drive volume growth through high-quality loading in 2021. By comparison, the wireless penetration rate in the U.S. is well on the back of strong ongoing industry growth over 100%, while in Europe and Asia it is even higher, suggesting an opportunity for continued growth in Canada. • Seeking new sources of wireless revenue, such as Internet of Things (IoT) or Internet of Everything, machine-to-machine (M2M) The 2020 wireless market in Canada was challenged by the pan- and security applications demic. Growth in blended average billing per subscriber unit per month • Exploring and securing new channel strategies associated with (ABPU) had been moderating as carriers migrated their customer bases attractive economic characteristics to unlimited data and device financing plans. However, ABPU moder- ation was exacerbated by the pandemic as wireless industry roaming • Pursuing smart bundling opportunities across wireless and wireline to achieve better economies of scope and enhance lifetime revenue revenue significantly declined from customers’ reduced travel activity. per customer 92 • TELUS 2020 ANNUAL REPORT MD&A: GENERAL TRENDS, OUTLOOK AND ASSUMPTIONS, AND REGULATORY DEVELOPMENTS AND PROCEEDINGS • Working persistently to enhance the efficiency of the flow from revenue to EBITDA, or the flow from ABPU to average margin Our IP-based Optik TV platform continues to offer numerous service advantages over this cable platform, including: flexible pricing plans and per subscriber unit per month (AMPU), in order to buttress and packaging available to all customers; picture clarity and quality; content enhance our operating margins, including ongoing efficiency depth and breadth; and the number of ways customers can access and effectiveness initiatives. The Canadian wireless industry continues to be highly competitive and capital-intensive, with carriers continuing to expand and enhance their broadband wireless networks, including material investments in spectrum. content, including wireless set-top boxes, Restart TV, higher-capacity PVR and the Optik TV app, which offers more than twice as many live TV channels at home or on the go compared to our largest Western Canadian cable competitor. Notably, we are the only Canadian TV service provider offering both 4K HDR live channels and 4K HDR on-demand movies, including the latest Hollywood blockbusters and the latest movies Wireline Similar to the Canadian wireless industry, wireline markets and oper- and series from Netflix, which has named TELUS’ PureFibre network the number one network for streaming Netflix for 17 consecutive months ations were significantly affected by the pandemic. Physical distancing prior to the start of the COVID-19 pandemic (based on the Netflix ISP requirements impacted traditional wireline installations as installers were Speed Index rankings for Canadian providers released monthly, as of not entering customers’ premises. Conversely, with large numbers of March 2020) and the only Canadian carrier to achieve the highest workers and students working and learning from home, demand for ratings for each month from August 2020 to December 2020 for the wireline services surged, with traffic levels reaching historic levels during newly revamped index, as well as 4K sports content, more HD content, the pandemic. Although the consumer high-speed internet market is more on-demand content and more over-the-top (OTT) content with maturing, with a penetration rate of approximately 88% in both Western Netflix, YouTube, Prime Video (included in the Amazon Prime member- Canada and across Canada at the end of 2020, subscriber growth is ship), hayu, TED Talks and the National Film Board of Canada. We are the expected to continue over the coming years. The four major cable-TV multicultural content leader in Western Canada. We were also the first companies had an estimated 7.17 million internet subscribers at the end provider in Canada to offer Amazon Prime as a benefit to customers with of 2020 (49% market share), up 2% from approximately 7.0 million at select Optik TV theme packs and, for customers who are already Prime the end of 2019. Telecommunications companies had approximately members, easy access to Prime Video through the app on their 4K 7.25 million internet subscribers (50% market share), up 4% from Optik TV digital box. approximately 7.0 million at the end of 2019. We continue to make mod- The national Canadian telecom providers continue to acquire and erate gains in market share as a result of the expansion of our TELUS otherwise develop capabilities in home security and automation. In the PureFibre infrastructure and the pull-through of subscribers from our fourth quarter of 2019, we acquired ADT Security Services Canada, Inc., IP-based TELUS TV service including bundling of our mobility and home one of Canada’s leading providers of security and automation solutions services, as well as significant growth in home security and automation. for residential and business customers, and in 2020, we continued Our ongoing focus on fibre to the premises or home (FTTP/FTTH) has acquiring other smaller home and business security companies. These allowed us to connect approximately 2.5 million households and busi- acquisitions further our commitment to leverage the power of technology nesses in B.C., Alberta and Eastern Quebec (representing approximately to bring state-of-the-art convenience, control and safety into the lives, 81% of our total high-speed broadband footprint) at December 31, 2020 homes and businesses of more Canadians. They also provide opportun- to our TELUS PureFibre technology. Additionally, we received recognition ities to offer attractive bundled solutions and advance our connected from PCMag being the fastest internet service provider (ISP) in Canada home strategy while accelerating our entry into smart home and auto- among major ISPs. mation solutions. Our SmartHome Security and TELUS Secure Business While Canadians still watch conventional TV, digital platforms are service offerings complement our industry-leading customer service playing an increasingly important role in the broadcasting industry and build on our strategy and commitment to leverage our world-leading and in respect of content. Popular online video services are providing wireless and PureFibre network, enabling us to enhance connected Canadians with more choice about where, when and how to access home, business, security, IoT, cybersecurity, smart buildings, smart cities video content. In 2020, Canadian IP TV providers increased their sub- scriber base by an estimated 3% to 3.0 million, or 30% of market share, and health services for customers in Canada. Canada’s four major cable-TV companies had an estimated base up from 28% at the end of 2019, as a result of expanded network of approximately 3.3 million telephony subscribers at the end of 2020. coverage, enhanced differentiated service offerings, and marketing This represents a national consumer market share of approximately and promotions focused on IP TV. Despite this IP TV growth, the com- 42%, relatively flat compared to 2019. Telecommunications companies bined cable-TV and satellite-TV subscriber penetration rate declined. had an estimated 3.8 million telephony subscribers at the end of 2020, We estimate that the four major cable-TV companies had approximately representing approximately 49% of market share, relatively flat com- 5.0 million TV subscribers or a 48% market share at the end of 2020, pared to 2019. Other non-facilities-based competitors also offer local a decrease from 49% at the end of 2019. The balance of industry and long distance voice over IP (VoIP) services and resell high-speed subscribers were served by satellite-TV and regional providers. internet solutions. Technological substitution by wireless services is In recent years, three of the largest Canadian cable-TV companies continuing to erode the number of residential voice subscribers and have launched new TV services based on the Comcast X1 TV platform, associated local and long distance revenues, as expected. including Shaw, Rogers and most recently Quebecor’s Videotron brand. TELUS 2020 ANNUAL REPORT • 93 9.2 Telecommunications industry general outlook and trends Wireless Wireless growth continues to be driven by increasing data usage and adoption, including: higher-value smartphones, unlimited data offerings, shared family data plans and tablets, and growth in IoT and M2M devices. In addition, consumers continue to replace wireline access with wireless access and related data services. These trends are expected to continue to drive a growing demand for wireless data services for the foreseeable future. Industry ABPU is expected to continue growing at a more moderate rate than in recent years. While LTE and LTE advanced (LTE-A) technologies increase download speeds, encourage data usage and improve the customer experience, growth in data traffic poses challenges to wireless access technology. To better manage this data traffic, Canadian providers continue to evolve their networks and deploy spectrum. Innovation, Science and Economic Development Canada (ISED) held its 600 MHz spectrum auction from March to April 2019. Further auctions for 3500 MHz spectrum are expected to start in June 2021, while we expect millimetre wave (mmWave) and 3800 MHz spectrum auctions in 2022 and 2023, respectively. M2M and IoT technologies connect communications-enabled remote devices via wireless technologies, allowing them to exchange key information and share processes. Advanced platforms and networks are already in place in industries such as healthcare, utilities, agriculture and fleet management, with deployment ongoing in other industries, including vehicle insurance, retail, food services and con- sumer utilities. These and other industries are looking to IoT, combined with other applications, to generate value from their connections. IoT represents a meaningful opportunity for growth in mobility products and services, with secure connectivity, customer value and efficiency. While M2M applications generally have lower average revenue per subscriber unit per month (ARPU) when sold as a stand-alone product, they tend to generate high service volumes with low or no subsidy costs, thereby supporting both revenue growth and margins. In 2020, we added 257,000 mobile connected devices, bringing our connected device subscriber base to approximately 1.8 million, up 21% from 2019. 5G has begun to play a mainstream role in technology evolution and innovation globally, and is an important component of meeting Canada’s and TELUS’ efforts to further bridge the digital divide and connect rural Canadians. Investing in 5G will drive capital expenditure savings by allowing us to provide high-speed internet services over wireless in less urban areas, as well as improved cost savings and innov- ative services in industrial automation, transportation and telehealth. Driven by significantly faster speeds, lower latencies, improved reliability and attractive economics, 5G will enable a host of new applications: for industries, 5G will enable remote operations, industrial control and manufacturing automation; for consumers, home automation, autono- mous vehicles, and wireless-to-the-home connectivity with speeds comparable to wired access technologies; and for healthcare, converged solutions for hospitals, clinics and remote patient monitoring. 5G is essential to the future of a global digital economy, including that of Canada’s, and is expected to generate significant innovation, growth and productivity. Mobile 5G wireless technology is up to 100 times faster than 4G technology. Enabling a robust and reliable 5G experience for Canadians will require complementary wireless spectrum bands to support the needs of a diverse subscriber base and consist of a portfolio of low, mid and high-band spectrum. Low-band spectrum, such as 600 MHz, covers wide areas and penetrates well into buildings, thus improving coverage in urban and suburban areas. This low-band spectrum will play a vital role in bringing 5G to Canadians and as such, it is an important resource for Canada as wireless operators build out 5G in rural areas. High-band spectrum, such as mmWave, can enable speeds up to 100 times faster than 600 MHz spectrum; however, it does not have the same coverage characteristics to penetrate well into buildings. This high-bandwidth spectrum and the associated faster connection speeds will help unlock new technologies such as virtual and augmented reality. Mid-band spec- trum, such as 3500 MHz, is important to the 5G ecosystem as it is able to support both the coverage characteristics of low-band spectrum and the speed characteristics of mmWave spectrum, albeit at slightly lower speeds. This spectrum will be integral to low-latency communications services, including autonomous monitoring and vehicle-to-everything communication. Current trials show 3500 MHz is key for broader 5G coverage and is increasingly being used globally for 5G coverage. The 3500 MHz and 3800 MHz spectrum bands are globally recognized as key for 5G networks. All of the national carriers in Canada commenced rolling out their initial 5G services in 2020 and are expected to continue in the years ahead. See Section 9.4 Communications industry regulatory developments and proceedings for further details on upcoming spectrum auctions. Wireline The traditional wireline telecommunications market is expected to remain very competitive in 2021, as technology substitution – such as the broad deployment of higher-speed internet; the use of email, mes- saging and social media as alternatives to voice services; and the growth of wireless and VoIP services – continues to replace higher-margin legacy voice revenues. In our incumbent operating areas of B.C. and Alberta, it is estimated that, in 2020, 56% of households no longer have a fixed line and 35% of households no longer have a broadcast TV service. We are a key provider of these substitution services and the decline in this legacy business is continuing as expected, although residential voice losses continued to slow in 2020 reflecting our suc- cess of bundling our home solutions and services. Our long-standing growth strategy remains focused on wireless, data and IP-centric wireline capabilities. The popularity of viewing TV and on-demand content anywhere, particularly on handheld devices, is expected to continue to grow as customers adopt services that enable them to view content on multiple screens. Streaming media providers continue to enhance OTT stream- ing services in order to compete for a share of viewership, as viewing habits and consumer demand evolve. Studies suggest that there were more than 23 million paid OTT video service subscriptions in Canada at the end of 2020, up 11% from 2019. The launch of streaming TV services is expected to continue in Canada, with the most recent launch being Disney+ in the fourth quarter of 2019. 94 • TELUS 2020 ANNUAL REPORT MD&A: GENERAL TRENDS, OUTLOOK AND ASSUMPTIONS, AND REGULATORY DEVELOPMENTS AND PROCEEDINGS Conventional TV content providers are monitoring OTT develop- A significant judgment we make is in respect of distinguishing ments and evolving their content and market strategy to compete with between our wireless and wireline operations and cash flows (and this these non-traditional offerings. Bell Media offers a content streaming extends to allocations of both direct and indirect expenses and capital service through its expanded Crave offering. We view OTT as an opportunity to add further capabilities to our linear and on-demand assets, providing customers with flexible options to choose the content expenditures). The clarity of this distinction has been increasingly affected by the convergence and integration of our wireless and wireline telecommunications infrastructure technology and operations. It has they want and encourage greater customer use of TELUS high-speed become increasingly difficult and impractical to objectively and clearly internet and wireless services and to limit customer frustration by distinguish between our wireless and wireline operations and cash needing to have a multitude of subscriptions. We continue to enhance flows, and the assets from which those cash flows arise. Beginning in our Optik TV service by adding content and capabilities, including ultra- January 2021, we modified our reporting processes, systems and high-definition 4K content, and by entering into multicultural content internal controls to accommodate the technology convergence-driven and distribution deals with OTT content providers such as Netflix, Bell cessation of the historical distinction between our wireless and wireline Media and Amazon Prime. TELUS continues to offer Pik TV, an attractive operations at the level of regularly reported discrete performance OTT-friendly basic TV offering that allows customers to access live measures that are provided to our chief operating decision-maker. We TV and streaming services like Netflix and YouTube conveniently and anticipate transitioning to a new segment reporting structure beginning affordably through Apple TV, internet browser or our Android and with the release of our first quarter 2021 results (see Section 5.1 for iOS mobile applications. further details). Consistent with facilities-based competition, telecommunications companies continue to make significant capital investments in broadband networks, with a focus on fibre to the premise (FTTP) to maintain and enhance their ability to support enhanced IP-based services and higher broadband speeds. Cable-TV companies continue to evolve their cable networks with DOCSIS-related bandwidth enhancements and node splitting. Although this platform increases speed in the near term and is cost-efficient, it does not offer the same advanced capabilities as FTTP over the longer term, such as fast symmetrical upload and download speeds. At the end of 2020, our fibre-optic infrastructure was available to approximately 2.5 million homes and businesses, reaching approximately 81% of our broadband footprint. Advances in LTE wireless technology and our extensive LTE infrastructure also allow us to target otherwise underserved areas with a fixed wireless solution, and 5G is expected to enhance these capabilities. Combining wireline local and long distance voice services with wireless and high-speed internet access and entertainment services, telecommunications companies can focus on offering bundled products to achieve competitive differentiation and provide customers with more flexibility and choice on networks that can reliably support these services. Our broadband investments, including the build-out of our FTTP broadband network and our premium differentiated IP-based Optik TV service, as well as lower-cost Pik TV service, home security and automation and integrated bundled service offerings which also encompass consumer healthcare and cybersecurity, continue to enhance our competitive position and customer loyalty relative to our main cable-TV competitor. As the industry evolves to 5G wireless technologies in the coming years, we expect to be operating on, and providing services over, a more converged network. The lines between wireline access and wireless access will continue to blur, as the way we deliver services to customers – and the way our customers use those services – continues to evolve. As our broadband network continues to expand and 5G is further com- mercialized in the coming years, we expect to benefit from the flexibility of being able to select the most efficient way to deliver services across our footprint. We do not expect to have to build fibre to every home; instead, we believe that there will be opportunities to deliver services to some areas within our broadband footprint wirelessly with 5G. Additional wireline capabilities In the business market (enterprise and small and medium-sized businesses, or SMB), the convergence of IT and telecommunications, facilitated by the ubiquity of IP, continues to shape the competitive environment, with non-traditional providers increasingly blurring the lines of competition and business models. Cable-TV companies continue to make investments to better compete in the highly contested SMB space. Telecommunications companies like TELUS are providing network-centric managed applications that leverage their significant FTTP investments, while IT service providers are bundling network connectivity with their proprietary software as service offerings. While our business-to-business (B2B) line of business was dilutive to our EBITDA in 2019, we aggressively pursued opportunities in 2020 to stabilize this business; however, the pandemic negatively impacted our SMB customer base. The development of IP-based platforms providing combined IP voice, data and video solutions creates potential cost efficiencies that compensate, in part, for the loss of margins resulting from the migration from legacy to IP-based services. New opportunities exist for integrated solutions, as well as business process and IT outsourcing, that could have a greater business impact than traditional telecommunications services. Data security represents both a chal- lenge and an opportunity for TELUS to provide customers with our data security solutions. Increasingly, businesses are looking to partner with their communications service provider to address their business goals and challenges, and to tailor cloud-based solutions for their needs that leverage telecommunications in ways not imagined a decade ago. Cloud computing is changing service delivery to always-on and everything-as-a-service, and strong growth is expected in this area. TELUS offers Network as a Service capabilities for businesses with the option of an IT network as a service over the internet, mirrored across multiple locations, based on a self-serve platform that reduces deploy- ment cycles and reliance on IT specialists. Our home and business security offerings in Western Canada are powered by our broadband network and integrate the latest smart devices to improve the lives of Canadians. TELUS 2020 ANNUAL REPORT • 95 Healthcare is expected to be a continued area of strong growth the healthcare market and assumptions about the business’ main growth in future years, based on an aging population in Canada, an increasing areas and path forward, reinforcing our focus on employee health and emphasis on chronic disease management, and the potential benefits virtual care. In 2021 and beyond, TELUS Health will leverage these that technology can deliver in terms of efficiency and effectiveness and other digital health tools to expand access to care for Canadians within the sector. Prior to the pandemic, the healthcare industry saw across the country. an emerging trend for physicians and other healthcare professionals TELUS International (Cda) Inc. (TELUS International or TI), a digital to use smartphones and connected devices to access patient records customer experience innovator that designs, builds, and delivers from remote locations. Since the lockdown measures were put into next-generation solutions for clients, continues its expansion through place, adoption of healthcare technology has accelerated, as clinicians organic growth and strategic acquisitions (see Section 1.3 Highlights have adapted to primarily virtual and tele-medicine-based practices, of 2020 for further details). TI’s solutions and services are relevant across resulting in the overall Canadian healthcare technology market growing multiple markets including information technology services for digital at a double-digit pace and beyond what was initially predicted at the transformation of customer experience systems (DX) and digital customer beginning of the year. The digitization of everyday functions within experience management (DCXM). TI is uniquely well-positioned to serve the healthcare ecosystem, combined with increased broadband network these markets, with a significant opportunity due to the overall industry connectivity, provides an opportunity to support the development and growth rate, low penetration to date and strong exposure to the compara- delivery of even more advanced health applications to benefit Canadians tively higher-growth DCXM sector of the market. In addition to DCXM, and improve health outcomes. TI serves markets that have experienced high growth in recent years, TELUS is leveraging our position as the leading end-to-end provider such as content moderation and data annotation. The necessity of mod- of digital healthcare in Canada and our expanding broadband network erating content on digital platforms has prompted enterprises to seek to increase access, integration and effectiveness of innovative healthcare specialized services to accommodate changes in the uncertain, highly tools and applications across the primary care ecosystem in order to regulated environment. Currently, the data annotation market demand continue positioning ourselves for anticipated strong continued growth. is driven by large technology companies; however, demand is growing These tools span personal health records to empower self-management from other enterprises as AI adoption increases. of healthcare data, electronic drug prescriptions with online insurance TI partners with major global and disruptive brands, fueling all stages validation by the physician, and home health monitoring devices and of company growth. TELUS Corporation remains TI’s largest customer. data capture with caregiver oversight. Following the 2018 acquisition of From TI’s successful inception 15 years ago in the Philippines, initially Medisys Health Group Inc. (relaunched as part of TELUS Health Care established to support TELUS’ growing customer service needs, TI has Centres in 2020), we were able to provide virtual care services, and we grown exponentially in size, scope and geographic diversity to deliver further expanded those virtual care capabilities with the 2019 acquisition exceptional digital customer experience solutions for clients from sites in of Akira and the 2020 acquisition of EQ Care, allowing patients 24/7 North and Central America, Europe and Asia. TI added significant scale bilingual and unlimited access to healthcare practitioners for the mental and diversity through the January 31, 2020 acquisition of Competence and physical care they need, from anywhere in the country. In the first Call Center (CCC), a leading provider of higher-value-added business quarter of 2019, TELUS Health also launched a future-forward virtual services with a focus on customer relationship management and content healthcare service called Babylon by TELUS Health, to further expand moderation. On December 31, 2020, TI further advanced its digital and revolutionize consumer access to healthcare. With innovative transformation strategy with the acquisition of Lionbridge AI (Lionbridge), AI-powered preventative health app features (available in English and a market-leading global provider of crowd-based training data and anno- French) such as the Symptom Checker, Monitor and Health Check, users tation platform solutions used in the development of AI algorithms to can get information about their health and, if required, speak directly with power machine learning. Lionbridge’s advanced technology innovation, a licensed physician from the convenience of a smartphone, in multiple combined with human ingenuity, improves data functionality to deliver languages across B.C., Alberta, Saskatchewan and Ontario. In 2020, significantly enhanced, customized and high-quality outcomes for Babylon by TELUS Health also launched two physical clinics in B.C. to customers. These two acquisitions added substantial scale and diversity augment our digital first approach. Together, these virtual care solutions to TI as its size, scope and reach grew to encompass almost 50,000 team and capabilities are empowering Canadians to better manage their members globally, providing integrated solutions and services that span health and get the care and information they need when it’s convenient digital strategy, innovation, consulting and design, digital transformation for them – a huge step forward in the evolution of Canada’s healthcare and IT lifecycle solutions, data annotation and intelligent automation, system and the current status quo. In 2020, TELUS Health enabled and omnichannel CX solutions, including content moderation, trust and Canadian practitioners to conduct virtual visits with their patients by safety solutions and other managed solutions, with back-office support integrating patient videoconferencing into its electronic medical records in almost 50 languages from more than 50 delivery locations across (EMR) across Canada, and by December 31, 2020, more than 226,000 over 20 countries. In February 2021, TI successfully completed its IPO, consultations have been conducted through the TELUS EMR Virtual further positioning the organization for continued growth in the years Visit solution. This capability has been augmented by the acquisition of to come (see Section 1.3 for additional details). InputHealth Systems Inc. and their Collaborative Health Record (CHR) With the official launch of TELUS Agriculture (TAG) in 2020, a business Virtual Care solution. Since the onset of the pandemic, these virtual care initially built on eight acquisitions over the course of 2019 and 2020, solutions experienced accelerated adoption, easing pressure on the we positioned ourselves to become a major global player in the promising healthcare system. In many ways, market activities and trends through- and rapidly growing agriculture technology market. Producing healthy, out the year have validated TELUS Health’s long-standing presence in safe and sustainable food remains a crucial global priority – both today 96 • TELUS 2020 ANNUAL REPORT MD&A: GENERAL TRENDS, OUTLOOK AND ASSUMPTIONS, AND REGULATORY DEVELOPMENTS AND PROCEEDINGS and for the future. It is estimated that global food supplies will need to increase by as much as 70% over the next 30 years, simply to keep pace with the world’s growing population. Increasingly so, farmers and produ- cers across the globe are leveraging digital technologies to efficiently Our key assumptions include the following: • Estimated economic growth rates in Canada, B.C., Alberta, Ontario and Quebec of 4.5%, 4.5%, 4.4%, 4.8% and 4.6%, respectively. • Estimated annual unemployment rates in Canada, B.C., Alberta, manage their operations and to harness valuable data insights in order Ontario and Quebec of 7.8%, 6.9%, 9.9%, 8.0% and 6.9%, respectively. to optimize production and output. With an ever-expanding world • Estimated annual rates of housing starts on an unadjusted basis in population, farmers are managing more acres, equipment and suppliers Canada, B.C., Alberta, Ontario and Quebec of 202,000 units, 35,000 than ever before, and streamlined digital access to data insights and features can translate into significant time and cost savings. TELUS is establishing meaningful positions in three key segments of the agriculture value chain: (i) agri-Business, which enables the flow units, 24,000 units, 77,000 units and 48,000 units, respectively. • No material adverse regulatory rulings or government actions. • Continued intense mobile products and services competition and fixed products and services competition in both consumer of business data between manufacturers, such as farm machinery, seed and business markets. and chemistry suppliers, distributors, retailers, and farms; (ii) agri-Food, • Continued increase in mobile phone industry penetration of which enables food traceability from the farm and ranch to the fork the Canadian market. on behalf of industry stakeholders such as food manufacturers, grocers, restaurants and consumers; and (iii) farm and ranch, which enables • Ongoing subscriber adoption of, and upgrades to, data-intensive smartphones, as customers seek more mobile connectivity precision agriculture, as well as farm and ranch management. We offer to the internet at faster speeds. We estimate there will be higher leading smart agriculture software solutions across the value chain and address agriculture’s complex data management challenges and device upgrade volumes closer to pre-pandemic levels in 2021. • Mobile products and services revenue growth resulting from data silos, to digitally transform, protect and improve the global food improvements in subscriber loading, with continued competitive system by improving the efficient production, transportation, quality pressure on blended ARPU. Roaming revenue will remain at levels and safety of our food. similar to the latter half of 2020 as continued travel advisories and As technology continues to change our industry rapidly, customer border restrictions, including those in Canada and the U.S., impact demand continues to evolve and grow, and Canada shifts to a more digital business and consumer travel in the first half of 2021, with recovery economy, we are committed to evolving our business and offering innov- expected to begin with the re-opening of the economy in the last half ative and reliable services and thought leadership in core future growth areas that are complementary to our current operations. This, along with our constant focus on leadership in delivering an enhanced customer of the year, but will not reach a full recovery until 2022 at the earliest. • Continued pressure on mobile products and services acquisition and retention expenses, arising from gross loading and customer experience, positions us for continued differentiation and growth. renewal volumes including potential impacts related to deferred 9.3 TELUS assumptions for 2021 In 2021, we expect the COVID-19 pandemic to continue to have significant impacts on our business, primarily in the first half of the year, attributed to economic factors such as continued travel advisories and border restrictions, decreasing business and consumer travel continuing to impact our roaming revenues and subsequent business lockdowns, and/or reduced scope of operations impacting our TELUS Health Care Centres. We expect that the availability, distribution and effectiveness of COVID-19 vaccinations to the general population will occur by the second half of 2021, which will allow for the re-opening of the global economy and areas where we conduct business. We expect that the COVID-19 pandemic impacts in 2021 will be similar to 2020. However, we still expect growth in EBITDA, driven by continued demand for data in our mobile and fixed products and services, and contribution from new business acquisitions; continued significant ongoing investments in our leading fibre broadband network and growing 5G deployment; our strategic efforts to enhance operational simplicity and efficiency; and our constant focus on an enhanced customer experience across all areas of our operations, with the objective of simplifying our customers’ interaction with us while reducing our overall cost structure. Our assumptions in support of our 2021 outlook are generally based on industry analysis, including our estimates regarding economic and telecom industry growth, as well as our 2020 results and trends discussed in Section 5. device upgrades during the global health pandemic, competitive intensity and customer preferences. Continued mobile connected devices growth, as our IoT offerings diversify and expand. • Continued growth in fixed products and services data revenue, reflecting an increase in internet, TV and security subscribers, speed upgrades, rate plans with larger data buckets or endless data usage, and expansion of our broadband infrastructure, healthcare solutions, and home and business security offerings. • Continued erosion of residential voice revenue resulting from technological substitution and greater use of inclusive long distance. • Continued growth of TI revenue and EBITDA generated by expanded services for existing and new clients and strategic business acquisitions. • Continued focus on our customers first initiatives and maintaining our customers’ likelihood-to-recommend. • Employee defined benefit pension plans: current service costs of approximately $107 million recorded in Employee benefits expense and interest expense of approximately $25 million recorded in Financing costs; a rate of 2.50% for discounting the obligation and a rate of 2.70% for current service costs for employee defined benefit pension plan accounting purposes; and defined benefit pension plan funding of approximately $51 million. • Restructuring and other costs of approximately $150 million for continuing operational effectiveness initiatives, with margin enhance- ment initiatives to mitigate pressures related to intense competition, technological substitution, repricing of our services, increasing subscriber growth and retention costs, and integration costs associated with business acquisitions. TELUS 2020 ANNUAL REPORT • 97 • Net cash Interest paid of approximately $755 million to $805 million. • Depreciation and Amortization of intangible assets of approximately $3.25 billion to $3.35 billion. • Income taxes: Income taxes computed at an applicable statutory rate of 25.3 to 25.9% and cash income tax payments of approximately $540 million to $620 million (2020 – $397 million). • Participation in ISED’s wireless spectrum auction for 3500 MHz spectrum band, with auction bidding expected to start on June 15, 2021. • Continued stabilization in the average Canadian dollar: U.S. dollar exchange rate ($1.28 in 2020). • Continued deployment of access-agnostic technology in our network. • SMB will continue to be negatively impacted by lockdown measures primarily during the first half of the year, and that they will continue to feel the effects through the rest of the year, with access to continued government support easing in the latter half of 2021. • Government funding programs to support consumers’ ability to pay bills will ease in the latter half of 2021. • We expect that we will be able to operate our retail stores as effect- ively as we had in the second half of 2020, reflecting the additional safety measures in place but still allowing us to serve our customers in-person, in addition to the digital capabilities that have enabled us to continue serving our customers through the pandemic. • Continued impacts on our TELUS Health Care Centres as a result of lockdown and stay-at-home measures resulting in cancellations of appointments, reduced capacity or closure of clinics. We expect recovery to begin in the second half of 2021 through effective deployment of value-added services and optimizing efficiency within the clinics. • Our international operations will be impacted by the recoveries in other global economies based on vaccine availability, distribution and effectiveness on their respective populations and regional lockdown measures. Our 2021 outlook is forward-looking information that is based on these assumptions and is subject to inherent risks and uncertainties. These assumptions may ultimately prove to have been inaccurate. Events or our actual results may differ materially from expectations expressed in or implied by this outlook due to these assumptions having been incorrect or as a result of risks such as those described in detail in Section 10 Risks and risk management. 9.4 Communications industry regulatory developments and proceedings Our telecommunications, broadcasting and radiocommunication services are regulated under federal laws by various authorities, including the Canadian Radio-television and Telecommunications Commission (CRTC), ISED, Canadian Heritage and the Competition Bureau. The following is a summary of certain significant regulatory develop- ments and proceedings relevant to our business and our industry. This summary is not intended to be a comprehensive legal analysis or descrip- tion of all of the specific issues described. Although we have indicated those issues for which we do not currently expect the outcome of a development or proceeding to be material to us, there can be no assurance that the expected outcome will occur or that our current assessment of its likely impact on us will be accurate. See Section 10.3 Regulatory matters. Radiocommunication licences and spectrum-related matters ISED regulates, among other matters, the allocation and use of radio spectrum in Canada and licenses radio apparatus, frequency bands and/ or radio channels within various frequency bands to service providers and private users. The department also establishes the terms and con- ditions that may attach to such radio authorizations, including restrictions on licence transfers, coverage obligations, research and development obligations, annual reporting, and obligations concerning mandated roaming and antenna site sharing with competitors. 3500 MHz spectrum auction to support 5G On June 5, 2019, ISED released its Decision on Revisions to the 3500 MHz Band to Accommodate Flexible Use and Preliminary Decisions on Changes to the 3800 MHz Band followed on March 5, 2020 by its Policy and Licensing Framework for Spectrum in the 3500 MHz Band, which defines the auction rules and conditions of licence for the 3500 MHz band. The auction framework provides for a 50 MHz set-aside in all markets where 50 MHz or more spectrum is available; in markets with a large population centre and less than 50 MHz of auction supply, all the auction supply will be set aside. This is on top of the competitive imbalance that has already been introduced by ISED’s 2019 transition decision for the band. That decision left nearly 90 MHz of the 200 MHz band in the hands of band incumbents. A combination of the transition decision, by way of a clawback and the asymmetric design of the auction framework, which sets aside a significant portion of the spectrum under auction exclusively for certain carriers in any given licence area, raises the risk that we may not be able to acquire all the spectrum we need in the auction process and we may be required to pay more than we might otherwise pay. The deadline for receipt of applications and financial deposits for participation in the 3500 MHz spectrum auction had been postponed to April 6, 2021, due to the COVID-19 pandemic, and auction bidding is expected to start on June 15, 2021. mmWave and 3800 MHz spectrum auctions to support 5G On June 5, 2019, ISED released its Decision on Releasing Millimetre Wave Spectrum to Support 5G, repurposing several tranches of mmWave spectrum for mobile use. ISED will consult on a licensing framework (i.e. auction rules and conditions of licence) for these mmWave bands in the future. ISED stated that the auction is expected to commence in 2021, but we believe it may not take place until 2022 or later. There is a risk that the auction rules may favour certain carriers over us and impact our ability to acquire an adequate quantity of mmWave spectrum. The 3800 MHz spectrum band is seen as an extension to the 3500 MHz band. ISED released the first of two consultations on August 27, 2020. This first consultation featured proposals from ISED and from Telesat, the Canadian satellite spectrum licensee of 3700– 4200 MHz spectrum, on how to repurpose existing spectrum. Following a decision on the first consultation, we expect a second consultation on an auction framework for the 3800 MHz band. ISED has forecasted a delay to the 3800 MHz auction process, now expected to take place in 2023 (formerly projected for late 2022). There is a risk that the auction rules will favour certain carriers over us and impact our ability to acquire an adequate quantity of 3800 MHz band spectrum on a cost-effective basis. 98 • TELUS 2020 ANNUAL REPORT MD&A: GENERAL TRENDS, OUTLOOK AND ASSUMPTIONS, AND REGULATORY DEVELOPMENTS AND PROCEEDINGS Regulatory and federal government reviews The CRTC and the federal government have initiated public pro- Separately, on November 13, 2019, we filed an application to the CRTC to review and vary Telecom Order CRTC 2019-288, primarily on ceedings to review various matters. A number of key proceedings the basis that the CRTC made errors in calculating the carriers’ costs. are discussed below. Review of mobile wireless services On February 28, 2019, the CRTC released its consultation to review the regulatory framework for mobile wireless services. The proceeding is now closed and we await a decision. The review examined three major issues – the level of competition in the retail market, the current wholesale mobile wireless service regulatory framework, with a focus on wholesale mobile virtual network operator (MVNO) access, and the future of mobile wireless services in Canada, with a focus on reducing barriers to infrastructure deployment. We participated throughout this proceeding and filed evidence to demonstrate the high performance of Canadian wireless services on dimensions including network coverage, network quality, availability of service and pricing. The impact of this proceeding on us will not be known until a decision is issued by the CRTC. That decision is not expected until early 2021. On December 13, 2019, Bell Canada and a group of cable companies also brought applications to the CRTC to review and vary Telecom Order CRTC 2019-288. Bell Canada and the cable companies also sought a stay of the order pending the disposition of the review and variance applications. The CRTC granted the stay on September 28, 2020 and has yet to issue its decisions on any of these applications. Also on November 13, 2019, we filed a petition to the Governor in Council seeking to refer back to Telecom Order CRTC 2019-288 for redetermination of the rates and seeking to vary Telecom Order CRTC 2019-288 to remove its retroactive effect, all on the basis that the rates and retroactive component of the order will threaten future investment. Bell Canada and a group of cable companies filed similar petitions on the same day. On August 15, 2020, the Governor in Council issued an Order in Council dismissing the petitions as premature in light of the applications to review and vary the order set out above, which remain under reserve. However, the Order in Council, as well as an accompanying statement Wireline wholesale services and interconnection follow-up On July 22, 2015, the CRTC released Review of wholesale wireline from the Minister of Innovation, Science and Industry, recognized that the rates set out in Telecom Order CRTC 2019-288 will, in some instances, services and associated policies, Telecom Regulatory Policy CRTC undermine investment in high-quality networks. We expect the CRTC to 2015-326 (TRP 2015-326). The major component of this decision was take this Order in Council into account in its decisions on the review and that the CRTC ordered the introduction of a disaggregated wholesale variance applications presently under reserve. Until the CRTC renders high-speed access (HSA) service for internet service provider (ISP) its decisions on these review and variance applications or otherwise lifts competitors. This includes access to FTTP facilities. the stay, the rates will not be in effect. On June 11, 2020, the CRTC released Call for comments – Appropriate network configuration for disaggregated wholesale high-speed access services, Telecom Notice of Consultation CRTC 2020-187 (TNC 2020-187), where it is addressing the appropriate network and service configurations for the disaggregated wholesale HSA service regime for all wholesale HSA service providers across the country. This new process takes the place of the previous follow-up proceedings and now features a common process for incumbent local exchange carriers (ILECs) and cable companies across Canada. Until the CRTC issues its decision, it is too early to determine the impact of this proceeding on us. Final rates for aggregated wholesale internet access services On August 15, 2019, the CRTC released Telecom Order CRTC 2019-288, which finalized rates for the aggregated wholesale internet services of the ILEC and incumbent cable companies. The final rates were consider- ably lower than the interim rates, and the CRTC ordered the rates to apply retroactively to October 6, 2016. The financial impact of this decision was not material to us, given the volume of wholesale internet customers we currently serve. On September 13, 2019, Bell Canada and affiliated companies and a group of cable companies filed separate applications with the Federal Court of Appeal to seek leave to appeal Telecom Order CRTC 2019-288. Bell Canada and the cable companies also sought a stay of the order. On November 22, 2019, the Federal Court of Appeal allowed both leave applications and granted a stay pending the disposition of the appeal. On September 10, 2020, the Federal Court of Appeal dismissed the appeals on merit, thereby upholding the CRTC’s decision. Bell Canada and the group of cable companies have sought leave to appeal this dismissal to the Supreme Court of Canada. The application remains under reserve. 5G security review – Public Safety Canada In September 2018, the federal government announced a review of national cybersecurity requirements for Canada’s 5G networks. The stated objective of the reviews was to provide policy clarity on what security controls or restrictions the government intends to impose on 5G networks in Canada and to which foreign vendors such controls and restrictions would apply. The timelines for the conclusion of this review were never released by the federal government, which has also not announced its intentions regarding 5G cybersecurity requirements. Given the range of potential government or regulatory action that may result from this review, the impact on us, and on Canadian wireless service providers in general, cannot be reliably predicted. International security developments On May 16, 2019, an executive order entered into force permitting the Secretary of Commerce to block certain technology transactions deemed to constitute national security risks. Additionally, the Bureau of Industry and Security of the United States Department of Commerce (BIS) subsequently amended Export Administration Regulations such that Huawei Technologies Co., Ltd. (Huawei) and 68 of its non-U.S. affiliates were added to the Entity List effective May 16, 2019. Effective August 19, 2019, an additional 46 non-U.S. affiliates were placed on the Entity List. Their addition to the Entity List imposed a licensing requirement under the Export Administration Regulations (EAR) regarding the export, re-export or transfer (in-country) of most items subject to the EAR to any of these 115 listed Huawei entities. A further final rule effective August 17, 2020 provided for additional non-U.S. affiliates of Huawei to be added to the Entity List and revisions to current entries on the Entity List; removal of the Temporary General License (TGL) and conforming changes to Entity List for TGL Removal; and changes to General Prohibition Three – the Foreign-Produced Direct Product Rule. TELUS 2020 ANNUAL REPORT • 99 Reversing an earlier position that would allow limited Huawei 5G CRTC proceeding regarding access to poles in the U.K., on July 14, 2020, the U.K. government announced plans to legislate a ban on the purchase of all new 5G infrastructure from Huawei owned by Canadian carriers On October 30, 2020, the CRTC issued Call for comments regarding by December 31, 2020, and to require the removal of Huawei 5G net- potential regulatory measures to make access to poles owned works deployed in the U.K. by 2027. The U.K. government is also currently by Canadian carriers more efficient, Telecom Notice of Consultation considering legislation that would further restrict the installation of any CRTC 2020-366. The CRTC commenced the proceeding further to Huawei equipment in U.K. 5G networks after September 30, 2021. comments in the proceeding initiated by Telecom Notice of Consultation Given the range of potential government or regulatory actions by CRTC 2019-406 that untimely and costly access to poles owned by foreign governments with respect to Huawei, the impact on us, and Canadian carriers has negative impacts on broadband deployment, on Canadian wireless service providers generally, cannot currently particularly in areas with limited or no access to broadband-capable be predicted. CRTC proceeding regarding device financing On August 30, 2019, the CRTC commenced a proceeding to inquire into device financing plans for wireless handsets and asked certain parties, including us, to show cause why their device financing plans are permitted networks. In the most recent proceeding, the CRTC will consider, among other issues, authorization delays, make-ready costs, spare capacity reservations, joint use agreements, and the potential for improved dispute resolution. We are participating fully in the proceeding. It is too early to determine the impact of the proceeding on us. under the Wireless Code. This proceeding followed the introduction of device financing plans by us, Rogers and Bell in July 2019, including, for Government mobile wireless pricing election commitment Ahead of the 2019 federal election, the Liberal Party of Canada made Rogers and us, plans with terms longer than 24 months. Under these a commitment to reduce wireless prices by 25%. On March 5, 2020, plans, customers who cancel wireless services contracts are required to the Liberal government clarified its expectation that we, Bell, and Rogers repay immediately the outstanding financing balance in full. On August 2, (including flanker brands) lower mobile wireless prices for postpaid, 2019, the CRTC issued a letter stating that wireless service providers bring-your-own-device plans in the 2 to 6 GB range by 25% by January were to stop offering device financing plans beyond 24 months so it 2022. The government reiterated this statement on June 5, 2020. could review the practice. In the proceeding, the CRTC sought comment To track progress, the government is reporting quarterly on wireless on the effects on consumers of financing plans beyond 24 months pricing. We are unable to determine the full impact of this commitment and how the provisions of the Wireless Code apply to device financing. at this time. The announcement or implementation of specific regulations We intervened to inform the CRTC that: device financing is desired by or other actions intended to reduce cell phone plan prices could customers; customers benefit from longer financing periods because precipitate a material reduction in operating expenditures and capital upfront device costs are lower and the cost of devices can be spread expenditures to ameliorate this impact. over a longer period, thereby reducing the monthly cost; the objective of the Wireless Code should be to benefit customers; and longer device financing periods further the federal government’s affordability agenda for wireless services. Until the CRTC issues a decision on its intended treatment of financing plans, it is too early to determine the impact of this proceeding on us. CRTC review of rate setting for wholesale telecommunications services On April 24, 2020, the CRTC issued Call for comments – Review of the approach to rate setting for wholesale telecommunications services, Telecom Notice of Consultation CRTC 2020-131. In this proceeding, the CRTC is seeking comment on whether to change its methodology of setting wholesale rates and, if so, how. The CRTC has stated its intent CRTC proceeding regarding potential barriers to the deployment to use the proceeding to establish a more transparent and efficient rate- of broadband-capable networks in underserved areas in Canada On December 10, 2019, the CRTC issued Call for comments regarding potential barriers to the deployment of broadband-capable networks in underserved areas in Canada, Telecom Notice of Consultation CRTC 2019-406. In this proceeding, the CRTC is seeking comment on barriers that service providers and communities face in building new facilities, or interconnecting to or accessing existing facilities, and in extending networks into underserved areas in order to offer universal service objective-level services. The CRTC has specifically identified access to affordable transport services and efficient use of support structures as potential barriers. We are participating fully in the proceed- ing. It is too early to determine the impact of the proceeding on us. setting process. We are participating fully in all stages of the proceeding. It is too early to determine the impact of the proceeding on us. CRTC review of availability of mobile wireless plans for Canadians with disabilities On June 1, 2020, the CRTC issued Call for comments – Accessibility – mobile wireless service plans that meet the needs of Canadians with various disabilities, Telecom Notice of Consultation 2020-178. In this proceeding, the CRTC is examining whether retail wireless service providers are meeting their requirements to offer mobile wireless plans that meet the needs of Canadians with disabilities; to promote those plans in ways that are accessible (including through stores, websites and customer service representatives); and whether new regulatory measures are required. We are participating fully in this proceeding to demonstrate how we are complying with existing requirements. The impact of this proceeding is not expected to be material. 100 • TELUS 2020 ANNUAL REPORT MD&A: GENERAL TRENDS, OUTLOOK AND ASSUMPTIONS, AND REGULATORY DEVELOPMENTS AND PROCEEDINGS CRTC review of deadlines for transition to next-generation Further to the report, on November 3, 2020, the government introduced 9-1-1 service On September 4, 2020, the CRTC issued Call for comments – Establishment of new deadlines for Canada’s transition to next- legislation to amend the Broadcasting Act. The bill would bring streaming services that operate over the internet expressly within the scope of the Broadcasting Act, and would provide the CRTC with new and expanded generation 9-1-1, Telecom Notice of Consultation CRTC 2020-326. regulatory powers to implement a modernized regulatory framework As a result of the COVID-19 pandemic, the CRTC had previously that addresses declining levels of support for Canadian content over suspended the deadlines associated with the implementation the past several years, and provide a more sustainable source of support of next-generation 9-1-1 service. The CRTC is now examining what going forward. The Minister of Canadian Heritage has indicated that the new deadlines for next-generation 9-1-1 service should be, further reforms will be needed to fully modernize the regulation of the including for the filing of cost studies and tariffs for next-generation broadcasting system, but that these proposed reforms are an important 9-1-1 network providers (including us), and when providers should first step. It is too early to determine if these proposed amendments, have their networks ready to support next-generation 9-1-1 voice services. as well as any other potential legislative changes arising as a result of The impact of this proceeding is not expected to be material. the report, will have a material impact on us. Proposed changes to Personal Information Protection and Electronic Documents Act On November 17, 2020, the federal government introduced Bill C-11, Review of the Copyright Act and Copyright Board reforms The Copyright Act’s statutorily mandated five-year review was due in 2017, and a process for conducting the review via parliamentary committee the Digital Charter Implementation Act, 2020, which, if passed, would was announced in December 2017. The House of Commons Standing make significant changes to the Personal Information Protection and Electronic Documents Act (PIPEDA) and create a new Consumer Privacy Committee on Industry, Science and Technology (INDU Committee), with the assistance of the Standing Committee on Canadian Heritage, Protection Act (CPPA). This bill aims to give consumers new rights and completed the review early in 2019, and both committees presented imposes new monetary penalties for non-compliance. The bill is currently reports to the House of Commons in May and June of 2019. Although at second reading stage in the House of Commons and is expected to the INDU Committee had requested that a comprehensive government go to Committee for further review in 2021. The full extent of the impact response be tabled by September 1, 2019, the government did not on us is not yet known. Broadcasting-related issues Broadcasting licences held by TELUS Our regional licences to operate broadcasting distribution undertakings in B.C. and Alberta were granted renewals in Broadcasting Decision CRTC 2018-267, which extends the licence terms to August 31, 2023. Our licence to operate a regional broadcasting distribution undertaking in areas of Quebec was renewed on June 28, 2019 in Broadcasting Decision CRTC 2019-230, extending the licence term to August 31, 2024. Our licence to operate a national video-on-demand service was renewed to August 31, 2023, as part of Broadcasting Decision CRTC 2018-20. We received CRTC authorization to launch a pay-per-view service on June 28, 2020, as part of Broadcasting Decision CRTC 2020-235. respond. Following the October 2019 federal election, the timeline for potential changes to the Copyright Act is uncertain. The policy approach for copyright has traditionally been based on a balance of interests of creators and consumers, and as a result, any changes to the Copyright Act are not expected to have a negative material impact on us. Legal challenge to the CRTC’s ability to regulate affiliation agreements The CRTC’s ability to regulate affiliation agreements between broadcasting distributors and programming services is currently being challenged by vertically integrated broadcasting entities before the Federal Court of Appeal. We were granted leave to intervene in the case and will defend the CRTC’s regulatory powers as a cornerstone of its vertical integration framework, which aims to ensure the fair treatment by vertically inte- grated firms of rival broadcasting distributors and programming services. The Federal Court of Appeal has yet to set a hearing date and a decision Review of the Telecommunications Act, the Radiocommunication Act is not expected before mid to late 2021. While an adverse decision could and the Broadcasting Act On January 29, 2020, the Broadcasting and Telecommunications Legislative Review Panel released its final report entitled Canada’s Communications Future: Time to Act. The report contains 97 recommen- dations to update legislation governing broadcasting, telecommunications and radiocommunication for the Government of Canada to consider. weaken our negotiating position vis-a-vis vertically integrated firms that supply “must-have” channels to our broadcasting distribution business, it is too early to determine the impact it would have on our broadcasting distribution activities. TELUS 2020 ANNUAL REPORT • 101 10 Risks and risk management 10.1 Overview TELUS enterprise risk governance and management Risk is the effect of uncertainty that arises due to events, actions and our business activities that may have a negative impact on the achievement of our objectives and goals, but may also create positive opportunities. Risk oversight and management processes are integral elements of our risk governance and strategic planning practices. Risk governance, oversight and culture We maintain strong risk governance and oversight practices, with risk oversight responsibilities outlined in the policy manual for our Board of Directors. Our Board is responsible for ensuring that material risks to our business are identified, and overseeing the implementation of systems and processes that effectively identify, monitor and manage material risks. Our risk governance culture starts with clear risk management leadership and transparent communications, supported by our Board and Executive Team. In our approach to risk governance, accountability for the management of risks and reporting of risk information is clearly defined. Training and awareness programs, appropriate resources and risk champions help to ensure that we have the risk management com- petencies necessary to support effective decision-making across the organization. Ethics are integral to our risk governance culture, and our code of ethics and conduct directs team members to meet the highest standards of integrity in all business decisions and actions. Responsibilities for risk management We take a multi-step approach to managing risks, sharing responsibility across the organization and recognizing that effective risk management is dynamic and integral to the achievement of our strategic and oper- ational objectives. The first line of assurance is executive and operating BOARD OF DIRECTORS Risk governance and oversight COMMITTEES Executive risk briefings Board and committee- specific oversight accountabilities EXECUTIVE TEAM Executive risk ownership and reporting CEO CFO ENTERPRISE KEY RISK PROFILE VP Risk Management and Chief Internal Auditor Multi-level enterprise risk and control assessment process B USINESS OPERAT IONS AND ACTIVITIES management, and these team members are expected to integrate risk areas of TELUS and enable us to track multi-year trends in key risks management into core decision-making processes (including strategic and the control environment. A comprehensive annual risk and control planning processes) and day-to-day operations. We have risk management assessment is conducted with leaders and an annual assessment is and compliance functions across the organization, in areas that include completed by Board members to provide perspective on key enterprise Finance, Legal, Data and Trust (which includes Privacy), Security and other risks. Results of the assessments are shared with senior management, business operational areas, and these form the second line of assurance. our Board of Directors and Audit Committee, and inform the develop- These teams establish policies, provide guidance and expertise, and work collaboratively with management to monitor the design and operation of ment of our risk-focused internal audit program. This risk information is incorporated into our strategic planning, operational risk management controls. Internal Audit is the third line of assurance, providing independent and performance management processes. In addition, key enterprise assessments of the effectiveness and efficiency of risk management risks are reviewed on a quarterly basis in order to capture and com- and controls across all areas of our business. municate any changes, and detailed risk assessments are conducted Risk and control assessment process Events within and outside of TELUS present us with both risks and opportunities. We strive to avoid taking on undue risk and we work to ensure alignment of risks with business strategies, objectives, values and risk tolerances; in turn, we also seek to take advantage of opportun- for various risk management, strategic and operational initiatives throughout the year. 10.2 Principal risks and uncertainties ities that may emerge. We strive to proactively mitigate our risk exposures This section describes our principal risks and uncertainties. The signifi- through performance planning, business operational management cance of these risks is such that they, alone or in combination, may have and risk response strategies, which can include mitigating, transferring, material impacts on our business operations, results, reputation and brand, retaining and/or avoiding risks. as well as the approaches taken by investment analysts when evaluating We have in place multi-level enterprise risk and control assessment or valuing TELUS. These risks and the associated risk mitigation activities processes that solicit and incorporate insights from leaders across all are addressed further in the following sections. 102 • TELUS 2020 ANNUAL REPORT MD&A: RISKS AND RISK MANAGEMENT On March 11, 2020, the World Health Organization declared the out- may in the future be, negatively impacted by the pandemic, and the cor- break of the novel coronavirus identified as COVID-19 to be a pandemic. responding reduction in demand for their services may negatively affect Due to the wide range of possible COVID-19 pandemic outcomes and the revenue from those clients. As a result of the COVID-19 pandemic, the uncertainty with regard to the duration and impact of the pandemic, TI has had to temporarily close a number of sites in accordance with government policies implemented to limit its spread and the ongoing government ordinances applicable in the various jurisdictions in which evolution of the development and distribution of effective vaccines, we it operates. Closures of sites for such extended periods of time may cannot accurately forecast the impact of the COVID-19 pandemic on our impact the ability to retain and attract talent, which may have negative future operations, financial performance, financial position or cash flows. impacts on human resource costs and profitability. Risks and uncer- However, the COVID-19 pandemic may, directly or indirectly, mater- tainties that could affect our business results, as well as the price of our ially and adversely affect our operations, condition and financial results. securities, and that could be accentuated by the COVID-19 pandemic For example, the ability of our TI subsidiary to continue operations or by any future pandemic or similar event include, but are not limited to, effectively during the COVID-19 pandemic is dependent on a number the risks described here in Section 10. See Section 1.2 for a description of factors, such as the continued availability of high-quality internet of the operational measures currently undertaken or planned to address bandwidth, an uninterrupted supply of electricity, the sustainability of risks to our business relating to the COVID-19 pandemic. social infrastructure to enable our team members who are working Although we believe the measures we take to identify and mitigate remotely to continue delivering services, and on otherwise adequate risks are reasonable, there can be no expectation or assurance that conditions for remote working, all of which are outside of our control. they will effectively mitigate or fully address the risks described, or that Some of the geographies in which TI team members work remotely may new developments and risks will not materially affect our operations not be well-suited to work-from-home approaches to providing client or financial results. Despite our efforts to implement controls in our services due to connectivity or other issues with the local infrastructure. domestic and international operations, there can be no assurance that The effects of the pandemic have caused our TI subsidiary’s clients to these controls will prove to be effective in all instances. Forward-looking defer decision-making, delay planned work, reduce volumes or seek statements in this section and elsewhere in this MD&A are based on to terminate current agreements with TI. Additionally, a number of our the assumption that our risk mitigation measures and controls will be TI subsidiary’s clients in the Travel and Hospitality vertical have been, and effective. See Caution regarding forward-looking statements. Strategic risks These strategic risks arise from uncertainties that may shape the nature and focus of our strategic direction as an organization and our ability to sustain profitable revenue growth. Risk Potential impact Mitigations Regulatory matters (see 10.3) Constraining of domestic telecom practices by elected officials and regulatory decisions, reviews and government activity, domestically and internationally, may have strategic, financial (including revenue and free cash flow) or operational impacts. Competitive environment (see 10.4) Technology (see 10.5) Suppliers (see 10.6) Competitor expansion, activity and intensity (pricing, bundling), as well as non-traditional competitors, disruptive technology and disintermediation, may alter the nature of the market and impact our market share and financial results (including revenue and free cash flow). Consumer adoption of alternative technologies and changing customer expectations have the potential to impact our revenue streams and customer churn. We may be impacted by supply chain practices, disruptions and lack of resiliency in relation to global or localized events. Dependence on a single supplier for products, components, service delivery or support may impact our ability to efficiently meet constantly changing and rising customer expectations while maintaining our quality of service. Organizational change (see 10.7) Investment and acquisition activities present opportunities to expand our scope but may expose us to new risks. We may be unsuccessful in gaining market traction/share and realizing benefits and integration efforts may distract from other priorities. 1 Not incorporated by reference. TELUS 2020 ANNUAL REPORT • 103 • Advocacy • Spectrum acquisition strategies • Non-regulated, diversified revenue streams • Prudent investment and cost efficiency planning decisions commensurate with our regulatory environment • Customers first strategy • Bundling of services • Competitive monitoring • Product portfolio innovation and acquisition • Product life cycle management • Technology road map • Fibre deployment • Spectrum acquisition strategies • Supplier risk profiling and multi-vendor strategy • Vendor partnerships, contracts and agreements • Supplier code of conduct • Business continuity management plans Information on supply chain sustainability can be found in our sustainability report1 at telus.com/sustainability. • Investment and acquisition strategy • Pre- and post-acquisition due diligence • TELUS Ventures investments • Innovation partnerships Operational risks and uncertainties Operational risks arise from uncertainties we face in our day-to-day operations. Our approach is guided by our code of ethics and conduct, while our operations are supported by policies, procedures and internal controls. Risk Potential impact Customer service excellence (see 10.8) Our systems and processes (see 10.9) Customer interactions and our service delivery directly impact customer experience, customer churn, and likelihood to recommend outcomes. Systems and technology innovation, maintenance and management may impact our IT systems and network reliability, as well as our operating costs. Security and data protection (see 10.10) Our team (see 10.11) Our awareness of security issues and the effectiveness of our security controls influence our ability to identify potential threats and vulnerabilities, protect our environment, detect breaches, respond to attacks and restore normal operations. A successful disruption may impact the operations of our network or allow the unauthorized interception, destruction, use or dissemination of customer, team member or business information. The rapidly evolving and highly competitive nature of our business and changing workforce demographics, as well as the sufficiency of internal training, development and succession programs, may impact our ability to attract, develop and retain team members with the skills required to meet the changing needs of our customers and our business. Our environment (see 10.12) Natural disasters, pandemics, climate change impacts and disruptive events may impact our operations, customer satisfaction and team member experience. Mitigations • Process simplification and digitization • Customer experience management • Life cycle management and adoption of emerging solutions • Project management • Change management • Continuous monitoring and response programs • Disaster recovery program and plans • Security policies, standards and methodologies • Privacy and security impact assessments • Vulnerability assessments • Continuous monitoring and response programs • Performance development program • Health and well-being strategy • Compensation and benefits program • Retention and succession planning • Work Styles program Additional information on our programs can be found in our sustainability report at telus.com/sustainability. • Business continuity and disaster recovery program and plans • Emergency Management Operating Committee (EMOC) • Medical Advisory Council to ensure our response and mitigation measures related to the COVID-19 pandemic are informed and supported by qualified medical advice • Commitment to sustainable and responsible business practices and decisions that balance economic growth with positive social and environmental outcomes See Section 5.2 of our 2020 Annual Information Form for a description of Task Force on Climate- related Financial Disclosures. Additionally, a detailed report of our environmental risk mitigation activities can be found in our sustainability report at telus.com/sustainability. 104 • TELUS 2020 ANNUAL REPORT Financial risks and uncertainties Financial risks arise from uncertainties involved in maintaining appropriate levels of liquidity, financing and debt to sustain operations and support MD&A: RISKS AND RISK MANAGEMENT future growth. Risk Financing, debt and dividends (see 10.13) Tax matters (see 10.14) The economy (see 10.15) Potential impact Mitigations Our access to capital markets may be impacted by general market conditions and investors’ assessments of our cash generation capability. Our current intention to return capital to shareholders could constrain our ability to invest in our operations to support future growth. Complexity of domestic and foreign tax laws, regulations and reporting requirements related to TELUS and our international operating subsidiaries may impact financial results, effective governance of tax considerations and compliance. International acquisitions and expansion of operations increase our exposure to multiple forms of taxation. Changing global economic conditions, as well as our effectiveness in monitoring and revising growth assumptions and contingency plans, may impact the achievement of our corporate objectives and our financial results (including free cash flow). • Shelf prospectus in effect until June 2022 • Investment grade credit ratings • Credit facilities, AR securitization and commercial paper program • Foreign currency forward contracts • Tax strategy • Internal taxation professionals • External advisors • Pension investment governance and monitoring • Foreign currency forward contracts • Diverse product sets • Efficient business operations Compliance risks and uncertainties Compliance risks arise from uncertainties related to compliance with laws and regulations across the many jurisdictions in which we operate. We have policies, controls, processes and contractual arrangements in place, as well as insurance coverage, that are designed to support compliance and limit our exposure to compliance risks. Risk Litigation and legal matters (see 10.16) Potential impact Complexity of, and compliance with, laws, regulations and commitments may have a financial and reputational impact. Mitigations • Customer contracts and agreements • Supplier contracts and agreements • Insurance policies • Compliance programs TELUS International risks On December 4, 2019, we announced that we were targeting an initial The price of the TI Subordinate Voting Shares may be volatile and is likely to fluctuate due to a number of factors, including actual or public offering (IPO) of TELUS International (Cda) Inc. (TELUS International anticipated changes in profitability; general economic, social or political or TI) in the subsequent 12–24 months. On February 3, 2021, we and TI developments; changes in industry conditions; changes in governance announced the pricing of the upsized TI IPO of 37 million subordinate regulation; inflation; the general state of the securities markets; and voting shares (TI Subordinate Voting Shares) at a price to the public of other material events. TI may choose to publicize targets or provide other US$25.00 per share. The TI Subordinate Voting Shares began trading on the New York Stock Exchange and the Toronto Stock Exchange on guidance regarding its business and it may not achieve such targets. Failure to do so could also result in a reduction in the trading price of the February 3, 2021 under the ticker “TIXT”. The offering of the TI Subordinate TI Subordinate Voting Shares. A reduction in the trading price of the TI Voting Shares was made by a registration statement on Form F-1 filed Subordinate Voting Shares due to these or other factors could result in a with the Securities and Exchange Commission (SEC) and a preliminary reduction in the fair value of TI multiple voting shares held by TELUS. base PREP Prospectus with the securities regulatory authorities in each of the provinces and territories of Canada. The risks associated with investing in TI are described in the registration statement and in subse- quent filings with the SEC and the Canadian Securities Administrators made by TI. The significance of these risks is such that they, alone or 10.3 Regulatory matters Risk category: Strategic The regulatory regime under which we operate, including the laws, in combination, may have material impacts on our business operations, regulations, and decisions in regulatory proceedings and court cases, results, reputation and brand, as well as the assessment made by reviews, appeals, policy announcements and other developments, investment analysts when evaluating or valuing TELUS or TI. such as those described in Section 9.4 Communications industry Following this transaction, we retained approximately 67% of the regulatory developments and proceedings, imposes conditions on the combined voting interest attached to all issued and outstanding shares in products and services that we provide and the ways in which we provide TI, and we consolidate TI’s financial results into our results of operations. them. The regulatory regime sets forth, among other matters, rates, Our financial performance is impacted by the financial performance of terms and conditions for the provision of telecommunications services, TI. TI’s financial performance may be affected by a number of factors, licensing of broadcast services, licensing of spectrum and radio appar- including, but not limited to, those described in this Section 10. atus, and restrictions on ownership and control by non-Canadians. TELUS 2020 ANNUAL REPORT • 105 The allocation and use of spectrum in Canada are governed by of laws or regulations by provinces or municipalities that threaten Innovation, Science and Economic Development Canada (ISED), which unitary federal regulatory authority over telecommunications in Canada, establishes spectrum policies, determines spectrum auction frameworks, could materially and adversely affect our business. These changes may issues licences and sets radio authorization conditions. increase our costs, restrict or impede the way we provide our services, Canadian ownership and control requirements, including restric- limit the range of services we provide, and otherwise cause us to reduce tions on the ownership of the common shares of TELUS Corporation our capital and operational expenditures, including investment in our (Common Shares) by non-Canadians, are imposed by the Canadian Telecommunications Common Carrier Ownership and Control Regulations under the Telecommunications Act (collectively, the Telecommunications network, and alter customer perceptions of our operations. The further regulation of our broadband, wireless and other activities and any related regulatory decisions could also restrict our ability to compete Regulations) and the Direction to the CRTC (Ineligibility of Non-Canadians), in the marketplace and limit the return we can expect to achieve on as ordered by the Governor in Council pursuant to the Broadcasting Act past and future investments in our network. Such changes may not be (the Broadcasting Direction). anticipated or, when they are anticipated, our assessment of their With our Internet of Things (IoT), business, health, agriculture and impact on us and our business may not be accurate. global international footprint, our operations must also comply with Our ability to provide competitive services, including our ability to the laws, regulations and decisions in effect in all of the jurisdictions in enhance our current services and offer new services on a timely basis, which we operate. These jurisdictions, as well as the contracts that is also dependent on our ability to obtain access to new spectrum we enter into (particularly those of our TI subsidiary), require us to comply licences at a reasonable cost as they are made available. The revocation with or facilitate our customers’ and clients’ compliance with numerous, of, or a material limitation on obtaining, spectrum licences could have complex and sometimes conflicting legal regimes, both domestically a material adverse effect on our business and our operations, including and internationally. These laws and regulations relate to a number of the quality and reliability of our network and service offerings, as well aspects of our business, including anti-corruption, internal and disclosure as our financial condition. control obligations, data privacy and protection, wage-and-hour standards, Government or regulatory actions with respect to certain countries employment and labour relations, trade protections and restrictions, or suppliers may also impact us, and other Canadian telecommunications import and export control, tariffs, taxation, sanctions, data and transaction carriers generally, and may have material, non-recurring, incremental processing security, payment card industry data security standards, cost consequences for us. records management, user-generated content hosted on websites we Overall, compliance with laws and regulations in multiple jurisdictions operate, privacy practices, data residency, corporate governance, anti-trust globally may involve significant costs, consume significant time and resour- and competition, team member and third-party complaints, telemarketing ces or require changes in our business practices that result in reduced regulations, telephone consumer regulations, government affairs and revenue and profitability. We may also face burdensome and expensive other regulatory requirements affecting trade and investment. Our cus- governmental investigations or enforcement actions regarding our compli- tomers and clients are also located around the world, and the laws and ance, including being subject to significant fines. Non-compliance could regulations that apply include, among others, U.S. federal laws and also result in fines, damages, criminal sanctions against us, our officers or regulations, state laws on third-party administration services, utilization our team members, prohibitions on the conduct of our business, damage to review services, data privacy and protection telemarketing services or our reputation, restrictions on our ability to process information, allegations state laws on debt collection in the U.S., collectively enforced by numerous by our clients that we have not performed our contractual obligations, or federal and state government agencies and attorneys general, as well other unintended consequences. In addition, we are required under various as similar consumer protection laws in other countries in which our laws to obtain and maintain accreditations, permits and/or licences for TI subsidiary’s clients’ customers are based. Failure to perform services the conduct of our business in all jurisdictions in which we have operations in a manner that complies with any such requirements could result in and, in some cases, where our clients receive our services, including the breaches of contracts with our TI subsidiary’s clients. The application of United States, Canada and Europe. If we do not maintain our accreditations, these laws and regulations to our TI subsidiary’s clients is often unclear licences or other qualifications to provide our services or if we do not adapt and may at times conflict. The global nature of our operations, in particular to changes in legislation or regulation, we may have to cease operations in our TI operations, increases the difficulty of compliance. For example, the relevant jurisdictions and may not be able to provide services to existing in many foreign countries, particularly in those with developing economies, clients or be able to attract new clients. Our failure to comply with applicable it is common to engage in business practices that are prohibited by legal and regulatory requirements could have a material adverse effect on regulations applicable to us or our TI subsidiary’s clients, including our business, financial performance, financial condition and cash flows. Canada’s Corruption of Foreign Public Officials Act and the United States Foreign Corrupt Practices Act. We cannot provide assurance that our TI subsidiary’s clients will not take actions in violation of our internal policies or Canadian or United States laws. Compliance with these laws and regu- lations may further be challenged by the remote working environment caused by the COVID-19 pandemic. For example, payment card industry and HIPAA guidance is evolving in light of the increase in remote working conditions globally, and thus there exists uncertainty over the additional cost and ability to comply with such evolving standards. Potential impact Changes to the regulatory regime under which we operate, including Changes over the past 12 months Significant regulatory developments and proceedings by the Government of Canada, and its various authorities, continued through 2020. A summary of certain significant regulatory developments and proceedings relevant to our business and industry are highlighted in Section 9.4. This includes, but is not limited to, the following: • Conclusion of all hearings and submissions by the CRTC for its review of the regulatory framework for mobile wireless services • Continued cybersecurity review of international suppliers of 5G network equipment and technologies, with a focus on Huawei Technologies, to evaluate potential risks involved in the development changes to laws and regulations and ownership rules or the enactment of 5G networks in Canada 106 • TELUS 2020 ANNUAL REPORT MD&A: RISKS AND RISK MANAGEMENT • Decision to significantly reduce wholesale internet service rates charged by incumbent local exchange carriers for wholesale Wireless markets are characterized by aggressive competition from established players and regional carriers, with competitors using various digital subscriber line and cable companies’ third-party internet promotional offers to attract and retain customers. access services to competitor internet service providers, and In the consumer market, cable companies and other competitors subsequent appeals • Expectation set out by the federal government that we, Bell and Rogers (including respective flanker brands) lower mobile wireless continue to offer a mix of residential local voice over IP (VoIP), long distance, internet access and, in some cases, wireless services under one bundled and/or discounted monthly rate, along with their existing prices for postpaid, bring-your-own-device plans in the 2, 4 and broadcast or satellite-based TV services. Some of our competitors own 6 GB range by 25% by January 2022 • TI completed the acquisition of Lionbridge AI on December 31, 2020. In connection with the acquisition, TI submitted a declaration filing with and continue to acquire broadcast content assets, which could result in content being withheld from us or being made available to us at inflated prices or on unattractive terms. CFIUS and, at CFIUS’ request, a joint voluntary notice that triggered an In the business market, traditional facilities-based competitors additional 45-day review period. While we believe that CFIUS will clear continue to compete based on network footprint and reliability, while the acquisition of Lionbridge AI, CFIUS approval may be subject to conditions imposed on TI or on TELUS. See Section 10.3 Regulatory matters and Section 10.6 Suppliers. hyperscalers such as Microsoft (Teams, Skype) and other IP voice/ collaborative providers such as Zoom only emphasize price, flexibility and convenience. These service providers do not invest in, or own, Mitigation We advocate at all levels of government, including: our participation in CRTC and federal government proceedings, studies, reviews and other consultations; representations before provincial and municipal governments pertaining to telecommunications issues; legal proceedings impacting our operations at all levels of the courts; and other relevant inquiries (such as those relating to the exclusive federal jurisdiction over telecommunications), as described in Section 9.4 Communications industry regulatory developments and proceedings. We will continue to monitor regulatory developments and may need to reconsider our investment decisions with a view to generating a necessary return on capital. Our risk mitigating strategies for investment decisions may include, but are not limited to, reducing capital and operational expenditures and reducing employment. We continue to strive to comply with all radio authorization and spectrum licence and renewal conditions, and we plan to participate in future spectrum auctions. We continue to advocate with the federal government for fair spectrum auction rules, so that companies like TELUS can bid on an equal footing with other competitors for spectrum blocks available at auction and can purchase spectrum licences available for sale from competitors. We also continue to strongly advocate that preferential treatment is not required and is not in the best interests of all Canadians, specifically rural Canadians, for regional carriers, including for 5G services, most notably for carriers that are currently part of established, sophisticated and well-financed cable companies. As a holding corporation of Canadian carriers, the Telecommunications Regulations give us certain powers to monitor and control the level of non-Canadian ownership of our Common Shares. These powers have been incorporated into our Articles and extended to ensure compliance under the Broadcasting Act. 10.4 Competitive environment Risk category: Strategic As the telecommunications industry continues to evolve, we have expanded our offerings beyond the delivery of traditional voice and data services for consumer and business customers to focus on security, customer care and business services, healthcare and agriculture, both inside and outside Canada (see Competition overview in Section 4.1). We face intense competition in our traditional voice and data services, as well as in new areas of business. networks or other infrastructure but compete directly with video, voice and messaging services across both the consumer and business market segments. Tl is a leading digital customer experience innovator with a focus on customer experience and transformation innovation that designs, builds and delivers next-generation digital solutions and content moderation. It competes with professional services companies that offer consulting services, information technology companies with digital capabilities, and traditional contact centre and business process outsourcing companies that are expanding their capabilities to offer higher-margin and higher- growth digital services. In addition, the continued digital expansion of the services offered by TI and the markets in which it operates will result in new and different competitors, many of which may have significantly greater market recognition than TI in the markets it is entering, as well as increased competition with existing competitors that are also expanding their services to cover digital capabilities. From time to time, our TI sub- sidiary’s clients who currently use TI services may determine that they can provide these services in-house. As a result, TI faces competitive pressure to continually offer services in a manner that will be viewed by its clients as better and more cost-effective than what they could provide themselves. TELUS Health competes with other providers of electronic medical records and pharmacy management products, claims adjudicators, systems integrators and health service providers, including those that own a vertically integrated mix of health services delivery, IT solutions and related services, and global providers. With consumer-facing health products, we compete in the provision of virtual healthcare services (with access to general practitioners, nurse practitioners, mental health therapists and dieticians provided through virtual consultations), pre- ventative health services, and personal emergency response services. TELUS Agriculture is a global data management and application solutions provider to a wide variety of agriculture and agri-food customers. While we maintain a broad solution set as compared to other agriculture technology providers, we compete with focused software and IoT competitors. Potential impact Our customers’ loyalty and their likelihood to recommend TELUS are both dependent upon our ability to provide a service experience that meets or exceeds their expectations, a range of relevant products and services, and reliable state-of-the-art networks. Intense competition from wireless competitors, traditional telephony, data, IP and IT service providers and VoIP-focused competitors in both the consumer and business markets, along with various promotional TELUS 2020 ANNUAL REPORT • 107 offers, inclusive bundles and rate plans, places pressures on average The COVID-19 pandemic has driven an accelerated adoption of revenue per subscriber per month (ARPU), churn and costs of acquisition cloud-based solutions (IP voice, collaboration and NaaS) and expedited and retention. In addition, technological substitution and technological the shift from legacy business solutions to third wave technologies. advances across all key business lines and market segments have blurred Non-traditional competitors such as Amazon, Google and Microsoft the boundaries between broadcasting, internet and telecommunications are entering the business market and are able to leverage their global sectors (see Section 10.5 Technology). scale to offer low-cost data storage and cloud computing services. The inability of TI to compete successfully against companies that In addition, rapidly advancing technologies, such as software-defined offer similar services and to offer our TI subsidiary’s clients a compelling networks and virtualized network functions, enable the layering of alternative to taking the services TI provides in-house could result in new services in cloud-centric solutions. increased client churn, revenue loss, pressures on recruitment and reten- Digital health adoption, including virtual care, is accelerating along tion of team members, service price reductions and increased marketing with the rapid expansion of competitor offerings and the emergence of and promotional expenses, or reduced operating margins, which could new players in the market, capitalizing on increased demand and available have a material adverse effect on our TI subsidiary’s business, financial government funding. Early in the COVID-19 pandemic, non-traditional performance, financial condition and cash flows. healthcare companies, such as Google, Amazon Web Services and We also face intense competition in agriculture, health and digital Apple, made moves into the healthcare space. technologies from companies that offer similar services. If we are unable Within the Canadian digital health market specifically, several of TELUS to differentiate effectively in these businesses, our business, financial Health’s long-standing competitors announced significant investments performance, financial condition and cash flows could be materially or acquisitions that mirror the activities of U.S.-based or international adversely impacted and we may not achieve the benefits of the significant companies. The overall trend appears to be for competitors to quickly investments that we have made in acquiring, integrating and growing expand product offerings through partnerships or acquisitions. In several these businesses. Changes over the past 12 months On July 30, 2020, Shaw Communications launched Shaw Mobile for customers in B.C. and Alberta. Continued wireless promotional activities, along with device financing, unlimited data plans and substitution by increasingly available Wi-Fi networks, are impacting chargeable usage, ARPU and customer churn (see Wireless trends and seasonality in cases, some of our competitors are now working together, such as Loblaw Companies Ltd. and Maple Corporation or Sun Life Financial and Dialogue Technologies Inc. However, we believe no other digital health provider spans the Canadian healthcare ecosystem with comparable breadth or depth. Mitigation Our top corporate priority is putting customers first and earning industry Section 5.4), while the use of unlicensed spectrum and high-throughput leadership in the likelihood to recommend. In fact, 60% of our internal satellites to deliver higher-speed data services is intensifying competition corporate scorecard is weighted to team member engagement and (see Communications industry regulatory developments and proceedings customer experience. To enhance customer experience, we continue in Section 9.4). to invest in our products and services, system and network reliability, In October 2020, the CRTC approved the application from Space team members, and system and process improvements. Additionally, Exploration Technologies Corp. (SpaceX Starlink) to provide low earth orbit with our product life cycle management processes, we endeavour satellite internet to rural Canadians. By December 31, 2020, the service to introduce innovative products and services through both research had already been made available to select users for beta testing, with and development and acquisition, enhance our current services with the promise of wider availability in 2021. Additionally, in November 2020, integrated bundled offers, and invest in customer-focused initiatives to the Government of Canada announced it has entered into an agreement bring greater transparency and simplicity to our customers, all to help with Telesat to secure high-speed internet capacity over Canada through differentiate ourselves from our competition. Telesat’s low earth orbit satellite constellation and has secured up to Our 4G technology covers approximately 99% of Canada’s population, $600 million to secure capacity to improve connectivity in rural and remote Canada, including the far north. Other competitors in the market which has enabled us to establish and maintain a strong position in smartphone and data device selection and expand roaming capability include Amazon (Kuiper), Boeing, OneWeb and the European company to more than 225 destinations. To compete effectively across customer Thales Alenia. However, these companies do not yet have approval to segments, we offer a wide range of services across our TELUS, Koodo provide services in Canada. Canadian cable competitors are licensing next-generation TV plat- forms while continuing to increase the speed of their internet offerings and Public Mobile brands. Each brand has a unique value proposition and web-based channel (see Our capabilities in Section 4.1 and Our major brands and distribution channels in Section 4.2). In addition, we have and their roll-out of Wi-Fi services in metropolitan areas. OTT services, deployed 5G networks within Vancouver, Toronto, Montreal, Calgary, such as Netflix, Amazon Prime Video, Disney+ and YouTube, are also Edmonton and other areas, providing superior coverage in urban centres competing for share of viewership, which may accelerate the discon- with future plans to cover rural Canada. At the end of 2020, our 5G nection of TV services or affect subscriber and revenue growth in network covered over 28% of Canada’s population. As we expand our our TV and entertainment services. 5G coverage, we will continue to deliver a network that is reliable, fast Erosion of our residential voice lines and the decline of legacy voice and built in full compliance with all of the Health Canada safety guidelines revenues are expected to continue, due to competition and ongoing in order to provide our customers with faster speeds, increased capacity technological substitution by wireless and VoIP. This has been only partially and near instantaneous responsiveness, while also enabling applications offset by growth in demand and/or migration of customers to IP-based such as remote surgery and autonomous cars and the creation of truly platforms, as IP-based solutions are also experiencing lower margins. smart cities (see Our technology, systems and properties in Section 4.2). 108 • TELUS 2020 ANNUAL REPORT MD&A: RISKS AND RISK MANAGEMENT We are making significant investments in our broadband infra- and drive efficiency and profitability. As one of the few businesses with structure, including connecting more homes and businesses directly to a perspective that covers the full value chain, we expect to be able to our fibre-optic network. At December 31, 2020, approximately 2.5 million differentiate ourselves from more narrowly focused competitors. households and businesses in B.C., Alberta and Eastern Quebec were We are continuing our disciplined long-term strategy of investing connected with fibre-optic cable (representing approximately 81% of our in our growth areas and delivering on our customers first priority. total high-speed broadband footprint), which provides these premises with immediate access to our fibre-optic infrastructure. This is up from approximately 2.2 million households and businesses at December 31, We intend to continue to market and distribute innovative and differen- tiated services; offer bundled services across our product portfolio; invest in our extensive network and systems to support customer service; 2019. Our broadband investments extend the reach and functionality of evolve technologies; invest in our distribution channels, including our our IP TV services and business and healthcare solutions, and are also digital capabilities; and acquire the use of spectrum to facilitate service enabling a more efficient and timely evolution to a converged 5G network development and the expansion of our subscriber base, as well as to (see Our technology, systems and properties in Section 4.2). address the accelerating growth in demand for data usage. Our IP TV and OTT multimedia initiatives support the next generation of IP TV and, importantly, tie our OTT environment to one platform, which allows us to be agile in the delivery of OTT services, such as Netflix, Amazon Prime and YouTube, while also strengthening our leadership position in Western Canada in the provision of high-definition linear channels, video-on-demand services and ultra-high definition 4K HDR content. Our strategy is to aggregate, integrate and make content and applications accessible for our customers’ enjoyment, on a timely basis across multiple devices. We have demonstrated that it is not necessary to own content in order to make it accessible to customers on an eco- nomically attractive basis, provided there is timely and strict enforcement of the CRTC’s regulatory safeguards. In addition, as more OTT service providers launch services and offer higher-resolution video over the internet, we continue to make investments in our network. Throughout 2020, TELUS PureFibre was the leader in Canada in the Netflix Internet Service Provider Speed Index, a measure of prime-time Netflix perform- ance delivered by a specific group of internet service providers around the world, and was ranked first in network coverage, speed, reliability or experience by Opensignal, J.D. Power, Ookla and Tutela. Our SmartHome Security and Secure Business solutions offerings further leverage our infrastructure investments and our strong customer experience capabilities to enhance our suite of services with video sur- veillance and analytics, home and business automation and related safety and security monitoring. These services are provided over smartphone applications and leverage our leading PureFibre and wireless networks, 10.5 Technology Risk category: Strategic We are a technology-enabled company and we maintain short-term and long-term strategies to optimize our selection, costs and use of technol- ogy, minimize risks and uncertainties and diversify our product and service offerings. Our 5G technology, 4G LTE network, LTE advanced (LTE-A) and TELUS PureFibre infrastructure are foundational to our future growth (see Our technology, systems and properties in Section 4.2). A paradigm shift involving customer adoption of alternative technolo- gies, such as video and voice OTT offerings (e.g. Netflix and FaceTime), IP voice and collaboration services, NaaS, and increasingly available Wi-Fi networks, could negatively affect our revenue streams. For example, Wi-Fi networks are being used to deliver entertainment services to cus- tomers outside the home, while OTT content providers are competing for a share of entertainment viewership. OTT technology may also impact the business by enabling capabilities that in the past were associated with telecommunications service providers (e.g. cloud-based services and roaming). The proliferation of low-power wide-area (LPWA) IoT networks and services also presents challenges arising from low bandwidth usage, which may put additional pressure on our revenue streams. In addition, we are constantly focused on advances in cybersecurity, in order to identify any opportunities they may offer. while also generating multi-service bundling and retention profiles. We continue to add to our capabilities in the business market Potential impact Our business depends on deploying technology and maintaining suffi- through product development, acquisitions and partnerships and invest- cient access to spectrum to deliver services. Rising data traffic levels and ments in software-defined networks, unified communications and IoT. the fast pace of data device innovation present challenges to providing In September 2020, TELUS launched GoCo, bringing together diverse, adequate capacity and maintaining high service levels at competitive experienced technology entrepreneurs and combining the strengths cost structures. and expertise of bluArc, BroadConnect Canada, Infra-Solutions, Netrium, Our growth, profitability and the diversity of our revenue sources Radiant and Ubity to provide businesses across Canada with simple and will depend on our ability to develop and adopt new technologies to scalable solutions for unified communications, managed connectivity expand our existing offerings, proactively identify new revenue streams and network security. and improve cost efficiencies in our operations, all while meeting rapidly Through TELUS Health, we have leveraged our systems, proprietary evolving customer expectations. We may not always be successful in solutions and third-party solutions to extend our footprint in healthcare anticipating or responding to our customers’ expectations and interests and benefit from the investments in eHealth being made by governments in adopting evolving technology solutions and the integration of these and employers. With the introduction of healthcare products and services technology solutions into our offerings, and may not achieve the intended for Canadians, we are seeing evidence of a positive shift in perception, enhancements or cost reductions in our operations. New services and driving overall interest and sales of TELUS services, and differentiating technologies offered by our competitors may make our service offerings TELUS from our traditional competitors. uncompetitive. Our failure to innovate, maintain technological advantages Over the course of 2019 and 2020, TELUS completed several or respond effectively and timely to changes in technology could have a key acquisitions to assemble a suite of agriculture industry assets and material adverse effect on our business, financial performance, financial in November 2020, TELUS Agriculture was formally launched to help condition and cash flows. companies improve their continuity of supply, protect their brands, TELUS 2020 ANNUAL REPORT • 109 Changes over the past 12 months The demand for wireless data services continues to grow rapidly. additional capacity in order to mitigate risks from growing data traffic. We also plan to combine our licensed spectrum with unlicensed According to the CRTC Communications Monitoring Report 2020, supplementary spectrum, as network and device ecosystems evolve the average data usage per subscriber increased by 23.6% in 2019 to support licensed assisted access (LAA) technology. The spectrum over the 2018 average, while wireless data revenue increased by 3.2% licences previously used for our CDMA access technology have over the same period. been repurposed for use with LTE technology. Our public Wi-Fi service 5G technology is evolving rapidly, with the world’s first standards- increasingly integrates seamlessly with our 4G access technology, based commercial launches having occurred in 2019. Most early 5G automatically shifting our smartphone customers to Wi-Fi, offloading ecosystems operate on three distinct spectrum bands: 3500 MHz, data traffic from our spectrum and extending service and channel millimetre wave (mmWave) spectrum (2800 MHz and 3700 to 4000 MHz) opportunities. Our deployment of small-cell technology, coupled with and 600 MHz. Globally, 3500 MHz spectrum is becoming the primary both licensed and licence-exempt spectrum technologies, is helping band for 5G mobile coverage. In Canada, 3500 MHz spectrum was auc- us achieve a more efficient utilization of our spectrum holdings. tioned for fixed wireless access between 2004 and 2009; it is currently With ISED scheduling its 3500 MHz spectrum auction for June 2021, not licensed for mobile applications and is largely held by Bell and Rogers and assuming our successful participation in the auction, we expect to in most urban markets. In 2019, ISED issued a decision to claw back a begin operationalizing the spectrum in the later part of 2021. portion of the 3500 MHz band and re-auction it for flexible use (permitting In order to prepare for the future deployment of mmWave spectrum, its deployment for mobile applications, such as 5G). In March 2020, we continue to conduct 5G trials in the mmWave spectrum bands. ISED released its framework for the 3500 MHz spectrum licence auction, Our trials have established a platform that will form the basis for evalu- which is now scheduled to take place in June 2021. The auction rules ating our future 5G use cases and help us prepare for network planning create a material risk that we could end up with less 3500 MHz spectrum in the mmWave bands. Additionally, we continue to collaborate with than certain other carriers, and thus not be able to compete equally in ISED, sharing trial results in discussions to help guide the regulator as it the provision of higher network speeds and 5G capacity. finalizes its decisions on establishing the policy and timing for the release Spectrum in the mmWave band is expected to be used for very high of mmWave spectrum for 5G. The auction for mmWave spectrum is data demand locations in which customers are very close to the antenna expected to occur in 2021. Furthermore, our investment in small-cell and have an unobstructed view of the transmitting site. Services using technology will help us densify our network and mitigate any potential this particular spectrum are expected to be an alternative to fibre-to-the- speed and capacity disadvantages created by 3500 MHz availability, premises deployments. as well as improve future mmWave deployment feasibility, cost and time Mitigation At December 31, 2020, our 4G LTE access technology covered 99.6% of Canada’s population, and our LTE-A access technology covered 97.6%, while our 5G access technology covered 28.3%. Our ongoing investments in 4G LTE technology, including LTE-A technology and 5G capabilities, allow us to manage data capacity demands by more effectively utilizing our spectrum holdings. The evolution to LTE-A technologies is supported by our investments in our IP network, IP/fibre back-haul to cell sites, including our small-cell infrastructure, and a software-upgradeable radio infrastructure. The LTE-A expansion is expected to further increase network capacity and speed, reduce delivery costs per megabyte, enable richer multimedia applications and services, and deliver a superior subscriber experience. Mobile network infrastructure investments will increasingly be directed to systems based on network function virtualization (NFV), which offer greater capacity for computing and storage, higher levels of resiliency and more flexible software design. Our large-scale move to national, geographically distributed data centres that use commercial off-the-shelf computing and storage solutions enables the utilization of broad-scale NFV and software-defined network technologies, which will allow us to virtualize much of our infrastructure and will also facilitate a common control plane for coordination of our virtualized and non-virtualized network assets. The architecture of our intelligence and content capabil- ities is located at the edge of our network, close to our customers. The distributed smaller-scale computing power and storage deliver services faster while managing the ongoing need to continually scale the IP/fibre core network infrastructure. Rapid growth of data volumes requires efficient utilization of our spectrum holdings of 700 MHz, AWS-3 and 2500 MHz spectrum licences. We are now deploying those licences as required to provide to market. Since early 2014, we have worked with numerous businesses and many major sports and entertainment venues as we continue to expand our public Wi-Fi infrastructure. This public Wi-Fi service is a part of our network strategy of deploying small cells that integrate seamlessly with our 4G wireless access technology, automatically shifting our smart- phone customers to Wi-Fi and offloading data traffic from our wireless spectrum. Integrated public Wi-Fi infrastructure build-out activity also extends service and channel opportunities with small and medium- sized enterprises and improves customers’ likelihood to recommend. Integration of home Wi-Fi increases the propensity for higher data usage on smartphones within and outside the home, helping to drive the uptake of our internet service. In addition to the availability of our Wi-Fi service, our IoT portfolio is also growing, with the addition of services such as GEOTrac and TELUS Alert and Assist, as well as a wide variety of IoT solu- tions combined with seamless global IoT connectivity across more than 200 countries and networks. We are also capitalizing on advanced self-learning technologies and automation (e.g. artificial intelligence and robotic process automation), which will change the way we manage our operations and support customer experience innovation, as well as present new revenue opportunities. In addition, we are maintaining a constant focus on cybersecurity solutions recognizing that cybersecurity, as an ecosystem of technologies and processes working together, may provide greater visibility to risks and guide better security decisions for organizations across Canada. Ongoing investments in fibre-to-the-premises should support the further evolution of IP-based telephony, and as those services evolve, we will continue to assess opportunities to further consolidate separate technologies within a single voice service environment. The overall con- vergence of wireless and wireline services provides opportunities for 110 • TELUS 2020 ANNUAL REPORT MD&A: RISKS AND RISK MANAGEMENT cost savings and for the rapid development and deployment of new and These lead time increases are a function of challenges obtaining advanced services; to support this convergence within a common IP- the supply of chip sets, which is in turn challenged by the silicon based application environment, we are leveraging modular architectures, wafer supply. lab investments and employee trials. We are partnering with system Huawei, a leading global telecom supplier and phone manufacturer, integrators where appropriate, purchasing hardware that is common to continued to come under further international scrutiny in 2020, with most other North American IP-based technology deployments and the U.K. government announcing that the purchase of new Huawei introducing virtualization technologies, where feasible. We are also active equipment for high-speed 5G networks would be banned as of the end in a number of standards bodies, such as the Metro Ethernet Forum, of 2020 and that all Huawei equipment must be removed from U.K. in order to influence a new IP infrastructure strategy that leverages 5G networks by 2027, following a review by the government’s National standards-based functionality, which could allow us to further simplify Cyber Security Centre (see Section 9.4). This is in addition to similar our network. 10.6 Suppliers bans by the United States and Australia and could result in a general shortage of chip sets and other equipment. Mitigation We value our relationships with our suppliers because they help us Risk category: Strategic We rely on, and have relationships with, multiple vendors, including achieve our business objectives and contribute to our success. We work closely with key strategic suppliers to ensure appropriate timing in the large suppliers such as Amazon, Apple, Cisco, Google, Microsoft, manufacturing, delivery and warehousing of their products so that our Ericsson, Nokia, Samsung and Huawei, which are important in supporting needs will be met regardless of changing conditions. We strive to award our network and service evolution plans and our delivery of services business to suppliers that have demonstrated a strong commitment to to our customers. Our suppliers and vendors may experience business sustainable development by adopting ethical, labour, health and safety, difficulties, privacy and/or security incidents, and external events such and environmental principles and compliance practices that align as epidemics or pandemics, as well as government or regulatory pres- with our expectations and support the well-being of their employees, sures. They may restructure their operations, be consolidated with other contractors and communities. suppliers, discontinue or cease to provide support or updates for certain In response to the impact of the pandemic on global supply chains, products or sell their operations or products to other vendors. In addition, our supply operations in collaboration with our product development various suppliers may sell products or services directly to our customers. and marketing teams, have extended future forecasts and increased In certain cases, the number of suppliers of a product, service or purchase order quantities to help maintain our fulfilment capabilities technology that we use is limited. In addition, government or regulatory in the context of longer lead times. In addition, we continue to seek actions with respect to certain countries or suppliers may affect our alternative devices or sources of supply and refurbish equipment where relationship with certain vendors and our future use of their products possible to support sustainability. and services. Potential impact Our agility in the delivery of products and services is directly linked to our ability to engage or replace a supplier or vendor on a timely basis and without incurring additional cost. Reliance on certain manufacturers may increase their market power and adversely affect our ability to purchase certain products at an affordable cost. Consequently, the success of upgrades and the evolution of technology that we offer our customers, including our IP TV solutions and the roll-out and evolution of our broadband technologies and systems, may be impacted, as well as the cost of acquisition or the time required to deploy certain tech- nologies and systems. There is no guarantee that our vendor strategies and agreements will not be impacted by vendor operational difficulties or government/ regulatory pressures, or that we will not incur additional costs or delays in continuing to provide services or in deploying our technologies and systems. Changes over the past 12 months The COVID-19 pandemic had a significant impact on many of our As a leading network aggregator, we partner with several network equipment suppliers and work with numerous international and domestic vendors to deliver the best possible experience for our customers. We consider possible vendor strategies and/or restructuring outcomes when planning for our future growth, as well as the maintenance and support of existing equipment and services. We have reasonable con- tingency plans for different scenarios, including working with multiple vendors, maintaining ongoing strong vendor relationships with periodic reviews of vendor performance, and working closely with other product and service users to influence vendors’ product or service develop- ment plans. With continued international focus on telecom suppliers, business continuity plans have been formalized to ensure availability of supply in compliance with U.S. Bureau of Industry and Security (BIS) Entity List restrictions. For our 5G network build, we have announced partnerships with Ericsson, Nokia and Samsung, consistent with our multi-vendor strategy. In addition, we regularly monitor the risk profile of our key vendors and review the applicable terms and conditions of our agreements to determine whether additional contractual safeguards are required. We also promote our supplier code of conduct, which is based on suppliers and on the global supply chain overall throughout 2020, with generally accepted standards of ethical business conduct. workforce restrictions, material quarantines and logistics difficulties. In respect of supplier market power, we offer and promote alternative While many suppliers have re-established a large portion of their pro - devices to provide greater choice for consumers and to help limit our duction capacity, significant challenges in particular segments still reliance on a few key suppliers. remain. For example, most of the subscriber equipment used in our Additional information on supply chain sustainability can be found home services portfolio, such as routers and set-top boxes, has seen in our sustainability report at telus.com/sustainability. lead times lengthen from approximately 20 weeks to over 40 weeks. TELUS 2020 ANNUAL REPORT • 111 10.7 Organizational change Risk category: Strategic We will partner, acquire and divest as necessary to accelerate the implementation of our strategy. Through the partnerships and acquisitions we pursue, we may seek opportunities to expand the scope of our existing services, add new customers or enter new geographic markets. There can be no assurance that we will successfully identify suitable candidates in the future for partnering or strategic transactions at acceptable prices or at all or be able to consummate any desired transactions. As we have implemented this strategy, we have experienced rapid growth and significantly expanded our operations into new business areas and countries, and the number of our team members has increased signifi- cantly over the past several years. We expect to develop and improve our internal systems in the locations where we operate in order to address the anticipated continued growth of our business. Our TI subsidiary is also continuing to look for delivery locations outside of its current operating geographies to decrease the risks of operating from a limited number of countries. We may not, however, be able to effectively manage our infra- structure and team member expansion, open additional delivery locations or hire additional skilled team members as and when they are required to meet the ongoing needs of our customers and clients and to meet our current growth trajectory, and we may not be able to develop and improve our internal systems. We also need to manage cultural differences between our team member populations and that may increase the risk for employ- ment law claims. Our inability to execute our growth strategy, to ensure the continued adequacy of our current systems or to manage our expansion, capital and other resources effectively could have a material adverse effect on our business, financial performance, financial condition and cash flows. A substantial majority of the assets and operations of our TI sub- sidiary are located outside Canada and the United States. In addition, TI’s business strategies may involve expanding or developing its business in emerging market regions, including Europe and Asia-Pacific. Due to the international nature of our business, we are exposed to various economic, political and other risks of doing business globally. Potential impact Business combination transactions add complexity to our corporate which could have an adverse effect on our business, financial performance, financial condition and cash flows. Future acquisitions may also result in the incurrence of indebtedness or the issuance of additional equity securities. We could also experience financial or other setbacks if transactions encounter unanticipated problems, including problems related to execution, integration or underperformance relative to prior expectations. Post-acquisition activities include the review and alignment of team member cultures, accounting policies, treasury policies, corporate policies such as ethics and privacy policies, team member transfers and moves, information systems integration, optimization of service offerings and the establishment of control over new operations. Such activities may not be conducted efficiently and effectively. Our management may not be able to successfully integrate any future acquired business into our operations and culture on our anticipated timeline or at all, or maintain our standards, controls and policies, which could negatively impact the experi- ence of our customers and clients, optimization of our service offerings and control over operations and otherwise have a material adverse effect on our business, financial performance, financial condition and cash flows. Consequently, any acquisition we complete may not result in antici- pated or long-term benefits or synergies to us or we may not be able to further develop the acquired business in the manner we anticipated. The risks to which we are exposed by doing business globally and in emerging markets may impede our strategy by limiting the countries and regions in which we are able to expand. The impacts of these risks may also only materialize after we have begun preparations and made investments to provide services in this new country or region. The expos- ure to these risks may require us to incur additional costs to mitigate the impact of these risks on our business. As we continue to operate our business globally, our success will depend, in part, on the nature and extent of any such changes and how well we are able to anticipate, respond to and effectively manage any such changes. Finally, inter- national trade and political disputes can adversely affect the operations of multinational corporations like ours by limiting or disrupting trade and business activity between countries or regions. For example, we may be required to limit or halt operations, terminate customer or client rela- tionships or forgo profitable opportunities in countries which may, in the future, be subject to sanctions or other restrictions on business activity by structure, product and service offerings, and operational systems and corporations such as ours, by U.S. or Canadian legislation, executive order processes. If pre-acquisition due diligence is insufficient or ineffective, or otherwise. Some of our TI subsidiary’s clients have been targeted by our investments may not realize potential synergies or generate strategic and may, in the future, be subject to such sanctions. Additionally, fail ure growth. Our failure to complete potential acquisitions in which we have to resolve the trade dispute between the countries may also lead to invested or may invest significant time and resources could have an unexpected operating difficulties in certain countries, including enhanced adverse effect on our business, financial performance, financial condition regulatory scrutiny, greater difficulty transferring funds or negative cur- and cash flows. rency impacts. All the foregoing could have a material adverse effect on We may be unable to successfully identify, complete, integrate and our business, financial performance, financial condition and prospects. realize the benefits of acquisitions or manage the associated risks. Given the rapid rate of technological change, we may also look to Consequently, any acquisition we complete may not result in anticipated partner and invest in emerging opportunities that may not yet be fully or long-term benefits or synergies to us or we may not be able to further viable and established. These investments may require high levels of initial develop the acquired business in the manner we anticipated. funding and experience low levels of initial adoption, growth and returns, Acquisitions, including completed acquisitions, involve a number of all of which could impact our financial position in the short term. risks, including diversion of management’s attention from operating our business, developing our relationships with customers and seeking new revenue opportunities, failure to retain key personnel of acquired com- panies, legal risks and liabilities relating to the acquisition or the acquired entity’s historic operations that may be unknown or undisclosed and for which we may not be indemnified fully or at all, failure to integrate the acquisition in a timely manner, and, in the case of our potential acquisitions, our ability to finance the acquisitions on attractive terms or at all, any of Changes over the past 12 months Over the course of 2020, we made a number of acquisitions. In July 2020, TELUS acquired Mobile Klinik, Canada’s largest same- day smartphone repair company, expanding our wireless value chain to include repair services. With approximately half of our customers now retaining their devices for three or more years, wireless device repair has become an essential service. 112 • TELUS 2020 ANNUAL REPORT MD&A: RISKS AND RISK MANAGEMENT In the third quarter of 2020, TELUS acquired AFS, a global leader Our TI business has derived and we believe that, in the near term, will in sales and distribution solutions for the consumer goods market; and continue to derive, a significant portion of its revenue from a limited num- Agrian, a unified management platform supporting greater precision ber of large clients. Google, Inc. (Google) was TI’s largest external client in agronomy, sustainability, analytics and compliance. These acquisitions in the fiscal years ended December 31, 2019 and 2018 and accounted for were part of the formal launch of TELUS Agriculture in November 2020. In December 2020, TELUS acquired EQ Care, a virtual healthcare approximately 12% and 14% of its revenue in such periods, respectively. In addition, Google is the largest client of Lionbridge AI, the data annotation provider supporting 24/7 national and bilingual virtual care. The acqui- business TI acquired on December 31, 2020. Google accounted for 65% sition further enables access to digital healthcare services and better of Lionbridge AI’s revenue in the year ended December 31, 2019. As a health outcomes for Canadians, improving the overall patient experience result of the acquisition of Lionbridge AI, an even greater percentage of supported by TELUS Health. TI’s revenue will be dependent on Google. TI’s largest external client for the In January 2020, TI completed the acquisition of Competence Call nine-month period ended September 30, 2020, which is a leading social Center, a leading provider of higher-value-added business services with media company, represented approximately 16% of TI’s revenue for such a focus on customer relationship management and content moderation period. We do not have a comparative figure for this client for the same and in December 2020, TI acquired Lionbridge AI, a market-leading period in the previous year. Additionally, the volume of work performed for global provider of crowd-based training data and annotation platform specific clients of TI or the revenue it generates can vary from year to year. solutions used in the development of artificial intelligence algorithms to For example, a client may demand price reductions, change its customer power machine learning. Through these acquisitions, TI has an expanded engagement strategy or move work in-house, and continued consolidation portfolio of customer experience, digital transformation, content moder- in many of the verticals in which TI offers services could result in the loss ation, IT lifecycle, advisory and digital consulting, risk management, and of a client. As a result of the foregoing, a major client in one year may not back-office support that will enable new go-to-market opportunities provide the same level of revenue in any subsequent year. and drive growth. Mitigation To support ongoing investment in leading-edge and innovative technology, Potential impact Delivering sub-optimal experiences when our customers engage with us for the provision of services or support may negatively impact customer we have diversified our approach to allow for varied levels of commitment, satisfaction, our portfolio of brands and our ability to grow our customer which we determine based on the relative maturity of that technology in base, including customers of our non-traditional telecom businesses, its life cycle, its alignment with our strategy and its linkage with our value such as TELUS International, TELUS Health and TELUS Agriculture. proposition. Our TELUS Ventures investments include more than 20 active Inadequate or inefficient customer interactions (e.g. order taking, support companies, and we continue to build on our commitment to help develop contact, service delivery, billing accuracy, network and services reliability) exciting new technologies with the potential to deliver benefits for our may increase customer dissatisfaction and churn. Failure to continue customers, stakeholders and shareholders. In addition, we continue to to execute effectively on organizational initiatives, such as our customers engage in partnerships that can research and develop leading-edge first priority, solutions advisor support, digitization and simplification, may innovative technology and services in sectors such as entertainment, lead to a deterioration in the customer experience we provide. As well, healthcare and agriculture. any significant or prolonged systems and service disruptions or outages Over the course of time, we have built a disciplined corporate may negatively impact customer satisfaction and our brands. Regulatory development and ventures expertise, with due diligence and post- decisions may also limit our ability to invest in our customer experience. acquisition integration planning rigour, reinforced by a well-defined In addition, our corporate sustainability and social purpose activities process and governance approach to evaluating investments and acqui- are an important part of our organizational culture and are becoming sitions. Where a larger-scale business combination is contemplated, a key factor in attracting and retaining customers and differentiating us our teams follow a well-established and collaborative due-diligence review from our competitors. If we are unable to meet or exceed the evolving process, with oversight by our senior leadership and Board. In addition, formal post-acquisition processes are in place to support onboarding, expectations of our customers in these areas or implement high-quality corporate sustainability and social purpose activities on a timely basis, engagement and operational integration with our risk monitoring and effectively communicate them to our customers, our reputation may and management practices. suffer, which may negatively impact our ability to attract new and retain 10.8 Customer service excellence Risk category: Operational Our customers’ loyalty, their likelihood to expand the services they use with us and the likelihood to recommend us, are dependent upon our ability to provide a service experience that meets or exceeds their expectations and is differentiated from our competitors. Our service delivery teams focus on driving excellence and efficiencies in our oper- ations, implementing radical simplification and becoming best-in-class solution advisors, with the goal of safely minimizing the effort involved for existing customers. Any significant reduction in or elimination of the use of the services TI provides as a result of client consolidation or our removal from a key client’s provider network would result in reduced revenue to TI and could harm our business. In addition, such consolidation may encourage our TI subsidiary’s clients to apply increasing pressure on TI to lower the prices it charges for its solutions. All the foregoing could have a material adverse effect on our business, financial condition, financial performance and prospects. Changes over the past 12 months The global pandemic has had widespread effects on many areas of our customers when they interact with us. Having our TI team members service delivery. These include significant constraints on when, where assist with performing customer-serving activities further strengthens and how we can interact with our customers; a major acceleration to our ability to continue delivering exceptional customer service. a digital first organization and the proliferation of self-serve capabilities TELUS 2020 ANNUAL REPORT • 113 to help our customers. These impacts have affected our team around virtual-visit functionality into our electronic medical records (EMR) across the world, requiring us to be agile in enabling our team members to work Canada. This feature allows clinicians to virtually support their own roster efficiently from home or from alternative locations, as well as virtually of patients while maintaining continuity of care and fully up-to-date health with customers through our virtual technician model (VTM) and do-it- records. As of December 31, 2020, more than 226,000 consultations yourself (DIY) capabilities. have been conducted through the TELUS EMR Virtual Visit solution. Statistics Canada research on the impact of the COVID-19 pandemic We continue to be ranked favourably in third-party reports based on Canadian families and children released on July 9, 2020 identified that on customer and network experience. In 2020, we were ranked first 40% of respondents were very or extremely concerned about school in network coverage, speed, reliability or experience by Opensignal, year and academic success and 43% were very or extremely concerned J.D. Power, Ookla and Tutela. This successful performance was the result about staying connected with family and friends. Initial measures to of continuing to evolve our coverage across Canada, increasing access- prevent the spread of COVID-19 transitioned students to online learning ibility to our network, and working to better understand the emerging across Canada and established restrictions on social gatherings. While network methodologies that can enhance coverage and LTE availability, students were able to return to classrooms during the fall, measures all of which won us recognition for providing the best network coverage requiring online learning and restricting social gatherings continued to be among our competitors. enacted in communities based on transmission and outbreak levels. As a social capitalism company, we are also committed to making Mitigation Continued simplification and digitization, including our ongoing work on conversational interactive voice response and enhanced call-back capabilities, has improved first-time interaction experiences by reducing the number of call transfers and shortening customer wait times. We continue to enhance the reliability and functionality of our websites and applications, while promoting digital engagement to minimize effort for our customers and reduce the volume of calls related to basic transactions, interactions and other activities. To ensure minimal disruption to our ability to deliver on our service promise during any further lockdown scenarios, we quickly developed a robust capacity to ramp our virtual repair and installation program up or down at a community level in response to outbreak data, maxi- mizing value and safety. This is in conjunction with our focus on further developing our DIY installation and repair program and our VTM, which will deliver further internal cost savings and greater choice for our a difference by building stronger, healthier communities and ensuring that the most vulnerable among us are not left behind. Our Internet for Good program is focused on connecting Canadians in need by providing low-cost high-speed internet access for low-income families, youth aging out of care and people with disabilities. During 2020, we expanded this program by empowering schools across Alberta and B.C. to extend the offer directly to families in need. In addition, our Mobility for Good program provides subsidized smartphones and plans for youth leaving foster care and low-income seniors, helping them stay in touch with loved ones, maintain vital support networks and build new lives. Additional information on our sustainability and environmental govern- ance practices and related disclosure is detailed in Our environment (see Section 10.12). 10.9 Our systems and processes customers. We have also invested in our work-from-home capabilities, including increased virtual private network (VPN) capacity, around the Risk category: Operational We are a key provider of essential telecommunications services, as well world that allows over 90% of our global workforce to work from home as security and health services in Canada. Through TELUS International, or from alternative locations for the foreseeable future and serve our cus- we provide digital customer experience services to global brands and tomers safely. The work of our EMOC also helps us track outbreaks and through TELUS Agriculture we leverage technology and data to improve coordinate responses to keep our customers and team members safe. the flow of information across the agriculture and food industry in Canada Our TI subsidiary was created with an intense focus on customer and internationally. Our success depends on our ability to deliver reliable service excellence, continuous improvement and a values-driven culture and continuous services to all our customers. with a goal of better serving its growing portfolio of global clients. Through TI, our customer care and business services (CCBS) are delivered with We have a large number of interconnected operational and business support systems. Acquisitions, business combinations and the develop- a TELUS-wide unified culture via a flexible team of almost 50,000 team ment and launch of new services typically require significant systems members in over 20 countries, minimizing business disruptions. CCC development and integration efforts. As next-generation services are and Lionbridge AI were acquired during 2020; these acquisitions help introduced, they must work with next-generation systems, frameworks extend the reach of our TI subsidiary’s customer service capabilities and IT infrastructures, while also being compatible with legacy services by diversifying its service offerings. CCC provides higher-value-added and support systems. In addition, our large enterprise deals and TI client business services with a focus on trust and safety, including content contracts may involve complex and multi-faceted customer-specific moderation, while Lionbridge AI’s solutions help improve data functionality enterprise requirements, including customized systems and reporting and deliver secure, compliant, scalable and high-quality solutions for requirements in support of service delivery. our TI subsidiary’s clients. Within TELUS Health, we have designed virtual care delivery options, including the capability to perform virtual health assessments from our local care centres. We have also introduced a “virtual first” approach to implementation of our software solutions. Virtual training and onboarding is being delivered to new physician and pharmacist clients, incorporating rigorous practices that ensure the safety of our customers and team members when on-site visits are required. In April 2020, we launched Potential impact Our network, technology, infrastructure, supply chain, team members and operations may be materially impacted by natural hazards (see Section 10.12 Our environment), disruptions of critical infrastruc- ture due to intentional threats (see Section 10.10 Security and data protection), health threats (such as epidemics or pandemics), labour disruptions (see Section 10.11 Our team) or unintentional threats. 114 • TELUS 2020 ANNUAL REPORT MD&A: RISKS AND RISK MANAGEMENT Any of these events may lead to the disruption of our ability to deliver the recently acquired Lionbridge AI utilizes the services of a crowd- services to our customers and may also make it difficult or impossible sourced provider base that is geographically dispersed across the globe. for team members to reach or work in our business locations. Damage In line with industry best practice, our approach is to separate or destruction that interrupts our provision of services could adversely business support systems (BSS) from operational support systems affect our reputation, our relationships with our customers and our (OSS) and underlying network technology. Our aim is to decouple leadership team’s ability to administer and supervise our business, the introduction of new network technologies from the services we sell or may cause us to incur substantial additional expenditures to repair to customers so that both can evolve independently. This allows us to or replace damaged equipment or sites. We may also be liable to optimize network investments while limiting the impact on customer our customers for disruption in service resulting from such damage services, and also facilitates the introduction of new services. In addition, or destruction. Our resiliency and disaster recovery plans may not be due to the maturing nature of telecommunications vendor software, adequate to provide continuity and reliability of service during disrup- we adopt industry-standard software for BSS/OSS functions, leverage tions or reduce the duration and impact of service outages sufficiently SaaS and IaaS capacities, and avoid custom development where or at all. While we currently have commercial liability insurance, our possible. This enables us to leverage vendor knowledge and industry insurance coverage may be insufficient or may not provide coverage practices acquired through the installation of those platforms at numer- at all for certain events. Furthermore, we may be unable to secure ous global telecommunications companies. We have established a such insurance coverage at premiums acceptable to us in the future, next-generation BSS/OSS framework to ensure that, as new services or such insurance may become unavailable. Any of the above factors and technologies are developed, they are part of the next-generation may adversely affect our business. framework that will ease the retirement of legacy systems in accordance As the complexity of our systems increases, our system stability with TeleManagement Forum’s next-generation operations systems and and availability may be affected. There can be no assurance that software program. As part of our ongoing fibre roll-out, we have invested any of our proposed IT systems or process change initiatives will be in new operational support systems that are consolidating our legacy implemented successfully, that they will be implemented in accordance systems and simplifying our current environment. This will improve our with anticipated timelines, or that sufficiently skilled team members ability to support and maintain our systems with newer, more resilient will be available to complete such initiatives. If we fail to implement and technology. We also continue to make significant investments in system maintain appropriate IT systems on a timely basis, fail to create and resiliency and reliability in support of our ongoing customer first initiatives. maintain an effective governance and operating framework to support For each new large enterprise deal, we look to leverage systems the management of our teams, or fail to understand and streamline our and processes developed in previous contract wins while incorporating significant number of legacy systems and proactively meet constantly others as required, using a controlled methodology to draft a new evolving business requirements, we could experience an adverse effect custom solution and following standard industry practices for project on our business and financial performance. management and systems support. We have release and change Changes over the past 12 months During 2020, expansion of our work-from-home programs due to the COVID-19 pandemic increased requirements on our VPN systems. IT services remain increasingly delivered by cloud-based vendors as either Software as a Service (SaaS) or Infrastructure as a Service (IaaS) and our reliance upon these third-party cloud-computing services is growing. While this can result in benefits of speed to market, reliability, performance and agility, it requires adjustments to our operations and may increase the potential for service disruptions. Operational support processes and vendor negotiations must now take into account that the delivery of hardware and software services is occurring outside of our own infrastructure, and therefore controls need to be incorporated into our operational support processes and tools. In addition, we routinely have numerous integration activities, complex system and process change initiatives, and development projects underway. Mitigation During the COVID-19 pandemic, we expanded our VPN capacity in order to ensure stability, productivity and security for team members working from home and from alternative locations, and we accelerated management policies, processes and controls in place that are based on industry best practices. In general, we strive to ensure that system development and process changes are prioritized, and we apply a project management approach to such initiatives that includes appro- priate risk identification and contingency planning, scope and change control, and resource and quality management. We conduct reasonable functional, performance and revenue assurance testing, as well as capturing and applying any lessons learned. Where a change involves major system and process conversions, we often shift our business continuity planning and emergency management operations centre to a heightened state of readiness in advance of the change. We conduct ongoing monitoring of our systems and critical appli- cations. Risk-based disaster recovery capabilities are leveraged to help prevent outages and limit impacts on customers and our operations. In addition, enterprise-wide business continuity programs are in place to support monitoring, preparedness, mitigation, response and recovery. However, there can be no assurance that specific events, or a combination of events, will not disrupt our operations. 10.10 Security and data protection the purchase and deployment of a new VPN system, improving con- nection capacity and reliability while enhancing our security measures. Risk category: Operational As a national provider of information and communications services, For our TI subsidiary clients, to the extent possible, we were able we have a perspective beyond that of individual organizations. We lever- to redistribute customer volumes from facilities impacted by local age this insight and understanding to monitor and identify security trends government-mandated temporary site closures to sites that were as they evolve in the wider threat landscape. The risks outlined below less impacted. We have also enabled 95% of our customer-serving TI reflect both our experience and the trends we have observed in the team members to provide remote support to our clients. In addition, wider ecosystem. TELUS 2020 ANNUAL REPORT • 115 We have a number of assets that may be exposed to intentional We and our partners may also be subject to software, equipment threats. These include physical assets that may be exposed to security or other system malfunctions that could result in unauthorized access risks such as terrorist attacks, vandalism and/or theft, including (but not to, or change, loss or destruction of, our data. These malfunctions could limited to) cellular towers, distributive copper cable, corporate stores, compromise the privacy of individuals, including our customers, team network and telephone switch centres, and elements of corporate members and suppliers, and could expose other sensitive information. infrastructure. A successful disruption of our systems, network and infrastructure, Additionally, we operate data centres and collect and manage data or those of third parties, our suppliers, vendors and partners, may prevent in our business and on behalf of our customers (including, in the case of us from providing reliable service, impact the operations of our network TELUS Health, sensitive health information) that may move across our or allow for the unauthorized interception, destruction, use or dissemin- interconnected operational and business support systems and networks. ation of our information or our customers’ information. Such disruption, Depending on the nature of the data, it may be restricted for use within whether physical or digital, or unauthorized access to our data could Canada or leveraged by our teams or outsourcing partners in Canada or cause us to lose customers or revenue, incur expenses, or experience abroad. Our systems and networks may also be subject to cyberattacks. reputational and goodwill damages. Additionally, such damages could A number of TI’s service contracts provide for high or unlimited liability result in TELUS incurring costs associated with investigation efforts, for the benefit of its clients related to damages resulting from breaches replacement or restoration of assets and potential civil lawsuits or fines of privacy or data security in connection with provision of its services. imposed by regulatory bodies. Although our network security and the authentication of our customer While we believe our team members undergo appropriate training, credentials are designed to protect against unauthorized disclosure, if any person, including any of our team members, negligently disregards alteration and destruction of, and access to, data on our networks, it is or intentionally breaches controls or procedures with which we are impossible for such security measures to be perfectly effective. There can responsible for complying with respect to such data or otherwise mis- be no assurance that such measures will function as expected or will manages or misappropriates that data, or if unauthorized access to be sufficient to protect our network infrastructure against certain attacks, or disclosure of data in our possession or control occurs, we could be and there can be no assurance that such measures will successfully subject to significant liability to customers, our TI subsidiary’s clients or prevent or mitigate service interruptions or further security incidents. its clients’ customers for breaching contractual confidentiality and security All network infrastructure is vulnerable to rapidly evolving cyberattacks, provisions or for permitting access to personal information subject to and our user data and corporate systems and security measures may privacy laws, as well as liability and penalties in connection with any be breached due to the actions of outside parties (including malicious violation of applicable privacy laws or criminal prosecution. Unauthorized cyberattacks), team member error, malfeasance, internal bad actors, a disclosure of sensitive or confidential customer, client or team member combination of these, or otherwise. A breach may allow an unauthorized data, whether through breach of computer systems, systems failure, party to obtain access to or exfiltrate our data or our users’, customers’ team member negligence, fraud or misappropriation, or otherwise, or clients’ data. Additionally, outside parties may attempt to fraudulently could damage our reputation and cause us to lose customers and clients induce team members, users, customers or clients to install malicious and result in liability to individuals whose information was compromised. software, disclose sensitive information or access credentials, or take other Similarly, unauthorized access to or through our information systems actions that may provide access to our data or our users’, customers’ or and networks or those we develop or manage for our customers and clients’ data. Because modern networking and computing environments clients, whether by our team members or third parties, could result in are increasing in complexity and techniques used to obtain unauthor- negative publicity, damage to our reputation, loss of customers, clients or ized access, disable or degrade service or sabotage systems change business, class action or other litigation, costly regulatory investigations frequently, increase in sophistication over time or may be designed to and other potential liability. remain dormant until a predetermined event and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security occurs (or a breach of a customer’s or client’s security that can be attributed to our fault or is perceived to be our fault), the market perception of the effectiveness of our security measures could be harmed and we could lose users, customers and clients. Security breaches also expose us to a risk of loss of this informa- tion, class action or other litigation brought both by customers and clients and by individuals whose information was compromised, remediation costs, increased costs for security measures, loss of revenue, damage to our reputation, and potential liability. Potential impact Physical security threats can place both our team members and our Changes over the past 12 months In August 2020, INTERPOL reported that its assessment of the impact of COVID-19 on cybercrime revealed a significant shift in targets from individuals and small businesses to major corporations, governments and critical infrastructure. With organizations and businesses rapidly deploying remote systems and networks to support their team members working from home, criminals are also taking advantage of new and greater security vulnerabilities to steal data, generate profits and cause disruption. With our perspective and our monitoring capabilities, we have observed that the frequency and sophistication of cyberattacks continue to increase with adversaries evolving in parallel with trends in technol- ogy. These attacks may involve a variety of techniques that include the targeting of individuals and the use of sophisticated malicious software and hardware, or a combination of both, to evade the technical and infrastructure, systems and networks at risk of incurring significant harm, administrative safeguards that are in place (including firewalls, intrusion including personal injury, destruction of property, and loss of service and/ prevention systems, active monitoring and other measures). Cyberattacks or data. The risk and consequences of cyberattacks on our assets could penetrating the network security of our data centres or any unauthorized surpass physical security risks and consequences due to the rapidly disclosure or access to confidential information and data of our customers, evolving nature and sophistication of these threats. clients or their end customers could also have a negative impact on our 116 • TELUS 2020 ANNUAL REPORT MD&A: RISKS AND RISK MANAGEMENT reputation and client confidence, which could have a material adverse effect by government agencies in the United States and many other countries on our business, financial performance, financial condition and cash flows. where our Lionbridge AI business uses the services of independent Mitigation Our security program addresses risk through a number of mechanisms, including: • Security awareness programs • Controls based on policies, standards and methodologies that are aligned with recognized industry frameworks and practices • Monitoring of external activities by potential attackers • Incident response • Regular security evaluations of our most important assets • Identification and regular re-evaluation of our known security risks • Regular reviews of our standards and policies to ensure they address current needs and threats • Regular reviews of our business continuity and recovery planning processes that would be invoked in the event of a disruption • A privacy and security impact assessment process • A secure-by-design process that incorporates security provisions into new initiatives across the Company. Incident response is a critical control within our organization. Our tech- nical capabilities help us identify security-related events, respond to possible threats and adjust our security posture appropriately. Additionally, our approach to cyber-hygiene includes regular vulnerability assess- ments and the prioritization and remediation of any identified exposure through patching or other mechanisms. Our security office also works with law enforcement and other agencies to address ongoing threats and disruptions, and provides awareness training to our team members to help them better recognize and report threats. 10.11 Our team Risk category: Operational Our success depends on the abilities, experience, well-being and engagement of our team members, as well as our ability to attract and retain the talent upon which our service offerings depend. Each year, we carry out a number of unique initiatives that are intended to improve our productivity and competitiveness. These include acquisitions, operational business integrations, efficiency programs, business process automation and/or outsourcing, offshoring and reorganizations. We believe that our unique customer first and caring culture has led to our ability to attract and retain a highly skilled, engaged and motivated workforce. This has driven our strong customer and client retention. It may become more difficult for us and, in particular for our TI subsidiary, to maintain a culture that supports our success if we continue to evolve our products and services, grow into new geographies, open new delivery locations, increase the number of team members and acquire new contractors. We generally believe that most individuals who provide their data annotation services through Lionbridge AI’s crowdsourcing solution are independent contractors because, among other things, they can choose whether, when, and where to provide services, are free to provide services on competitors’ platforms, and use their own equipment. We may not be successful in defending the independent contractor classification in the jurisdictions where we operate or where such classification is challenged. The costs associated with defending, settling, or resolving any future lawsuits (including demands for arbitration) relating to the independent contractor classification could be material to our business. Potential impact Lost work time resulting from team member illness or injury can negatively affect organizational productivity and employee benefit costs. The loss of key team members through attrition and retirement, the inability to attract and retain team members with essential or evolving skills, including familiarity with legacy systems, or, in the case of team members leading recent acquisitions in emerging areas of our business, specialized knowledge of such businesses, or any deterioration in overall team member morale and engagement resulting from organizational changes, unresolved collective agreements or ongoing cost reduction initiatives, could have an adverse impact on our growth, business and profitability and our efforts to enhance the customer experience. In addition, changes in technology are shifting the set of skills needed by our team and driving competition for resources among global players. Our corporate sustainability and social purpose activities are also important to our team members, and our failure to meet or exceed the evolving expectations of our team members in these areas could have adverse impacts on our ability to attract and retain team members. Changes over the past 12 months The COVID-19 pandemic has led to heightened uncertainty in many of our lives, resulting in increased stress and anxiety around the world and among our team members. Long before March 2020, when we began adopting stricter measures to prevent the spread of COVID-19, 500,000 Canadians per week were citing mental health symptoms or illnesses as the reason they were unable to work. Many Canadian workers – our team members included – are still working at home, isolated from peers and extended family members and friends, and juggling multiple competing priorities. At December 31, 2020, over 95% of our domestic team members (excluding field technicians and retail store representatives) and over 90% of our TI team members were working from home or alternate work locations. Global events and ongoing efforts from marginalized communities to achieve equality and social justice focused attention on the discrimination and racial injustice that continue to affect many communities. companies. If our unique culture is not maintained, our ability to attract and retain highly skilled team members and clients across our core Mitigation Our People and Culture team works to provide an environment for verticals may be adversely impacted, and our operational and financial our team members that is safe, empowering and engaging. Our culture results may be negatively affected. is anchored in our TELUS leadership values, which were set out by our Our business would be adversely affected if individuals providing their data annotation services through Lionbridge AI’s crowdsourcing solutions were classified as employees. The classification of certain individuals who provide their services through third-party digital platforms as indepen- dent contractors is currently being challenged in courts, by legislators and team nearly two decades ago. These values affirm that: • We embrace change and seize opportunity • We have a passion for growth • We believe in spirited teamwork • We have the courage to innovate. TELUS 2020 ANNUAL REPORT • 117 Our objective is to attract, develop and retain talented employees in development, recognition, diversity and inclusiveness, health and well- Canada and internationally. We achieve this objective by investing in our ness programs, our Work Styles program (e.g. enabling team members people throughout their careers, and by offering diverse and inclusive to work where and how they will be most effective and equipping employment prospects and development opportunities. them with robust digital collaboration tools to stay connected), and our To support team members’ overall well-being and to achieve a positive community volunteerism, including TELUS Days of Giving. The level effect on absenteeism in the workplace, we take a holistic and proactive of our team member engagement continues to place our organization approach to their health that involves risk prevention, early intervention, within the top 10% of all employers surveyed. team member and family assistance, assessment and support services, Additional information on our programs can be found in our disability management, and accommodation and return to work services. sustainability report at telus.com/sustainability. Our health and well-being strategy encourages our team members to develop optimal personal health through five dimensions of well-being: physical, psychological, financial, social and environmental. To promote safe work practices, we offer training and orientation programs for team members and contractors who have access to our facilities. In May 2020, we launched a team member survey to assess our team’s health and wellness and gather their insights about our new work environment in light of changes due to COVID-19. Key highlights included team members confirming their belief that their safety is a priority for their leaders; communication is timely, transparent and informative; and they have the support they need during this extraordinary time. In 2020, we continued to reach out to our team members to share TELUS’ stance against all forms of systemic bias, including racism; reaf- firming our commitment to standing united in our pursuit of equity, fairness, social justice and systemic change. Consistent with TELUS’ culture and use of our fair process engagement model, our Diversity and Inclusiveness team invited all team members to participate in open and meaningful dia- logue on how to best combat racial inequity, and to use these “Share, listen, learn and reflect” sessions to apply a wider lens and increase inclusiveness and help remediate social injustice for all of our team members and the communities where we live, work and serve. At TELUS, our commitment to diversity and inclusiveness is central to the passionate social purpose col- lectively embraced by our team members, reflected in our brand promise of a friendlier future, and continues to define us as an organization. We aim to attract and retain key team members through both mon- etary and non-monetary approaches. Our compensation and benefits program is designed to support our high-performance culture and is both market-driven and performance-based. Where required, we implement targeted retention solutions for employees with critical skills or talents that are scarce in the marketplace, and we have a succession planning process to identify top talent for senior-level positions. We focus on and manage organizational change through a formal business transformation function that leverages the expertise, key learnings and effective practices developed in recent years during the implementation of mergers, business integrations and efficiency- related reorganizations. We have a post-merger integration team that works with our busi- ness units and the operations they acquire, applying an integration model based on learnings from previous integrations, while also focusing on the unique attributes and employee cultures of the acquired companies, which advances the standardization of our business processes and is intended to preserve the unique qualities of each acquired operation. Additionally, we continuously strive to raise the level of our team members’ engagement. We believe that our strong team member 10.12 Our environment Risk category: Operational Our operations, infrastructure and team members may be exposed to climate-related physical risks, which include extreme weather events and other natural hazards. We may also be exposed to transition risks related to climate change, such as the impact of changes in policy or the deployment of lower-emission technology. Our TI delivery locations and our data and voice communications, including in Central America, India, Ireland and the Philippines, in par- ticular, may be damaged or disrupted as a result of natural disasters or extreme weather events, including those resulting from or exacerbated by climate change, such as earthquakes, floods, volcano eruptions, heavy rains, winter storms, tsunamis and cyclones; epidemics or pandemics, including the COVID-19 pandemic; technical disruptions and infrastructure breakdowns including damage to, or interruption of, electrical grids, transportation systems, communication systems or telecommunication cables; issues with information technology systems and networks, including computer glitches, software vulnerabilities and electronic viruses or other malicious code; accidents and other events such as fires, floods, failures of fire suppression and detection, heating, ventilation or air conditioning systems or other events, such as protests, riots, labour unrest, security threats and terrorist attacks. Any of these events may lead to the disruption of information systems and telecommunication services for sustained periods and may create delays and inefficiencies in pro- viding services to clients and potentially result in closure of our TI sites. They also may make it difficult or impossible for TI team members to reach or work in our TI business locations. Some locations may not be well-suited to work-from-home approaches to providing client services due to connectivity, infrastructure or other issues. Certain areas of our operations are subject to environmental considerations, such as the construction of telecommunications infra- structure, handling and disposing of waste, electronic waste or other residual materials, managing our water use, and responding to spills and releases. Some areas of our operations are also subject to evolving and increasingly stringent federal, provincial and local environmental and health and safety laws and regulations. Such laws and regulations impose requirements with respect to matters such as the release of certain substances into the environment, corrective and remedial action concerning such releases, protection of sensitive ecosystems and associated wildlife habitat, and the proper handling and management of certain substances, including wastes. engage ment continues to be supported by our focus on the customer and team member experience, our success in the marketplace and our Potential impact Evolving public expectations and increasingly stringent laws and social purpose. We plan to continue our focus on other non-monetary regulations could result in increased costs of compliance, while failure to factors that are supportive of team member engagement, including recognize and adequately respond to the same could result in penalties, performance development, career opportunities, learning and regulatory scrutiny or damage to our reputation and brand. 118 • TELUS 2020 ANNUAL REPORT MD&A: RISKS AND RISK MANAGEMENT Damage or destruction that interrupts our provision of services could for specific health and safety measures, which are incorporated into adversely affect our reputation, our relationships with our customers our corporate infectious disease playbook. The playbook is continuously and clients, our leadership team’s ability to administer and supervise our updated and provides foundational governance for all other business business or may cause us to incur substantial additional expenditures function specific pandemic-related playbooks. to repair or replace damaged equipment or sites. We also may be liable We are committed to following sustainable and responsible business to our customers and clients for disruption in service resulting from practices and making decisions that balance economic growth with such damage or destruction. Our resiliency and disaster recovery plans may not be adequate to provide continuity and reliability of service social and environmental benefits. We have implemented award-winning sustainability and environmental governance practices and related during disruptions or reduce the duration and impact of service outages disclosure. The Corporate Governance Committee of our Board is sufficiently or at all. While we currently have commercial liability insurance, responsible for oversight of corporate social responsibility and climate- our insurance coverage may be insufficient or may not provide cover- related risks. Our Chief Executive Officer and Executive Team exercise age at all for certain events. Furthermore, we may be unable to secure oversight of climate-related risks and opportunities and provide such insurance coverage at premiums acceptable to us in the future, approval of the overall strategic direction of our sustainability programs. or such insurance may become unavailable. Prolonged disruption of our Our Sustainability and Environmental Compliance team prepares services could also entitle our customers and clients to terminate their quarterly reports for the Corporate Governance Committee, as well as contracts with us or require us to pay penalties or damages. Any of other updates for the Board as required, on climate and environment- the above factors may materially adversely affect our business, financial related risks, targets and key performance metrics. performance, financial condition and cash flows. Disclosure in our sustainability report and other financial filings Changes over the past 12 months The COVID-19 pandemic has had a significant impact on our operations and team members throughout 2020. Along with the continued and widely shared concerns about climate- related changes and the environmental impacts of business operations, there is an increasing focus on the disclosure of environmental and sustainability governance strategies, targets and risk management practices, including climate-related scenario analysis. In its 2020 Status Report, the Task Force on Climate-related Financial Disclosures (TCFD) identified that the number of organizations expressing support for TCFD had grown to reach over 1,500 organizations globally, with many companies having begun to implement TCFD recommendations. Potential impacts associated with low levels of non-ionizing radio frequency (RF) emissions from mobile phones and cell towers continue to be a matter of public concern, and will remain a public concern as we move toward a 5G environment, in which the number of small cells contains information pertaining to the governance and management of climate-related risks and opportunities. Included are strategies for assessing impacts of these risks using scenario analysis, as well as strategies for addressing impacts of these risks, risk management practices pertaining to these risks, and the metrics and targets used to manage them. Scenario analysis in 2020 included a consideration of risks and opportunities under a low-carbon adoption scenario and an extreme global warming scenario. Our corporate targets include, but are not limited to: • Meeting 100% of our electricity requirements with energy from renewable sources by 2025 and becoming net carbon neutral across our operations by 2030. We have signed purchase agreements for renewable energy that will help us reach these targets • Diverting 90% of waste from landfills by the end of 2025 • Improving our energy efficiency (MWh per terabyte of data) by 50% from 2020 levels by 2030. in our infrastructure is expected to increase as we continue to upgrade In addition to these targets, we also plan to set further science-based our network. targets, which are to be achieved by 2030. Mitigation Business continuity and disaster recovery programs are in place that encompass provisions for monitoring and preparedness, mitigation, response and recovery. These programs enhance the safety of our team members, minimize the potential impact of threats to our facilities, infrastructure and business operations, support the maintenance of service to our customers and help keep our communities connected. In response to the COVID-19 pandemic, the Corporate Business Continuity Office convened a cross-functional working group on January 22, 2020, and on March 4, 2020, our EMOC was activated. The EMOC meets regularly to coordinate strategic management of the COVID-19 pandemic and advise on tactical issues such as door-to- door activities, retail safety measures, and technician safety in the field. Outbreaks are closely monitored to align operations with public health measures within individual public health agency jurisdictions. TELUS assembled a Medical Advisory Committee (MAC), composed of leading medical professionals from across the country and key leadership roles from within TELUS. The MAC meets regularly, advises on the Company’s COVID-19 pandemic policy, and makes recommendations An ISO 14001:2015 certified environmental management system is in place to identify and control environmental impacts associated with our operations and to support compliance with regulatory requirements. We continue to identify new ways to reduce our environmental impact. In both 2019 and 2020, we were named to the Corporate Knights Global 100 Most Sustainable Corporations in the World. See our climate-related financial disclosure in Section 5.2 of our 2020 Annual Information Form. Additionally, a detailed report of our environmental risk mitigation activities can be found in our sustainability report at telus.com/sustainability. Canada’s federal government is responsible for establishing safe limits for signal levels of radio devices. We are confident that the mobile handsets and devices we sell, and our cell towers and other associated devices, comply, in all material respects, with all applicable Canadian and U.S. government safety standards. We continue to monitor new published studies, government regulations and public concerns about the health impacts of RF exposure. Stakeholder engagement also continues to be undertaken as part of the regulatory process concerning the installation of new cell towers. TELUS 2020 ANNUAL REPORT • 119 10.13 Financing, debt and dividends Risk category: Financial Risk factors, such as fluctuations in capital markets, the economic environment or regulatory requirements pertaining to bank capitalization, lending activity or changes in the number of Canadian chartered banks, may impact the availability of capital and the cost of such capital for investment grade corporate issuers, including us. The trading price of our common stock may be affected by various factors, such as TELUS Corporation’s continued access to banks, AR securitization, and public debt markets. The trading price may also be affected by TI factors, such as: • The trading price for TI subordinate voting stock • TI’s access to banks and public markets • Actions taken or statements made by TELUS, TI, or others concerning our relationship with TI • Factors impacting the performance of TI, that may impact TI’s financial performance and subsequently our financial performance. and cash-generating working capital initiatives, borrowings under the unutilized portion of our bank credit facilities, use of securitized trade receivables, use of commercial paper and/or the issuance of debt or equity securities. We have a shelf prospectus in effect until June 2022, under which we can offer up to $2.0 billion of debt or equity securities as of the date of this MD&A. We believe that our investment grade credit ratings, coupled with our efforts to maintain a constructive relationship with banks, investors and credit rating agencies, continue to provide reasonable access to capital markets. To enable us to meet our financial objective of generally maintaining $1.0 billion of available liquidity, we have a $2.25 billion credit facility that expires on May 31, 2023 ($1.5 billion available at December 31, 2020), as well as availability under other bank credit facilities (see Section 7.6 Credit facilities). In addition, our TCI subsidiary has an agreement with an arm’s-length securitization trust, ending December 31, 2021, under which it is able to sell an interest in certain of its trade receivables up to a maximum of $500 million, of which $400 million was available at December 31, 2020 (see Section 7.7 Sale of trade receivables). Our financial instruments, and the nature of the credit risks, liquidity We successfully completed a number of debt transactions in 2019 risks and market risks to which they may be subject, are described in and 2020 (see Section 7.4). As a result, the average term to maturity of Section 7.9 Financial instruments, commitments and contingent liabilities. our long-term debt (excluding commercial paper, the revolving compon- Potential impact Our business plans and growth could be negatively affected if existing financing is not sufficient to cover funding requirements. External capital market conditions could potentially affect our ability to make strategic investments or meet ongoing capital funding requirements, and may prohibit the roll-over of commercial paper at low rates. There can be no assurance that we will maintain or improve our current credit ratings. Given the cash demands of the 2019 600 MHz and upcoming spectrum auctions and the inability to predict impacts of the COVID-19 pandemic, we may be unable to lower our net debt to EBITDA ratio to our objective range in the medium term, which could eventually have a negative impact on our credit ratings. Our cost of capital could increase and our access to capital could be affected by a reduction in the credit ratings of TELUS and/or TELUS Communications Inc. (TCI). A reduction in our ratings from the current BBB+ or equivalent could result in an increase in our cost of capital. While future free cash flow and sources of capital are expected to be sufficient to meet current requirements, our intention to return capital to shareholders could constrain our ability to invest in our operations for future growth. ent of the TELUS International (Cda) Inc. credit facility (TI credit facility), lease liabilities and other long-term debt) was 12.2 years at December 31, 2020 (as compared to 12.8 years at December 31, 2019) and the aver- age cost of our long-term debt was 3.80% (excluding commercial paper, the revolving component of the TI credit facility, lease liabilities and other long-term debt). Foreign currency forward contracts are used to manage currency risk arising from the issuance of commercial paper and long- term debt denominated in U.S. dollars (excluding the TI credit facility). Our commercial paper program is fully backstopped by our $2.25 billion credit facility. At December 31, 2020, TELUS International (Cda) Inc. had a credit facility consisting of US$850 million of revolving components and US$850 million of term loan components. For further details on the TI credit facility, see Section 7.6 Credit facilities. We manage our capital structure and adjust it in light of changes in economic conditions and the risk characteristics of our business and telecommunications infrastructure. We have financial policies in place that are reviewed annually and are intended to help maintain our existing investment grade credit ratings in the range of BBB+ or the equivalent. Four credit rating agencies currently have ratings that are in line with this target. Access to our $2.25 billion credit facility would be maintained, Changes over the past 12 months On February 26, 2020, we issued 57.5 million Common Shares at a price even if our ratings were reduced to below BBB+. Funding for future spectrum licence purchases, defined benefit of $26.00 for total gross proceeds of $1.5 billion. pension plan obligations and any increases in corporate income tax rates At December 31, 2020, our senior unsecured debt was approximately will reduce the after-tax cash flow otherwise available to return to our $16.2 billion (see the Senior unsecured debt principal maturities chart shareholders. Should actual results differ from our expectations, there can in Section 4.3). We operate a commercial paper program (maximum of be no assurance that we will not change our financing plans, including $1.4 billion) that currently provides access to low-cost funding. At Decem- our intention to pay dividends according to our payout policy guidelines ber 31, 2020, we had $731 million of commercial paper outstanding, and to maintain our multi-year dividend growth program. No shares were all of which was denominated in U.S. dollars (US$574 million). When we purchased in 2020 under the normal course issuer bid (NCIB) program. issue commercial paper, it must be refinanced on an ongoing basis in We may seek TSX approval to implement a NCIB which would allow us to order to realize the cost savings relative to borrowing on the $2.25 billion purchase our Common Shares if and when we consider it advantageous, credit facility. Mitigation We may finance future capital funding requirements with internally generated funds, including possible monetization of non-core assets based on our financial position and outlook, and the market price of our Common Shares. There is no assurance that such approval, if requested, would be granted or that any NCIB will be implemented. For further details on our multi-year dividend growth program and NCIB program, see Section 4.3 Liquidity and capital resources. 120 • TELUS 2020 ANNUAL REPORT MD&A: RISKS AND RISK MANAGEMENT Our Board of Directors reviews and approves the declaration of deferred income tax liabilities are also based on our anticipated mix a dividend each quarter, and the amount of the dividend, based on a of revenues among the jurisdictions in which we operate, which is also number of factors, including our financial position and outlook. This subject to change. assessment is subject to various assumptions and the impact of various The audit and review activities of tax authorities affect the ultimate risks and uncertainties, including those described here in Section 10. determination of the actual amounts of indirect taxes payable or receiv- 10.14 Tax matters Risk category: Financial We collect and pay significant amounts of indirect taxes, such as goods able, income taxes payable or receivable, deferred income tax liabilities, taxes on certain items included within capital and income tax expense. Therefore, there can be no assurance that taxes will be payable as anticipated and/or that the amount and timing of receipt or use of the tax-related assets will be as currently expected. and services taxes, harmonized sales taxes, provincial sales taxes, sales and use taxes and value-added taxes, to various tax authorities. As our Changes over the past 12 months Our geographical footprint and breadth of products have increased operations are complex and the related tax interpretations, regulations, significantly during the past 12 months, which increases our exposure legislation and jurisprudence that pertain to our activities are subject to to multiple forms of taxation. continual change and evolving interpretation, the final determination of the taxation of many transactions is uncertain. Moreover, the implementa- tion of new legislation in itself has its own complexities, including those of execution where multiple systems are involved and the interpretation of new rules as they apply to specific transactions, products and services. TELUS, along with TI, operates in a number of foreign jurisdictions, including Armenia, Australia, Austria, Bosnia and Herzegovina, Brazil, Bulgaria, China, Costa Rica, the Czech Republic, Denmark, El Salvador, Finland, France, Germany, Guatemala, India, Ireland, Japan, Korea, Latvia, Mexico, Philippines, Poland, Romania, Slovakia, Spain, Switzerland, Turkey, the United Kingdom and the United States, which increases our exposure to multiple forms of taxation. Generally, each jurisdiction has taxation peculiarities in the forms of taxation imposed (e.g. value-added tax, gross receipts tax, stamp and transfer tax, and income tax), and differences in the applicable tax base and tax rates, legislation and tax treaties, where applicable, as well as currency and language differences. In addition, the telecommunications industry faces unique issues that lead to uncertainty in the application of tax laws and the division of tax between domestic and foreign jurisdictions. Mitigation We follow a comprehensive tax strategy that has been adopted by our Board. This strategy outlines the principles underlying and guiding the roles of team members, their responsibilities and personal conduct, the method of conducting business in relation to tax law and the approaches to working relationships with external tax authorities and external advisors. This strategy recognizes the requirement to comply with all relevant tax laws. The components necessary to manage tax risk are outlined in the strategy. In giving effect to this strategy, we maintain an internal Taxation department composed of professionals who stay current on domestic and foreign tax obligations, supplemented where appropriate with external advisors. This team reviews systems and process changes for compliance with applicable domestic and international taxation laws and regulations. Its members are also responsible for the specialized accounting required for income taxes. Material transactions are reviewed by our Taxation department so that transactions of an unusual or non-recurring nature are assessed from multiple risk-based perspectives. As a matter of regular practice, large Potential impact We are subject to the risk that income and indirect tax amounts, including transactions are reviewed by external tax advisors, while other third-party advisors may also be engaged to express their views as to the potential tax expense, may be materially different than anticipated, and that a gen- for tax liability. We continue to review and monitor our activities, so that we eral tendency by domestic and foreign tax collection authorities to adopt can take action to comply with any related regulatory, legal and tax obli- more interpretations and aggressive auditing practices could adversely gations. In some cases, we also engage external advisors to review our affect our financial condition and operating results. systems and processes for tax-related compliance. The advice provided We have significant current and deferred income tax assets and liabil- and tax returns prepared by such advisors and counsel are reviewed ities, income tax expenses and cash tax payments. Income tax amounts are based on our estimates, applying accounting principles that recognize the benefit of income tax positions only when it is more likely than not that the ultimate determination of the tax treatment of a position will result in the related benefit being realized. The assessment of the likelihood and amount of income tax benefits, as well as the timing of realization of such amounts, can materially affect the determination of Net income or cash flows. We expect the income taxes calculated at applicable statutory rates to range between 25.3% to 25.9% in 2021 (as compared to 26.1% in 2020). These expectations can change as a result of changes in interpretations, regulations, legislation or jurisprudence. The timing of the monetization of deferred income tax accounts is uncertain, as it is dependent upon our future earnings and other events. The amounts of deferred income tax liabilities are also uncertain, as the amounts are based on substantively enacted future income tax rates that were in effect at the time of deferral, which can be changed by tax authorities. As well, the amounts of cash tax payments and current and for reasonableness by our internal Taxation department. 10.15 The economy Risk category: Financial Risks to the Canadian economy include fluctuations in oil prices, interest rates and levels of consumer and mortgage debt, fluctuations in the housing market, timing and rate of economic recovery from the effects of the COVID-19 pandemic and uncertainty related to trade issues, including the ongoing imposition of tariffs. In addition, as we expand international operations as a result of acquisitions, such as those within agriculture, and continued acquisitions by TI, we become more susceptible to global market conditions. Meanwhile, trade conflicts between countries, as well as other economic and political uncertainties and developments outside of Canada, may have global implications, as supply chains become increasingly integrated. TELUS 2020 ANNUAL REPORT • 121 Potential impact Economic uncertainty may cause consumers and business customers to In 2020, the Canadian dollar exchange rate with the U.S. dollar was volatile, with the Canadian dollar generally strengthening over the year, reduce or delay discretionary spending, impacting new service purchases, from $1.30 at the end of 2019 to $1.27 at the end of 2020. volumes of use and substitution by lower-priced alternatives. The employee defined benefit pension plans, in aggregate with Globally, countries may require additional financial support, sovereign the application of the asset ceiling, were in a $913 million deficit position credit ratings may continue to decline and there may be default on at December 31, 2020 (compared to a $425 million deficit position at sovereign debt obligations of certain countries. Any of these global eco- the end of 2019). The solvency position, as determined under the Pension nomic conditions may increase the cost of borrowing and cause credit Benefits Standards Act, 1985, was estimated to be a surplus of $375 mil- to become more limited, which could have a material adverse effect on lion at the end of 2020 (compared to a $372 million surplus position at our business, financial condition, financial performance and cash flows. the end of 2019). Economic and political uncertainty, including for example the withdrawal of the United Kingdom from the European Union in 2020, commonly referred to as “Brexit”, could undermine business confidence and cause potential new clients of TI to delay engaging TI and cause existing clients to reduce or defer their spending on TI’s services or reduce or eliminate spending under existing contracts with TI. Fluctuations in the Canadian economy could adversely impact our customer growth, revenue, profitability and free cash flow, and could potentially require us to record impairments in the carrying values of our assets, including, but not limited to, our intangible assets with indefinite lives (spectrum licences and goodwill). Impairments in the carrying values of our assets would result in a charge to earnings and a reduction in owners’ equity, but would not affect cash flow. Fluctuations in the global economy could affect different industry verticals in different ways. Counter-cyclical industries such as agriculture and logistics should remain reasonably unaffected, as food producers, distributors and retailers continue to operate. Healthcare, particularly products and services related to logistics or vaccines, should do well as vaccines are rolled out, and hospitals and healthcare providers in certain countries could perform well. Cyclical industries such as retail, travel and hospitality, and others will continue to be negatively affected until a broad roll-out of vaccines takes effect during 2021. With certain revenues, capital acquisitions and operating costs denominated in U.S. dollars, fluctuations in the Canadian dollar exchange rate may impact our financial and operating results. Mitigation While economic risks cannot be completely mitigated, our top priority of putting customers first and pursuing global leadership in the likelihood of our clients to recommend our products, services and people also sup- ports our efforts to acquire and retain customers through the economic fluctuations that affect them and us. We also continue to pursue cost reduction and efficiency initiatives in our own business (see discussion in Section 3 Corporate priorities). See Section 4.3 Liquidity and capital resources for our capital structure financial policies and plans. An increase in our revenue denominated in U.S. dollars may help to mitigate currency risk, as our revenue base has been primarily in Canadian dollars. Foreign currency forward contracts and currency options are lever- aged to fix the exchange rates on U.S. dollar-denominated transactions, commitments, commercial paper and U.S. Dollar Notes in order to help mitigate risks related to exchange rate fluctuations, and we seek to mitigate pension risk through the application of policies and procedures for managing exposure to investment risk and through ongoing monitor- ing of our funding position. Our best estimate of cash contributions to our defined benefit pension plans in 2021 is $50.6 million ($50.4 million in 2020). 10.16 Litigation and legal matters Economic and capital market fluctuations could also adversely affect the investment performance, funding and expense associated with our Risk category: Compliance Given the size of our organization, investigations, claims and lawsuits defined benefit pension plans, as obligations are based on certain actu- seeking damages and other relief are regularly threatened or pending arial assumptions related to expected plan asset returns, salary escalation, against us. The expansion of our product and service offerings into areas retirement ages, life expectancy, the performance of the financial markets such as managed services, security, healthcare and agriculture technol- and future interest rates. Changes over the past 12 months In 2020, both the Canadian and global economy slowed dramatically as a result of the COVID-19 pandemic. There were indications of a recovery in the summer and through the third quarter with a reduction in measures and, in Canada, government assistance programs, but macroeconomic conditions worsened toward the end of the year as it became clear that a second wave of the pandemic was starting. We anticipate that the pan- demic will continue to present challenges to both the Canadian and global economy for at least the first two quarters of 2021, notwithstanding that vaccines have been developed and are being administered, but based on the current pace of vaccine production and immunization capacity. Interest rates are expected to remain low for some time, with several central banks making specific mention of this, but low rates will not be enough to stimulate a consumer-driven downturn. Interest rates should have a net positive effect on corporate borrowing and investment, but this will be offset by slowing overall demand. ogy, and the TI IPO have also added to our compliance requirements, the risk of litigation and the possibility of damages, sanctions and fines. We may also be the target of class actions due to our millions of consumer customer relationships. In addition, like other public companies, we may be subject to civil liability for misrepresentations in written disclosure and oral statements, and liability for fraud and market manipulation. The intellectual property and proprietary rights of owners and develop- ers of hardware, software, business processes and other technologies may be protected under statute, such as patent, copyright and industrial design legislation, or under common law, such as trade secrets. Significant damages may be awarded in intellectual property infringement claims and defendants may incur significant costs to defend or settle such claims. Potentially material certified and uncertified class actions, intellectual property litigation and other claims against us are detailed in Note 29(a) of the Consolidated financial statements. With operations in foreign jurisdictions, we are required to comply not only with Canadian laws and regulations, but also with local laws and regu- lations, which may differ substantially from Canadian laws and add to our 122 • TELUS 2020 ANNUAL REPORT MD&A: DEFINITIONS AND RECONCILIATIONS regulatory, legal and tax exposures. As we continue to expand our business pursue infringement claims. Given the vast array of technologies and into additional jurisdictions, and expand our product and service offerings systems that we use to deliver products and services, and the rapid in such jurisdictions, this may further add to our regulatory, legal and tax change and complexity of such technologies, the number of disputes exposure. In certain cases, foreign laws with extra-territorial application over intellectual property and proprietary rights can reasonably be may also impose obligations on us. See Section 10.3 Regulatory matters. expected to increase. Potential impact It is not currently possible to predict the outcome of such legal matters Mitigation We believe that we have in place reasonable policies, controls, processes due to various factors, including: the preliminary nature of some claims; and contractual arrangements, as well as insurance coverage, designed uncertain damage theories and demands; incomplete factual records; to enable compliance and reduce our exposure. We have a designated the uncertain nature of legal theories and procedures and their resolution Chief Data and Trust Officer, whose role is to work across the enterprise by the courts, at both the trial and appellate levels; and the unpredictable to ensure that the business has appropriate processes and controls in nature of opposing parties and their demands. place in order to facilitate legal compliance and to report on compliance We are typically required to process, and sometimes collect and/or to the Audit Committee. store sensitive data, including, but not limited to, personal data regulated Our team of legal professionals advise on and manage risks related by the General Data Protection Regulation, the Personal Information to claims and possible claims, vigorously defend class actions and Protection and Electronic Documents Act, California Consumer Privacy other claims, pursue settlements in appropriate cases, regularly assess Act, the California Invasion of Privacy Act, Personal Data Protection Bill of our business practices and monitor legal developments that may 2018, and the Data Privacy Act of 2012. The adoption and enforcement by governments of increasingly stringent privacy legislation may increase impact risk. They seek and obtain contractual protections consistent with standard industry practices to help mitigate the risks of intellectual our risk. A successful class action lawsuit or intellectual property infringe- property infringements and work to protect our intellectual property ment claim, by its nature, could result in a sizeable damage award that rights through litigation and other means. could negatively affect a defendant’s financial or operating results. We have a corporate disclosure policy that restricts the role of There can be no assurance that our financial or operating results Company spokesperson, provides a protocol for communicating with will not be negatively impacted by any of these factors. investment analysts, investors and others, and outlines our communi- Changes over the past 12 months As our TELUS Health team and medical clinics offer new services (such as virtual care and electronic prescription), including in some cases to consumers and in other cases through third-party partnerships, new risks arise across parameters such as dependence on third-party suppliers for legal compliance and/or compliance with medical professional standards, as well as a heightened possibility of political intervention. As we increase the number of offerings in agriculture technology (such as animal health and management) and the jurisdictions in which we offer them, we face increased risks with respect to regulatory compliance and data security and privacy. With the growth and development of technology-based industries, the value of intellectual property and proprietary rights has increased. Due to trends in awarding of damages, costs to defend and the likeliness of settlements, property rights holders may be encouraged to aggressively cation approach. We rely on our team members, officers, Board of Directors, key suppli- ers and other business partners to demonstrate behaviour consistent with applicable legal and ethical standards in all jurisdictions within which we operate. We have an anti-bribery and corruption policy, a comprehensive code of ethics and conduct for our team members and Board of Directors, and mandatory annual integrity training for all team members and identified contractors. Subject to the foregoing limitations, management is of the opinion, based upon legal assessments and the information presently available, that it is unlikely that any liability relating to existing investigations, claims and lawsuits, to the extent not provided for through insurance or other- wise, would have a material effect on our financial position and the results of our operations, excepting the items disclosed herein and in Note 29(a) of the Consolidated financial statements. 11 Definitions and reconciliations 11.1 Non-GAAP and other financial measures We have issued guidance on and report certain non-GAAP measures that are used to evaluate the performance of TELUS, as well as to determine compliance with debt covenants and to manage our capital structure. As non-GAAP measures generally do not have a standardized meaning, they may not be comparable to similar measures presented by other issuers. Securities regulations require such measures to be clearly defined, qualified and reconciled with their nearest GAAP measure. Certain of the metrics do not have generally accepted industry definitions. Adjusted Net income and adjusted basic earnings per share: These measures are used to evaluate performance at a consolidated level and exclude items that, in management’s view, may obscure underlying trends in business performance or items of an unusual nature that do not reflect our ongoing operations. These measures should not be considered alternatives to Net income and basic earnings per share in measuring TELUS’ performance. (See Reconciliation of adjusted Net income and Reconciliation of adjusted basic EPS in Section 1.3.) TELUS 2020 ANNUAL REPORT • 123 Capital expenditure intensity: This measure is calculated as capital expenditures (excluding spectrum licences) divided by total Operating Earnings coverage: This measure is defined in the Canadian Securities Administrators’ National Instrument 41-101 and related instruments, revenues and Other income. This measure provides a basis for com- and is calculated as follows: paring the level of capital expenditures to those of other companies of varying size within the same industry. Calculation of Earnings coverage TELUS Corporation Common Share (Common Share) dividend payout ratio: Commencing in 2020, this is a historical measure calcu- lated as the sum of the most recent four quarterly dividends declared, as recorded in the financial statements, net of dividend reinvestment Years ended December 31 ($ millions, except ratio) Net income attributable to Common Shares Income taxes (attributable to Common Shares) Borrowing costs (attributable to Common Shares)1 plan effects, divided by the sum of free cash flow amounts for the most Numerator recent four quarters for interim reporting periods. For fiscal years, the Denominator – Borrowing costs denominator is annual free cash flow. Our objective range for the annual Ratio (times) 2020 1,207 428 749 2019 1,746 455 724 2,384 2,925 749 3.2 724 4.0 TELUS Corporation Common Share dividend payout ratio is on a pro- spective basis, rather than on a trailing basis. (See Section 7.5 Liquidity and capital resource measures.) Calculation of Common Share dividend payout ratio, net of dividend reinvestment plan effects Determined using management measures 12-month periods ended December 31 ($ millions, except ratio) Sum of the last four quarterly dividends declared Sum of the last four quarterly amount of dividends 2020 1,520 2019 1,358 declared reinvested in Common Shares (561) (290) Numerator – Sum of the last four quarterly dividends declared, net of dividend reinvestment plan effects Denominator – Free cash flow Ratio (%) 959 1,435 67 1,068 932 1 1 5 Calculation of ratio of Common Share dividends declared to cash provided by operating activities less capital expenditures (excluding spectrum licences) Determined using most comparable IFRS-IASB measures 1 Interest on Long-term debt plus Interest on short-term borrowings and other plus long-term debt prepayment premium, adding capitalized interest and deducting borrowing costs attributable to non-controlling interests. EBITDA (earnings before interest, income taxes, depreciation and amortization): We have issued guidance on and report EBITDA because it is a key measure used to evaluate performance at a consolidated level. EBITDA is commonly reported and widely used by investors and lending institutions as an indicator of a company’s operating performance and ability to incur and service debt, and as a valuation metric. EBITDA should not be considered an alternative to Net income in measuring TELUS’ performance, nor should it be used as a measure of cash flow. EBITDA as calculated by TELUS is equivalent to Operating revenues and Other income less the total of Goods and services purchased expense and Employee benefits expense. We calculate EBITDA – excluding restructuring and other costs, as it is a component of the EBITDA – excluding restructuring and other costs interest coverage ratio and the Net debt to EBITDA – excluding restructuring and other costs ratio. We also calculate Adjusted EBITDA to exclude items of an unusual nature that do not reflect our ongoing operations and should not, in our opinion, be considered in a long-term valuation metric or should not be included in an assessment of our ability to service or incur debt. 12-month periods ended December 31 ($ millions, except ratio) Numerator – Sum of the last four quarterly dividends declared Cash provided by operating activities Less: Capital expenditures 2020 2019 1,520 4,574 1,358 3,927 (excluding spectrum licences) (2,775) (2,906) Denominator – Cash provided by operating activities less capital expenditures (excluding spectrum licences) Ratio (%) 1,799 84 1,021 133 EBITDA reconciliation Years ended December 31 ($ millions) Net income Financing costs Income taxes Depreciation Amortization of intangible assets EBITDA Add restructuring and 2020 1,260 771 451 2,107 905 5,494 2019 1,776 733 468 1,929 648 5,554 other costs included in EBITDA 259 134 EBITDA – excluding restructuring and other costs Add other equity losses related to real estate joint ventures Deduct retirement of a provision arising from business acquisition-related written put options within TI 5,753 5,688 19 (71) 5 – Adjusted EBITDA 5,701 5,693 124 • TELUS 2020 ANNUAL REPORT MD&A: DEFINITIONS AND RECONCILIATIONS Calculation of EBITDA margin Free cash flow calculation Years ended December 31 ($ millions, except margin) Numerator – EBITDA Denominator – Operating revenues and Other income EBITDA margin (%) Calculation of Adjusted EBITDA margin Years ended December 31 ($ millions, except margin) Numerator – Adjusted EBITDA Adjusted Operating revenues and Other income: 2020 5,494 2019 Years ended December 31 ($ millions) 5,554 EBITDA 15,463 14,658 35.5 37.9 2020 5,701 2019 5,693 Deduct non-cash gains from the sale of property, plant and equipment Restructuring and other costs, net of disbursements Effects of contract asset, acquisition and fulfilment (IFRS 15 impact) and TELUS Easy Payment device financing Effects of lease principal (IFRS 16 impact) Leases formerly accounted for 2020 5,494 2019 5,554 (4) 35 (21) (36) 43 (365) (1 1 8) (333) as finance leases (IFRS 16 impact) 86 108 Operating revenues and Other income 15,463 14,658 Items from the Consolidated statements Other equity losses related to real estate joint ventures Retirement of a provision arising from business acquisition-related written put options within TI Denominator – Adjusted Operating revenues 19 (71) 5 – of cash flows: Share-based compensation, net Net employee defined benefit plans expense Employer contributions to employee defined benefit plans Interest paid and Other income 15,41 1 14,663 Interest received Adjusted EBITDA margin (%) 37.0 38.8 Capital expenditures (excluding 27 102 (51) (740) 13 (2) 78 (41) (714) 7 spectrum licences)1 (2,775) (2,906) EBITDA – excluding restructuring and other costs interest coverage: This measure is defined as EBITDA –excluding restructuring and other Free cash flow before income taxes Income taxes paid, net of refunds costs, divided by Net interest cost, calculated on a 12-month trailing basis. Free cash flow 1,865 (430) 1,435 1,576 (644) 932 This measure is similar to the coverage ratio covenant in our credit facilities, as described in Section 7.6 Credit facilities. Free cash flow: We report this measure as a supplementary indicator of our operating performance, and there is no generally accepted industry 1 Refer to Note 31 of the Consolidated financial statements for further information. The following reconciles our definition of free cash flow with Cash provided by operating activities. definition of free cash flow. It should not be considered an alternative to the measures in the Consolidated statements of cash flows. Free cash Free cash flow reconciliation with Cash provided by operating activities flow excludes 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. It provides an indication of how much cash generated by operations is available after capital expenditures (excluding purchases of spectrum licences) that may be used to, among other things, pay dividends, repay debt, purchase shares or make other investments. We exclude impacts of accounting changes that do not impact cash, such as IFRS 15 and IFRS 16. Free cash flow may be supplemented from time to time by proceeds from divested assets or financing activities. Years ended December 31 ($ millions) Free cash flow Add (deduct): Capital expenditures (excluding spectrum licences) Adjustments to reconcile to Cash provided by operating activities Cash provided by operating activities 2020 1,435 2019 932 2,775 2,906 364 4,574 89 3,927 TELUS 2020 ANNUAL REPORT • 125 Net debt: We believe that net debt is a useful measure because it represents the amount of Short-term borrowings and long-term debt obligations that are not covered by available Cash and temporary investments. The nearest IFRS measure to net debt is Long-term debt, including Current maturities of Long-term debt. Net debt is a component of the Net debt to EBITDA – excluding restructuring and other costs ratio. Calculation of Net debt As at December 31 ($ millions) 11.2 Operating indicators The following measures are industry metrics that are useful in assessing the operating performance of a wireless and wireline telecommunications entity, but do not have a standardized meaning under IFRS-IASB. Mobile phone average billing per subscriber per month (ABPU) is calculated as network revenue derived from monthly service plan, roaming and usage charges, as well as monthly re-payments of the outstanding device balance owing from customers on contract; divided 2020 2019 by the average number of mobile phone subscribers on the network Long-term debt including current maturities 20,288 18,474 during the period, and is expressed as a rate per month. Debt issuance costs netted against long-term debt Derivative (assets) liabilities, net 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) Cash and temporary investments, net Short-term borrowings Net debt 97 120 87 (37) Mobile phone average revenue per subscriber per month (ARPU) is calculated as network revenue derived from monthly service plan, roaming and usage charges; divided by the average number of mobile phone subscribers on the network during the period, and is expressed as a rate per month. 69 (848) 100 1 1 0 (535) 100 Churn is calculated as the number of subscribers deactivated during a given period divided by the average number of subscribers on the network during the period, and is expressed as a rate per month. Mobile phone churn refers to the aggregate average of both prepaid and postpaid mobile phone churn. A TELUS, Koodo or Public Mobile 19,826 18,199 brand prepaid mobile phone subscriber is deactivated when the sub- scriber has no usage for 90 days following expiry of the prepaid credits. Net debt to EBITDA – excluding restructuring and other costs: This measure is defined as net debt at the end of the period divided by 12-month trailing EBITDA – excluding restructuring and other costs. (See discussion in Section 7.5 Liquidity and capital resource measures.) This measure is similar to the leverage ratio covenant in our credit facilities, as described in Section 7.6 Credit facilities. Net interest cost: This measure is the denominator in the calculation of EBITDA – excluding restructuring and other costs interest coverage. Net interest cost is defined as financing costs, excluding capitalized long-term debt interest, employee defined benefit plans net Mobile connected device subscriber means a TELUS subscriber on an active service plan with a recurring revenue-generating portable unit (e.g. tablets, internet keys, Internet of Things, wearables and connected cars) that is connected to the TELUS network and is intended for limited or no cellular voice capability. Mobile phone subscriber means a TELUS subscriber on an active service plan with a recurring revenue-generating portable unit (e.g. feature phones and smartphones) that is connected to the TELUS network and provides voice, text and/or data connectivity. interest and recoveries on redemption and repayment of debt, calculated on a 12-month trailing basis. Expenses recorded for the long-term debt Internet subscriber means a TELUS subscriber on an active internet plan with a recurring revenue-generating fixed unit that is connected prepayment premium, if any, are included in net interest cost. Net interest to the TELUS network and provides internet connectivity. cost was $792 million in 2020 and $755 million in 2019. Restructuring and other costs: With the objective of reducing ongoing costs, we incur associated incremental, non-recurring restructuring costs. We may also incur atypical charges, which are included in other costs, when undertaking major or transformational changes to our business or operating models or post-acquisition business integration. In other costs, we include incremental atypical external costs incurred in connection with business acquisition or disposition activity, as well as significant litigation costs in respect of losses or settlements, adverse Residential voice subscriber means a TELUS subscriber on an active phone plan with a recurring revenue-generating fixed unit that is connected to the TELUS network and provides voice service. Security subscriber means a TELUS subscriber on an active security plan with a recurring revenue-generating fixed unit that is connected to the TELUS security and automation platform. TV subscriber means a TELUS subscriber on an active TV plan with a recurring revenue-generating fixed unit subscription for video services retrospective regulatory decisions and incremental atypical costs from a TELUS TV platform (e.g. Optik TV and Pik TV). incurred due to the COVID-19 pandemic. Components of restructuring and other costs Years ended December 31 ($ millions) Goods and services purchased Employee benefits expense Restructuring and other costs included in EBITDA 2020 209 50 2019 65 69 259 134 126 • TELUS 2020 ANNUAL REPORT Report of management on internal control over financial reporting Management of TELUS Corporation (TELUS, or the Company) is Based on the assessment referenced in the preceding paragraph, responsible for establishing and maintaining adequate internal control management has determined that the Company’s internal control over over financial reporting and for its assessment of the effectiveness of financial reporting is effective as of December 31, 2020. In connection internal control over financial reporting. with this assessment, no material weaknesses in the Company’s internal TELUS’ President and Chief Executive Officer and Executive control over financial reporting were identified by management as of Vice-President and Chief Financial Officer have assessed the effective- December 31, 2020. ness of the Company’s internal control over financial reporting as of Deloitte LLP, an Independent Registered Public Accounting Firm, December 31, 2020, in accordance with the criteria established in Internal audited the Company’s Consolidated financial statements for the year Control – Integrated Framework (2013) issued by the Committee of ended December 31, 2020, and as stated in the Report of Independent Sponsoring Organizations of the Treadway Commission. Internal control Registered Public Accounting Firm, they have expressed an unqualified over financial reporting is a process designed by, or under the super- opinion on the effectiveness of the Company’s internal control over vision of, the President and Chief Executive Officer and the Executive financial reporting as of December 31, 2020. Vice-President and Chief Financial Officer and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projec- tions of any evaluation of the effectiveness of internal control over financial Doug French Darren Entwistle reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the Executive Vice-President and Chief Financial Officer President and Chief Executive Officer degree of compliance with the policies or procedures may deteriorate. February 11, 2021 February 11, 2021 TELUS 2020 ANNUAL REPORT • 127 CONSOLIDATED FINANCIAL STATEMENTSReport of independent registered public accounting firm To the Shareholders and Board of Directors Such procedures included examining, on a test basis, evidence of TELUS Corporation Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial position of TELUS Corporation and subsidiaries (the Company) as at December 31, 2020 and 2019, the related consolidated statements regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. of income and other comprehensive income, changes in owners’ equity and cash flows, for each of the two years in the period ended Critical Audit Matters The critical audit matters communicated below are matters arising from December 31, 2020, and the related notes (collectively referred to as the current-period audit of the financial statements that were communi- the “financial statements”). In our opinion, the financial statements present cated or required to be communicated to the audit committee and that fairly, in all material respects, the financial position of the Company (1) relate to accounts or disclosures that are material to the financial as at December 31, 2020 and 2019, and its financial performance and its statements and (2) involved our especially challenging, subjective, or cash flows for each of the two years in the period ended December 31, complex judgments. The communication of critical audit matters does 2020, in accordance with International Financial Reporting Standards not alter in any way our opinion on the financial statements, taken as issued by the International Accounting Standards Board. as a whole, and we are not, by communicating the critical audit matters We have also audited, in accordance with the standards of the Public below, providing separate opinions on the critical audit matters or Company Accounting Oversight Board (United States) (PCAOB), the on the accounts or disclosures to which they relate. Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations Goodwill Impairment Analysis – Refer to Note 1(f) and Note 18 to the financial statements of the Treadway Commission and our report dated February 11, 2021, expressed an unqualified opinion on the Company’s internal control Critical Audit Matter Description The Company assesses goodwill impairment by comparing the over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of recoverable amounts of its cash-generating units to their carrying values. The Company determined the recoverable amounts of the cash-generating units based on a fair value less costs of disposal calculation. The fair value less costs of disposal calculation uses discounted cash flow projections that employ the following key assumptions: • Future cash flows and growth projections. • Associated economic risk assumptions and estimates of the likelihood of achieving key operating metrics and drivers. • Weighted average cost of capital. the PCAOB. Those standards require that we plan and perform the Changes in these assumptions could have a significant impact on audit to obtain reasonable assurance about whether the financial either the fair value less costs of disposal, the amount of any goodwill statements are free of material misstatement, whether due to error or impairment charge, or both. Given the significant judgments made by fraud. Our audits included performing procedures to assess the risks management, auditing the key assumptions required a high degree of of material misstatement of the financial statements, whether due to auditor judgment and an increased extent of effort, including the need error or fraud, and performing procedures that respond to those risks. to involve a fair value specialist. 128 • TELUS 2020 ANNUAL REPORT How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the key assumptions included the following, among others: • Evaluated the effectiveness of controls over the key assumptions used by management. • Compared management’s historical cash flow forecasts to actual historical results. • Evaluated the reasonableness of management’s forecasts of future cash flows and growth projections; associated economic risk assumptions; and estimates of the likelihood of achieving key operating metrics and drivers by comparing the forecasts to: • Historical revenues, • Analyst and industry reports for the Company and certain of its peer companies, • Known changes in the Company’s operations and/or tele- communication industry, which are expected to impact future operating performance, and • Internal communications to management and the Board of Directors. • With the assistance of a fair value specialist, evaluated the reasonableness of the weighted average cost of capital and growth projections by: • Testing the source information underlying the determination of the weighted average cost of capital. • Developing a range of independent estimates for the weighted average cost of capital and growth projections and comparing those to the rates selected by management. Valuation of Intangible Assets Acquired in Business Combinations – Refer to Note 1(b) and Note 18(b) to the financial statements Critical Audit Matter Description The Company completed business combinations of Competence Call Center (CCC) and the data annotation business of Lionbridge Technologies, Inc. (Lionbridge AI) and recognized the assets acquired and liabilities assumed at their acquisition-date fair values, including intangible assets for customer relationships and a crowdsource asset. The fair value measurement of these intangible assets required manage- ment to make significant estimates and assumptions in forecasting future cash flows. While there are many estimates and assumptions that management and the approximate time to replace the workforce used in valuing the crowdsource asset. Performing audit procedures to evaluate these estimates and assumptions required a high degree of auditor judgment and an increased extent of audit effort, including the involvement of fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the forecasts of future revenue, discount rates, and time-to-replace assumptions used to determine the fair value of intangible assets acquired included the following, among others: • Evaluated the effectiveness of controls over the determination of the fair value of customer relationships and the crowdsource asset at the time of acquisition, including management’s controls over key assumptions used in the valuations. • Evaluated the reasonableness of management’s forecasts of future revenue by: • Inspecting contracts with customers to substantiate the existence of legally enforceable contracts in place, as well as inspecting and assessing management’s business plans to grow revenue with these customers, • Assessing the reasonableness of management’s forecasts of future revenue by comparing the projections to historical results and external sources, including industry trends and peer companies’ historical data. • With the assistance of fair value specialists, evaluated the reason- ableness of the discount rates by testing the source information underlying the determination of the discount rates and by developing a range of independent rates based on industry data and comparing them to the discount rates used by management. • With the assistance of fair value specialists, assessed the appropriate- ness of the valuation methodology and performed an independent assessment of the time-to-replace assumption used in valuing the crowdsource asset, including recalculating the approximate value of the crowdsource workforce in place and performing a sensitivity analysis to substantiate the value of the lost opportunity. makes to determine the fair value of the customer relationships acquired Chartered Professional Accountants for both CCC and Lionbridge AI and the crowdsource asset acquired February 11, 2021 for Lionbridge AI, the estimates and assumptions with the highest degree Vancouver, Canada of subjectivity are the forecasts of future revenue arising from existing customers and discount rates used in valuing the customer relationships, We have served as the Company’s auditor since 2002. TELUS 2020 ANNUAL REPORT • 129 CONSOLIDATED FINANCIAL STATEMENTSReport of independent registered public accounting firm To the Shareholders and Board of Directors Definition and Limitations of Internal Control of TELUS Corporation Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of TELUS Corporation and subsidiaries (the Company) as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 11, 2021, expressed an unqualified opinion on those financial statements. over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance Basis for Opinion The Company’s management is responsible for maintaining effective regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect internal control over financial reporting and for its assessment of the on the financial statements. effectiveness of internal control over financial reporting, included in the Because of its inherent limitations, internal control over financial accompanying Report of Management on Internal Control over Financial reporting may not prevent or detect misstatements. Also, projections of Reporting. Our responsibility is to express an opinion on the Company’s any evaluation of effectiveness to future periods are subject to the risk internal control over financial reporting based on our audit. We are a that controls may become inadequate because of changes in conditions, public accounting firm registered with the PCAOB and are required to be or that the degree of compliance with the policies or procedures independent with respect to the Company in accordance with the U.S. may deteriorate. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial Chartered Professional Accountants reporting, assessing the risk that a material weakness exists, testing and February 11, 2021 evaluating the design and operating effectiveness of internal control Vancouver, Canada based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 130 • TELUS 2020 ANNUAL REPORT Consolidated statements of income and other comprehensive income Years ended December 31 (millions except per share amounts) Note 2020 2019 Operating Revenues Service Equipment Operating revenues (arising from contracts with customers) Other income Operating revenues and other income Operating Expenses Goods and services purchased Employee benefits expense Depreciation Amortization of intangible assets Operating Income Financing costs Income Before Income Taxes Income taxes Net Income Other Comprehensive Income (Loss) Items that may subsequently be reclassified to income Change in unrealized fair value of derivatives designated as cash flow hedges Foreign currency translation adjustment arising from translating financial statements of foreign operations 6 7 8 17 18 9 10 11 Items never subsequently reclassified to income Change in measurement of investment financial assets Employee defined benefit plan re-measurements Comprehensive Income Net Income Attributable to: Common Shares Non-controlling interests Comprehensive Income Attributable to: Common Shares Non-controlling interests Net Income Per Common Share* 12 Basic Diluted Total Weighted Average Common Shares Outstanding* Basic Diluted The accompanying notes are an integral part of these consolidated financial statements. *Amounts reflect retrospective application of March 17, 2020, share split (see Note 28(b)). TELUS 2020 ANNUAL REPORT • 131 $ 13,277 $ 12,400 2,064 15,341 122 15,463 6,268 3,701 2,107 905 12,981 2,482 771 1,71 1 451 1,260 (1 1 1 ) 1 1 3 2 14 (312) (298) (296) 2,189 14,589 69 14,658 6,070 3,034 1,929 648 1 1 ,681 2,977 733 2,244 468 1,776 84 20 104 12 (338) (326) (222) $ 964 $ 1,554 $ 1,207 $ 1,746 53 30 $ 1,260 $ 1,776 $ 893 $ 1,516 71 38 $ 964 $ 1,554 $ 0.95 $ 0.94 $ $ 1.45 1.45 1,275 1,278 1,204 1,204 CONSOLIDATED FINANCIAL STATEMENTSConsolidated statements of financial position As at December 31 (millions) Assets Current assets Cash and temporary investments, net Accounts receivable Income and other taxes receivable Inventories Contract assets Prepaid expenses Current derivative assets Non-current assets Property, plant and equipment, net Intangible assets, net Goodwill, net Contract assets Other long-term assets Liabilities and Owners’ Equity Current liabilities Short-term borrowings Accounts payable and accrued liabilities Income and other taxes payable Dividends payable Advance billings and customer deposits Provisions Current maturities of long-term debt Current derivative liabilities Non-current liabilities Provisions Long-term debt Other long-term liabilities Deferred income taxes Liabilities Owners’ equity Common equity Non-controlling interests Contingent liabilities The accompanying notes are an integral part of these consolidated financial statements. Approved by the Directors: David L. Mowat Director R.H. Auchinleck Director 132 • TELUS 2020 ANNUAL REPORT Note 2020 2019 $ 848 2,355 $ 535 1,962 148 407 439 484 2 127 437 737 547 8 4,683 4,353 15,014 15,026 7,235 268 1,106 38,649 $ 43,332 14,232 12,846 5,307 328 919 33,632 $ 37,985 $ 100 2,962 $ 100 2,749 135 403 772 73 1,432 32 5,909 924 18,856 1,265 3,776 24,821 30,730 12,074 528 12,602 55 352 675 288 1,332 23 5,574 590 17,142 806 3,214 21,752 27,326 10,548 1 1 1 10,659 $ 43,332 $ 37,985 6(b) 1(l) 6(c) 20 4(h) 17 18 18 6(c) 20 22 23 13 24 25 26 4(h) 25 26 27 10 28 29 Consolidated statements of changes in owners’ equity Common equity Equity contributed Common Shares (Note 28) (millions) Note Number of shares* Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Non- controlling interests Total Total Balance as at January 1, 2019 1,197 $ 5,390 $ 383 $ 4,321 $ 1 1 $ 10,105 $ 74 $ 10,179 Net income Other comprehensive income (loss) Dividends Dividends reinvested and 11 13 optional cash payments 13(b), 14(c) Equity accounted share-based compensation Share option award net-equity settlement feature Issue of Common Shares in business combination Change in ownership interests of subsidiary Balance as at December 31, 2019 – – – 8 1 – 3 – – – – 184 13 1 72 – – – – – 20 (1) – (4) 1,746 – 1,746 30 1,776 (338) (1,358) – – – – – 108 – – – – – – (230) (1,358) 184 33 – 72 8 – – – – – (222) (1,358) 184 33 – 72 (4) (1) (5) 1,209 $ 5,660 $ 398 $ 4,371 $ 1 1 9 $ 10,548 $ 1 1 1 $ 10,659 Balance as at January 1, 2020 1,209 $ 5,660 $ 398 $ 4,371 $ 1 1 9 $ 10,548 $ 1 1 1 $ 10,659 Net income Other comprehensive income (loss) Dividends Dividends reinvested and – – – – – – 11 13 optional cash payments 13(b), 14(c) 23 541 Equity accounted share-based compensation Issue of Common Shares in business combination Common Shares issued Change in ownership 14(b) 18(b) 28(a) 1 – 15 8 58 1,453 – – – – 82 – – interests of subsidiary 28(d) – – 54 1,207 – 1,207 (312) (1,520) (2) – (314) (1,520) – – – – – – – – – – 541 97 8 1,453 53 18 – – – – – 1,260 (296) (1,520) 541 97 8 1,453 54 346 400 Balance as at December 31, 2020 1,291 $ 7,677 $ 534 $ 3,746 $ 1 1 7 $ 12,074 $ 528 $ 12,602 The accompanying notes are an integral part of these consolidated financial statements. *Amounts reflect retrospective application of March 17, 2020, share split (see Note 28(b)). TELUS 2020 ANNUAL REPORT • 133 CONSOLIDATED FINANCIAL STATEMENTSConsolidated statements of cash flows Years ended December 31 (millions) Operating Activities Net income Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization Deferred income taxes Share-based compensation expense, net Net employee defined benefit plans expense Employer contributions to employee defined benefit plans Non-current contract assets Non-current unbilled customer finance receivables Loss from equity accounted investments Other Net change in non-cash operating working capital Cash provided by operating activities Investing Activities Cash payments for capital assets, excluding spectrum licences Cash payments for spectrum licences Cash payments for acquisitions, net Advances to, and investment in, real estate joint ventures and associate Real estate joint venture receipts Proceeds on disposition Investment in portfolio investments and other Cash used by investing activities Financing Activities Common Shares issued Dividends paid to holders of Common Shares Issue (repayment) of short-term borrowings, net Long-term debt issued Redemptions and repayment of long-term debt Shares of subsidiary issued to non-controlling interests Other Cash provided by financing activities Cash Position Increase in cash and temporary investments, net Cash and temporary investments, net, beginning of period Cash and temporary investments, net, end of period Supplemental Disclosure of Operating Cash Flows Interest paid Interest received Income taxes paid, net In respect of comprehensive income In respect of business acquisitions The accompanying notes are an integral part of these consolidated financial statements. 134 • TELUS 2020 ANNUAL REPORT Note 2020 2019 $ 1,260 $ 1,776 3,012 2,577 10 14(a) 15(a) 20 7, 21 31(a) 31(a) 18(b) 21 21 31(b) 13(a) 26 26 28(d) 76 27 102 (51) 60 (136) 29 (75) 270 1 1 5 (2) 78 (41) 130 (178) (4) (192) (332) 4,574 3,927 (2,822) – (3,205) (100) 5 86 (129) (6,165) 1,495 (930) (8) 4,882 (3,863) 400 (72) 1,904 313 535 (2,952) (942) (1,105) (35) 7 16 (33) (5,044) – (1,149) (1) 7,705 (5,261) (9) (47) 1,238 121 414 $ 848 $ 535 $ (740) $ 13 $ (397) (33) $ (430) $ (714) $ 7 $ (629) (15) $ (644) Notes to consolidated financial statements December 31, 2020 Notes to consolidated financial statements Page TELUS Corporation is one of Canada’s largest telecommunications companies, providing a wide range of telecommunications services and products, including wireless and wireline voice and data. Data services include: internet protocol; television; hosting, managed information technology and cloud-based services; healthcare solutions; customer care and business services; and home and business smart technology (including security and agriculture). TELUS Corporation was incorporated under the Company Act (British Columbia) on October 26, 1998, under the name BCT.TELUS General application 1. Summary of significant accounting policies 2. Accounting policy developments 3. Capital structure financial policies 4. Financial instruments Consolidated results of operations focused 5. Segment information 6. Revenue from contracts with customers Communications Inc. (BCT). On January 31, 1999, pursuant to 7. Other income a court-approved plan of arrangement under the Canada Business 8. Employee benefits expense Corporations Act among BCT, BC TELECOM Inc. and the former Alberta-based TELUS Corporation (TC), BCT acquired all of the shares of BC TELECOM Inc. and TC in exchange for Common Shares and Non-Voting Shares of BCT, and BC TELECOM Inc. was dissolved. 9. Financing costs 10. Income taxes 11. Other comprehensive income On May 3, 2000, BCT changed its name to TELUS Corporation and in 12. Per share amounts February 2005, TELUS Corporation transitioned under the Business 13. Dividends per share Corporations Act (British Columbia), successor to the Company Act (British Columbia). TELUS Corporation maintains its registered office at Floor 7, 510 West Georgia Street, Vancouver, British Columbia, V6B 0M3. The terms “TELUS”, “we”, “us”, “our” or “ourselves” refer to TELUS 14. Share-based compensation 15. Employee future benefits 16. Restructuring and other costs Corporation and, where the context of the narrative permits or requires, Consolidated financial position focused its subsidiaries. 17. Property, plant and equipment 18. Intangible assets and goodwill 19. Leases 20. Other long-term assets 21. Real estate joint ventures and investment in associate 22. Short-term borrowings 23. Accounts payable and accrued liabilities 24. Advance billings and customer deposits 25. Provisions 26. Long-term debt 27. Other long-term liabilities 28. Owners’ equity 29. Contingent liabilities Other 30. Related party transactions 31. Additional statement of cash flow information TELUS 2020 ANNUAL REPORT • 135 136 143 144 147 153 155 156 156 157 157 159 159 160 160 163 169 170 171 175 176 177 179 179 179 180 181 185 185 186 188 189 CONSOLIDATED FINANCIAL STATEMENTS1 Summary of significant accounting policies Our consolidated financial statements are expressed in Canadian dollars. The generally accepted accounting principles that we use are International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS-IASB) and Canadian generally accepted accounting principles. Accounting policy Generally accepted accounting principles require that we disclose General application the accounting policies we have selected in those instances in which we (a) Consolidation have been obligated to choose from among various accounting policies that comply with generally accepted accounting principles. In certain other instances, including those in which no selection among policies is allowed, we are also required to disclose how we have applied certain accounting policies. In the selection and application of accounting policies, we consider, among other factors, the fundamental qualitative characteristics of useful financial information, namely relevance and faithful representation. In our assessment, the accounting policy dis- closures we are required to make are not all equally significant for us, as set out in the accompanying table; their relative significance for us will evolve over time, as we do. These consolidated financial statements for each of the years (b) Use of estimates and judgments (c) Financial instruments – recognition and measurement (d) Hedge accounting Results of operations focused (e) Revenue recognition (f) Depreciation, amortization and impairment (g) Translation of foreign currencies (h) Income and other taxes (i) Share-based compensation (j) Employee future benefit plans ended December 31, 2020 and 2019, were authorized by our Board Financial position focused of Directors for issue on February 11, 2021. (a) Consolidation Our consolidated financial statements include our accounts and the accounts of all of our subsidiaries, the principal ones of which are: TELUS Communications Inc., in which, as at December 31, 2020, we have a 100% equity interest; and TELUS International (Cda) Inc., in which, as at December 31, 2020, we have a 62.6% equity interest, as discussed further in Note 28(d). TELUS Communications Inc. includes substantially all of our wireless and wireline operations, excluding the customer experience and digital enablement transformation provided through the customer care and business services business of TELUS International (Cda) Inc. Our financing arrangements and those of our wholly owned subsidiaries do not impose restrictions on inter-corporate dividends. On a continuing basis, we review our corporate organization and effect changes as appropriate so as to enhance the value of TELUS Corporation. This process can, and does, affect which of our subsidiaries are considered principal subsidiaries at any particular point in time. (k) Cash and temporary investments, net (l) Inventories (m) Property, plant and equipment; intangible assets (n) Investments (b) Use of estimates and judgments The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, assumptions and judgments that affect: the reported amounts of assets and liabilities at the date of the financial statements; the disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts and classification of income and expense during the reporting period. Actual results could differ from those estimates. Accounting policy requiring a more significant choice among policies and/or a more significant application of judgment Yes No X X X X X X X X X X X X X X Denotes accounting policy requiring, for us, a more significant choice among accounting policies and/or a more significant application of judgment. 136 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 1 Estimates Examples of the significant estimates and assumptions that we make, and their relative significance and degree of difficulty, are set out in the graphic below. Higher Lower DEGREE OF DIFFICULTY • The recoverability of intangible assets with indefinite lives (see Note 18(e) for discussion of key assumptions) • The recoverability of goodwill (see Note 18(e) • for discussion of key assumptions) r e h g H i Certain actuarial and economic assumptions used in determining defined benefit pension costs and accrued pension benefit obligations (see Note 15(e) for discussion of key assumptions) E C N A C F N G S I I I • Determination of the amounts and composition of income and other tax assets and liabilities, including the amounts of unrecognized tax benefits • Amounts for net identifiable assets acquired in business combinations and provisions related to business combinations r e w o L • The recoverability of long-term investments • The estimated useful lives of assets (see (f) following) • Certain economic assumptions used in provisioning for asset retirement obligations (see (m) following) • The recoverability of tangible and intangible assets subject to amortization • Determination of the allowance for doubtful accounts and the impairment allowance for contract assets • Determination of the allowance for inventory obsolescence Judgments Examples of our significant judgments, apart from those involving estimation, include the following: • Assessments about whether line items are sufficiently material to warrant separate presentation in the primary financial statements obligor to the end-user customers. The effect of this judgment is that no equipment revenue is recognized upon the transfer of inventory to third-party re-sellers. • We compensate third-party re-sellers and our employees for generating revenues, and we must make judgments as to and, if not, whether they are sufficiently material to warrant separate whether such sales-based compensation amounts are costs presentation in the notes to the financial statements. In the normal incurred to obtain contracts with customers that should be course, we make changes to our assessments regarding materiality capitalized (see Note 20). We believe that compensation amounts for presentation so that they reflect current economic conditions. tangentially attributable to obtaining a contract with a customer, Due consideration is given to the view that it is reasonable to expect because the amount of such compensation could be affected differing opinions of what is, and is not, material. • In respect of revenue-generating transactions, we must make judgments that affect the timing of the recognition of revenue, as set out following: • We have millions of multi-year contracts with our customers in ways other than by simply obtaining that contract, should be expensed as incurred; compensation amounts directly attribut- able to obtaining a contract with a customer should be capitalized and subsequently amortized on a systematic basis, consistent with the satisfaction of our associated performance obligations. and we must make judgments about when we have satisfied our Judgment must also be exercised in the capitalization of costs performance obligations to our customers, either over a period of time or at a point in time. Service revenues are recognized based incurred to fulfill revenue-generating contracts with customers. Such fulfilment costs are those incurred to set up, activate or upon customers’ access to, or usage of, our telecommunications otherwise implement services involving access to, or usage of, infrastructure; we believe that this method faithfully depicts the our telecommunications infrastructure that would not otherwise transfer of the services, and thus the revenues are recognized be capitalized as property, plant, equipment and/or intangible as the services are made available and/or rendered. We consider assets (see Note 20). our performance obligations arising from the sale of equipment • The decision to depreciate and amortize any property, plant, to have been satisfied when the equipment has been delivered equipment (including right-of-use lease assets) and intangible assets to, and accepted by, the end-user customers (see (e) following). that are subject to amortization on a straight-line basis, as we believe • Principally in the context of revenue-generating transactions involving wireless handsets, we must make judgments about that this method reflects the consumption of resources related to the economic lifespan of those assets better than an accelerated whether third-party re-sellers that deliver equipment to our cus- method and is more representative of the economic substance tomers are acting in the transactions as principals or as our agents. of the underlying use of those assets. Upon due consideration of the relevant indicators, we believe that the decision to consider the re-sellers to be acting, solely for • The preparation of financial statements in accordance with generally accepted accounting principles requires management to make accounting purposes, as our agents is more representative of the judgments that affect the financial statement disclosure of information economic substance of the transactions, as we are the primary regularly reviewed by our chief operating decision-maker used to Denotes accounting policy requiring, for us, a more significant choice among accounting policies and/or a more significant application of judgment. TELUS 2020 ANNUAL REPORT • 137 make resource allocation decisions and to assess performance telecommunications infrastructure technology and operations have (segment information, Note 5). A significant judgment we make is in respect of distinguishing between our wireless and wireline experienced to date, and because of our continuous development. There are instances in which similar judgments must also be made operations and cash flows (and this extends to allocations of both in respect of future capital expenditures in support of both wireless direct and indirect expenses and capital expenditures). The clarity and wireline operations, which are a component of the determination of this distinction has been increasingly affected by the convergence of recoverable amounts used in the annual impairment testing, and integration of our wireless and wireline telecommunications as discussed further in Note 18(e). infrastructure technology and operations. Less than one-half of the operating expenses included in the segment performance measure • In respect of claims and lawsuits, as discussed further in Note 29(a), the determination of whether an item is a contingent liability or reported to our chief operating decision-maker during the years whether an outflow of resources is probable and thus needs to ended December 31, 2020 and 2019, were direct costs; judgment, be accounted for as a provision. largely based upon historical experience, is applied in apportioning indirect expenses that are not objectively distinguishable between our wireless and wireline operations. (c) Financial instruments – recognition and measurement In respect of the recognition and measurement of financial instruments, Until recently, our judgment was that our wireless and wireline telecommunications infrastructure technology and operations had we have adopted the following policies: • Regular-way purchases or sales of financial assets or financial not experienced sufficient convergence to objectively make their liabilities (purchases or sales that require actual delivery of financial respective operations and cash flows practically indistinguishable. assets or financial liabilities) are recognized on the settlement date. The continued build-out of our technology-agnostic fibre-optic infra- We have selected this method as the benefits of using the trade date structure, in combination with converged edge network technology, method were not expected to exceed the costs of selecting and has significantly affected this judgment, as have the commercialization implementing that method. of fixed-wireless telecommunications solutions for customers and the consolidation of our non-customer facing operations. • Transaction costs, other than in respect of items held for trading, are added to the initial fair value of the acquired financial asset As a result, it has become increasingly difficult and impractical or financial liability. We have selected this method as we believe to objectively and clearly distinguish between our wireless and that it results in a better matching of the transaction costs with wireline operations and cash flows, and the assets from which those the periods in which we benefit from the transaction costs. cash flows arise. Our judgment as to whether these operations can continue to be judged to be individual components of the business (d) Hedge accounting and discrete operating segments has changed; effective January 1, 2020, we embarked upon modifying our internal and external reporting processes, systems and internal controls to accommodate the technology convergence-driven cessation of the historical dis- tinction between our wireless and wireline operations at the level of regularly reported discrete performance measures that are provided to our chief operating decision-maker. We anticipate transitioning to a new segment reporting structure during the first quarter of 2021. General We apply hedge accounting to the financial instruments used to: establish designated currency hedging relationships for certain U.S. dollar-denominated future purchase commitments and debt repayments, as set out in Note 4(a) and (d); and fix the compensation cost arising from specific grants of restricted share units, as set out in Note 4(f) and discussed further in Note 14(b). The impracticality of objectively distinguishing between our wireless and wireline cash flows, and the assets from which those Hedge accounting The purpose of hedge accounting, in respect of our designated hedging cash flows arise, is evidence of their increasing interdependence, relationships, is to ensure that counterbalancing gains and losses and this is expected to result in the unification of the wireless are recognized in the same periods. We have chosen to apply hedge cash-generating unit and the wireline cash-generating unit as a accounting as we believe that it is more representative of the economic single telecommunications cash-generating unit for future impair- substance of the underlying transactions. ment testing purposes. As our business continues to evolve, In order to apply hedge accounting, a high correlation (which indicates new cash-generating units may also develop. effectiveness) is required in the offsetting changes in the risk-associated • The view that our spectrum licences granted by Innovation, Science and Economic Development Canada (including spectrum licences that values of the financial instruments (the hedging items) used to establish the designated hedging relationships and all, or a part, of the asset, have been subordinated to us) will likely be renewed; that we intend liability or transaction having an identified risk exposure that we have to renew them; that we believe we have the financial and operational taken steps to modify (the hedged items). We assess the anticipated ability to renew them; and thus, that they have an indefinite life, effectiveness of designated hedging relationships at inception and their as discussed further in Note 18(d). • In connection with the annual impairment testing of intangible assets with indefinite lives and goodwill, there are instances in which we actual effectiveness for each reporting period thereafter. We consider a designated hedging relationship to be effective if the following critical terms match between the hedging item and the hedged item: the notional must exercise judgment in allocating our net assets, including shared amount of the hedging item and the principal amount of the hedged corporate and administrative assets, to our cash-generating units item; maturity dates; payment dates; and interest rate index (if, and as, when determining their carrying amounts. These judgments are applicable). As set out in Note 4(i), any ineffectiveness, such as would necessary because of the convergence that our wireless and wireline result from a difference between the notional amount of the hedging Denotes accounting policy requiring, for us, a more significant choice among accounting policies and/or a more significant application of judgment. 138 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 1 item and the principal amount of the hedged item, or from a previously payments that may be required under the terms of contracts with effective designated hedging relationship becoming ineffective, customers and in-store “cash and carry” sales of equipment and acces- is reflected in the Consolidated statements of income and other sories, payments are typically due 30 days from the billing date. Billings comprehensive income as Financing costs if in respect of long-term are typically rendered on a monthly basis. debt, as Goods and services purchased if in respect of U.S. dollar- Multiple contracts with a single customer are normally accounted denominated future purchase commitments, or as Employee benefits for as separate arrangements. In instances where multiple contracts are expense if in respect of share-based compensation. entered into with a customer in a short period of time, the contracts are Hedging assets and liabilities In the application of hedge accounting, an amount (the hedge value) is recorded in the Consolidated statements of financial position in respect of the fair value of the hedging items. The net difference, if any, between the amounts recognized in the determination of net income and the amounts necessary to reflect the fair value of the designated cash flow hedging items recorded in the Consolidated statements of financial position is recognized as a component of Other comprehensive income, as set out in Note 11. In the application of hedge accounting to the compensation cost arising from share-based compensation, the amount recognized in the determination of net income is the amount that counterbalances the difference between the quoted market price of our Common Shares at the statement of financial position date and the price of our Common Shares in the hedging items. (e) Revenue recognition General We earn the majority of our revenues (wireless: network revenues (voice and data); wireline: data revenues (which include: internet protocol; television; hosting, managed information technology and cloud-based services; customer care and business services; certain healthcare solutions; and home and business smart technology (including security and agriculture)) and voice revenues) from access reviewed as a group to ensure that, as with multiple element arrange- ments, their relative transaction prices are appropriate. Lease accounting is applied to an accounting unit if it conveys to a customer the right to use a specific asset but does not convey the risks and/or benefits of ownership. Our revenues are recorded net of any value-added and/or sales taxes billed to the customer concurrent with a revenue-generating transaction. We use the following revenue accounting practical expedients provided for in IFRS 15, Revenue from Contracts with Customers: • No adjustment of the contracted amount of consideration for the effects of financing components when, at the inception of a contract, we expect that the effect of the financing component is not significant at the individual contract level. • No deferral of contract acquisition costs when the amortization period for such costs would be one year or less. • When estimating minimum transaction prices allocated to any remaining unfulfilled, or partially unfulfilled, performance obligations, exclusion of amounts arising from contracts originally expected to have a duration of one year or less, as well as amounts arising from contracts under which we may recognize and bill revenue in an amount that corresponds directly with our completed performance obligations. Contract assets Many of our multiple element arrangements arise from bundling the to, and usage of, our telecommunications infrastructure. The majority sale of equipment (e.g. a wireless handset) with a contracted service of the balance of our revenues (wireless equipment and other) arises period. Although the customer receives the equipment at contract from providing services and products facilitating access to, and inception and the revenue from the associated completed performance usage of, our telecommunications infrastructure. obligation is recognized at that time, the customer’s payment for the We offer complete and integrated solutions to meet our customers’ equipment will effectively be received rateably over the contracted needs. These solutions may involve deliveries of multiple services and service period to the extent it is not received as a lump-sum amount products (our performance obligations) that occur at different points at contract inception. The difference between the equipment revenue in time and/or over different periods of time; as referred to in (b), this is recognized and the associated amount cumulatively billed to the a significant judgment for us. As required, the performance obligations of these multiple element arrangements are identified, the transaction customer is recognized on the Consolidated statements of financial position as a contract asset. price for the entire multiple element arrangement is determined and Contract assets may also arise in instances where we give consider- allocated among the performance obligations based upon our relative ation to a customer. When we receive no identifiable, separable benefit stand-alone selling prices for each of them, and our relevant revenue for consideration given to a customer, the amount of the consideration recognition policies are then applied, so that revenue is recognized is recorded as a reduction of revenue rather than as an expense. Such when, or as, we satisfy the performance obligations. To the extent that amounts are included in the determination of transaction prices for variable consideration is included in determining the minimum transac- tion price, it is constrained to the “minimum spend” amount required in a contract with a customer. Service revenues arising from contracts allocation purposes in multiple element arrangements. • Some forms of consideration given to a customer, effectively at contract inception, such as rebates (including prepaid non-bank with customers typically have variable consideration, because customers cards) and/or equipment, are considered to be performance obliga- have the ongoing ability to both add and remove features and services, tions in a multiple element arrangement. Although the performance and because customer usage of our telecommunications infrastructure obligation is satisfied at contract inception, the customer’s payment may exceed the base amounts provided for in their contracts. associated with the performance obligation will effectively be Our contracts with customers do not have a significant financing received rateably over the associated contracted service period. component. With the exception of both equipment-related upfront The difference between the revenue arising from the satisfied Denotes accounting policy requiring, for us, a more significant choice among accounting policies and/or a more significant application of judgment. TELUS 2020 ANNUAL REPORT • 139 performance obligation and the associated amount cumulatively We recognize the subsidy on an accrual basis by applying the subsidy reflected in billings to the customer is recognized on the Consolidated rate to the number of residential network access lines we provide in high statements of financial position as a contract asset. • Other forms of consideration given to a customer, either at contract inception or over a period of time, such as discounts (including cost serving areas, as discussed further in Note 7. Differences, if any, between interim and final subsidy rates set by the CRTC are accounted for as a change in estimate in the period in which the CRTC finalizes the prepaid bank cards), may result in us receiving no identifiable, separ- subsidy rate. able benefit and thus are not considered performance obligations. Such consideration is recognized as a reduction of revenue rateably over the term of the contract. The difference between the consider- ation provided and the associated amount recognized as a reduction of revenue is recognized on the Consolidated statements of financial position as a contract asset. Other and wireless equipment We recognize product revenues, including amounts related to wireless handsets sold to re-sellers and customer premises equipment, when the products are both delivered to, and accepted by, the end-user cus- tomers, irrespective of which supply channel delivers the product. With respect to wireless handsets sold to re-sellers, we consider ourselves Contract liabilities Advance billings are recorded when billing occurs prior to provision of to be the principal and primary obligor to the end-user customers. Revenues from operating leases of equipment are recognized on a the associated services; such advance billings are recognized as revenue systematic and rational basis (normally a straight-line basis) over the in the period in which the services and/or equipment are provided term of the lease. (see Note 24). Similarly, and as appropriate, upfront customer activation and connection fees are deferred and recognized over the average (f) Depreciation, amortization and impairment expected term of the customer relationship. Costs of contract acquisition and contract fulfilment Costs of contract acquisition (typically commissions) and costs of Depreciation and amortization Property, plant and equipment (including right-of-use lease assets) are depreciated on a straight-line basis over their estimated useful lives contract fulfilment are capitalized and recognized as an expense, (lease terms for right-of-use lease assets) as determined by a continuing generally over the life of the contract on a systematic and rational basis program of asset life studies. Depreciation includes amortization of consistent with the pattern of the transfer of goods or services to leasehold improvements and, prior to fiscal 2019, amortization of assets which the asset relates. The amortization of such costs is included in under finance leases. Leasehold improvements are normally amortized the Consolidated statements of income and other comprehensive over the lesser of their expected average service lives or the terms of income as a component of Goods and services purchased, with the associated leases. Intangible assets with finite lives (intangible assets the exception of amounts paid to our employees, which are included subject to amortization) are amortized on a straight-line basis over their as Employee benefits expense. estimated useful lives, which are reviewed at least annually and adjusted The total cost of wireless equipment sold to customers and as appropriate. As referred to in (b), the use of a straight-line basis of advertising and promotion costs related to initial customer acquisition depreciation and amortization is a significant judgment for us. are expensed as incurred; the cost of equipment we own that is Estimated useful lives for the majority of our property, plant and situated at customers’ premises and associated installation costs are equipment and right-of-use lease assets subject to depreciation are capitalized as incurred. Costs of advertising production, advertising as follows: airtime and advertising space are expensed as incurred. Voice and data We recognize revenues on an accrual basis and include an estimate of revenues earned but unbilled. Wireless and wireline service revenues are recognized based upon access to, and usage of, our telecommunications infrastructure and upon contract fees. Advance billings are recorded when billing occurs prior to provision of the associated services; such advance billings are recognized as revenue in the period in which the services are provided. Similarly, and as appropriate, upfront customer activation and connection fees are deferred and recognized over the average expected term of the customer relationship. Network assets Outside plant Inside plant Wireless site equipment Real estate right-of-use lease assets Balance of depreciable property, plant and equipment and right-of-use lease assets Estimated useful lives1 17 to 40 years 4 to 25 years 5 to 7 years 5 to 20 years 3 to 40 years 1 The composite property, plant and equipment depreciation rate for the year ended December 31, 2020, was 5.0% (2019 – 5.0%). The rate is calculated by dividing property, plant and equipment depreciation expense by an average of the gross book value of property, plant and equipment depreciable assets over the reporting period. We use the liability method of accounting for the amounts of our Estimated useful lives for the majority of our intangible assets subject to quality of service rate rebates that arise from the jurisdiction of the amortization are as follows: Canadian Radio-television and Telecommunications Commission (CRTC). The CRTC has established a mechanism to subsidize local exchange carriers, such as ourselves, that provide residential basic telephone service to high cost serving areas. The CRTC has determined the per network access line/per band subsidy rate for all local exchange carriers. Wireline subscriber base Customer contracts and related customer relationships Software Estimated useful lives 25 years 4 to 15 years 2 to 10 years Access to rights-of-way, crowdsource assets and other 5 to 30 years Denotes accounting policy requiring, for us, a more significant choice among accounting policies and/or a more significant application of judgment. 140 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 1 Impairment – general Impairment testing compares the carrying values of the assets or (g) Translation of foreign currencies Trade transactions completed in foreign currencies are translated into cash-generating units being tested with their recoverable amounts Canadian dollars at the rates of exchange prevailing at the time of the (the recoverable amount being the greater of an asset’s or a cash- transactions. Monetary assets and liabilities denominated in foreign generating unit’s value in use or its fair value less costs of disposal); currencies are translated into Canadian dollars at the rate of exchange in as referred to in (b), this is a significant estimate for us. Impairment effect at the statement of financial position date, with any resulting gain losses are immediately recognized to the extent that the carrying value or loss recorded in the Consolidated statements of income and other of an asset or a cash-generating unit exceeds its recoverable amount. Should the recoverable amounts for impaired assets or cash-generating comprehensive income as a component of Financing costs, as set out in Note 9. Hedge accounting is applied in specific instances, as discussed units subsequently increase, the impairment losses previously recog- further in (d) preceding. nized (other than in respect of goodwill) may be reversed to the extent We have foreign subsidiaries that do not have the Canadian dollar that the reversal is not a result of “unwinding of the discount” and as their functional currency. Foreign exchange gains and losses arising that the resulting carrying values do not exceed the carrying values from the translation of these foreign subsidiaries’ accounts into Canadian which would have been the result if no impairment losses had been dollars are reported as a component of other comprehensive income, recognized previously. as set out in Note 11. Impairment – property, plant and equipment; intangible assets subject to amortization The continuing program of asset life studies considers such items as the timing of technological obsolescence, competitive pressures and future infrastructure utilization plans; these considerations could also indicate that the carrying value of an asset may not be recoverable. If the carrying value of an asset were not considered to be recoverable, an impairment loss would be recognized. Impairment – intangible assets with indefinite lives; goodwill The carrying values of intangible assets with indefinite lives and goodwill (h) Income and other taxes We follow the liability method of accounting for income taxes; as referred to in (b), this is a significant estimate for us. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year. Deferred income tax assets and liabilities are recognized for temporary differences between the tax and accounting bases of assets and liabilities, and also for any benefits of losses and Investment Tax Credits available to be carried forward to future years for tax purposes that are more likely than not to be realized. The amounts recognized in respect of deferred income tax assets and liabilities are based upon are periodically tested for impairment. The frequency of the impairment the expected timing of the reversal of temporary differences or the testing is generally the reciprocal of the stability of the relevant events usage of tax losses and the application of the substantively enacted and circumstances, but intangible assets with indefinite lives and goodwill tax rates at the time of reversal or usage. must, at a minimum, be tested annually; we have selected December We account for any changes in substantively enacted income tax rates as the time of our annual test. affecting deferred income tax assets and liabilities in full in the period in We assess our intangible assets with indefinite lives by comparing which the changes are substantively enacted. We account for changes the recoverable amounts of our cash-generating units to their carrying in the estimates of tax balances for prior years as estimate revisions in values (including the intangible assets with indefinite lives allocated to the period in which changes in the estimates arise; we have selected this a cash-generating unit, but excluding any goodwill allocated to a cash- approach as its emphasis on the statement of financial position is more generating unit). To the extent that the carrying value of a cash-generating consistent with the liability method of accounting for income taxes. unit (including the intangible assets with indefinite lives allocated to Our operations are complex and the related domestic and foreign tax the cash-generating unit, but excluding any goodwill allocated to the interpretations, regulations, legislation and jurisprudence are continually cash-generating unit) exceeds its recoverable amount, the excess amount changing. As a result, there are usually some tax matters in question that would be recorded as a reduction in the carrying value of intangible result in uncertain tax positions. We recognize the income tax benefit assets with indefinite lives. Subsequent to assessing intangible assets with indefinite lives, we assess goodwill by comparing the recoverable amounts of our cash- of an uncertain tax position only when it is more likely than not that the ultimate determination of the tax treatment of the position will result in that benefit being realized; however, this does not mean that tax author- generating units to their carrying values (including the intangible assets ities cannot challenge these positions. We accrue an amount for interest with indefinite lives and any goodwill allocated to a cash-generating unit). charges on current tax liabilities that have not been funded, which would To the extent that the carrying value of a cash-generating unit (including include interest and penalties arising from uncertain tax positions. the intangible assets with indefinite lives and the goodwill allocated We include such charges in the Consolidated statements of income to the cash-generating unit) exceeds its recoverable amount, the excess amount would first be recorded as a reduction in the carrying value and other comprehensive income as a component of Financing costs. Our research and development activities may be eligible to earn of goodwill and any remainder would be recorded as a reduction in Investment Tax Credits, for which the determination of eligibility is a the carrying values of the assets of the cash-generating unit on a complex matter. We recognize Investment Tax Credits only when there pro-rated basis. is reasonable assurance that the ultimate determination of the eligibility of our research and development activities will result in the Investment Tax Credits being received, at which time they are accounted for using the cost reduction method, whereby such credits are deducted from the expenditures or assets to which they relate, as set out in Note 10(c). Denotes accounting policy requiring, for us, a more significant choice among accounting policies and/or a more significant application of judgment. TELUS 2020 ANNUAL REPORT • 141 (i) Share-based compensation General When share-based compensation vests in its entirety at one future point in time (cliff-vesting), we recognize the expense on a straight-line basis over the vesting period. When share-based compensation vests in tranches (graded-vesting), we recognize the expense using the accel- erated expense attribution method. An estimate of forfeitures during the vesting period is made at the date of grant of such share-based compensation; this estimate is adjusted to reflect actual experience. Restricted share units In respect of restricted share units with neither an equity settlement feature Defined contribution plans We use defined contribution accounting for the Telecommunication Workers Pension Plan and the British Columbia Public Service Pension Plan, which cover certain of our employees and provide defined benefits to their members. In the absence of any regulations governing the calculation of the share of the underlying financial position and plan per- formance attributable to each employer-participant, and in the absence of contractual agreements between the plans and the employer-participants related to the financing of any shortfall (or distribution of any surplus), we account for these plans as defined contribution plans in accordance with International Accounting Standard 19, Employee Benefits. nor market performance conditions, as set out in Note 14(b), we accrue a liability equal to the product of the number of vesting restricted share units multiplied by the fair market value of the corresponding Common Shares at the end of the reporting period (unless hedge accounting is (k) Cash and temporary investments, net Cash and temporary investments, which may include investments in money market instruments that are purchased three months or less from maturity, are presented net of outstanding items, including cheques applied, as set out in (d) preceding). Similarly, we accrue a liability for the notional subset of our restricted share units without an equity settlement feature and with market performance conditions using a Monte Carlo written but not cleared by the related banks as at the statement of financial position date. Cash and temporary investments, net, are classified as a liability in the statement of financial position when the total amount of simulation-determined fair value. Restricted share units that have an equity all cheques written but not cleared by the related banks exceeds the settlement feature are accounted for as equity instruments. The expense amount of cash and temporary investments. When cash and temporary for restricted share units that do not ultimately vest is reversed against investments, net, are classified as a liability, they may also include the expense that was previously recorded in their respect. overdraft amounts drawn on our bilateral bank facilities, which revolve Share option awards A fair value for share option awards is determined at the date of grant and that fair value is recognized in the financial statements. Proceeds arising from the exercise of share option awards are credited to share capital, as are the recognized grant-date fair values of the exercised share option awards. Share option awards that have a net-equity settlement feature, as set out in Note 14(d), are accounted for as equity instruments. We have selected the equity instrument fair value method of accounting for the net-equity settlement feature as it is consistent with the accounting treatment applied to the associated share option awards. (j) Employee future benefit plans Defined benefit plans We accrue amounts for our obligations under employee defined benefit plans and the related costs, net of plan assets. The cost of pensions and other retirement benefits earned by employees is actuarially deter- mined using the accrued benefit method pro-rated on service and management’s best estimates of both salary escalation and the retirement ages of employees. In the determination of net income, net interest for each plan, which is the product of the plan’s surplus (deficit) multiplied by the discount rate, is included as a component of Financing costs, as set out in Note 9. An amount reflecting the effect of differences between the discount rate and the actual rate of return on plan assets is included as a com- ponent of employee defined benefit plan re-measurements within Other comprehensive income, as set out in Note 11 and Note 15. We determine the maximum economic benefit available from the plans’ assets on the basis of reductions in future contributions to the plans. On an annual basis, at a minimum, the defined benefit plan key assumptions are assessed and revised as appropriate; as referred to in (b), these are significant estimates for us. daily and are discussed further in Note 22. (l) Inventories Our inventories primarily consist of wireless handsets, parts and accessories totalling $328 million at year-end (2019 – $375 million) and communications equipment held for resale. Inventories are valued at the lower of cost and net realizable value, with cost being determined on an average cost basis. Costs of goods sold for the year ended December 31, 2020, totalled $2.0 billion (2019 – $2.1 billion). (m) Property, plant and equipment; intangible assets General Property, plant and equipment and intangible assets are recorded at historical cost, which for self-constructed property, plant and equipment includes materials, direct labour and applicable overhead costs. For internally developed, internal-use software, the historical cost recorded includes materials, direct labour and direct labour-related costs. Where property, plant and equipment construction projects are of sufficient size and duration, an amount is capitalized for the cost of funds used to finance construction, as set out in Note 9. The rate for cal- culating the capitalized financing cost is based on the weighted average cost of borrowing that we experience during the reporting period. When we sell property, plant and/or equipment, the net book value is netted against the sale proceeds and the difference, as set out in Note 7, is included in the Consolidated statements of income and other comprehensive income as a component of Other income. Asset retirement obligations Provisions for liabilities, as set out in Note 25, are recognized for statutory, contractual or legal obligations, normally when incurred, associated with the retirement of property, plant and equipment (primarily certain items of outside plant and wireless site equipment) when those obligations result from the acquisition, construction, development and/or normal Denotes accounting policy requiring, for us, a more significant choice among accounting policies and/or a more significant application of judgment. 142 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 2 operation of the assets; as referred to in (b), this is a significant estimate for us. The obligations are measured initially at fair value, which is determined using present value methodology, and the resulting costs are capitalized as a part of the carrying value of the related asset. received. The excess of the cost of an equity investment over its underlying book value at the date of acquisition, except for goodwill, is amortized over the estimated useful lives of the underlying assets to which the excess cost is attributed. In subsequent periods, the provisions for these liabilities are adjusted Similarly, we account for our interests in the real estate joint ventures, for the accretion of discount, for any changes in the market-based discount rate and for any changes in the amount or timing of the as discussed further in Note 21, using the equity method of accounting. Unrealized gains and losses from transactions with (including contribu- underlying future cash flows. The capitalized asset retirement cost is depreciated on the same basis as the related asset and the discount tions to) the real estate joint ventures are deferred in proportion to our remaining interest in the real estate joint ventures. accretion, as set out in Note 9, is included in the Consolidated state- ments of income and other com prehensive income as a component We account for our other long-term investments at their fair values unless they are investment securities that do not have quoted of Financing costs. (n) Investments We account for our investments in companies over which we have market prices in an active market or do not have other clear and objective evidence of fair value. When we do not account for our other long-term investments at their fair values, we use the cost basis of accounting, whereby the investments are initially recorded at cost, significant influence, as discussed further in Note 21, using the equity method of accounting, whereby the investments are initially recorded at cost and subsequently adjusted to recognize our share of earnings and earnings from those investments are recognized only to the extent received or receivable. When there is a significant or prolonged decline in the value of an other long-term investment, the carrying value of or losses of the investee companies and any earnings distributions that other long-term investment is adjusted to its estimated fair value. 2 Accounting policy developments (a) Initial application of standards, interpretations and amendments to standards and interpretations in the reporting period In October 2018, the International Accounting Standards Board amended (b) Standards, interpretations and amendments to standards and interpretations in the reporting period not yet effective and not yet applied In August 2020, the International Accounting Standards Board issued IFRS 3, Business Combinations, seeking to clarify whether an acquisition Interest Rate Benchmark Reform – Phase 2, which amends IFRS 9 transaction results in the acquisition of an asset or the acquisition of a Financial Instruments, IAS 39 Financial Instruments: Recognition and business. The amendments are effective for acquisition transactions on Measurement, IFRS 7 Financial Instruments: Disclosures, IFRS 4 or after January 1, 2020, although earlier application was permitted. Insurance Contracts and IFRS 16 Leases. The amendments are effective The amended standard has a narrower definition of a business, which for periods beginning on or after January 1, 2021, although earlier appli- could result in the recognition of fewer business combinations than cation is permitted. Interest rate benchmarks such as interbank offer under the previous standard; the implication of this is that amounts rates (IBORs) play an important role in global financial markets as they which may have been recognized as goodwill in a business combination index a wide variety of financial products, including derivative financial under the previous standard may now be recognized as allocations to instruments. Market developments have impacted the reliability of net identifiable assets acquired under the amended standard (with an some existing benchmarks and, in this context, the Financial Stability associated effect in an entity’s results of operations that would differ Board has published a report setting out recommendations to reform from the effect of goodwill having been recognized). We have applied the standard prospectively from January 1, 2020. The effects of the amended standard on our financial performance and disclosure will be dependent upon the facts and circumstances of any future acquisition transactions and have not been material in the current fiscal year. such benchmarks. The Interest Rate Benchmark Reform – Phase 2 amendments focus on the effects of the interest rate benchmark reform on a company’s financial statements that arise when an interest rate benchmark used to calculate interest is replaced with an alternative benchmark rate; most significantly, there will be no requirement to derecognize or adjust the amount of financial instruments for changes required by the reform, but will instead update the effective interest rate to reflect the change to the alternative benchmark rate. The effects of these amendments on our financial performance and disclosure will be dependent upon the facts and circumstances of future changes in the derivative financial instruments we use, if any, and any future changes in interest rate benchmarks, if any, referenced by such derivative financial instruments we use. Denotes accounting policy requiring, for us, a more significant choice among accounting policies and/or a more significant application of judgment. TELUS 2020 ANNUAL REPORT • 143 3 Capital structure financial policies General Our objective when managing capital is to maintain a flexible During 2020, our financial objectives, which are reviewed annually, were unchanged from 2019, except for a change in the methodology capital structure that optimizes the cost and availability of capital for calculating our TELUS Corporation Common Share dividend payout at acceptable risk. ratio. We believe that our financial objectives are supportive of our In the management of capital and in its definition, we include long-term strategy. common equity (excluding accumulated other comprehensive income), We monitor capital utilizing a number of measures, including: net debt long-term debt (including long-term credit facilities, commercial paper to earnings before interest, income taxes, depreciation and amortization backstopped by long-term credit facilities and any hedging assets (EBITDA*) – excluding restructuring and other costs ratio; coverage ratios; or liabilities associated with long-term debt items, net of amounts and dividend payout ratios. recognized in accumulated other comprehensive income), cash and temporary investments, and short-term borrowings arising from securitized trade receivables. Debt and coverage ratios Net debt to EBITDA – excluding restructuring and other costs is We manage our capital structure and make adjustments to it calculated as net debt at the end of the period, divided by 12-month in light of changes in economic conditions and the risk characteristics trailing EBITDA – excluding restructuring and other costs. This measure, of our business. In order to maintain or adjust our capital structure, historically, is substantially similar to the leverage ratio covenant in our we may adjust the amount of dividends paid to holders of Common credit facilities. Net debt and EBITDA – excluding restructuring and Shares, purchase Common Shares for cancellation pursuant to other costs are measures that do not have any standardized meanings normal course issuer bids, issue new shares, issue new debt, issue prescribed by IFRS-IASB and are therefore unlikely to be comparable new debt to replace existing debt with different characteristics and/or to similar measures presented by other issuers. The calculation of these increase or decrease the amount of trade receivables sold to an measures is set out in the following table. Net debt is one component arm’s-length securitization trust. of a ratio used to determine compliance with debt covenants. *EBITDA does not have any standardized meaning prescribed by IFRS-IASB and is therefore unlikely to be comparable to similar measures presented by other issuers; we define EBITDA as operating revenues and other income less goods and services purchased and employee benefits expense. We have issued guidance on, and 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. 144 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 3 As at, or for the 12-month periods ended, December 31 ($ in millions) Objective 2020 2019 Components of debt and coverage ratios Net debt1 EBITDA – excluding restructuring and other costs2 Net interest cost3 (Note 9) Debt ratio Net debt to EBITDA – excluding restructuring and other costs 2.20 – 2.704 Coverage ratios Earnings coverage5 EBITDA – excluding restructuring and other costs interest coverage6 $ 19,826 $ 5,753 $ 792 3.45 3.2 7.3 $ 18,199 $ 5,688 $ 755 3.20 4.0 7.5 1 Net debt and total capitalization are calculated as follows: 2 EBITDA – excluding restructuring and other costs is calculated as follows: As at December 31 Long-term debt Debt issuance costs netted against long-term debt Derivative (assets) liabilities, net 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 Cash and temporary investments, net Short-term borrowings 22 Net debt Common equity Less: accumulated other comprehensive income included in common equity above Total capitalization Note 26 2020 2019 Years ended December 31 $ 20,288 $ 18,474 EBITDA 97 120 87 (37) Restructuring and other costs EBITDA – excluding restructuring and other costs Note 5 16 2020 2019 $ 5,494 $ 5,554 259 134 $ 5,753 $ 5,688 69 (848) 100 19,826 12,074 1 1 0 (535) 100 18,199 10,548 (1 1 7) (1 1 9) $ 31,783 $ 28,628 3 Net interest cost is defined as financing costs, excluding employee defined benefit plans net interest, 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 December 31, 2020, 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 upcoming 2021, 2022 and 2023 spectrum auctions), 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 4.00:1.00 (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 amounts 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 shares by TELUS Corporation) from the offering was included in cash 3.45 times as at December 31, 2020, up from 3.20 times one year and temporary investments, net; had such reduction, and inclusion, earlier. The effect of the increase in net debt, primarily due to business respectively, been made at December 31, 2020, the pro forma net debt acquisitions and the acquisition of spectrum licences, exceeded the to EBITDA – excluding restructuring and other costs ratio would have effect of growth in EBITDA – excluding restructuring and other costs. been 3.30 times. EBITDA growth was reduced by COVID-19 pandemic impacts. As set out in Note 28(d), in February 2021, TELUS International (Cda) The earnings coverage ratio for the 12-month period ended December 31, 2020, was 3.2 times, down from 4.0 times one year Inc. made an initial public offering of subordinate voting shares; both earlier. Higher borrowing costs reduced the ratio by 0.1 and a decrease TELUS Corporation and a TELUS International (Cda) Inc. non-controlling in income before borrowing costs and income taxes decreased the ratio shareholder individually also offered subordinate voting shares in by 0.7. The EBITDA – excluding restructuring and other costs interest conjunction with the initial public offering. Through February 11, 2021, coverage ratio for the 12-month period ended December 31, 2020, was net proceeds of approximately $0.6 billion from the offering were used 7.3 times, down from 7.5 times one year earlier. Growth in EBITDA – to reduce the amount of outstanding TELUS International (Cda) Inc. excluding restructuring and other costs increased the ratio by 0.1, while credit facility indebtedness and $0.2 billion (comprised of net proceeds an increase in net interest costs reduced the ratio by 0.3. on disposition of TELUS International (Cda) Inc. subordinate voting TELUS 2020 ANNUAL REPORT • 145 TELUS Corporation Common Share dividend payout ratio Commencing in 2020, so as to be consistent with the way we manage for TELUS Corporation Common Shares, as recorded in the financial statements net of dividend reinvestment plan effects (see Note 13), our business, we updated our revised TELUS Corporation Common divided by the sum of free cash flow* amounts for the most recent four Share dividend payout ratio presented to be a historical measure calcu- quarters for interim reporting periods (divided by annual free cash flow lated as the sum of the most recent four quarters’ dividends declared if the reported amount is in respect of a fiscal year). For the 12-month periods ended December 31 Determined using management measures TELUS Corporation Common Share dividend payout ratio – net of dividend reinvestment plan effects Determined using most comparable IFRS-IASB measures Objective 2020 2019 60%–75%1 67% 1 1 5% Ratio of TELUS Corporation Common Share dividends declared to cash provided by operating activities – less capital expenditures (excluding spectrum licences) 84% 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 December 31 (millions) TELUS Corporation Common Share dividends declared Amount of TELUS Corporation Common Share dividends declared reinvested in TELUS Corporation Common Shares TELUS Corporation Common Share dividends declared – net of dividend reinvestment plan effects Our calculation of free cash flow, and the reconciliation to cash provided by operating activities, is as follows: For the 12-month periods ended December 31 (millions) EBITDA Deduct non-cash gains from the sale of property, plant and equipment Restructuring and other costs, net of disbursements Effects of contract asset, acquisition and fulfilment and TELUS Easy Payment device financing Effects of lease principal Leases accounted for as finance leases prior to adoption of IFRS 16 Items from the Consolidated statements of cash flows: Share-based compensation, net Net employee defined benefit plans expense Employer contributions to employee defined benefit plans Interest paid Interest received Capital expenditures (excluding spectrum licences) Free cash flow before income taxes Income taxes paid, net of refunds Free cash flow Add (deduct): Capital expenditures (excluding spectrum licences) Adjustments to reconcile to cash provided by operating activities Cash provided by operating activities 2020 $ 1,520 (561) $ 959 2020 $ 5,494 (4) 35 43 (365) 86 27 102 (51) (740) 13 (2,775) 1,865 (430) 1,435 2,775 364 $ 4,574 2019 $ 1,358 (290) $ 1,068 2019 $ 5,554 (21) (36) (1 1 8) (333) 108 (2) 78 (41) (714) 7 (2,906) 1,576 (644) 932 2,906 89 $ 3,927 Note 5 31(b) 14 15 5 5 *Free cash flow does not have any standardized meaning prescribed by IFRS-IASB and is therefore unlikely to 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 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 measure that management, and investors, use to evaluate the performance of our business. 146 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 4 4 Financial instruments (a) Risks – overview Our financial instruments, their accounting classification and the nature of certain risks to which they may be subject are set out in the following table. Financial instrument Measured at amortized cost Accounts receivable Contract assets Construction credit facilities advances to real estate joint venture Short-term borrowings Accounts payable Provisions (including restructuring accounts payable) Long-term debt Measured at fair value Accounting classification AC1 AC1 AC1 AC1 AC1 AC1 AC1 Cash and temporary investments FVTPL2 Long-term investments (not subject to significant influence)3 FVTPL/FVOCI3 Foreign exchange derivatives4 Share-based compensation derivatives4 FVTPL2 FVTPL2 Risks Market risks Credit Liquidity Currency Interest rate Other price X X X X X X X X X X X X X X X X X X X X X X X X X X 1 2 3 For accounting recognition and measurement purposes, classified as amortized cost (AC). For accounting recognition and measurement purposes, classified as fair value through net income (FVTPL). Unrealized changes in the fair values of financial instruments are included in net income unless the instrument is part of a cash flow hedging relationship. The effective portions of unrealized changes in the fair values of financial instruments held for hedging are included in other comprehensive income. Long-term investments over which we do not have significant influence are measured at fair value if those fair values can be reliably measured. For accounting recognition and measurement purposes, on an investment-by-investment basis, long-term investments are classified as either fair value through net income or fair value through other comprehensive income (FVOCI). 4 Use of derivative financial instruments is subject to a policy which requires that no derivative transaction is to be entered into for the purpose of establishing a speculative or leveraged position (the corollary being that all derivative transactions are to be entered into for risk management purposes only) and sets criteria for the creditworthiness of the transaction counterparties. Derivatives that are part of an established and documented cash flow hedging relationship are accounted for as held for hedging. We believe that classification as held for hedging results in a better matching of the change in the fair value of the derivative financial instrument with the risk exposure being hedged. In respect of hedges of anticipated transactions, hedge gains/losses are included with the related expenditure and are expensed when the transaction is recognized in our results of operations. We have selected this method as we believe that it results in a better matching of the hedge gains/losses with the risk exposure being hedged. Derivatives that are not part of a documented cash flow hedging relationship are accounted for as held for trading and thus are measured at fair value through net income. Derivative financial instruments We apply hedge accounting to financial instruments used to establish (b) Credit risk Excluding credit risk, if any, arising from currency swaps settled on a hedge accounting relationships for U.S. dollar-denominated transactions gross basis, the best representation of our maximum exposure (excluding and to fix the cost of some share-based compensation. We believe that income tax effects) to credit risk, which is a worst-case scenario and our use of derivative financial instruments for hedging or arbitrage assists does not reflect results we expect, is set out in the following table. us in managing our financing costs and/or reducing the uncertainty associated with our financing or other business activities. Uncertainty associated with currency risk and other price risk is reduced through our use of foreign exchange derivatives and share-based compensation derivatives that effectively swap floating currency exchange rates and share prices for fixed rates and prices. When entering into derivative financial instrument contracts, we seek to align the cash flow timing of the hedging items with that of the hedged items. The effects of this risk management strategy and its application are set out in (i) following. As at December 31 (millions) 2020 2019 Cash and temporary investments, net $ 848 $ 535 Accounts receivable Contract assets Derivative assets 2,716 707 42 2,187 1,065 84 $ 4,313 $ 3,871 Cash and temporary investments, net Credit risk associated with cash and temporary investments is managed by ensuring that these financial assets are placed with: governments; major financial institutions that have been accorded strong investment grade ratings by a primary rating agency; and/or other creditworthy counterparties. An ongoing review evaluates changes in the status of counterparties. TELUS 2020 ANNUAL REPORT • 147 Accounts receivable Credit risk associated with accounts receivable is inherently managed by when deemed necessary. Accounts are considered to be past due (in default) when customers have failed to make the contractually required the size and diversity of our large customer base, which includes substan- payments when due, which is generally within 30 days of the billing date. tially all consumer and business sectors in Canada. We follow a program Any late payment charges are levied at an industry-based market or of credit evaluations of customers and limit the amount of credit extended negotiated rate on outstanding non-current customer account balances. As at December 31 (millions) Note Gross Allowance 2020 Net1 Gross Allowance 2019 Net1 Customer accounts receivable, net of allowance for doubtful accounts Less than 30 days past billing date $ 815 $ (19) $ 796 $ 803 $ (10) $ 793 30–60 days past billing date 61–90 days past billing date More than 90 days past billing date Unbilled customer finance receivables Current Non-current 20 339 90 98 1,026 $ 2,368 $ 1,986 382 (17) (19) (43) (42) 322 71 55 984 $ (140) $ 2,228 $ (1 1 9) $ 1,867 (21) 361 331 74 73 523 $ 1,804 $ 1,570 234 (8) (5) (14) (18) $ (55) $ (46) (9) 323 69 59 505 $ 1,749 $ 1,524 225 $ 2,368 $ (140) $ 2,228 $ 1,804 $ (55) $ 1,749 1 Net amounts represent customer accounts receivable for which an allowance had not been made as at the dates of the Consolidated statements of financial position (see Note 6(b)). We maintain allowances for lifetime expected credit losses related basis for customer accounts receivable above a specific balance to doubtful accounts. Current economic conditions (including forward- threshold and on a statistically derived allowance basis for the remainder. looking macroeconomic data), historical information (including credit No customer accounts receivable are written off directly to the doubtful agency reports, if available), reasons for the accounts being past due and accounts expense. the line of business from which the customer accounts receivable arose The following table presents a summary of the activity related to our are all considered when determining whether to make allowances for allowance for doubtful accounts. past-due accounts. The same factors are considered when determining whether to write off amounts charged to the allowance for doubtful accounts against the customer accounts receivable; amounts charged to the customer accounts receivable allowance for doubtful accounts that were written off but were still subject to enforcement activity as at December 31, 2020, totalled $597 million (2019 – $449 million). The doubt ful accounts expense is calculated on a specific-identification Years ended December 31 (millions) Balance, beginning of period Additions (doubtful accounts expense) Accounts written off less than recoveries Other Balance, end of period 2020 $ 55 91 (22) 16 $ 140 2019 $ 53 64 (66) 4 $ 55 Contract assets Credit risk associated with contract assets is inherently managed by the size and diversity of our large customer base, which includes substantially all consumer and business sectors in Canada. We follow a program of credit evaluations of customers and limit the amount of credit extended when deemed necessary. As at December 31 (millions) Contract assets, net of impairment allowance To be billed and thus reclassified to accounts receivable during: The 12-month period ending one year hence The 12-month period ending two years hence Thereafter Gross Allowance 2020 Net (Note 6(c)) Gross Allowance 2019 Net (Note 6(c)) $ 61 1 265 16 $ 892 $ (29) $ 582 $ 952 $ (42) $ 910 (12) (1) 253 15 322 21 (14) (1) 308 20 $ (42) $ 850 $ 1,295 $ (57) $ 1,238 148 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 4 We maintain allowances for lifetime expected credit losses related to con- tract assets. Current economic conditions, historical information (including (c) Liquidity risk As a component of our capital structure financial policies, discussed credit agency reports, if available), and the line of business from which the contract asset arose are all considered when determining impairment allowances. The same factors are considered when determining whether further in Note 3, we manage liquidity risk by: • maintaining a daily cash pooling process that enables us to manage our available liquidity and our liquidity requirements according to to write off amounts charged to the impairment allowance for contract our actual needs; assets against contract assets. Derivative assets (and derivative liabilities) Counterparties to our share-based compensation cash-settled equity forward agreements and foreign exchange derivatives are major financial institutions that have been accorded investment grade ratings by a primary credit rating agency. The total dollar amount of credit exposure under contracts with any one financial institution is limited and • maintaining an agreement to sell trade receivables to an arm’s-length securitization trust and bilateral bank facilities (Note 22), a commercial paper program (Note 26(c)) and syndicated credit facilities (Note 26(d),(f)); • maintaining an in-effect shelf prospectus; • continuously monitoring forecast and actual cash flows; and • managing maturity profiles of financial assets and financial liabilities. counterparties’ credit ratings are monitored. We do not give or receive Our debt maturities in future years are as disclosed in Note 26(i). collateral on swap agreements and hedging items due to our credit As at December 31, 2020, we could offer $2.0 billion of debt or equity rating and those of our counterparties. While we are exposed to the risk securities pursuant to a shelf prospectus that is in effect until June 2022 of potential credit losses due to the possible non-performance of our (2019 – $2.0 billion pursuant to a shelf prospectus that was in effect counterparties, we consider this risk remote. Our derivative liabilities do not have credit risk-related contingent features. until August 2021). We believe that our investment grade credit ratings contribute to reasonable access to capital markets. We closely match the contractual maturities of our derivative financial liabilities with those of the risk exposures they are being used to manage. The expected maturities of our undiscounted financial liabilities do not differ significantly from the contractual maturities, other than as noted below. The contractual maturities of our undiscounted financial liabilities, including interest thereon (where applicable), are set out in the following tables. Non-derivative Derivative Composite long-term debt As at December 31, 2020 (millions) Non-interest bearing financial liabilities Short-term borrowings1 Long- term debt, excluding leases1 (Note 26) Leases (Note 26) Currency swap agreement amounts to be exchanged2 Currency swap agreement amounts to be exchanged (Receive) Pay Other (Receive) Pay Total 2021 2022 2023 2024 2025 2026–2030 Thereafter Total $ 2,669 $ 101 $ 1,658 $ 538 $ (882) $ 892 $ – $ (454) $ 475 $ 4,997 74 8 8 9 12 – – – – – – – 2,204 1,149 1,706 2,868 7,953 9,877 371 230 191 145 417 379 (149) (149) (150) (525) (1,836) (2,889) 151 151 151 575 1,898 2,949 – 6 – – – – – – – – – – – – – – – – 2,651 1,395 1,906 3,072 8,444 10,316 $ 2,780 $ 101 $ 27,415 $ 2,271 $ (6,580) $ 6,767 $ 6 $ (454) $ 475 $ 32,781 Total (Note 26(i)) $ 29,873 1 Cash outflows in respect of interest payments on our short-term borrowings, commercial paper and amounts drawn under our credit facilities (if any) have been calculated based upon the interest rates in effect as at December 31, 2020. 2 The amounts included in undiscounted non-derivative long-term debt in respect of U.S. dollar-denominated long-term debt, and the corresponding amounts in the long-term debt currency swap receive column, have been determined based upon the currency exchange rates in effect as at December 31, 2020. The hedged U.S. dollar-denominated long-term debt contractual amounts at maturity, in effect, are reflected in the long-term debt currency swap pay column as gross cash flows are exchanged pursuant to the currency swap agreements. TELUS 2020 ANNUAL REPORT • 149 As at December 31, 2019 (millions) Non-interest bearing financial liabilities Short-term borrowings1 Non-derivative Construction credit facilities commitment (Note 21) Long- term debt, excluding leases1 Composite long-term debt Derivative Currency swap agreement amounts to be exchanged2 Currency swap agreement amounts to be exchanged Leases (Receive) Pay Other (Receive) Pay Total 2020 2021 2022 2023 2024 2025–2029 Thereafter $ 2,639 $ 3 $ 10 $ 1,657 $ 373 $ (1,140) $ 1,153 $ – $ (917) $ 921 $ 4,699 43 103 7 5 5 4 – – – – – – – – – – – – 1,698 2,235 1,021 1,595 7,31 1 10,102 338 207 189 157 429 388 (1 1 9) (1 1 9) (1 1 9) (1 1 9) (1,919) (3,019) 1 1 8 1 1 8 1 1 8 1 1 8 1,944 3,020 – 8 – – – – – – – – – – – – – – – – 2,181 2,456 1,214 1,756 7,769 10,491 Total $ 2,703 $ 106 $ 10 $ 25,619 $ 2,081 $ (6,554) $ 6,589 $ 8 $ (917) $ 921 $ 30,566 Total $ 27,735 1 Cash outflows in respect of interest payments on our short-term borrowings, commercial paper and amounts drawn under our credit facilities (if any) have been calculated based upon the interest rates in effect as at December 31, 2019. 2 The amounts included in undiscounted non-derivative long-term debt in respect of U.S. dollar-denominated long-term debt, and the corresponding amounts in the long-term debt currency swap receive column, have been determined based upon the currency exchange rates in effect as at December 31, 2019. The hedged U.S. dollar-denominated long-term debt contractual amounts at maturity, in effect, are reflected in the long-term debt currency swap pay column as gross cash flows are exchanged pursuant to the currency swap agreements. (d) Currency risk Our functional currency is the Canadian dollar, but certain routine When we have temporary investments, they have short maturities and fixed interest rates and, as a result, their fair values will fluctuate with revenues and operating costs are denominated in U.S. dollars and changes in market interest rates; absent monetization prior to maturity, some inventory purchases and capital asset acquisitions are sourced the related future cash flows will not change due to changes in market internationally. The U.S. dollar is the only foreign currency to which interest rates. we have a significant exposure as at the balance sheet date. If the balance of short-term investments includes dividend-paying Our foreign exchange risk management includes the use of foreign equity instruments, we could be exposed to interest rate risk. currency forward contracts and currency options to fix the exchange Due to the short-term nature of the applicable rates of interest rates on a varying percentage, typically in the range of 50% to 75%, charged, the fair value of the construction credit facility advances made of our domestic short-term U.S. dollar-denominated transactions and to the real estate joint venture is not materially affected by changes commitments and all U.S. dollar-denominated commercial paper. in market interest rates; the associated cash flows representing interest Other than in respect of U.S. dollar-denominated commercial paper, payments will be affected until such advances are repaid. we designate only the spot element of these instruments as the hedging As short-term obligations arising from bilateral bank facilities, item, as the forward element is wholly immaterial; in respect of U.S. which typically have variable interest rates, are rarely outstanding for dollar-denominated commercial paper, we designate the forward rate. periods that exceed one calendar week, interest rate risk associated As discussed further in Note 26(b) and Note 26(f), we are also with this item is not material. exposed to currency risk in that the fair value or future cash flows of Short-term borrowings arising from the sales of trade receivables to our U.S. Dollar Notes and our TELUS International (Cda) Inc. credit facility an arm’s-length securitization trust are fixed-rate debt. Due to the short U.S. dollar borrowings could fluctuate because of changes in foreign exchange rates. Currency hedging relationships have been established maturities of these borrowings, interest rate risk associated with this item is not material. for the related semi-annual interest payments and the principal payment All of our currently outstanding long-term debt, other than commercial at maturity in respect of the U.S. Dollar Notes; we designate only the paper and amounts drawn on our credit facilities (Note 26(c), (f)), is spot element of these instruments as the hedging item, as the forward fixed-rate debt. The fair value of fixed-rate debt fluctuates with changes element is wholly immaterial. As the functional currency of our TELUS in market interest rates; absent early redemption, the related future cash International (Cda) Inc. subsidiary is the U.S. dollar, fluctuations in foreign flows will not change. Due to the short maturities of commercial paper, exchange rates affecting its borrowings are reflected as a foreign its fair value is not materially affected by changes in market interest rates, currency translation adjustment within other comprehensive income. but the associated cash flows representing interest payments may be (e) Interest rate risk Changes in market interest rates will cause fluctuations in the fair values Amounts drawn on our short-term and long-term credit facilities will be affected by changes in market interest rates in a manner similar or future cash flows of temporary investments, construction credit facility to commercial paper. affected if the commercial paper is rolled over. advances made to the real estate joint venture, short-term obligations, long-term debt and interest rate swap derivatives. 150 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 4 (f) Other price risk Long-term investments We are exposed to equity price risk arising from investments classified as fair value through other comprehensive income. Such investments are held for strategic rather than trading purposes. Share-based compensation derivatives We are exposed to other price risk arising from cash-settled share- The sensitivity analysis of our exposure to currency risk at the reporting date has been determined based upon a hypothetical change taking place at the relevant statement of financial position date. The U.S. dollar-denominated and European euro-denominated balances and derivative financial instrument notional amounts as at the statement of financial position dates have been used in the calculations. The sensitivity analysis of our exposure to interest rate risk at the reporting date has been determined based upon a hypothetical change based compensation (appreciating Common Share prices increase both taking place at the beginning of the relevant fiscal year and being held the expense and the potential cash outflow). Certain cash-settled equity constant through to the statement of financial position date. The principal swap agreements were entered into which fixed the cost associated and notional amounts as at the relevant statement of financial position with our estimate of the TELUS Corporation restricted share units that date have been used in the calculations. were expected to vest. (g) Market risks Net income and other comprehensive income for the years ended The sensitivity analysis of our exposure to other price risk arising from share-based compensation at the reporting date has been determined based upon a hypothetical change taking place at the relevant statement of financial position date. The relevant notional number of Common December 31, 2020 and 2019, could have varied if the Canadian dollar: Shares at the relevant statement of financial position date, which included U.S. dollar exchange rate, the U.S. dollar: European euro exchange rate, those in the cash-settled equity swap agreements, were used in market interest rates and our Common Share price varied by reasonably the calculations. possible amounts from their actual statement of financial position Income tax expense, which is reflected net in the sensitivity analysis, date amounts. Years ended December 31 (increase (decrease) in millions) Reasonably possible changes in market risks1 10% change in C$: US$ exchange rate Canadian dollar appreciates Canadian dollar depreciates 10% change in US$: € exchange rate U.S. dollar appreciates U.S. dollar depreciates 25 basis point change in interest rates Interest rates increase Canadian interest rate U.S. interest rate Combined Interest rates decrease Canadian interest rate U.S. interest rate Combined 25%2 change in Common Share price3 Price increases Price decreases reflects the applicable statutory income tax rates for the reporting periods. Net income Other comprehensive income Comprehensive income 2020 2019 2020 2019 2020 2019 $ – $ – $ – $ – $ (1) $ – $ (1) $ 1 $ – $ 1 N /A N /A $ – $ – $ – $ – $ (2) $ – $ (2) $ 2 $ – $ 2 $ (5) $ 13 $ 14 $ (14) $ (54) $ 54 $ 107 $ (107) $ – $ (1 1 2) $ 1 1 3 $ 1 N /A N /A $ (80) $ 80 $ (4) $ 4 $ 93 $ (95) $ (2) $ (98) $ 101 $ 3 $ 5 $ (5) $ 14 $ (14) $ (54) $ 54 $ 106 $ (107) $ (1) $ (1 1 1 ) $ 1 1 3 $ 2 N /A N /A $ (80) $ 80 $ (4) $ 4 $ 91 $ (95) $ (4) $ (96) $ 101 $ 5 $ – $ 8 1 These sensitivities are hypothetical and should be used with caution. Changes in net income and/or other comprehensive income generally cannot be extrapolated because the relationship of the change in assumption to the change in net income and/or other comprehensive income may not be linear. In this table, the effect of a variation in a particular assumption on the amount of net income and/or other comprehensive income is calculated without changing any other factors; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. The sensitivity analysis assumes that we would realize the changes in exchange rates and market interest rates; in reality, the competitive marketplace in which we operate would have an effect on this assumption. No consideration has been made for a difference in the notional number of Common Shares associated with share-based compensation awards made during the reporting period that may have arisen due to a difference in the Common Share price. 2 To facilitate ongoing comparison of sensitivities, a constant variance of approximate magnitude has been used. Reflecting a 12-month data period and calculated on a monthly basis, the volatility of our Common Share price as at December 31, 2019, was 9.9%. 3 The hypothetical effects of changes in the price of our Common Shares are restricted to those which would arise from our share-based compensation awards that are accounted for as liability instruments and the associated cash-settled equity swap agreements; as at December 31, 2020, we had no Common Share compensation awards accounted for as liability instruments. TELUS 2020 ANNUAL REPORT • 151 (h) Fair values Derivative The derivative financial instruments that we measure at fair value on a recurring basis subsequent to initial recognition are set out in the following table. As at December 31 (millions) 2020 Maximum maturity date Notional amount Designation Fair value1 and carrying value Price or rate Maximum maturity date Notional amount Fair value1 and carrying value 2019 Price or rate Current Assets2 Derivatives used to manage Currency risk arising from U.S. dollar revenues Changes in share-based HFT4 2021 $ 87 $ 2 US$1.00: C$1.27 2020 $ 36 $ 1 US$1.00: C$1.30 compensation costs (Note 14(b)) HFH3 – $ – Currency risk arising from U.S. dollar- denominated long-term debt (Note 26(b)–(c)) Currency risk associated with European HFH3 2021 $ 95 euro-denominated business acquisition HFH5 – $ – – – – $ 2 – 2020 $ 72 4 $ 24.40* US$1.00: C$1.27 – $ – – 2020 $ 472 – 3 – €1.00: US$ 1.12 $ 8 Other Long-Term Assets2 Derivatives used to manage Currency risk arising from U.S. dollar- denominated long-term debt6 (Note 26(b)–(c)) Current Liabilities2 Derivatives used to manage Currency risk arising from U.S. dollar- denominated purchases Currency risk arising from U.S. dollar- denominated long-term debt (Note 26(b)–(c)) Currency risk arising from European euro functional currency operations purchased with U.S. dollar-denominated long-term debt7 (Notes 18(b), 26(f)) Interest rate risk associated with non-fixed rate credit facility amounts drawn (Note 26(f)) Other Long-Term Liabilities2 Derivatives used to manage Currency risk arising from U.S. dollar- denominated long-term debt6 (Note 26(b)–(c)) Currency risk arising from European euro functional currency operations purchased with U.S. dollar-denominated long-term debt7 (Notes 18(b), 26(f)) Interest rate risk associated with non-fixed rate credit facility amounts drawn (Note 26(f)) HFH3 2049 $ 2,176 $ 40 HFH3 2021 $ 388 $ 21 HFH3 2021 $ 647 1 1 HFH5 2024 $ 34 HFH3 2022 $ 8 – – $ 32 US$1.00: C$1.27 US$1.00: C$1.34 US$1.00: C$1.29 €1.00: US$1.09 2048 $ 3,068 $ 76 2020 $ 412 $ 6 2020 $ 1,037 17 US$1.00: C$1.28 US$1.00: C$1.32 US$1.00: C$1.32 – $ – 2.64% 2022 $ 8 – 2.64% – – $ 23 2049 $ 2,485 $ 22 US$1.00: C$1.34 HFH3 2049 $ 3,260 $ 82 HFH5 2025 $ 557 67 US$1.00: C$1.33 €1.00: US$1.09 HFH3 2022 $ 120 6 2.64% 2022 $ 130 $ 155 – $ – – 2.64% – 4 $ 26 Fair value measured at reporting date using significant other observable inputs (Level 2). 1 2 Derivative financial assets and liabilities are not set off. 3 Designated as held for hedging (HFH) upon initial recognition (cash flow hedging item); hedge accounting is applied. Unless otherwise noted, hedge ratio is 1:1 and is established by assessing the degree of matching between the notional amounts of hedging items and the notional amounts of the associated hedged items. 4 Designated as held for trading (HFT) and classified as fair value through net income upon initial recognition; hedge accounting is not applied. 5 Designated as a hedge of a net investment in a foreign operation and hedge accounting is applied. Hedge ratio is 1:1 and is established by assessing the degree of matching between the notional amounts of hedging items and the notional amounts of the associated hedged items. 6 We designate only the spot element as the hedging item. As at December 31, 2020, the foreign currency basis spread included in the fair value of the derivative instruments, which is used for purposes of assessing hedge ineffectiveness, was $101 (2019 – $38). 7 We designate only the spot element as the hedging item. As at December 31, 2020, the foreign currency basis spread included in the fair value of the derivative instruments, which is used for purposes of assessing hedge ineffectiveness, was $4. *Amounts reflect retrospective application of March 17, 2020, share split (see Note 28(b)). 152 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 5 Non-derivative Our long-term debt, which is measured at amortized cost, and the fair value thereof, are set out in the following table. As at December 31 (millions) 2020 Long-term debt, excluding leases (Note 26) $ 18,451 $ 20,313 $ 16,813 Carrying value Fair value Carrying value 2019 Fair value $ 17,930 (i) Recognition of derivative gains and losses The following table sets out the gains and losses, excluding income tax effects, arising from derivative instruments that are classified as cash flow hedging items and their location within the Consolidated statements of income and other comprehensive income. Credit risk associated with such derivative instruments, as discussed further in (b), would be the primary source of hedge ineffectiveness. There was no ineffective portion of the derivative instruments classified as cash flow hedging items for the periods presented. Years ended December 31 (millions) Note 2020 2019 Location Derivatives used to manage currency risk Amount of gain (loss) recognized in other comprehensive income (effective portion) (Note 11) Gain (loss) reclassified from other comprehensive income to income (effective portion) (Note 11) Amount 2020 2019 Arising from U.S. dollar-denominated purchases $ (6) $ (16) Goods and services purchased $ (9) $ 1 1 Arising from U.S. dollar-denominated long-term debt1 Arising from net investment in a foreign operation2 Derivatives used to manage other market risk Arising from changes in share-based compensation costs and other 26(b)–(c) (44) (21) Financing costs 12 (162) (67) (1 1 7) 3 Financing costs (34) 14(b) (6) 10 Employee benefits expense – 3 1 – (151) 12 $ (123) $ (24) $ 4 $ (139) 1 Amounts recognized in other comprehensive income are net of the change in the foreign currency basis spread (which is used for purposes of assessing hedge ineffectiveness) included in the fair value of the derivative instruments; such amount for the year ended December 31, 2020, was $63 (2019 – $9). 2 Amounts recognized in other comprehensive income are net of the change in the foreign currency basis spread (which is used for purposes of assessing hedge ineffectiveness) included in the fair value of the derivative instruments; such amount for the year ended December 31, 2020, was $4. The following table sets out the gains and losses arising from derivative instruments that are classified as held for trading and that are not designated as being in a hedging relationship, as well as their location within the Consolidated statements of income and other comprehensive income. Years ended December 31 (millions) Derivatives used to manage currency risk 5 Segment information Gain (loss) recognized in income on derivatives Location Financing costs 2020 $ 1 1 2019 $ (7) General Operating segments are components of an entity that engage in and internal controls to accommodate the technology convergence- driven cessation of the historical distinction between our wireless and business activities from which they earn revenues and incur expenses wireline operations at the level of regularly reported discrete performance (including revenues and expenses related to transactions with the other measures that are provided to our chief operating decision-maker. component(s)), the operations of which can be clearly distinguished Prior to the World Health Organization characterizing COVID-19 as a and for which the operating results are regularly reviewed by a chief pandemic, we had anticipated transitioning to a new segment reporting operating decision-maker to make resource allocation decisions and structure during 2020, and did not, and do not, anticipate a substantive to assess performance. Effective January 1, 2020, we embarked upon change to our products and services revenue reporting from such modifying our internal and external reporting processes, systems transition; such transition is now anticipated in the first quarter of 2021. TELUS 2020 ANNUAL REPORT • 153 The wireless segment includes network revenues and equipment (mobile versus fixed), the technical expertise required to deliver the sales arising from mobile technologies. The wireline segment includes data services and products, customer characteristics, the distribution channels revenues (which include internet protocol; television; hosting, managed used and regulatory treatment. Intersegment sales are recorded at the information technology and cloud-based services; customer care and exchange value, which is the amount agreed to by the parties. business services; certain healthcare solutions; and home and business The segment information regularly reported to our Chief Executive security and agriculture), voice and other telecommunications services Officer (our chief operating decision-maker), and the reconciliations revenues (excluding wireless arising from mobile technologies), and equip- thereof to our products and services view of revenues, other revenues ment sales. Segmentation has been based on similarities in tech nology and income before income taxes, are set out in the following table. Years ended December 31 (millions) 2020 2019 2020 2019 2020 2019 2020 2019 Wireless Wireline Eliminations Consolidated Operating revenues External revenues Service Equipment Operating revenues (arising from contracts with customers) Other income Intersegment revenues EBITDA1 CAPEX, excluding spectrum licences2 $ 6,096 1,809 $ 6,165 1,964 $ 7,181 $ 6,235 $ 255 225 $  – – $ 13,277 $ 12,400 2,064 2,189 7,905 9 7,914 60 $ 7,974 $ 3,642 8,129 20 8,149 53 $ 8,202 $ 3,693 7,436 1 1 3 7,549 262 6,460 49 6,509 251 $ 1,852 $ 1,861 $ 810 $ 889 $ 1,965 $ 2,017 – – – 15,341 122 15,463 – 14,589 69 14,658 – (322) (304) $ $ – – $ $  –  – $ 5,494 $ 5,554 $ 2,775 $ 2,906 $ 7,81 1 $ 6,760 $ (322) $ (304) $ 15,463 $ 14,658 – – – – – Operating revenues – external and other income (above) Goods and services purchased Employee benefits expense EBITDA (above) Depreciation Amortization Operating income Financing costs $ 15,463 $ 14,658 6,268 3,701 5,494 2,107 905 2,482 771 6,070 3,034 5,554 1,929 648 2,977 733 1 Earnings before interest, income taxes, depreciation and amortization (EBITDA) does not have any standardized meaning prescribed by IFRS-IASB and is therefore unlikely to be comparable to similar measures presented by other issuers; we define EBITDA as operating revenues and other income less goods and services purchased and employee benefits expense. We have issued guidance on, and 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 Total capital expenditures (CAPEX); see Note 31(a) for a reconciliation of capital expenditures, excluding spectrum licences, to cash payments for capital assets, excluding spectrum licences, reported in the Consolidated statements of cash flows. Income before income taxes $ 1,71 1 $ 2,244 Geographical information We attribute revenues from external customers to individual countries on of property, plant and equipment located outside of Canada. As at December 31, 2020, on a historical cost basis, we had approximately the basis of the location where the goods and/or services are provided; $2.2 billion (2019 – $0.2 billion) and approximately $2.2 billion for the year ended December 31, 2020, we attributed approximately (2019 – $0.6 billion) of intangible assets and goodwill, respectively, $1.9 billion (2019 – $1.1 billion) of our revenues to countries other than located outside of Canada. Canada (our country of domicile). We do not have significant amounts 154 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 6 6 Revenue from contracts with customers (a) Revenues In the determination of the minimum transaction prices in contracts transaction prices allocated to remaining unfulfilled, or partially unfulfilled, future contracted performance obligations and the timing of when with customers, amounts are allocated to fulfilling, or completion of we might expect to recognize the associated revenues; actual amounts fulfilling, future contracted performance obligations. These unfulfilled, could differ from these estimates due to a variety of factors, including the or partially unfulfilled, future contracted performance obligations are unpredictable nature of: customer behaviour; industry regulation; the largely in respect of services to be provided over the duration of the economic environments in which we operate; and competitor behaviour. contract. The following table sets out our aggregate estimated minimum As at December 31 (millions) 2020 2019 Estimated minimum transaction price allocated to remaining unfulfilled, or partially unfulfilled, performance obligations to be recognized as revenue in a future period1,2 During the 12-month period ending one year hence During the 12-month period ending two years hence Thereafter $ 2,279 $ 2,405 883 35 930 40 $ 3,197 $ 3,375 1 2 Excludes constrained variable consideration amounts, amounts arising from contracts originally expected to have a duration of one year or less and, as a permitted practical expedient, amounts arising from contracts that are not affected by revenue recognition timing differences arising from transaction price allocation or from contracts under which we may recognize and bill revenue in an amount that corresponds directly with our completed performance obligations. IFRS-IASB requires the explanation of when we expect to recognize as revenue the amounts disclosed as the estimated minimum transaction price allocated to remaining unfulfilled, or partially unfulfilled, performance obligations. The estimated amounts disclosed are based upon contractual terms and maturities. Actual minimum transaction price revenues recognized, and the timing thereof, will differ from these estimates primarily due to the frequency with which the actual durations of contracts with customers do not match their contractual maturities. (b) Accounts receivable As at December 31 (millions) Customer accounts receivable Accrued receivables – customer Allowance for doubtful accounts Accrued receivables – other Accounts receivable – current (c) Contract assets Years ended December 31 (millions) Balance, beginning of period Net additions arising from operations Amounts billed in the period and thus reclassified to accounts receivable1 Change in impairment allowance, net Other Balance, end of period To be billed and thus reclassified to accounts receivable during: The 12-month period ending one year hence The 12-month period ending two years hence Thereafter Balance, end of period Reconciliation of contract assets presented in the Consolidated statements of financial position – current Gross contract assets Note 4(b) Note 4(b) Reclassification to contract liabilities of contracts with contract assets less than contract liabilities Reclassification from contract liabilities of contracts with contract liabilities less than contract assets 24 24 2020 $ 1,986 241 (1 1 9) 2,108 247 $ 2,355 2020 $ 1,238 959 (1,363) 15 1 2019 $ 1,570 180 (46) 1,704 258 $ 1,962 2019 $ 1,475 1,161 (1,416) 17 1 $ 850 $ 1,238 $ 582 $ 910 253 15 308 20 $ 850 $ 1,238 $ 582 (10) (133) $ 439 $ 910 (7) (166) $ 737 1 For the year ended December 31, 2020, amounts billed for our wireless products and services and reclassified to accounts receivable totalled $1,015 (2019 – $1,288). TELUS 2020 ANNUAL REPORT • 155 7 Other income Years ended December 31 (millions) Government assistance Other sublet revenue Investment income (loss), gain (loss) on disposal of assets and other Interest income Changes in business combination-related provisions Note 19 21(b) 25 2020 $ 13 4 (12) 4 1 1 3 $ 122 2019 $ 22 2 24 4 17 $ 69 We receive government assistance, as defined by IFRS-IASB, from a that are then disbursed to incumbent local exchange carriers as subsidy number of sources and generally include such amounts received in Other payments to partially offset the costs of providing residential basic income. We recognize such amounts on an accrual basis as the subsidized telephone services in non-forborne high cost serving areas. The subsidy services are provided or as the subsidized costs are incurred. payment disbursements are based upon a total subsidy requirement CRTC subsidy Local exchange carriers’ costs of providing the level of residential basic telephone services that the CRTC requires to be provided in high calculated on a per network access line/per band subsidy rate. For the year ended December 31, 2020, our subsidy receipts were $10 million (2019 – $15 million). cost serving areas are greater than the amounts the CRTC allows the local exchange carriers to charge for the level of service. To ameliorate Government of Quebec Salaries for qualifying employment positions in the province of Quebec, the situation, the CRTC directs the collection of contribution payments, mainly in the information technology sector, are eligible for tax credits. in a central fund, from all registered Canadian telecommunications In respect of such tax credits, for the year ended December 31, 2020, service providers (including voice, data and wireless service providers) we recorded $3 million (2019 – $7 million). 8 Employee benefits expense Years ended December 31 (millions) Employee benefits expense – gross Wages and salaries1 Share-based compensation Pensions – defined benefit Pensions – defined contribution Restructuring costs Employee health and other benefits Capitalized internal labour costs, net Contract acquisition costs Capitalized Amortized Contract fulfilment costs Capitalized Amortized Property, plant and equipment Intangible assets subject to amortization Note 2020 2019 14 15(b) 15(f) 16(a) 20 20 $ 3,668 $ 3,017 173 102 94 49 190 147 78 92 63 184 4,276 3,581 (74) 55 (2) 4 (350) (208) (575) (54) 48 (3) 4 (351) (191) (547) $ 3,701 $ 3,034 1 For the year ended December 31, 2020, wages and salaries are net of Canada Emergency Wage Subsidy program amounts. 156 • TELUS 2020 ANNUAL REPORT 9 Financing costs Years ended December 31 (millions) Interest expense Interest on long-term debt, excluding lease liabilities – gross Interest on long-term debt, excluding lease liabilities – capitalized1 Interest on long-term debt, excluding lease liabilities Interest on lease liabilities Interest on short-term borrowings and other Interest accretion on provisions Long-term debt prepayment premium Employee defined benefit plans net interest Foreign exchange Interest income Net interest cost Interest on long-term debt, excluding lease liabilities – capitalized1 Employee defined benefit plans net interest CONSOLIDATED FINANCIAL STATEMENTS: NOTES 7–10 Note 2020 2019 18(a) 19 25 26(b) 15 3 $ 676 (37) 639 70 5 16 18 748 16 14 778 (7) $ 771 $ 792 (37) 16 $ 771 $ 634 (23) 61 1 67 8 22 28 736 1 3 740 (7) $ 733 $ 755 (23) 1 $ 733 1 Interest on long-term debt, excluding lease liabilities at a composite rate of 4.33% was capitalized to intangible assets with indefinite lives in the periods. 10 Income taxes (a) Expense composition and rate reconciliation Years ended December 31 (millions) Current income tax expense For the current reporting period Adjustments recognized in the current period for income taxes of prior periods Deferred income tax expense Arising from the origination and reversal of temporary differences Revaluation of deferred income tax liability to reflect future income tax rates Adjustments recognized in the current period for income taxes of prior periods 2020 2019 $ 474 (99) 375 3 (6) 79 76 $ 451 $ 416 (63) 353 193 (124) 46 1 1 5 $ 468 Our income tax expense and effective income tax rate differ from those computed by applying the applicable statutory rates for the following reasons: Years ended December 31 ($ in millions) Income taxes computed at applicable statutory rates Revaluation of deferred income tax liability to reflect future income tax rates Adjustments recognized in the current period for income taxes of prior periods Other Income tax expense per Consolidated statements of income $ 446 (6) (20) 31 2020 26.1% (0.4) (1.3) 1.9 $ 604 (124) (17) 5 2019 26.9% (5.5) (0.8) 0.2 and other comprehensive income $ 451 26.3% $ 468 20.8% TELUS 2020 ANNUAL REPORT • 157 (b) Temporary differences We must make significant estimates in respect of the composition of our Temporary differences comprising the net deferred income tax liability and the amounts of deferred income taxes recognized in the deferred income tax liability. Our operations are complex and the related Consolidated statements of income and other comprehensive income income tax interpretations, regulations, legislation and jurisprudence and the Consolidated statements of changes in owners’ equity are are continually changing. As a result, there are usually some income tax estimated as follows: matters in question. Property, plant and equipment (owned) and intangible assets subject to amortization Intangible assets with indefinite lives Property, plant and equipment (leased), net of lease liabilities Net pension and share-based compensation amounts Contract assets and liabilities Provisions not currently deductible Losses available to be carried forward1 Net deferred income tax liability Other $ 1,204 $ 1,718 $ (83) $ 496 $ (21) $ (189) $ (6) $ (29) $ 3,090 (millions) As at January 1, 20192 Deferred income tax expense recognized in Net income Other comprehensive income Deferred income taxes charged directly to owners’ equity and other (Note 18(c)) Deferred income tax expense recognized in Net income Other comprehensive income Deferred income taxes charged directly to owners’ equity and other (Note 18(b)) As at December 31, 20193 1,616 1,608 332 – 80 (1 1 0) – – 85 – 82 – 6 – – (77) 37 – 621 2 – (78) – (9) (1 1 0) (23) – – 418 – – (140) (212) (1 1 1 ) – – (31) (109) – 8 – – (5) – – (1 1 ) (33) – 2 32 1 1 5 (78) 1 6 81 3,208 39 (13) 76 (122) (4) (16) 603 As at December 31, 20204 $ 2,322 $ 1,692 $ (40) $ 307 $ (280) $ (204) $ (48) $ 16 $ 3,765 1 We expect to be able to utilize our non-capital losses prior to expiry. 2 Deferred tax liability of $3,095, net of deferred tax asset of $5 (included in Other long-term assets). 3 Deferred tax liability of $3,214, net of deferred tax asset of $6 (included in Other long-term assets). 4 Deferred tax liability of $3,776, net of deferred tax asset of $11 (included in Other long-term assets). Temporary differences arise from the carrying value of investments to control the timing and manner of the reversal of temporary differences in subsidiaries and partnerships exceeding their tax base, for which no in respect of our non-Canadian subsidiaries, and it is probable that such deferred income tax liabilities have been recognized because the parent differences will not reverse in the foreseeable future. is able to control the timing of the reversal of the difference and it is probable that it will not reverse in the foreseeable future. In our specific instance, this is relevant to our investments in Canadian subsidiaries (c) Other We conduct research and development activities, which may be eligible to and Canadian partnerships. We are not required to recognize such earn Investment Tax Credits. During the year ended December 31, 2020, deferred income tax liabilities, as we are in a position to control the timing and manner of the reversal of the temporary differences, which would we recorded Investment Tax Credits of $12 million (2019 – $8 million). Of this amount, $6 million (2019 – $4 million) was recorded as a reduction not be expected to be exigible to income tax, and it is probable that such of property, plant and equipment and/or intangible assets and the balance differences will not reverse in the foreseeable future. We are in a position was recorded as a reduction of Goods and services purchased. 158 • TELUS 2020 ANNUAL REPORT 11 Other comprehensive income CONSOLIDATED FINANCIAL STATEMENTS: NOTES 11–12 Items that may subsequently be reclassified to income Change in unrealized fair value of derivatives designated as cash flow hedges in current period (Note 4(i)) Derivatives used to manage currency risk Derivatives used to manage other market risks Item never reclassified to income Item never reclassified to income Prior period (gains) losses transferred to net income Gains (losses) arising Prior period (gains) losses transferred to net income Gains (losses) arising Total Cumulative foreign currency translation adjustment Change in measurement of investment financial assets Accumulated other compre- hensive income Employee defined benefit plan re-measurements Other compre- hensive income Total Total $ (19) $  – $ (19) $ 22 $ – $ 3 $ (34) $ 10 $ 151 $ 22 $ 10 $ 2 $ (12) $ (3) 1 1 7 32 85 66 (2) (1) (1) 1 1 5 31 84 (1) 65 20 – 20 42 $ (1 1 7) $ (5) $ $ (3) (9) (120) $ (6) (14) $ (2) $ (1) $ – (7) (2) (127) (16) 1 1 3 – (5) (1 1 1 ) 1 1 3 13 1 12 12 17 3 14 148 32 1 1 6 1 1 9 3 (13) 16 $ (448) $ (300) (1 1 0) (78) $ (338) $ (222) $ (421) $ (418) (109) (122) $ (312) $ (296) (106) $ (40) $ (6) $ (46) $ 155 $ 26 $ 135 $ 1 1 7 18 $ 135 Years ended December 31 (millions) Accumulated balance as at January 1, 2019 Other comprehensive income (loss) Amount arising Income taxes Net Accumulated balance as at December 31, 2019 Other comprehensive income (loss) Amount arising Income taxes Net Accumulated balance as at December 31, 2020 Attributable to: Common Shares Non-controlling interests 12 Per share amounts Basic net income per Common Share is calculated by dividing net For the years ended December 31, 2020 and 2019, no outstanding income attributable to Common Shares by the total weighted average equity-settled restricted share unit awards were excluded in the number of Common Shares outstanding during the period. Diluted net computation of diluted income per Common Share. For the year ended income per Common Share is calculated to give effect to share option December 31, 2020, one million* outstanding TELUS Corporation share awards and restricted share unit awards. option awards were excluded in the calculation of diluted net income The following table presents reconciliations of the denominators per Common Share; as at December 31, 2019, no TELUS Corporation of the basic and diluted per share computations. Net income was equal share option awards were outstanding. to diluted net income for all periods presented. Years ended December 31 (millions) 2020 2019* Basic total weighted average number of Common Shares outstanding 1,275 1,204 Effect of dilutive securities – Restricted share units 3 – Diluted total weighted average number of Common Shares outstanding 1,278 1,204 *Amounts reflect retrospective application of March 17, 2020, share split (see Note 28(b)). TELUS 2020 ANNUAL REPORT • 159 13 Dividends per share (a) Dividends declared Years ended December 31 (millions except per share amounts) 2020 Common Share dividends Effective Per share* Declared Paid to shareholders Declared Total Effective Per share* Paid to shareholders 2019 Total Quarter 1 dividend Quarter 2 dividend Quarter 3 dividend Quarter 4 dividend Mar. 11, 2020 $ 0.29125 Apr. 1, 2020 $ 371 Mar. 11, 2019 $ 0.27250 Apr. 1, 2019 $ 329 June 10, 2020 0.29125 July 2, 2020 Sep. 10, 2020 0.29125 Dec. 11, 2020 0.31 1 20 Oct. 1, 2020 Jan. 4, 2021 372 374 403 June 10, 2019 0.28125 July 2, 2019 Sep. 10, 2019 0.28125 Oct. 1, 2019 Dec. 11, 2019 0.29125 Jan. 2, 2020 339 338 352 $ 1.18495 $ 1,520 $ 1.12625 $ 1,358 On February 10, 2021, the Board of Directors declared a quarterly dividends and by making additional optional cash payments to the dividend of $0.3112 per share on our issued and outstanding TELUS trustee. Under this plan, we have the option of offering TELUS Corporation Corporation Common Shares payable on April 1, 2021, to holders of Common Shares from Treasury or having the trustee acquire TELUS record at the close of business on March 11, 2021. The final amount of Corporation Common Shares in the stock market. We may, at our discre- the dividend payment depends upon the number of TELUS Corporation tion, offer TELUS Corporation Common Shares at a discount of up to 5% Common Shares issued and outstanding at the close of business on from the market price under the plan. Effective with our dividends paid March 11, 2021. (b) Dividend Reinvestment and Share Purchase Plan We have a Dividend Reinvestment and Share Purchase Plan under October 1, 2019, we offered TELUS Corporation Common Shares from Treasury at a discount of 2%. In respect of TELUS Corporation Common Shares held by eligible shareholders who have elected to participate in the plan, dividends declared during the year ended December 31, 2020, which eligible holders of TELUS Corporation Common Shares may of $524 million (2019 – $256 million) were to be reinvested in TELUS acquire additional TELUS Corporation Common Shares by reinvesting Corporation Common Shares. 14 Share-based compensation (a) Details of share-based compensation expense Reflected in the Consolidated statements of income and other comprehensive income as Employee benefits expense and in the Consolidated statements of cash flows are the following share-based compensation amounts: Years ended December 31 (millions) Restricted share units Employee share purchase plan Share option awards Note (b) (c) (d) Employee benefits expense Associated operating cash outflows $ 131 $ (109) 33 9 (33) (4) $ 173 $ (146) 2020 Statement of cash flows adjustment $ 22 – 5 $ 27 Employee benefits expense $ 107 37 3 Associated operating cash outflows $ (1 1 2) (37) – $ 147 $ (149) 2019 Statement of cash flows adjustment $ (5) – 3 $ (2) For the year ended December 31, 2020, the associated operating cash outflows in respect of restricted share units were net of cash inflows arising from cash-settled equity forward agreements of $4 million (2019 – $13 million). For the year ended December 31, 2020, the income tax benefit arising from share-based compensation was $43 million (2019 – $39 million). *Amounts reflect retrospective application of March 17, 2020, share split (see Note 28(b)). 160 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTES 13–14 (b) Restricted share units General We use restricted share units as a form of retention and incentive compensation. Each restricted share unit is nominally equal in value units prior to fiscal 2019 are accounted for as liability instruments, as the associated obligation is normally cash-settled. TELUS Corporation restricted share units We also award restricted share units that largely have the same to one equity share and is nominally entitled to the dividends that features as our general restricted share units, but have a variable payout would arise thereon if it were an issued and outstanding equity share. (0%–200%) that depends upon the achievement of our total customer The notional dividends are recorded as additional issuances of restricted connections performance condition (with a weighting of 25%) and the share units during the life of the restricted share unit. Due to the notional total shareholder return on TELUS Corporation Common Shares relative dividend mechanism, the grant-date fair value of restricted share units to an international peer group of telecommunications companies equals the fair market value of the corresponding equity shares at the (with a weighting of 75%). The grant-date fair value of the notional subset grant date, other than for the notional subset of our restricted share units of our restricted share units affected by the total customer connections affected by the relative total shareholder return performance condition performance condition equals the fair market value of the corresponding (which have their grant-date fair value determined using a Monte Carlo TELUS Corporation Common Shares at the grant date, and thus the simulation). The restricted share units generally become payable when notional subset has been included in the presentation of our restricted vesting is complete and typically vest over a period of 33 months share units with only service conditions. The estimate, which reflects (the requisite service period). The vesting method of restricted share a variable payout, of the fair value of the notional subset of our restricted units, which is determined on or before the date of grant, may be share units affected by the relative total shareholder return performance either cliff or graded; the majority of restricted share units outstanding are cliff-vesting. Accounting for restricted share units, as either equity condition is determined using a Monte Carlo simulation. Grants of restricted share units in 2020 and 2019 are accounted for as equity- instruments or liability instruments, is based upon the expected manner settled, as that was their expected manner of settlement when granted. of their settlement when they are granted. Grants of restricted share The following table presents a summary of outstanding TELUS Corporation non-vested restricted share units. Number of non-vested restricted share units as at December 31 Restricted share units without market performance conditions Restricted share units with only service conditions Notional subset affected by total customer connections performance condition Restricted share units with market performance conditions Notional subset affected by relative total shareholder return performance condition 2020* 2019* 5,718,328 298,957 6,017,285 6,186,854 282,100 6,468,954 896,870 846,298 6,914,155 7,315,252 The following table presents a summary of the activity related to TELUS Corporation restricted share units without market performance conditions. Years ended December 31 Outstanding, beginning of period* Non-vested Vested Granted Initial award In lieu of dividends Vested Settled in cash Settled in equity Forfeited Outstanding, end of period Non-vested Vested Number of restricted share units1 Non-vested Vested 2020 Weighted average grant- date fair value Number of restricted share units1 Non-vested Vested 2019 Weighted average grant- date fair value 6,468,954 – – 30,800 3,199,809 428,750 – 624 (3,696,539) 3,696,539 – – (3,053,349) (644,744) (383,689) 6,017,285 – – – 29,870 $ 23.37 $ 22.02 $ 25.36 $ 23.08 $ 23.14 $ 22.82 $ 24.17 $ 23.82 $ 24.55 $ 24.58 6,387,040 – – 126,766 4,092,094 333,600 – 578 (4,004,162) 4,004,162 – – (339,618) 6,468,954 (4,100,706) – – – – 30,800 $ 22.42 $ 22.45 $ 23.82 $ 23.62 $ 22.28 $ 22.28 $ – $ 22.65 $ 23.37 $ 22.02 1 Excluding the notional subset of restricted share units affected by the relative total shareholder return performance condition. *Amounts reflect retrospective application of March 17, 2020, share split (see Note 28(b)). TELUS 2020 ANNUAL REPORT • 161 TELUS International (Cda) Inc. restricted share units We also award restricted share units that largely have the same features as the TELUS Corporation restricted share units, but have a variable payout (0%–150%) that depends upon the achievement of TELUS International (Cda) Inc. financial performance and non-market quality-of-service performance conditions. The following table presents a summary of the activity related to TELUS International (Cda) Inc. restricted share units. Years ended December 31 2020 US$ denominated US$ denominated Canadian $ denominated 2019 Number of restricted share units Non-vested Vested Weighted average grant-date fair value Number of restricted share units Non-vested Vested Weighted average grant-date fair value Number of vested restricted share units Weighted average grant-date fair value 2,093,603 – 357,966 – – – US$ 6.1 1 – US$ 2,527,704 – US$ 1 1 .1 1 836,145 – – – US$ 5.71 US$ – US$ 7.32 (982,395) 982,395 US$ 5.95 (1,186,524) 1,186,524 US$ 5.10 – 145,346 – – $ – $ 4.75 $ $ – – – (982,395) US$ 5.95 – (1,186,524) US$ 5.10 (145,346) $ 4.75 Outstanding, beginning of period1 Non-vested Vested Granted Vested Settled in cash Forfeited Outstanding, end of period – non-vested 1,383,642 – US$ 7.94 2,093,603 (85,532) – US$ 7.00 (83,722) – – US$ 5.94 US$ 6.1 1 – – $ $ – – 1 Amounts reflect retrospective application of February 4, 2021, 4.5-for-one share subdivision which occurred in connection with TELUS International (Cda) Inc.’s initial public offering of shares (see Note 28(d)). (c) Employee share purchase plan We have an employee share purchase plan under which eligible share options and the average historical volatility in the prices of a peer group’s shares in respect of TELUS International (Cda) Inc. share options. employees up to a certain job classification can purchase TELUS The dividend yield is the annualized dividend current at the time of Corporation Common Shares through regular payroll deductions. grant divided by the share option award exercise price. Dividends are In respect of TELUS Corporation Common Shares held within the not paid on unexercised share option awards and are not subject employee share purchase plan, TELUS Corporation Common Share to vesting. dividends declared during the year ended December 31, 2020, of $37 million (2019 – $34 million) were to be reinvested in TELUS Corporation Common Shares acquired by the trustee from Treasury, with no discount applicable prior to October 1, 2019; subsequent to that date, a discount was applicable, as set out in Note 13(b). (d) Share option awards TELUS Corporation share options Employees may be granted options to purchase TELUS Corporation Common Shares at an exercise price equal to the fair market value at the time of grant. Share option awards granted under the plan may be exercised over specific periods not to exceed seven years from the time of grant. Share option awards granted in fiscal 2020 were for frontline employees; no share option awards were granted in fiscal 2019. General We use share option awards as a form of retention and incentive com- These share option awards have a net-equity settlement feature. The optionee does not have the choice of exercising the net-equity pensation. We apply the fair value method of accounting for share-based settlement feature; it is at our option whether the exercise of a share compensation awards granted to officers and other employees. Share option awards typically have a three-year vesting period (the requisite option award is settled as a share option or settled using the net-equity settlement feature. service period). The vesting method of share option awards, which is The following table presents a summary of the activity related to the determined on or before the date of grant, may be either cliff or graded; all TELUS Corporation share option plan. share option awards granted subsequent to 2004 have been cliff-vesting. The weighted average fair value of share option awards granted is calculated by using the Black-Scholes model (a closed-form option pricing model). The risk-free interest rate used in determining the fair value of the share option awards is based on a Government of Canada yield curve that is current at the time of grant. The expected lives of Year ended December 31, 2020 Outstanding, beginning of period* Granted Forfeited the share option awards are based on our historical share option award Outstanding, end of period Number of share options – 3,171,600 (156,900) 3,014,700 Weighted average share option price1 $   – $ 21.57 $ 21.29 $ 21.59 exercise data. Similarly, expected volatility considers the historical volatility 1 in the price of our Common Shares in respect of TELUS Corporation The weighted average remaining contractual life is 6.3 years. No options were exercisable as at the balance sheet date. *Amounts reflect retrospective application of March 17, 2020, share split (see Note 28(b)). 162 • TELUS 2020 ANNUAL REPORT The weighted average fair value of share option awards granted, and the weighted average assumptions used in the fair value estimation at the time of grant, calculated by using the Black-Scholes model (a closed- form option pricing model), are as follows: Year ended December 31, 2020 Share option award fair value (per share option) Risk-free interest rate Expected lives1 (years) Expected volatility Dividend yield CONSOLIDATED FINANCIAL STATEMENTS: NOTE 15 TELUS International (Cda) Inc. share options Employees may be granted equity share options (equity-settled) to purchase TELUS International (Cda) Inc. subordinate voting shares at a price equal to, or a multiple of, the fair market value at the time of grant and/or phantom share options (cash-settled) that provide them with $ 0.65 0.95% 4.25 12.3% 5.4% exposure to TELUS International (Cda) Inc. subordinate voting share price appreciation. Share option awards granted under the plan may be exer- cised over specific periods not to exceed ten years from the time of grant. All equity share option awards and most phantom share option awards have a variable payout (0%–100%) that depends upon the achievement of TELUS International (Cda) Inc. financial performance and non-market 1 The maximum contractual term of the share option awards granted in 2020 was seven years. quality-of-service performance conditions. The following table presents a summary of the activity related to the TELUS International (Cda) Inc. share option plan. Years ended December 31 2020 2019 US$ denominated Canadian $ denominated US$ denominated Canadian $ denominated Number of share options Weighted average share option price2 Number of share options Share option price3 Number of share options Weighted average share option price2 Number of share options Share option price3 Outstanding, beginning of period1 4,484,790 Granted Exercised – (562,734) US$ 6.91 – US$ US$ 6.21 242,244 – – $ $ 4.75 – – $ 3,864,308 US$ 6.63 242,244 620,482 US$ 8.46 – US$ – – – Outstanding, end of period 3,922,056 US$ 6.94 242,244 $ 4.75 4,484,790 US$ 6.91 242,244 Exercisable, end of period 3,267,423 US$ 6.58 242,244 $ 4.75 – US$ – – $ 4.75 $ – $ – $ 4.75 $ – 1 Amounts reflect retrospective application of February 4, 2021, 4.5-for-one share subdivision which occurred in connection with TELUS International (Cda) Inc.’s initial public offering of shares (see Note 28(d)). 2 The range of share option prices is US$4.87 – US$8.95 per TELUS International (Cda) Inc. equity share and the weighted average remaining contractual life is 6.4 years. 3 The weighted average remaining contractual life is 5.6 years. 15 Employee future benefits We have a number of defined benefit and defined contribution plans that provide pension and other retirement and post-employment benefits Pensionable remuneration is determined by the average of the best five years of remuneration in the last ten years preceding retirement. to most of our employees. As at December 31, 2020 and 2019, all regis- tered defined benefit pension plans were closed to substantially all new participants and substantially all benefits had vested. The benefit plans in which our employees are participants reflect developments in our corporate history. Pension Plan for Management and Professional Employees of TELUS Corporation This defined benefit pension plan, which with certain limited exceptions ceased accepting new participants on January 1, 2006, and which comprises approximately one-quarter of our total defined benefit obli- TELUS Corporation Pension Plan Management and professional employees in Alberta who joined us gation accrued, provides a non-contributory base level of pension benefits. Additionally, on a contributory basis, employees annually can prior to January 1, 2001, and certain unionized employees who joined choose increased and/or enhanced levels of pension benefits above us prior to June 9, 2011, are covered by this contributory defined the base level. At an enhanced level of pension benefits, the plan has benefit pension plan, which comprises slightly more than one-half indexation of 100% of the annual increase in a specified cost-of-living of our total defined benefit obligation accrued. The plan contains index, to an annual maximum of 2%. Pensionable remuneration is a supplemental benefit account that may provide indexation of up determined by the annualized average of the best 60 consecutive to 70% of the annual increase in a specified cost-of-living index. months of remuneration. TELUS 2020 ANNUAL REPORT • 163 TELUS Québec Defined Benefit Pension Plan This contributory defined benefit pension plan, which ceased accepting of employees up to 5% of their pensionable earnings and 80% of contributions of employees greater than that. Membership in a defined new participants on April 14, 2009, covers any employee not governed contribution pension plan is generally voluntary until an employee’s third- by a collective agreement in Quebec who joined us prior to April 1, 2006, year service anniversary. In the event that annual contributions exceed any non-supervisory employee governed by a collective agreement allowable maximums, excess amounts are in certain cases contributed who joined us prior to September 6, 2006, and certain other unionized to a non-registered supplementary defined contribution pension plan. employees. The plan comprises approximately one-tenth of our total defined benefit obligation accrued. The plan has no indexation and pensionable remuneration is determined by the average of the best four years of remuneration. TELUS Edmonton Pension Plan This contributory defined benefit pension plan ceased accepting new Other defined benefit plans Other defined benefit plans, which are all non-contributory and, as at December 31, 2020 and 2019, non-funded, included a healthcare plan for retired employees and a life insurance plan, both of which ceased accepting new participants on January 1, 1997. participants on January 1, 1998. Indexation is 60% of the annual increase in a specified cost-of-living index and pensionable remuneration is deter- (a) Defined benefit pension plans – funded status overview Information concerning our defined benefit pension plans, in aggregate, mined by the annualized average of the best 60 consecutive months of is as follows: remuneration. The plan comprises less than one-tenth of our total defined benefit obligation accrued. Other defined benefit pension plans In addition to the foregoing plans, we have non-registered, non- contributory supplementary defined benefit pension plans, which have the effect of maintaining the earned pension benefit once the allowable maximums in the registered plans are attained. As is common with non-registered plans of this nature, these plans are typically funded only as benefits are paid. These plans comprise less than 5% of our total defined benefit obligation accrued. Telecommunication Workers Pension Plan Certain employees in British Columbia are covered by a negotiated-cost, target-benefit union pension plan. Our contributions are determined in accordance with provisions of negotiated labour contracts (the current contract will expire on December 31, 2021), and are generally based on employee gross earnings. We are not required to guarantee the benefits or assure the solvency of the plan, and we are not liable to the plan for other participating employers’ obligations. For the years ended December 31, 2020 and 2019, our contributions comprised a significant proportion of the employer contributions to the union pension plan; similarly, a significant proportion of the plan participants were our active and retired employees. British Columbia Public Service Pension Plan Certain employees in British Columbia are covered by a public service pension plan. Contributions are determined in accordance with provisions of labour contracts negotiated by the Province of British Columbia and are generally based on employee gross earnings. Defined contribution pension plans We primarily offer three defined contribution pension plans, which are contributory, and these are the primary pension plans that we sponsor that are available to our non-unionized and certain of our unionized employees. For the years ended December 31, 2020 and 2019, employees could gen- erally choose to contribute to the plans at a rate of between 3% and 6% of their pensionable earnings; generally, we match 100% of contributions As at December 31 (millions) 2020 2019 Present value of the defined benefit obligations Balance, beginning of year $ 9,684 $ 8,723 Current service cost Past service cost Interest expense Actuarial loss (gain) arising from: Demographic assumptions Financial assumptions Benefits paid Balance, end of year Plan assets Fair value, beginning of year Return on plan assets Notional interest income on plan assets at discount rate Actual return on plan assets 1 1 1 3 297 67 836 (477) 91 – 335 20 984 (469) 10,521 9,684 9,380 9,043 285 344 (less than) greater than discount rate 480 408 Contributions Employer contributions (d) Employees’ contributions Benefits paid Administrative fees Fair value, end of year Effect of asset ceiling limit Beginning of year Change End of year 51 19 (477) (7) 41 19 (469) (6) 9,731 9,380 (121) (2) (123) (263) 142 (121) Fair value of plan assets at end of year, net of asset ceiling limit 9,608 9,259 Funded status – plan surplus (deficit) $ (913) $ (425) The measurement date used to determine the plan assets and defined benefit obligations accrued was December 31. 164 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 15 Employee benefits expense (Note 8) Financing costs (Note 9) Other comprehensive income (Note 11) $ 92 $ $ – – (b) Defined benefit pension plans – details Expense Our defined benefit pension plan expense was as follows: Years ended December 31 (millions) Recognized in Current service cost Past service cost Net interest; return on plan assets Interest expense arising from defined benefit obligations accrued Return, including interest income, on plan assets1 Interest effect on asset ceiling limit Administrative fees Re-measurements arising from: Demographic assumptions Financial assumptions Changes in the effect of limiting net defined benefit assets to the asset ceiling 3 – – – – 7 – – – – 297 (285) 4 16 – – – – – 2020 Total $ 92 3 297 (765) 4 (464) 7 67 836 903 Employee benefits expense (Note 8) $ 72 – – – – – 6 – – – – – – (480) – (480) – 67 836 903 2019 Total $ 72 – 335 (752) 10 (407) 6 20 984 Financing costs (Note 9) Other comprehensive income (Note 11) $  – $ – 335 (344) 10 – – – (408) – (408) – 20 984 1 – – – – – 1 1,004 1,004 (152) (152) $ 444 $ 523 $ 102 $ 16 $ 421 $ 539 (2) (2) – $ 78 $ 1 The interest income on the plan assets portion of the employee defined benefit plans net interest amount included in Financing costs reflects a rate of return on plan assets equal to the discount rate used in determining the defined benefit obligations accrued. TELUS 2020 ANNUAL REPORT • 165 Disaggregation of defined benefit pension plan funding status Defined benefit obligations accrued are the actuarial present values of benefits attributed to employee services rendered to a particular date. Our disaggregation of defined benefit pension plan surpluses and deficits at year-end is as follows: As at December 31 (millions) Defined benefit obligations accrued Plan assets Difference (Notes 20, 27) 2020 PBSR solvency position1 Defined benefit obligations accrued Plan assets Difference (Notes 20, 27) 2019 PBSR solvency position1 Pension plans that have plan assets in excess of defined benefit obligations accrued Pension plans that have defined benefit obligations accrued in excess of plan assets Funded Unfunded Defined benefit obligations accrued owed to: Active members Deferred members Pensioners $ 708 $ 721 $ 13 $ 524 $ 8,277 $ 8,432 $ 155 $ 473 9,550 263 9,813 8,887 – 8,887 (663) (263) (926) (149) N/A 2 (149) 1,167 240 1,407 827 – 827 (340) (240) (580) (101) N/A2 (101) $ 10,521 $ 9,608 $ (913) $ 375 $ 9,684 $ 9,259 $ (425) $ 372 $ 2,461 561 7,499 $ 10,521 $ 2,184 513 6,987 $ 9,684 1 The Office of the Superintendent of Financial Institutions, by way of the Pension Benefits Standards Regulations, 1985 (PBSR) (see (d)), requires that a solvency valuation be performed on a periodic basis. The actual PBSR solvency positions are determined in conjunction with mid-year annual funding reports prepared by actuaries (see (d)); as a result, the PBSR solvency positions in this table as at December 31, 2020 and 2019, are interim estimates and updated estimates, respectively. The interim estimate as at December 31, 2019, was a net surplus of $568. Interim estimated solvency ratios as at December 31, 2020, ranged from 95% to 109% (2019 – updated estimate is 96% to 109%; interim estimate was 98% to 112%) and the estimated three-year average solvency ratios, adjusted as required by the PBSR, ranged from 97% to 109% (2019 – updated estimate is 97% to 108%; interim estimate was 98% to 109%). The solvency valuation effectively uses the fair value (excluding any asset ceiling limit effects) of the funded defined benefit pension plan assets (adjusted for theoretical wind-up expenses) to measure the solvency assets. Although the defined benefit obligations accrued and the solvency liabilities are calculated similarly, the assumptions used for each differ, primarily in respect of retirement ages and discount rates, and the solvency liabilities, due to the required assumption that each plan is terminated on the valuation date, do not reflect assumptions about future compensation levels. Relative to the experience-based estimates of retirement ages used for purposes of determining the defined benefit obligations accrued, the minimum no-consent retirement age used for solvency valuation purposes may result in either a greater or lesser pension liability, depending upon the provisions of each plan. The solvency positions in this table reflect composite weighted average discount rates of 2.60% (2019 – 2.90%). A hypothetical decrease of 25 basis points in the composite weighted average discount rate would result in a $330 decrease in the PBSR solvency position as at December 31, 2020 (2019 – $295); these sensitivities are hypothetical, should be used with caution, are calculated without changing any other assumption and generally cannot be extrapolated because changes in amounts may not be linear. 2 PBSR solvency position calculations are not required for the non-registered, unfunded pension plans. Fair value measurements Information about the fair value measurements of our defined benefit pension plan assets, in aggregate, is as follows: As at December 31 (millions) 2020 2019 2020 2019 2020 2019 Fair value measurements at reporting date using Total Quoted prices in active markets for identical items Other Asset class Equity securities Canadian Foreign Debt securities Issued by national, provincial or local governments Corporate debt securities Asset-backed securities Commercial mortgages Cash, cash equivalents and other Real estate Effect of asset ceiling limit $ 1,044 2,699 $ 979 2,405 $ 849 $ 787 $ 195 $ 192 685 663 2,014 1,742 1,453 2,087 32 803 528 1,085 9,731 (123) 1,698 1,628 30 1,012 621 1,007 9,380 (121) $ 9,608 $ 9,259 1,225 1,519 – – – 20 – – – – 21 – 228 2,087 32 803 508 1,085 179 1,628 30 1,012 600 1,007 $ 2,779 $ 2,990 $ 6,952 $ 6,390 166 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 15 As at December 31, 2020, pension benefit trusts that we administered component of the plan assets. Debt securities may also include real held no TELUS Corporation Common Shares and held debt of TELUS return bonds to provide inflation protection, consistent with the indexed Corporation with a fair value of approximately $2 million (2019 – $2 million) nature of some defined benefit obligations. Real estate investments (see (c) – Allowable and prohibited investment types). As at December 31, are used to provide diversification of plan assets, hedging of potential 2020 and 2019, pension benefit trusts that we administered did not lease long-term inflation and comparatively stable investment income. real estate to us. Future benefit payments Estimated future benefit payments from our defined benefit pension Relationship between plan assets and benefit obligations With the objective of lowering the long-term costs of our defined benefit pension plans, we purposely mismatch plan assets and benefit obliga- plans, calculated as at December 31, 2020, are as follows: tions. This mismatching is effected by including equity investments in the Years ending December 31 (millions) 2021 2022 2023 2024 2025 2026–2030 $ 473 480 484 489 493 2,513 (c) Plan investment strategies and policies Our primary goal for the defined benefit pension plans is to ensure the security of the retirement income and other benefits of the plan members and their beneficiaries. A secondary goal is to maximize the long-term rate of return on the defined benefit plans’ assets within a level of risk acceptable to us. Risk management We consider absolute risk (the risk of contribution increases, inadequate plan surplus and unfunded obligations) to be more important than relative return risk. Accordingly, the defined benefit plans’ designs, the nature and maturity of defined benefit obligations and the characteristics of the plans’ memberships significantly influence investment strategies and policies. We manage risk by specifying allowable and prohibited investment types, setting diversification strategies and determining target asset allocations. Allowable and prohibited investment types Allowable and prohibited investment types, along with associated long-term asset mix, as well as fixed income securities and mortgages with durations that differ from those of the benefit obligations. As at December 31, 2020, the present value-weighted average timing of estimated cash flows for the obligations (duration) of the defined benefit pension plans was 14.1 years (2019 – 13.7 years) and of the other defined benefit plans was 5.8 years (2019 – 6.2 years). Compensation for liquidity issues that may otherwise have arisen from the mismatching of plan assets and benefit obligations is provided by broadly diversified investment holdings (including cash and short-term investments) and cash flows from dividends, interest and rents from those diversified investment holdings. Asset allocations Our defined benefit pension plans’ target asset allocations and actual asset allocations are as follows: Years ended December 31 Equity securities Debt securities Real estate Other Target allocation 2021 25–55% 40–75% 10–30% 0–15% Percentage of plan assets at end of year 2020 38% 51% 1 1% – 2019 36% 53% 1 1% – 100% 100% (d) Employer contributions The determination of the minimum funding amounts necessary for sub- stantially all of our registered defined benefit pension plans is governed guidelines and limits, are set out in each plan’s required Statement of by the Pension Benefits Standards Act, 1985, which requires that current Investment Policies and Procedures (SIPP), which is reviewed and service costs be funded, and that both going-concern and solvency approved annually by the designated governing body. The SIPP guide- lines and limits are further governed by the permitted investments and valuations be performed on a specified periodic basis. • Any excess of plan assets over plan liabilities determined in the lending limits set out in the Pension Benefits Standards Regulations, 1985. going-concern valuation reduces our minimum funding requirement As well as conventional investments, each fund’s SIPP may provide for for current service costs, but may not reduce the requirement to an the use of derivative products to facilitate investment operations and to amount less than the employees’ contributions. The going-concern manage risk, provided that no short position is taken and no guidelines valuation generally determines the excess (if any) of a plan’s assets and limits established in the SIPP are violated. Internally and externally managed funds are not permitted to directly invest in our securities and are prohibited from increasing grandfathered investments in our securities; any such grandfathered investments were made prior to the merger of BC TELECOM Inc. and TELUS Corporation, our predecessors. Diversification Our strategy for investments in equity securities is to be broadly diversified across individual securities, industry sectors and geographical regions. A meaningful portion (20%–30% of total plan assets) of the plans’ invest- ment in equity securities is allocated to foreign equity securities with the intent of further diversifying plan assets. Debt securities may include a meaningful allocation to mortgages, with the objective of enhancing cash flow and providing greater scope for the management of the bond over its liabilities on a projected benefit basis. • As of the date of these consolidated financial statements, the solvency valuation generally requires that a plan’s average solvency liabilities, determined on the basis that the plan is terminated on the valuation date, in excess of its assets (if any) be funded, at a minimum, in equal annual amounts over a period not exceeding five years. So as to manage the risk of overfunding the plans, which results from the solvency valuation for funding purposes utilizing average solvency ratios, our funding may include the provision of letters of credit. As at December 31, 2020, undrawn letters of credit in the amount of $108 million (2019 – $173 million) secured certain obli- gations of the defined benefit pension plans, including non-registered unfunded plans. TELUS 2020 ANNUAL REPORT • 167 Our best estimate of fiscal 2021 employer contributions to our defined benefit plans is approximately $51 million for defined benefit pension Financial assumptions The discount rate, which is used to determine a plan’s defined benefit plans. This estimate is based upon the mid-year 2020 annual funding obligations accrued, is based upon the yield on long-term, high- valuations that were prepared by actuaries using December 31, 2019, quality, fixed-term investments, and is set annually. The rate of future actuarial valuations. The funding reports are based on the pension increases in compensation is based upon current benefits policies plans’ fiscal years, which are calendar years. The next annual funding and economic forecasts. valuations are expected to be prepared mid-year 2021. The significant weighted average actuarial assumptions arising (e) Assumptions As referred to in Note 1(b), management is required to make significant from these estimates and used in measuring our defined benefit obligations accrued are as follows: 2020 2019 estimates related to certain actuarial and economic assumptions that Discount rate1 used to determine: are used in determining defined benefit pension costs, defined benefit obligations accrued and pension plan assets. These significant estimates Net benefit costs for the year ended December 31 3.10% 3.90% Defined benefit obligations accrued as at are of a long-term nature, consistent with the nature of employee December 31 future benefits. Demographic assumptions In determining the defined benefit pension expense recognized in net income for the years ended December 31, 2020 and 2019, we utilized the Canadian Institute of Actuaries CPM 2014 mortality tables. 2.50% 2.70% 3.10% 3.20% Current service cost in subsequent fiscal year Rate of future increases in compensation used to determine: Net benefit costs for the year ended December 31 2.90% 2.80% Defined benefit obligations accrued as at December 31 2.90% 2.90% 1 The discount rate disclosed in this table reflects the computation of an average discount rate that replicates the timing of the obligation cash flows. Sensitivity of key assumptions The sensitivity of our key assumptions for our defined benefit pension plans was as follows: Years ended, or as at, December 31 Increase (decrease) (millions) Sensitivity of key demographic assumptions to an increase of one year1 in life expectancy Sensitivity of key financial assumptions to a hypothetical decrease of 25 basis points1 in: Discount rate Rate of future increases in compensation Change in obligations 2020 Change in expenses Change in obligations 2019 Change in expenses $ 349 $ 1 1 $ 297 $ 9 $ 386 $ (36) $ 15 $ (3) $ 342 $ (32) $ 13 $ (4) 1 These sensitivities are hypothetical and should be used with caution. Favourable hypothetical changes in the assumptions result in decreased amounts, and unfavourable hypothetical changes in the assumptions result in increased amounts, of the obligations and expenses. Changes in amounts based on a variation in assumptions of one year or 25 basis points generally cannot be extrapolated because the relationship of the change in an assumption to the change in amounts may not be linear. Also, in this table, the effect of a variation in a particular assumption on the change in obligations or change in expenses is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in the discount rate may result in changes in expectations about the rate of future increases in compensation), which might magnify or counteract the sensitivities. (f) Defined contribution plans – expense Our total defined contribution pension plan costs recognized were (g) Other defined benefit plans For the year ended December 31, 2020, other defined benefit plan as follows: Years ended December 31 (millions) 2020 2019 Union pension plan and public service pension plan contributions Other defined contribution pension plans $ 21 73 $ 94 $ 22 70 $ 92 current service cost was $3 million (2019 – $2 million), financing cost was $NIL (2019 – $NIL) and other re-measurements recorded in other comprehensive income were $NIL (2019 – $4 million). Estimated future benefit payments from our other defined benefit plans, calculated as at December 31, 2020, are $1 million annually for the five-year period from 2021 to 2025 and $5 million for the five-year period from 2026 to 2030. We expect that our 2021 union pension plan and public service pension plan contributions will be approximately $22 million. 168 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 16 16 Restructuring and other costs (a) Details of restructuring and other costs With the objective of reducing ongoing costs, we incur associated acquisition or disposition activity; significant litigation costs in respect of losses or settlements; adverse retrospective regulatory decisions; incremental non-recurring restructuring costs, as discussed further in and certain incremental atypical costs incurred in connection with (b) following. We may also incur atypical charges when undertaking the COVID-19 pandemic. major or transformational changes to our business or operating models Restructuring and other costs are presented in the Consolidated or post-acquisition business integration. In other costs, we include statements of income and other comprehensive income, as set out incremental atypical external costs incurred in connection with business in the following table: Years ended December 31 (millions) Goods and services purchased Employee benefits expense Restructuring (b) Other (c) Total 2020 $ 160 49 $ 209 2019 $ 56 63 $ 1 1 9 2020 $ 49 1 $ 50 2019 $ 9 6 $ 15 2020 $ 209 50 $ 259 2019 $ 65 69 $ 134 (b) Restructuring provisions Employee-related provisions and other provisions, as presented in (c) Other During the year ended December 31, 2020, incremental external Note 25, include amounts in respect of restructuring activities. In 2020, costs were incurred in connection with business acquisition activity. restructuring activities included ongoing and incremental efficiency In connection with business acquisitions, non-recurring atypical initiatives, some of which involved personnel-related costs and ration- business integration expenditures that would be considered neither alization of real estate. These initiatives were intended to improve our restructuring costs nor part of the fair value of the net assets acquired long-term operating productivity and competitiveness. have been included in other costs. Also during the year ended December 31, 2020, other costs were incurred in connection with the COVID-19 pandemic. Incremental costs were incurred due to proactive steps we elected to take to keep our customers and employees safe, including adjustments to the frequency of real estate cleaning and maintenance, among other items. As well, costs that have been incurred in the normal course but which are unable to contribute normally to the earning of revenues have been deemed atypical. TELUS 2020 ANNUAL REPORT • 169 17 Property, plant and equipment Owned assets Right-of-use lease assets (Note 19) Network assets Buildings and leasehold improvements Computer hardware and other Assets under construction Land Note Network assets Total Real estate Other Total Total (millions) At cost As at January 1, 2019 $ 29,855 $ 3,273 $ 1,173 $ 48 $ 779 $ 35,128 $ 101 $ 1,01 1 $ 31 $ 1,143 $ 36,271 Additions1 Additions arising from business acquisitions Dispositions, retirements and other Assets under construction put into service 1,073 42 84 127 (644) 3 (125) 12 (48) 1,302 121 152 Net foreign exchange differences – – – As at December 31, 2019 31,713 3,314 1,373 Additions1 Additions arising from 998 43 62 business acquisitions 18(b) Dispositions, retirements and other Assets under construction put into service Net foreign exchange differences 4 (497) 752 2 22 12 (70) (142) 1 1 9 100 – (2) – – – – – 48 5 – – 1 – 1,217 2,416 219 274 16 509 2,925 – – 142 – (817) (101) (1,575) – – – – – 12 (18) – (12) 421 36,869 219 1,267 1,191 2,299 282 224 1 1 2 – – 60 24 23 (1 1 7) 165 (934) – (12) – (12) 1,546 38,415 530 2,829 – – 38 (709) (972) – – – – (2) – – 74 (64) 6 (8) 80 (74) 1 1 8 (783) – 5 – – – 5 – 5 As at December 31, 2020 $ 32,972 $ 3,428 $ 1,403 $ 54 $ 640 $ 38,497 $ 499 $ 1,506 $ 82 $ 2,087 $ 40,584 $ 20,299 $ 2,050 $ 789 $ – $ – $ 23,138 $ 1 $ – $ – $ 1 $ 23,139 Accumulated depreciation As at January 1, 2019 Depreciation2 Dispositions, retirements and other 1,473 (712) 120 (1 1 8) As at December 31, 2019 21,060 2,052 Depreciation2 Dispositions, retirements and other Net foreign exchange differences 1,547 (489) 2 127 (70) (142) – (2) 135 (49) 875 158 – – – – – – – – – – – – 1,728 (879) 23,987 1,832 (701) – 13 (8) 6 37 – – 177 (3) 174 221 (16) 3 1 1 5 16 17 (6) – 201 1,929 (6) (885) 196 275 (22) 3 24,183 2,107 (723) 3 As at December 31, 2020 $ 22,120 $ 2,109 $ 889 $ – $ – $ 25,1 1 8 $ 43 $ 382 $ 27 $ 452 $ 25,570 Net book value As at December 31, 2019 $ 10,653 $ 1,262 $ 498 $ 48 $ 421 $ 12,882 $ 213 $ 1,093 $ 44 $ 1,350 $ 14,232 As at December 31, 2020 $ 10,852 $ 1,319 $ 514 $ 54 $ 640 $ 13,379 $ 456 $ 1,124 $ 55 $ 1,635 $ 15,014 For the year ended December 31, 2020, additions include $157 (2019 – $153) in respect of asset retirement obligations (see Note 25). 1 2 For the year ended December 31, 2020, depreciation includes $23 (2019 – $5) in respect of impairment of real estate right-of-use lease assets. As at December 31, 2020, our contractual commitments for the acquisition of property, plant and equipment totalled $235 million over a period ending December 31, 2022 (2019 – $136 million over a period ending December 31, 2022). 170 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTES 17–18 18 Intangible assets and goodwill (a) Intangible assets and goodwill, net Intangible assets subject to amortization Customer contracts, related customer relationships and subscriber base Note Access to rights-of-way, crowdsource assets and other1 Assets under construction Software1 Intangible assets with indefinite lives Total Spectrum licences Total intangible assets Total intangible assets and goodwill Goodwill1,2 (millions) At cost As at January 1, 2019 $ 616 $ 5,092 $ 103 $ 341 $ 6,152 $ 8,694 $ 14,846 $ 5,1 1 1 $ 19,957 Additions Additions arising from business acquisitions Dispositions, retirements and other (including capitalized interest) Assets under construction put into service Net foreign exchange differences As at December 31, 2019 Additions Additions arising from – 60 453 205 8 2 9 (29) (166) 24 – 679 (8) – 1,032 5,870 – 88 – – 137 4 – – (679) – 254 548 592 660 1,217 1,877 – 1,877 660 – 660 593 1,253 (171) 26 (145) – – (145) – – (8) – – – (8) (33) (41) 7,293 9,937 17,230 5,671 22,901 640 – 9 640 – 640 2,373 1,887 4,260 business acquisitions (b) 1,736 357 271 – 2,364 Dispositions, retirements and other (including capitalized interest) Assets under construction put into service Net foreign exchange differences 9 100 (421) (41) – (362) (36) (398) – 586 47 (1) – – (586) – – 46 – – – 46 – – 41 (398) – 87 As at December 31, 2020 $ 2,915 $ 6,479 $ 371 $ 216 $ 9,981 $ 9,910 $ 19,891 $ 7,599 $ 27,490 Accumulated amortization As at January 1, 2019 Amortization Dispositions, retirements and other As at December 31, 2019 Amortization Dispositions, retirements and other Net foreign exchange differences $ 226 $ 3,621 $ 65 $ 70 573 (1 1 ) (166) 285 215 4,028 671 (10) (424) 5 (1) 5 1 71 19 6 – As at December 31, 2020 $ 495 $ 4,274 $ 96 $ Net book value  – – – – – – – – $ 3,912 $ 648 (176) 4,384 905 (428) 4 $ 4,865 $ – – – – – – – – $ 3,912 $ 364 $ 4,276 648 (176) 4,384 905 (428) 4 – – 364 – – – 648 (176) 4,748 905 (428) 4 $ 4,865 $ 364 $ 5,229 As at December 31, 2019 $ 747 $ 1,842 As at December 31, 2020 $ 2,420 $ 2,205 $ 66 $ 275 $ 254 $ 2,909 $ 9,937 $ 12,846 $ 5,307 $ 18,153 $ 216 $ 5,1 1 6 $ 9,910 $ 15,026 $ 7,235 $ 22,261 1 Amounts for software, access to rights-of-way, crowdsource assets and other and goodwill arising from business acquisitions for the year ended December 31, 2019, have been adjusted as set out in (c). 2 Accumulated amortization of goodwill is amortization recorded prior to 2002; there are no accumulated impairment losses in the accumulated amortization of goodwill. As at December 31, 2020, our contractual commitments for the acquisition of intangible assets totalled $56 million over a period ending December 31, 2024 (2019 – $45 million over a period ending December 31, 2024). TELUS 2020 ANNUAL REPORT • 171 (b) Business acquisitions Competence Call Center On January 31, 2020, we acquired 100% of Competence Call Center, a provider of higher-value-added business services with a focus on cus- tomer relationship management and content moderation. The acquisition is complementary to, and was made with a view to growing, our existing lines of business and has been consolidated with our TELUS International (Cda) Inc. subsidiary. The primary factor that contributed to the recognition of goodwill was the earnings capacity of the acquired business in excess of the net tangible and intangible assets acquired (such excess arising from the acquired workforce and the benefits of acquiring an established business). The amount assigned to goodwill is not expected to be deductible for income tax purposes. Mobile Service Centre Canada Ltd. (d.b.a. Mobile Klinik) On July 1, 2020, we acquired 100% of Mobile Klinik, a storefront wireless device repair and sales business complementary to our existing wireless lines of business. Consideration includes contingent consideration of $34 million, payment of which is dependent upon achieving revenue, profitability, store expansion and wireless subscriber addition targets through 2023. The investment was made with a view to growing our wireless business. The primary factor that contributed to the recognition of goodwill was the earnings capacity of the acquired business in excess of the net tangible and intangible assets acquired (such excess arising from the acquired workforce and the benefits of acquiring an established business). The amount assigned to goodwill is not expected to be deductible for income tax purposes. AFS Technologies Inc. On August 19, 2020, we acquired 100% of AFS Technologies Inc., a business complementary to our existing technology-related lines of business that provides trade promotion and supply chain software solu- tions to consumer packaged goods companies, food distributors and food manufacturers. The investment was made with a view to growing our existing smart data solutions business. The primary factor that contributed to the recognition of goodwill was the earnings capacity of the acquired business in excess of the net tangible and intangible assets acquired (such excess arising from the acquired workforce and the benefits of acquiring an established business). The amount assigned to goodwill is not expected to be deductible for income tax purposes. Equinoxe Virtual Clinic Corp. (d.b.a. EQ Care) On December 16, 2020, we acquired 100% of EQ Care, a business complementary to our existing lines of healthcare business. As partial consideration for the acquired business, one of our subsidiaries issued shares to the selling shareholders and we concurrently provided a written put option on those subsidiary shares to those selling share- holders. The fair value of the puttable shares at the EQ Care acquisition date has been accounted for as a provision (see Note 25). The primary factor that contributed to the recognition of goodwill was the earnings capacity of the acquired business in excess of the net tangible and intangible assets acquired (such excess arising from the acquired workforce and the benefits of acquiring an established business). A portion of the amount assigned to goodwill may be deductible for income tax purposes. Lionbridge AI On December 31, 2020, we acquired 100% of an artificial intelligence- enablement business, Lionbridge AI, the data annotation business of Lionbridge Technologies, Inc. The acquisition is complementary to, and was made with a view to growing, our existing lines of business and the acquired business has been consolidated with our TELUS International (Cda) Inc. subsidiary. The primary factor that contributed to the recognition of goodwill was the earnings capacity of the acquired business in excess of the net tangible and intangible assets acquired (such excess arising from the acquired workforce and the benefits of acquiring an established business). The amount assigned to goodwill is not expected to be deductible for income tax purposes. Individually immaterial transactions During the year ended December 31, 2020, we acquired 100% ownership of businesses complementary to our existing lines of busi- ness. The primary factor that gave rise to the recognition of goodwill was the earnings capacity of the acquired businesses in excess of the net tangible and intangible assets acquired (such excess arising from the low level of tangible assets relative to the earnings capacities of the businesses). A portion of the amounts assigned to goodwill may be deductible for income tax purposes. 172 • TELUS 2020 ANNUAL REPORT Acquisition-date fair values Acquisition-date fair values assigned to the assets acquired and liabilities assumed are set out in the following table: CONSOLIDATED FINANCIAL STATEMENTS: NOTE 18 Competence Call Center Mobile Klinik AFS Technologies EQ Care Lionbridge AI Individually immaterial transactions Total1 (millions) Assets Current assets Cash Accounts receivable2 Other Non-current assets Property, plant and equipment Owned assets Right-of-use lease assets Intangible assets subject to amortization3 Intangible assets with indefinite lives Other Total identifiable assets acquired Liabilities Current liabilities Accounts payable and accrued liabilities Income and other taxes payable Advance billings and customer deposits Current maturities of long-term debt Non-current liabilities Long-term debt Other long-term liabilities Deferred income taxes Total liabilities assumed Net identifiable assets acquired Goodwill Net assets acquired Acquisition effected by way of: Cash consideration Provisions Pre-existing relationship effectively settled Issue of TELUS Corporation Common Shares $ 2 $ 35 $ 3 $ $ 90 64 2 156 21 43 754 – 2 820 976 42 63 – 1 1 1 1 6 216 – 215 431 547 429 726 $ 1,155 4 4 10 1 1 17 61 – – 89 99 4 – – 8 12 13 – 1 1 24 36 63 106 $ 169 19 2 56 1 7 369 – – 377 433 22 1 20 7 50 120 3 101 224 274 159 156 2 – 5 – – 164 – – 164 169 9 35 – – 44 – – 4 4 48 121 134 3 52 – 55 – 3 819 – – 822 877 28 7 1 1 37 2 1 237 240 277 600 596 $ 18 $ 151 20 9 47 5 10 197 9 4 225 272 23 2 22 9 56 8 2 39 49 105 167 169 161 17 329 38 80 2,364 9 6 2,497 2,826 128 108 43 36 315 359 6 607 972 1,287 1,539 1,887 $ 315 $ 255 $ 1,196 $ 336 $ 3,426 $ 1,155 $ 129 $ 315 $ 140 $ 1,196 $ 304 $ 3,239 – – – 37 3 – – – – 1 1 5 – – – – – 24 – 8 176 3 8 $ 1,155 $ 169 $ 315 $ 255 $ 1,196 $ 336 $ 3,426 1 The purchase price allocation, primarily in respect of customer contracts, related customer relationships and leasehold interests and deferred income taxes, had not been finalized as of the date of issuance of these consolidated financial statements. As is customary in a business acquisition transaction, until the time of acquisition of control, we did not have full access to the books and records of the acquired businesses. Upon having sufficient time to review the books and records of the acquired businesses, we expect to finalize our purchase price allocations. 2 The fair value of accounts receivable is equal to the gross contractual amounts receivable and reflects the best estimates at the acquisition dates of the contractual cash flows expected to be collected. 3 Customer contracts and customer relationships (including those related to customer contracts) are generally expected to be amortized over periods of 8–15 years; software is expected to be amortized over periods of 3–10 years; and other intangible assets are expected to be amortized over periods of 2–8 years. TELUS 2020 ANNUAL REPORT • 173 Pro forma disclosures The following pro forma supplemental information represents certain results of operations as if the business acquisitions noted above had assets, goodwill and deferred income taxes were increased (decreased) by $32 million, $2 million, $(24 million) and $10 million, respectively; as required by IFRS-IASB, comparative amounts have been adjusted so as been completed at the beginning of the fiscal 2020 year. to reflect those increases (decreases) effective the dates of acquisition. Year ended December 31, 2020 (millions except per share amounts) Operating revenues and other income Net income Net income per Common Share* Basic Diluted As reported1 Pro forma2 $ 15,463 $ 1,260 $ 16,054 $ 1,166 $ 0.95 $ 0.94 $ 0.89 $ 0.88 1 Operating revenues and other income, and net income, for the year ended December 31, 2020, include: $531 and $(2), respectively, in respect of Competence Call Center; $13 and $(11), respectively, in respect of Mobile Klinik; $40 and $(9), respectively, in respect of AFS Technologies; and $1 and $(1), respectively, in respect of EQ Care. 2 Pro forma amounts for the year ended December 31, 2020, reflect the acquired businesses. The results of the acquired businesses have been included in our Consolidated statements of income and other comprehensive income effective the dates of acquisition. The pro forma supplemental information is based on estimates and assumptions that are believed to be reasonable. The pro forma supplemental information is not necessarily indicative of our consoli- dated financial results in future periods or the actual results that would have been realized had the business acquisitions been completed at the beginning of the period presented. The pro forma supplemental information includes incremental property, plant and equipment depreci- ation, intangible asset amortization, financing and other charges as a result of the acquisitions, net of the related tax effects. (c) Business acquisitions – prior period In 2019, we acquired businesses that were complementary to our existing lines of business. As at December 31, 2019, purchase price allocations had not been finalized. During the year ended December 31, 2020, the preliminary acquisition-date values for software, other intangible (d) Intangible assets with indefinite lives – spectrum licences Our intangible assets with indefinite lives include spectrum licences granted by Innovation, Science and Economic Development Canada, which are used for the provision of both mobile and fixed wireless services. The spectrum licence policy terms indicate that the spectrum licences will likely be renewed. We expect our spectrum licences to be renewed every 20 years following a review of our compliance with licence terms. In addition to current usage, our licensed spectrum can be used for planned and new technologies. As a result of our assess- ment of the combination of these significant factors, we currently consider our spectrum licences to have indefinite lives and, as referred to in Note 1(b), this represents a significant judgment for us. (e) Impairment testing of intangible assets with indefinite lives and goodwill General As referred to in Note 1(f), the carrying values of intangible assets with indefinite lives and goodwill are periodically tested for impairment and, as referred to in Note 1(b), this test represents a significant estimate for us, while also requiring significant judgments to be made. Also as referred to in Note 1(b), effective January 1, 2020, we embarked upon modifying our internal and external reporting processes, systems and internal controls to accommodate the technology convergence-driven cessation of the his- torical distinction between our wireless and wireline operations and this is expected to reflect a concurrent redetermination of cash-generating units; although the future annual testing is expected to commensurately change to reflect this redetermination, the December 2020 and December 2019 annual tests reflect the historical distinction. The carrying values allocated to intangible assets with indefinite lives and goodwill are set out in the following table. As at December 31 (millions) Wireless Wireline Intangible assets with indefinite lives 2020 $ 9,910 – 2019 $ 9,937 – $ 9,910 $ 9,937 Goodwill Total 2020 $ 2,890 4,345 $ 7,235 20191 $ 2,890 2,417 $ 5,307 2020 2019 $ 12,800 $ 12,827 4,345 2,417 $ 17,145 $ 15,244 1 The goodwill balance for wireline as at December 31, 2019, has been adjusted, as set out in (c). The recoverable amounts of the cash-generating units’ assets have We validate our recoverable amount calculation results through a been determined based on a fair value less costs of disposal calculation. market-comparable approach and an analytical review of industry facts There is a material degree of uncertainty with respect to the estimates and facts that are specific to us. The market-comparable approach uses of the recoverable amounts of the cash-generating units’ assets, given current (at time of test) market consensus estimates and equity trading the necessity of making key economic assumptions about the future. prices for U.S. and Canadian firms in the same industry. In addition, Recoverable amounts based on fair value less costs of disposal calcula- we ensure that the combination of the valuations of the cash-generating tions are categorized as Level 3 fair value measures. units is reasonable based on our current (at time of test) market value. *Amounts reflect retrospective application of March 17, 2020, share split (see Note 28(b)). 174 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 19 Key assumptions The fair value less costs of disposal calculation uses discounted cash the wireline cash-generating unit; these growth rates do not exceed the long-term average growth rates observed in the markets in which flow projections that employ the following key assumptions: future we operate. cash flows and growth projections (including judgments about the allo- We believe that any reasonably possible change in the key cation of future capital expenditures to support both wireless and wireline assumptions on which the calculation of the recoverable amounts of operations); associated economic risk assumptions and estimates of our cash-generating units is based would not cause the cash-generating the likelihood of achieving key operating metrics and drivers; estimates units’ carrying values (including the intangible assets with indefinite of future generational infrastructure capital expenditures; and the future lives and the goodwill allocated to each cash-generating unit) to exceed weighted average cost of capital. We consider a range of reasonably their recoverable amounts. If the future were to adversely differ from possible amounts to use for key assumptions and decide upon amounts management’s best estimates for the key assumptions and associated that represent management’s best estimates of market amounts. cash flows were to be materially adversely affected, we could potentially In the normal course, we make changes to key assumptions so that experience future material impairment charges in respect of our they reflect current (at time of test) economic conditions, updates of intangible assets with indefinite lives and goodwill. historical information used to develop the key assumptions and changes (if any) in our debt ratings. The key assumptions for cash flow projections are based upon our approved financial forecasts, which span a period of three years and are discounted, for December 2020 annual impairment test purposes, at a consolidated post-tax notional rate of 7.0% (2019 – 7.0%). For impairment testing valuations, cash flows subsequent to the three- year projection period are extrapolated, for December 2020 annual impairment test purposes, generally using perpetual growth rates of 2.00% (2019 – 2.00%) for each of the wireless cash-generating unit and Sensitivity testing Sensitivity testing was conducted as a part of the December 2020 annual impairment test, a component of which was hypothetical changes in the future weighted average cost of capital. Stress testing included a scenario of moderate declines in annual cash flows with all other assumptions being held constant; under this scenario, we would be able to recover the carrying values of our intangible assets with indefinite lives and goodwill for the foreseeable future. 19 Leases We have the right of use of land, buildings and equipment under leases. Most of our leases for real estate that we use for office, retail liabilities with commensurate adjustments to the associated real estate right-of-use lease assets (and associated future depreciation amounts); or network (including wireless site) purposes typically have options these adjustments would represent our current variable lease payments. to extend the lease terms, which we use to protect our investment As well, we routinely and necessarily commit to leases that have not in leasehold improvements (including wireless site equipment), yet commenced. to mitigate relocation risk and/or which reflect the importance of As mandated by Innovation, Science and Economic Development the underlying real estate right-of-use lease assets to our operations. Canada, telecommunications companies are obligated to allow, on Judgments about lease terms are determinative of the measurement their real estate assets owned, on their real estate right-of-use lease of right-of-use lease assets and their associated lease liabilities. assets and/or on their owned-equipment situated on real estate Our judgment in respect of lease terms for leased real estate utilized right-of-use lease assets, competitors to co-locate telecommunications in connection with our telecommunications infrastructure, more so infrastructure equipment. Of our real estate right-of-use lease assets than for any other right-of-use lease assets, routinely includes periods used for purposes of situating telecommunications infrastructure covered by options to extend the lease terms, as we are reasonably certain that we will extend such leases. equipment, approximately one-fifth have subleases that we, as lessor, account for as operating leases. In the normal course of operations, there are future non-executory Maturity analyses of lease liabilities are set out in Note 4(c) and cash outflows in respect of leases to which we are potentially exposed Note 26(i); the period interest expense in respect thereof is set out in and which are not included in our lease liabilities as at the reporting Note 9. The additions to, the depreciation charges for, and the carrying date. A significant, and increasing, portion of our wireless site lease amounts of, right-of-use lease assets are set out in Note 17. We have payments have consumer price index-based price adjustments and not currently elected to exclude low-value and short-term leases from such adjustments result in future periodic re-measurements of the lease lease accounting. Years ended December 31 (millions) Income from subleasing right-of-use lease assets Co-location sublet revenue included in operating service revenues Other sublet revenue included in other income Lease payments Note 2020 2019 7 $ 17 $ 4 $ 434 $ 18 $ 2 $ 400 TELUS 2020 ANNUAL REPORT • 175 20 Other long-term assets As at December 31 (millions) Pension assets Unbilled customer finance receivables Derivative assets Costs incurred to obtain or fulfill a contract with a customer Real estate joint venture advances Investment in real estate joint venture Investment in associate Portfolio investments1 Prepaid maintenance Other Note 15(b) 4(b) 4(h) 21(b) 21(b) 21 2020 $ 13 361 40 103 1 1 4 1 69 236 50 1 1 9 2019 $ 155 225 76 109 104 3 – 1 1 0 55 82 $ 1,106 $ 919 1 Fair value measured at reporting date using significant other observable inputs (Level 2). The costs incurred to obtain and fulfill contracts with customers are set out in the following table: Years ended December 31 (millions) 2020 Balance, beginning of period Additions Amortization Balance, end of period Current1 Non-current Costs incurred to Costs incurred to Obtain contracts with customers Fulfill contracts with customers $ 344 261 (282) $ 323 $ 225 98 $ 323 $ 14 4 (7) $ 1 1 $ 6 5 $ 1 1 Obtain contracts with customers Fulfill contracts with customers $ 356 288 (300) $ 344 $ 243 101 $ 344 $ 15 4 (5) $ 14 $ 6 8 $ 14 Total $ 358 265 (289) $ 334 $ 231 103 $ 334 1 Presented in the Consolidated statements of financial position in prepaid expenses. 2019 Total $ 371 292 (305) $ 358 $ 249 109 $ 358 176 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTES 20–21 21 Real estate joint ventures and investment in associate (a) General Real estate joint ventures In 2013, we partnered, as equals, with two arm’s-length parties in a residential, retail and commercial real estate redevelopment project, TELUS Sky, in Calgary, Alberta. The new-build tower, completed in 2020, was to be built to the LEED Platinum standard. Associate On January 13, 2020, for cash consideration of approximately $73 million, we acquired a 28% basic equity interest in Miovision Technologies Incorporated, an associate that is complementary to, and is viewed to grow, our existing Internet of Things business; our judgment is that we obtained significant influence over the associate concurrent with obtaining the newly acquired equity interest. (b) Real estate joint ventures Summarized financial information As at December 31 (millions) 2020 2019 As at December 31 (millions) 2020 2019 Assets Current assets Liabilities and owners’ equity Current liabilities Cash and temporary investments, net $ 1 1 $ 15 Accounts payable and accrued liabilities $ 21 $ 25 Other Non-current assets Investment property Investment property under development Other Construction holdback liabilities Construction credit facilities Non-current liabilities Construction credit facilities Other 18 29 332 – 13 345 18 33 – 318 2 320 Owners’ equity TELUS1 Other partners – 342 363 – – – 363 5 6 1 1 15 – 40 312 3 315 355 1 (3) (2) 1 The equity amounts recorded by the real estate joint venture differ from those recorded by us by the amount of the deferred gains on our real estate contributed and the valuation provision we have recorded in excess of that recorded by the real estate joint venture. $ 374 $ 353 $ 374 $ 353 Years ended December 31 (millions) Revenue Depreciation and amortization Interest expense1 Net income (loss) and comprehensive income (loss)2 2020 $ 2 $ 3 $ 1 $ (42) 2019 $ – $ – $ – $ (1) 1 During the year ended December 31, 2020, the real estate joint venture capitalized $4 (2019 – $12) of financing costs. 2 As the real estate joint ventures are partnerships, no provision for income taxes of the partners is made in determining the real estate joint ventures’ net income and comprehensive income. TELUS 2020 ANNUAL REPORT • 177 Our real estate joint ventures activity Our real estate joint ventures investment activity is set out in the following table. Years ended December 31 (millions) Loans and receivables1 Equity2 2020 Total Loans and receivables1 Equity2 2019 Total Related to real estate joint ventures’ statements of income and other comprehensive income Comprehensive income (loss) attributable to us3 $ – $ (14) $ (14) $ – $ (4) $ (4) Related to real estate joint ventures’ statements of financial position Items not affecting currently reported cash flows Construction credit facilities financing costs charged by us (Note 7) Cash flows in the current reporting period Construction credit facilities Amounts advanced Financing costs paid to us Funds we advanced or contributed, excluding construction credit facilities Funds repaid to us and earnings distributed Net increase (decrease) Real estate joint ventures carrying amounts Balance, beginning of period Valuation provision Balance, end of period 4 10 (4) – – 10 104 – – – – 17 (1) 2 (2) (1 1 ) 4 4 10 (4) 17 (1) 12 102 (1 1 ) 35 (4) – – 35 69 – – – – – (3) (7) 5 – 4 35 (4) – (3) 28 74 – $ 1 1 4 $ (1 1 ) $ 103 $ 104 $ (2) $ 102 1 Loans and receivables are included in our Consolidated statements of financial position as Real estate joint venture advances and are comprised of advances under construction credit facilities. 2 We account for our interests in the real estate joint ventures using the equity method of accounting. As at December 31, 2020 and 2019, we had recorded equity losses in excess of our recorded equity investment in respect of one of the real estate joint ventures; such resulting balance has been included in long-term liabilities (Note 27). 3 As the real estate joint ventures are partnerships, no provision for income taxes of the partners is made in determining the real estate joint ventures’ net income and comprehensive income. We have entered into a lease agreement with the TELUS Sky real estate warranties and covenants and are secured by demand debentures joint venture; for lease accounting purposes, the lease commenced constituting first fixed and floating charge mortgages over the underlying during the three-month period ended March 31, 2019. real estate assets. The construction credit facilities are available by way Real estate joint ventures commitments and contingent liabilities Construction commitments As at December 31, 2020, the TELUS Sky real estate joint venture’s construction-related contractual commitments were approximately $17 million through to 2021 (2019 – $37 million through to 2020). Construction credit facilities The TELUS Sky real estate joint venture has a credit agreement, maturing August 31, 2021, with Canadian financial institutions (as 66 ⅔% lender) and TELUS Corporation (as 33⅓ % lender) to provide $342 million of construction financing for the project. The construction credit facilities contain customary real estate construction financing representations, of bankers’ acceptance or prime loan and bear interest at rates in line with similar construction financing facilities. As at December 31 (millions) Note 2020 2019 Construction credit facilities commitment – TELUS Corporation Undrawn Advances Construction credit facilities commitment – other 4(c) $ – $ 10 1 1 4 1 1 4 104 1 1 4 228 $ 342 228 $ 342 178 • TELUS 2020 ANNUAL REPORT 22 Short-term borrowings On July 26, 2002, one of our subsidiaries, TELUS Communications Inc., entered into an agreement with an arm’s-length securitization trust associated with a major Schedule I bank under which it is able to sell an interest in certain trade receivables up to a maximum of $500 million (2019 – $500 million). The term of this revolving-period securitization agreement ends December 31, 2021, and it requires minimum cash proceeds of $100 million from monthly sales of interests in certain trade receivables. TELUS Communications Inc. is required to maintain a credit rating of at least BB (2019 – BB) from DBRS Limited or the securi- CONSOLIDATED FINANCIAL STATEMENTS: NOTES 22–24 Short-term borrowings of $100 million (2019 – $100 million) are com- prised of amounts advanced to us by the arm’s-length securitization trust pursuant to the sale of trade receivables. The balance of short-term borrowings (if any) is comprised of amounts drawn on our bilateral bank facilities. 23 Accounts payable and accrued liabilities tization trust may require the sale program to be wound down prior As at December 31 (millions) to the end of the term. Sales of trade receivables in securitization transactions are recognized as collateralized short-term borrowings and thus do not result in our de-recognition of the trade receivables sold. When we sell our trade receivables, we retain reserve accounts, which are retained interests in the securitized trade receivables, and servicing rights. As at December 31, 2020, we had sold to the trust (but continued to recognize) trade receivables of $123 million (2019 – $124 million). Accrued liabilities Payroll and other employee-related liabilities Restricted share units liability Trade accounts payable Interest payable Indirect taxes payable and other 2020 2019 $ 1,251 $ 1,091 545 18 422 77 1,814 1,590 855 173 120 892 160 107 $ 2,962 $ 2,749 24 Advance billings and customer deposits As at December 31 (millions) Advance billings Deferred customer activation and connection fees Customer deposits Contract liabilities Other 2020 $ 551 7 34 592 180 2019 $ 522 9 14 545 130 $ 772 $ 675 TELUS 2020 ANNUAL REPORT • 179 Contract liabilities represent our future performance obligations to customers in respect of services and/or equipment for which we have received consideration from the customer or for which an amount is due from the customer. Our contract liability balances, and the changes in those balances, are set out in the following table: Years ended December 31 (millions) Balance, beginning of period Revenue deferred in previous period and recognized in current period Net additions arising from operations Additions arising from business acquisitions Balance, end of period Current Non-current Deferred revenues Deferred customer activation and connection fees Reconciliation of contract liabilities presented in the Consolidated statements of financial position – current Gross contract liabilities Reclassification to contract assets for contracts with contract liabilities less than contract assets Reclassification from contract assets for contracts with contract assets less than contract liabilities Note 18(b) 27 2020 $ 801 (577) 539 43 $ 806 $ 735 61 10 2019 $ 81 1 (648) 605 33 $ 801 $ 718 70 13 $ 806 $ 801 $ 735 (133) (10) $ 592 $ 718 (166) (7) $ 545 25 Provisions (millions) As at January 1, 2019 Additions Reversals Uses Interest effects1 Effects of foreign exchange, net As at December 31, 2019 Additions Reversals Uses Interest effects1 Effects of foreign exchange, net As at December 31, 2020 Current Non-current As at December 31, 2020 Asset retirement obligation $ 336 15 – (5) 149 – 495 – (5) (3) 174 – $ 661 $ 8 653 $ 661 Employee- related $ 88 Written put options and contingent consideration $ 282 Other $ 94 Total $ 800 64 – (88) – – 64 48 (1) (69) – – $ 42 $ 36 6 $ 42 32 (17) (62) 1 1 (19) 227 149 (1 1 4) (1 1 2) 2 13 $ 165 $ – 165 $ 165 73 (6) (69) – – 92 200 (20) (143) – – $ 129 $ 29 100 $ 129 184 (23) (224) 160 (19) 878 397 (140) (327) 176 13 $ 997 $ 73 924 $ 997 1 The difference of $160 (2019 – $138) between the asset retirement obligation interest effect in this table and the amount included in the amount disclosed in Note 9 is in respect of the change in the discount rates applicable to the provision, such difference being included in the cost of the associated asset(s) by way of being included with (netted against) the additions detailed in Note 17. 180 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTES 25–26 Asset retirement obligation We establish provisions for liabilities associated with the retirement of property, plant and equipment when those obligations result from the acquisition, construction, development and/or normal operation of the assets. We expect that the cash outflows in respect of the balance accrued as at the financial statement date will occur proximate to the dates these assets are retired. No cash outflows for the written put options are expected prior to their initial exercisability and no cash outflows for contingent con- sideration are expected prior to completion of the periods in which the contingent consideration can be earned. Other The provisions for other include: legal claims; non-employee-related restructuring activities; contract termination costs and onerous Employee-related The employee-related provisions are largely in respect of restructuring contracts related to business acquisitions; and costs incurred in con- nection with the COVID-19 pandemic. Other than as set out following, activities (as discussed further in Note 16(b)). The timing of the cash we expect that the cash outflows in respect of the balance accrued outflows in respect of the balance accrued as at the financial statement as at the financial statement date will occur over an indeterminate date is substantially short-term in nature. multi-year period. Written put options and contingent consideration In connection with certain business acquisitions, we have estab- As discussed further in Note 29, we are involved in a number of legal claims and we are aware of certain other possible legal claims. In respect of legal claims, we establish provisions, when warranted, after taking lished provisions for written put options in respect of non-controlling into account legal assessments, information presently available, and the interests. Provisions for written put options are determined based expected availability of recourse. The timing of cash outflows associated on the net present value of estimated future earnings results and with legal claims cannot be reasonably determined. require us to make key economic assumptions about the future. In connection with business acquisitions, we have established provi- Similarly, we have established provisions for contingent consideration. sions for contract termination costs and onerous contracts acquired. 26 Long-term debt (a) Details of long-term debt As at December 31 (millions) Note 2020 2019 Senior unsecured TELUS Corporation senior notes TELUS Corporation commercial paper TELUS Communications Inc. debentures Secured TELUS International (Cda) Inc. credit facility Other Lease liabilities Long-term debt Current Non-current Long-term debt (b) (c) (e) (f) (g) (h) $ 15,021 $ 14,479 731 622 1,015 621 1,804 273 431 267 18,451 16,813 1,837 1,661 $ 20,288 $ 18,474 $ 1,432 $ 1,332 18,856 17,142 $ 20,288 $ 18,474 (b) TELUS Corporation senior notes The notes are senior unsecured and unsubordinated obligations and rank equally in right of payment with all of our existing and future unsecured unsubordinated obligations, are senior in right of payment to all of our existing and future subordinated indebtedness, and are effec- tively subordinated to all existing and future obligations of, or guaranteed by, our subsidiaries. The indentures governing the notes contain certain covenants that, among other things, place limitations on our ability, and the ability of certain of our subsidiaries, to: grant security in respect of indebtedness; enter into sale-leaseback transactions; and incur new indebtedness. Interest is payable semi-annually. The notes require us to make an offer to repurchase them at a price equal to 101% of their principal amount plus accrued and unpaid interest to the date of repurchase upon the occurrence of a change in control triggering event, as defined in the supplemental trust indenture. At any time prior to the respective maturity dates set out in the table below, the notes are redeemable at our option, in whole at any time, or in part from time to time, on not fewer than 30 days’ and not more than 60 days’ prior notice. On or after the respective redemp- tion present value spread cessation dates set out in the table below, the notes are redeemable at our option, in whole but not in part, on not fewer than 30 days’ and not more than 60 days’ prior notice, at redemption prices equal to 100% of the principal amounts thereof. In addition, accrued and unpaid interest, if any, will be paid to the date fixed for redemption. TELUS 2020 ANNUAL REPORT • 181 Series Issued Maturity Issue price 3.60% Notes, Series CM November 2013 January 20212 3.20% Notes, Series CO April 2014 April 20212 2.35% Notes, Series CT March 2015 March 2022 3.35% Notes, Series CJ December 2012 March 2023 3.35% Notes, Series CK April 2013 April 2024 3.75% Notes, Series CQ September 2014 January 2025 3.75% Notes, Series CV December 2015 March 2026 2.75% Notes, Series CZ July 2019 July 2026 $997.15 $997.39 $997.31 $998.83 $994.35 $997.75 $992.14 $998.73 Effective interest rate1 3.65% 3.24% 2.39% 3.36% 3.41% 3.78% 3.84% 2.77% 2.35% Notes, Series CAC May 2020 January 2028 3.625% Notes, Series CX March 2018 March 2028 3.30% Notes, Series CY April 2019 May 2029 3.15% Notes, Series CAA December 2019 February 2030 2.05% Notes, Series CAD October 2020 October 2030 4.40% Notes, Series CL April 2013 April 2043 $997.25 $989.49 $991.75 $996.49 $997.93 $997.68 5.15% Notes, Series CN November 2013 November 2043 $995.00 2.39% 3.75% 3.40% 3.19% 2.07% 4.41% 5.18% Principal face amount Originally issued $400 million $500 million Outstanding at financial statement date $NIL $NIL Redemption present value spread Basis points 353 303 Cessation date N/A Mar. 5, 2021 $1.0 billion $1.0 billion 35.53 Feb. 28, 2022 $500 million $500 million $1.1 billion $1.1 billion $800 million $800 million $600 million $600 million $800 million $800 million $600 million $600 million $600 million $600 million $1.0 billion $1.0 billion $600 million $600 million $500 million $500 million $600 million $600 million 403 363 38.53 53.53 333 205 205 483 373 43.53 39.53 383 473 Dec. 15, 2022 Jan. 2, 2024 Oct. 17, 2024 Dec. 10, 2025 May 8, 2026 Nov. 16, 2026 June 15, 2027 Nov. 27, 2027 Dec. 1, 2027 Feb. 2, 2029 Nov. 19, 2029 July 7, 2030 Oct. 1, 2042 $400 million $400 million 503 May 26, 2043 2.80% U.S. Dollar Notes4 September 2016 February 2027 US$991.89 2.89% US$600 million US$600 million 3.70% U.S. Dollar Notes4 March 2017 September 2027 US$998.95 3.71% US$500 million US$500 million 4.85% Notes, Series CP Multiple6 April 2044 $987.916 4.93%6 $500 million6 $900 million6 4.75% Notes, Series CR September 2014 January 2045 4.40% Notes, Series CU March 2015 January 2046 $992.91 $999.72 4.80% 4.40% $400 million $400 million $500 million $500 million 4.70% Notes, Series CW Multiple7 March 2048 $998.067 4.71%7 $325 million7 $475 million7 4.60% U.S. Dollar Notes4 June 2018 November 2048 US$987.60 4.68% US$750 million US$750 million 4.30% U.S. Dollar Notes4 May 2019 June 2049 US$990.48 4.36% US$500 million US$500 million 463 51.53 60.53 58.53 Oct. 5, 2043 July 17, 2044 July 29, 2045 Sept. 6, 2047 255 May 16, 2048 255 Dec. 15, 2048 3.95% Notes, Series CAB Multiple8 February 2050 $997.548 3.97%8 $400 million8 $800 million8 57.53 Aug. 16, 2049 The effective interest rate is that which the notes would yield to an initial debt holder if held to maturity. 1 2 On May 22, 2020, we exercised our right to early redeem, on June 23, 2020, all of our 3.60% Notes, Series CM and all of our 3.20% Notes, Series CO. The long-term debt prepayment premium recorded in the three-month period ended June 30, 2020, was $18 million before income taxes (see Note 9). 3 The redemption price is equal to the greater of (i) the present value of the notes discounted at the Government of Canada yield plus the redemption present value spread calculated over the period to maturity, other than in the case of the Series CT, Series CU, Series CV, Series CW, Series CX, Series CY, Series CZ, Series CAA, Series CAB, Series CAC and Series CAD notes, for which it is calculated over the period to the redemption present value spread cessation date, or (ii) 100% of the principal amount thereof. 4 We have entered into foreign exchange derivatives (cross currency interest rate exchange agreements) that effectively converted the principal payments and interest obligations to Canadian dollar obligations as follows: Series 2.80% U.S. Dollar Notes 3.70% U.S. Dollar Notes 4.60% U.S. Dollar Notes 4.30% U.S. Dollar Notes Interest rate fixed at Canadian dollar equivalent principal 2.95% 3.41% 4.41% 4.27% $792 million $667 million $974 million $672 million Exchange rate $1.3205 $1.3348 $1.2985 $1.3435 5 The redemption price is equal to the greater of (i) the present value of the notes discounted at the U.S. Adjusted Treasury Rate plus the redemption present value spread calculated over the period to the redemption present value spread cessation date, or (ii) 100% of the principal amount thereof. 6 $500 million of 4.85% Notes, Series CP were issued in April 2014 at an issue price of $998.74 and an effective interest rate of 4.86%. This series of notes was reopened in December 2015 and a further $400 million of notes were issued at an issue price of $974.38 and an effective interest rate of 5.02%. 7 $325 million of 4.70% Notes, Series CW were issued in March 2017 at an issue price of $990.65 and an effective interest rate of 4.76%. This series of notes was reopened in February 2018 and a further $150 million of notes were issued at an issue price of $1,014.11 and an effective interest rate of 4.61% in March 2018. 8 $400 million of 3.95% Notes, Series CAB were issued in December 2019 at an issue price of $991.54 and an effective interest rate of 4.00%. This series of notes was reopened in May 2020 and a further $400 million of notes were issued at an issue price of $1,003.53 and an effective interest rate of 3.93%. (c) TELUS Corporation commercial paper TELUS Corporation has an unsecured commercial paper program, in U.S. dollars. Commercial paper debt is due within one year and is classified as a current portion of long-term debt, as the amounts are which is backstopped by our $2.25 billion syndicated credit facility fully supported, and we expect that they will continue to be supported, (see (d)) and is to be used for general corporate purposes, including by the revolving credit facility, which has no repayment requirements capital expenditures and investments. This program enables us to within the next year. As at December 31, 2020, we had $731 million issue commercial paper, subject to conditions related to debt ratings, (2019 – $1,015 million) of commercial paper outstanding, all of which up to a maximum aggregate amount at any one time of $1.4 billion was denominated in U.S. dollars (US$574 million; 2019 – US$781 million), (2019 – $1.4 billion). Foreign currency forward contracts are used to man- with an effective average interest rate of 0.33%, maturing through age currency risk arising from issuing commercial paper denominated June 2021. 182 • TELUS 2020 ANNUAL REPORT (d) TELUS Corporation credit facility As at December 31, 2020, TELUS Corporation had an unsecured revolving $2.25 billion bank credit facility, expiring on May 31, 2023, with a syndicate of financial institutions, which is to be used for general corporate purposes, including the backstopping of commercial paper. The TELUS Corporation credit facility bears interest at prime rate, CONSOLIDATED FINANCIAL STATEMENTS: NOTE 26 Continued access to the TELUS Corporation credit facility is not contingent upon TELUS Corporation maintaining a specific credit rating. As at December 31 (millions) Net available Backstop of commercial paper 2020 2019 $ 1,519 $ 1,235 731 1,015 $ 2,250 $ 2,250 U.S. Dollar Base Rate, a bankers’ acceptance rate or London interbank Gross available offered rate (LIBOR) (as such terms are used or defined in the credit facility), plus applicable margins. The credit facility contains customary representations, warranties and covenants, including two financial quarter-end ratio tests. These tests are that our leverage ratio must not exceed 4.25:1.00 and our operating cash flow to interest expense ratio must not be less than 2.00:1.00, all as defined in the credit facility. We had $190 million of letters of credit outstanding as at December 31, 2020 (2019 – $184 million), issued under various uncommitted facilities; such letter of credit facilities are in addition to the ability to provide letters of credit pursuant to our committed bank credit facility. (e) TELUS Communications Inc. debentures The Series 3 and 5 Debentures were issued by a predecessor corporation of TELUS Communications Inc., BC TEL, under a Trust Indenture dated May 31, 1990. The Series B Debentures were issued by a predecessor corporation of TELUS Communications Inc., AGT Limited, under a Trust Indenture dated August 24, 1994, and a supplemental trust indenture dated September 22, 1995. Series1 10.65% Debentures, Series 3 9.65% Debentures, Series 52 Issued June 1991 April 1992 Maturity June 2021 April 2022 8.80% Debentures, Series B September 1995 September 2025 Principal face amount Issue price Originally issued Outstanding at financial statement date Redemption present value spread (basis points) $998.00 $972.00 $995.10 $175 million $175 million N/A (non-redeemable) $150 million $249 million N/A (non-redeemable) $200 million $200 million 153 Interest is payable semi-annually. 1 2 Series 4 Debentures were exchangeable, at the holder’s option, effective on April 8 of any year during the four-year period from 1996 to 1999, for Series 5 Debentures; $99 million of Series 4 Debentures were exchanged for Series 5 Debentures. 3 At any time prior to the maturity date set out in the table, the debentures are redeemable at our option, in whole at any time, or in part from time to time, on not fewer than 30 days’ prior notice. The redemption price is equal to the greater of (i) the present value of the debentures discounted at the Government of Canada yield plus the redemption present value spread, or (ii) 100% of the principal amount thereof. In addition, accrued and unpaid interest, if any, will be paid to the date fixed for redemption. The debentures became obligations of TELUS Communications Inc. pursuant to an amalgamation on January 1, 2001, are not secured by any mortgage, pledge or other charge and are governed by certain covenants, including a negative pledge and a limitation on issues of additional debt, subject to a debt to capitalization ratio and an interest coverage test. Effective June 12, 2009, TELUS Corporation guaranteed the payment of the debentures’ principal and interest. (f) TELUS International (Cda) Inc. credit facility As at December 31, 2020, TELUS International (Cda) Inc. had a credit facility, secured by its assets, expiring on January 28, 2025 (2019 – December 20, 2022), with a syndicate of financial institutions and, joined in 2020, by TELUS Corporation. The credit facility is comprised of US$620 million (2019 – US$350 million) (TELUS Corporation as an approximately 7.5% lender) and US$230 million (2019 – N/A) (TELUS Corporation as a 12.5% lender) revolving components and amortizing US$600 million (2019 – US$120 million) (TELUS Corporation as a 12.5% lender) and US$250 million (2019 – N/A) term loan components. The credit facility is non-recourse to TELUS Corporation. The outstanding revolving components and term loan components had a weighted average interest rate of 2.90% as at December 31, 2020. As at December 31 (millions) Available Outstanding Due to other Due to TELUS Corporation Revolving components Term loan components1 2020 Total Revolving component Term loan component 2019 Total US$ 132 US$ N/A US$ 132 US$ 121 US$ N/A US$ 121 653 65 775 75 1,428 140 229 N/A 107 N/A 336 N/A US$ 850 US$ 850 US$ 1,700 US$ 350 US$ 107 US$ 457 1 We have entered into a receive-floating interest rate, pay-fixed interest rate exchange agreement that effectively converts our interest obligations on US$101 of the debt to a fixed rate of 2.64%. Relative to amounts owed to the syndicate of financial institutions, excluding TELUS Corporation, we have entered into foreign exchange derivatives (cross currency interest rate exchange agreements) that effectively convert an amortizing amount of US$415 of the principal payments and associated interest obligations to European euro obligations with an effective fixed interest rate of 0.65% and an effective fixed economic exchange rate of US$1.0932:€1.00. These have been accounted for as a net investment hedge in a foreign operation (see Note 4). TELUS 2020 ANNUAL REPORT • 183 The TELUS International (Cda) Inc. credit facility bears interest at prime shareholder individually also offered subordinate voting shares in rate, U.S. Dollar Base Rate, a bankers’ acceptance rate or London interbank conjunction with the initial public offering. Through February 11, 2021, offered rate (LIBOR) (all such terms as used or defined in the credit facility), net proceeds of approximately $0.6 billion (US$0.5 billion) from the plus applicable margins. The credit facility contains customary representa- offering were used to reduce the amount of outstanding credit facility tions, warranties and covenants, including two financial quarter-end ratio indebtedness. tests. The TELUS International (Cda) Inc. quarter-end net debt to operating cash flow ratio must not exceed: 5.25:1.00 through fiscal 2021; 4.50:1.00 during fiscal 2022; and 3.75:1.00 subsequently. The quarter-end operating (g) Other Other liabilities bear interest at 3.35%, are secured by the associated cash flow to debt service (interest and scheduled principal repayment) AWS-4 spectrum licences and a real estate holding, and are subject to ratio must not be less than 1.50:1.00, all as defined in the credit facility. amortization schedules, which results in the principal being repaid over The term loan components are subject to an amortization schedule the period to maturity, March 31, 2035. which requires that 5% of the principal advanced be repaid each year of the term of the agreement, with the balance due at maturity and December 22, 2022, for the US$250 million component, respectively. (h) Lease liabilities Lease liabilities are subject to amortization schedules, which results As set out in Note 28(d), in February 2021, TELUS International (Cda) in the principal being repaid over various periods, including reasonably Inc. made an initial public offering of subordinate voting shares; both expected renewals. The weighted average interest rate on lease liabilities TELUS Corporation and a TELUS International (Cda) Inc. non-controlling was approximately 4.45% as at December 31, 2020. (i) Long-term debt maturities Anticipated requirements to meet long-term debt repayments, calculated for long-term debts owing as at December 31, 2020, are as follows: Composite long-term debt denominated in Canadian dollars U.S. dollars Other currencies Years ending December 31 (millions) Long- term debt, excluding leases Leases (Note 19) Total Long- term debt, excluding leases Leases (Note 19) Currency swap agreement amounts to be exchanged (Receive)1 Pay Total Leases (Note 19) Total 2021 2022 2023 2024 2025 2026–2030 Thereafter $ 188 $ 396 $ 584 $ 803 $ 25 $ (759) $ 771 $ 840 $ 46 $ 1,470 1,263 530 1,1 1 5 1,016 4,789 4,168 259 134 1 1 9 93 267 275 1,522 664 1,234 1,109 5,056 4,443 314 33 33 1,366 1,401 1,592 23 19 9 6 9 – (28) (28) (28) (408) (1,401) (1,592) 28 28 28 457 1,459 1,646 337 52 42 1,421 1,468 1,646 35 30 23 13 32 13 1,894 746 1,299 2,543 6,556 6,102 Future cash outflows in respect of composite long-term debt principal repayments Future cash outflows in respect of associated interest and like carrying costs2 Undiscounted contractual maturities (Note 4(c)) 13,069 1,543 14,612 5,542 91 (4,244) 4,417 5,806 192 20,610 6,300 386 6,686 2,504 17 (2,336) 2,350 2,535 42 9,263 $ 19,369 $ 1,929 $ 21,298 $ 8,046 $ 108 $ (6,580) $ 6,767 $ 8,341 $ 234 $ 29,873 1 Where applicable, cash flows reflect foreign exchange rates as at December 31, 2020. 2 Future cash outflows in respect of associated interest and like carrying costs for commercial paper and amounts drawn under our credit facilities (if any) have been calculated based upon the rates in effect as at December 31, 2020. 184 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTES 27–28 Note 24 15(b) 4(h) 21(b) 24 2020 $ 61 5 66 926 64 17 155 12 15 1,255 10 $ 1,265 2019 $ 70 7 77 580 53 42 26 5 10 793 13 $ 806 27 Other long-term liabilities As at December 31 (millions) Contract liabilities Other Deferred revenues Pension benefit liabilities Other post-employment benefit liabilities Restricted share unit and deferred share unit liabilities Derivative liabilities Investment in real estate joint ventures Other Deferred customer activation and connection fees 28 Owners’ equity (a) TELUS Corporation Common Share capital – general Our authorized share capital is as follows: (b) TELUS Corporation Common Share split On February 13, 2020, we announced a subdivision of our Common As at December 31 First Preferred Shares Second Preferred Shares Common Shares 2020 2019 1 billion 1 billion 4 billion 1 billion 1 billion 4 billion* Shares on a two-for-one basis to be effected March 17, 2020. All refer- ences, unless otherwise indicated, to the number of shares authorized, the number of shares outstanding, the number of shares reserved, per share amounts and share-based compensation information in the consolidated financial statements have been retrospectively restated Only holders of Common Shares may vote at our general meetings, with each holder of Common Shares entitled to one vote per Common Share held at all such meetings so long as not less than 66 ⅔% of the issued and outstanding Common Shares are owned by Canadians. With respect to priority in the payment of dividends and in the distribution of assets in the event of our liquidation, dissolution or winding-up, whether voluntary or involuntary, or any other distribution of our assets among our shareholders for the purpose of winding up our affairs, preferences are as follows: First Preferred Shares; Second Preferred Shares; and finally Common Shares. During the three-month period ended March 31, 2020, we issued approximately 58 million* Common Shares for gross proceeds of $1.5 billion. As at December 31, 2020, approximately 20 million* Common Shares were reserved for issuance from Treasury under a dividend reinvestment and share purchase plan (see Note 13(b)); approximately 24 million* Common Shares were reserved for issuance from Treasury under a restricted share unit plan (see Note 14(b)); and approximately 90 million* Common Shares were reserved for issuance from Treasury under a share option plan (see Note 14(d)). to reflect the impact of the subdivision. (c) Purchase of TELUS Corporation Common Shares for cancellation pursuant to normal course issuer bid As referred to in Note 3, we may purchase a portion of our Common Shares for cancellation pursuant to normal course issuer bids in order to maintain or adjust our capital structure. In December 2019, we received approval for a normal course issuer bid to purchase and cancel up to 16 million* of our Common Shares (up to a maximum amount of $250 million) from January 2, 2020, to January 1, 2021. (d) Subsidiary with significant non-controlling interest Our TELUS International (Cda) Inc. subsidiary is incorporated under the Business Corporations Act (British Columbia) and has geographically dispersed operations with principal places of business in Asia, Central America, Europe and North America. During the three-month period ended March 31, 2020, non-controlling shareholders purchased TELUS International (Cda) Inc. common shares from Treasury for $209 million, which resulted in the non-controlling interests’ ownership interest increasing to 37.7% as at March 31, 2020, up from 35.9% as at Decem- ber 31, 2019. Associated with the transactions, adjustments reflecting the approximately 1.8% increase in the non-controlling interest in the net book value of the subsidiary were credited to non-controlling interests in our Consolidated statement of changes in owners’ equity, and the net balance of proceeds were credited to contributed surplus. *Amounts reflect retrospective application of March 17, 2020, share split (see Note 28(b)). TELUS 2020 ANNUAL REPORT • 185 On a continuing basis, we review our corporate organization and controlling interest and a 55.2% economic interest in TELUS International effect changes as appropriate so as to enhance the value of TELUS (Cda) Inc. subsequent to the public purchase of subordinate voting shares. Corporation. This process can affect our subsidiaries, including TELUS Associated with the public purchase of subordinate voting shares, an International (Cda) Inc.; during the three-month period ended June 30, adjustment, in fiscal 2021, equal to approximately one-half of our net pro- 2020, this process resulted in the non-controlling interests’ ownership ceeds reflecting the approximately 7.4% increase in the non-controlling interest decreasing to 36.2% as at June 30, 2020, with an adjustment ownership interest in the net book value of the subsidiary, was credited reflecting the approximately 1.5% decrease in the non-controlling interest to non-controlling interests in our Consolidated statement of changes in the net book value of the subsidiary credited to non-controlling in owners’ equity, and the net balance of our proceeds was credited to interests in our Consolidated statement of changes in owners’ equity, contributed surplus. offset by an equal amount charged to contributed surplus. During the three-month period ended December 31, 2020, a Summarized financial information non-controlling shareholder purchased TELUS International (Cda) Inc. As at, or for the years ended, December 31 (millions)1 2020 2019 common shares from Treasury for $191 million, which resulted in Statement of financial position the non-controlling interests’ ownership interest increasing to 37.4% as at December 31, 2020, up from 36.2% as at September 30, 2020. Associated with the transactions, adjustments reflecting the approximately 1.2% increase in the non-controlling ownership interest in the net book value of the subsidiary were credited to non-controlling interests in our Consolidated statement of changes in owners’ equity, and the net balance of proceeds were credited to contributed surplus. In February 2021, TELUS International (Cda) Inc. made an initial public offering of subordinate voting shares; both TELUS Corporation and a TELUS International (Cda) Inc. non-controlling shareholder individually also offered subordinate voting shares in conjunction with the initial public offering. Net proceeds, excluding tax, to TELUS Corporation for the sale of its offered shareholdings were approximately $0.2 billion (US$154 million), and net proceeds from shares offered by TELUS International (Cda) Inc. were approximately $0.6 billion (US$0.5 billion). Due to the voting rights associated with the remaining multiple voting shares held by TELUS Corporation, it retained a 67.0% voting and 29 Contingent liabilities (a) Claims and lawsuits General A number of claims and lawsuits (including class actions and intellectual property infringement claims) seeking damages and other relief are pending against us and, in some cases, other wireless carriers and tele- Current assets Non-current assets Current liabilities Non-current liabilities Statement of income and other comprehensive income Revenue and other income2 Goods and services purchased Employee benefits expense Depreciation Amortization of intangible assets Net income Comprehensive income $ 746 $ 4,072 $ 689 $ 2,713 $ 476 $ 1,057 $ 570 $ 647 $ 2,222 $ 404 $ 1,372 $ 253 $ 1,312 $ 829 $ 134 $ $ 1 1 0 141 $ 189 $ 97 $ 19 $ 85 $ 106 1 As required by IFRS-IASB, this summarized financial information excludes inter- 2 company eliminations. For the year ended December 31, 2020, includes revenues from the wireless segment and the wireline segment of $176 (2019 – $165) and $240 (2019 – $190), respectively. Certified class actions Certified class actions against us include the following: Per minute billing class action In 2008 a class action was brought in Ontario against us alleging breach of contract, breach of the Ontario Consumer Protection Act, breach communications service providers. As well, we have received notice of the Competition Act and unjust enrichment, in connection with our of, or are aware of, certain possible claims (including intellectual property practice of “rounding up” wireless airtime to the nearest minute and infringement claims) against us and, in some cases, other wireless charging for the full minute. The action sought certification of a national carriers and telecommunications service providers. class. In November 2014, an Ontario class only was certified by the It is not currently possible for us to predict the outcome of such Ontario Superior Court of Justice in relation to the breach of contract, claims, possible claims and lawsuits due to various factors, including: breach of Consumer Protection Act, and unjust enrichment claims; the preliminary nature of some claims; uncertain damage theories and all appeals of the certification decision have now been exhausted. demands; an incomplete factual record; uncertainty concerning legal At the same time, the Ontario Superior Court of Justice declined to stay theories and procedures and their resolution by the courts, at both the the claims of our business customers, notwithstanding an arbitration trial and the appeal levels; and the unpredictable nature of opposing clause in our customer service agreements with those customers. parties and their demands. This latter decision was appealed and on May 31, 2017, the Ontario However, subject to the foregoing limitations, management is of Court of Appeal dismissed our appeal. The Supreme Court of Canada the opinion, based upon legal assessments and information presently granted us leave to appeal this decision and on April 4, 2019, granted available, that it is unlikely that any liability, to the extent not provided for our appeal and stayed the claims of business customers. through insurance or otherwise, would have a material effect on our financial position and the results of our operations, including cash flows, with the exception of the items enumerated following. 186 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTE 29 Call set-up time class actions In 2005 a class action was brought against us in British Columbia to our wireless customers, and by charging our wireless customers inflated rate plan prices and termination fees higher than those permitted alleging that we have engaged in deceptive trade practices in charging under the Act. The claim was later amended to also seek compensation for incoming calls from the moment the caller connects to the network, for amounts paid by class members to unlock their mobile devices. and not from the moment the incoming call is connected to the recipient. The authorization hearing was held on April 30 and May 1, 2019, and on In 2011, the Supreme Court of Canada upheld a stay of all of the causes July 15, 2019, the Quebec Superior Court dismissed the authorization of action advanced by the plaintiff in this class action, with one exception, application. The plaintiff has appealed this decision and the appeal based on the arbitration clause that was included in our customer is expected to be heard in the first quarter of 2021. service agreements. The sole exception was the cause of action based on deceptive or unconscionable practices under the British Columbia Business Practices and Consumer Protection Act, which the Supreme Other claims Claims and possible claims received by us include: Court of Canada declined to stay. In January 2016, the British Columbia Supreme Court certified this class action in relation to the claim under Area code 867 blocking claim In 2018 a claim was brought against us alleging breach of a Direct the Business Practices and Consumer Protection Act. The class is limited Connection Call Termination Services Agreement, breach of a duty to residents of British Columbia who contracted wireless services with of good faith, and intentional interference with economic relations. us in the period from January 21, 1999, to April 2010. We have appealed The plaintiffs allege that we have improperly blocked calls to area code the certification decision. A companion class action was brought against 867 (including to customers of a plaintiff), for which a second plaintiff us in Alberta at the same time as the British Columbia class action. provides wholesale session initiation trunking services. The plaintiffs seek The Alberta class action duplicates the allegations in the British Columbia damages of $135 million. On April 23, 2019, the Ontario Superior Court action, but has not proceeded to date and is not certified. Subject to stayed this claim on the ground that the court has no jurisdiction over, a number of conditions, including court approval, we have now settled or is not the appropriate forum for, the subject matter of this action. both the British Columbia and the Alberta class actions. This matter has now been resolved and the Court has issued a consent Uncertified class actions Uncertified class actions against us include: 9-1-1 class actions In 2008 a class action was brought in Saskatchewan against us and other Canadian telecommunications carriers alleging that, among other matters, we failed to provide proper notice of 9-1-1 charges to the public, have been deceitfully passing them off as government charges, and have charged 9-1-1 fees to customers who reside in areas where 9-1-1 service is not available. The plaintiffs advance causes of action in breach of contract, misrepresentation and false advertising and seek certification of a national class. A virtually identical class action was filed in Alberta at the same time, but the Alberta Court of Queen’s Bench declared that class action expired against us as of 2009. No steps have been taken in this proceeding since 2016. order dismissing the action. Summary We believe that we have good defences to the above matters. Should the ultimate resolution of these matters differ from management’s assessments and assumptions, a material adjustment to our financial position and the results of our operations, including cash flows, could result. Management’s assessments and assumptions include that reliable estimates of any such exposure cannot be made considering the con- tinued uncertainty about: the nature of the damages that may be sought by the plaintiffs; the causes of action that are being, or may ultimately be, pursued; and, in the case of the uncertified class actions, the causes of action that may ultimately be certified. (b) Indemnification obligations In the normal course of operations, we provide indemnification in Public Mobile class actions In 2014 class actions were brought against us in Quebec and Ontario conjunction with certain transactions. The terms of these indemnification obligations range in duration. These indemnifications would require on behalf of Public Mobile’s customers, alleging that changes to the technology, services and rate plans made by us contravene our statutory and common law obligations. In particular, the Quebec action alleges us to compensate the indemnified parties for costs incurred as a result of failure to comply with contractual obligations, or litigation claims or statutory sanctions, or damages that may be suffered by an indemnified that our actions constitute a breach of the Quebec Consumer Protection party. In some cases, there is no maximum limit on these indemnification Act, the Quebec Civil Code, and the Ontario Consumer Protection Act. obligations. The overall maximum amount of an indemnification obligation It has not yet proceeded to an authorization hearing. The Ontario class will depend on future events and conditions and therefore cannot be action alleges negligence, breach of express and implied warranty, breach reasonably estimated. Where appropriate, an indemnification obligation of the Competition Act, unjust enrichment, and waiver of tort. No steps is recorded as a liability. Other than obligations recorded as liabilities at have been taken in this proceeding since it was filed and served. the time of the related transactions, historically we have not made signifi- Handset subsidy class action In 2016 a class action was brought in Quebec against us and other telecommunications carriers alleging that we breached the Quebec Consumer Protection Act and the Civil Code of Quebec by making false or misleading representations relating to the handset subsidy provided cant payments under these indemnifications. As at December 31, 2020, we had no liability recorded in respect of our indemnification obligations. See Note 21(b) for details regarding our guarantees to the real estate joint ventures. TELUS 2020 ANNUAL REPORT • 187 30 Related party transactions (a) Transactions with key management personnel Our key management personnel have authority and responsibility for overseeing, planning, directing and controlling our activities and consist of our Board of Directors and our Executive Leadership Team. Total compensation expense for key management personnel, and the composition thereof, is as follows: Years ended December 31 (millions) Short-term benefits Post-employment pension1 and other benefits Share-based compensation2 2020 $ 9 4 27 $ 40 2019 $ 12 4 37 $ 53 1 Our Executive Leadership Team members are members of our Pension Plan for Management and Professional Employees of TELUS Corporation and certain other non-registered, 2 non-contributory supplementary defined benefit pension plans. In respect of restricted share units with neither an equity settlement feature nor market performance conditions, we accrue a liability equal to the product of the number of vesting restricted share units multiplied by the fair market value of the corresponding Common Shares at the end of the reporting period. Similarly, we accrue a liability for the notional subset of our restricted share units without an equity settlement feature and with market performance conditions using a Monte Carlo simulation-determined fair value. Restricted share units with an equity settlement feature are accounted for as equity instruments. The expense for restricted share units that do not ultimately vest is reversed against the expense that was previously recorded in their respect. As disclosed in Note 14, we made initial awards of share-based compensation in 2020 and 2019, including, as set out in the following table, to our key management personnel. As most of these awards are cliff-vesting or graded-vesting and have multi-year requisite service periods, the related expense will be recognized rateably over a period of years and thus only a portion of the 2020 and 2019 initial awards are included in the amounts in the table above. Years ended December 31 ($ in millions) Awarded in period Number of restricted share units* 81 1 ,954 Notional value1 $ 20 2020 Grant-date fair value1 Number of restricted share units* $ 28 949,408 2019 Grant-date fair value1 $ 15 Notional value1 $ 23 1 Notional value is determined by multiplying the Common Share price at the time of award by the number of units awarded. The grant-date fair value differs from the notional value because the fair values of some awards have been determined using a Monte Carlo simulation (see Note 14(b)). No share options were awarded to our key management personnel in fiscal 2020 or 2019. The liability amounts accrued for share-based compensation awards to control, Executive Leadership Team members are not entitled to treatment key management personnel at December 31, 2019, were $25 million and any different than that given to our other employees with respect to $23 million for restricted share units and deferred shares, respectively; non-vested share-based compensation. as at December 31, 2020, no liability-accounted awards were outstanding. Our Directors’ Deferred Share Unit Plan provides that, in addition to his or her annual equity grant of deferred share units, a director may elect (b) Transactions with defined benefit pension plans During the year ended December 31, 2020, we provided management to receive his or her annual retainer and meeting fees in deferred share and administrative services to our defined benefit pension plans; units, TELUS Corporation Common Shares or cash. Deferred share units the charges for these services were on a cost recovery basis and entitle directors to a specified number of TELUS Corporation Common Shares. Deferred share units are paid out when a director ceases to be a director, for any reason, at a time elected by the director in accordance with the Directors’ Deferred Share Unit Plan; during the year ended amounted to $7 million (2019 – $6 million). (c) Transactions with real estate joint venture and associate During the years ended December 31, 2020 and 2019, we had trans- December 31, 2020, $3 million (2019 – $4 million) was paid out. actions with the TELUS Sky real estate joint venture, which is a related Employment agreements with members of the Executive Leadership party, as set out in Note 21. As at December 31, 2020, we had recorded Team typically provide for severance payments if an executive’s employ- lease liabilities of $76 million (2019 – $77 million) in respect of our ment is terminated without cause: generally 18–24 months of base salary, TELUS Sky lease and monthly cash payments are made in accordance benefits and accrual of pension service in lieu of notice, and 50% of with the lease agreement; one-third of those amounts is due to our base salary in lieu of an annual cash bonus. In the event of a change in economic interest in the real estate joint venture. *Amounts reflect retrospective application of March 17, 2020, share split (see Note 28(b)). 188 • TELUS 2020 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS: NOTES 30–31 31 Additional statement of cash flow information (a) Statements of cash flows – operating activities and investing activities Years ended December 31 (millions) Operating activities Net change in non-cash operating working capital Accounts receivable Inventories Contract assets Prepaid expenses Accounts payable and accrued liabilities Income and other taxes receivable and payable, net Advance billings and customer deposits Provisions Investing activities Cash payments for capital assets, excluding spectrum licences Capital asset additions Gross capital expenditures Property, plant and equipment Intangible assets subject to amortization Additions arising from leases Additions arising from non-monetary transactions Capital expenditures Effect of asset retirement obligations Other non-cash items included above Change in associated non-cash investing working capital Non-cash change in asset retirement obligation Note 2020 2019 $ (231) $ (329) 30 298 79 189 (49) 54 (100) (61) 123 – 73 (287) (10) 159 $ 270 $ (332) $ (2,672) (640) (3,312) 530 7 (2,775) (157) (2,932) (50) 160 1 1 0 $ (2,772) (660) (3,432) 509 17 (2,906) (153) (3,059) (31) 138 107 $ (2,822) $ (2,952) 17 18 17 5 TELUS 2020 ANNUAL REPORT • 189 (b) Changes in liabilities arising from financing activities Statement of cash flows Non-cash changes Year ended December 31, 2019 (millions) Beginning of period Issued or received Redemptions, repayments or payments Dividends payable to holders of Common Shares $ 326 $ Dividends reinvested in shares from Treasury Short-term borrowings Long-term debt TELUS Corporation senior notes TELUS Corporation commercial paper TELUS Communications Inc. debentures TELUS International (Cda) Inc. credit facility Other Lease liabilities $ 12,186 $ 3,474 $ (1,000) $ (145) $ (36) $ 14,479 – – – $ (1,332) 183 $ (1,149) – 326 $ $ $ 100 $ 850 $ (851) 4,135 (3,860) 774 620 419 – 1,483 – 96 – – – (64) (8) (333) (3,856) (9,121) Derivatives used to manage currency risk arising from U.S. dollar-denominated long-term debt – liability (asset) (73) 3,860 15,409 1 1 ,565 To eliminate effect of gross settlement of derivatives used to manage currency risk arising from U.S. dollar-denominated long-term debt – (3,860) 3,860 $ 15,409 $ 7,705 $ (5,261) $ (38) $ 622 $ 18,437 Statement of cash flows Non-cash changes Year ended December 31, 2020 (millions) Beginning of period Issued or received Redemptions, repayments or payments Dividends payable to holders of Common Shares $ 352 $ Dividends reinvested in shares from Treasury Short-term borrowings Long-term debt TELUS Corporation senior notes TELUS Corporation commercial paper TELUS Communications Inc. debentures TELUS International (Cda) Inc. credit facility Other Lease liabilities Derivatives used to manage currency risk arising from U.S. dollar-denominated long-term debt – liability (asset) – – – $ (1,469) 539 $ (930) – 352 $ $ $ 100 $ 215 $ (223) 1,015 1,782 (2,1 1 6) 621 431 267 1,661 (37) 18,437 – 1,600 – – 2,137 7,019 – (191) (319) (365) (2,109) (6,000) To eliminate effect of gross settlement of derivatives used to manage currency risk arising from U.S. dollar-denominated long-term debt – (2,137) 2,137 $ 14,479 $ 1,500 $ (900) $ (60) $ 2 $ 15,021 Foreign exchange movement (Note 4(i)) $ $ $  – –  –  – Other End of period $ 1,358 $ 352 (183) $ 1,175 $ 1 – 352 100 $ $ (34) – (22) – (16) 179 (38) – – 1 2 275 527 (147) 622 1,015 621 431 267 1,661 (37) 18,437 – – Foreign exchange movement (Note 4(i)) $ $ $ – – – – Other End of period $ 1,520 $ 403 (539) $ 981 $ 8 – 403 100 $ $ 50 – (27) – 7 94 64 – – 1 (9) 325 534 35 888 731 622 1,804 273 1,837 120 20,408 – – $ 18,437 $ 4,882 $ (3,863) $ 64 $ 888 $ 20,408 190 • TELUS 2020 ANNUAL REPORT Glossary GLOSSARY 4G (fourth generation): Wireless technologies, including HSPA+, LTE, LTE advanced and LTE advanced pro, as defined by the International LAA (licensed assisted access): An LTE feature that makes use of unlicensed spectrum in combination with licensed spectrum to deliver Telecommunications Union. enhanced performance for mobile device users. 5G (fifth generation): The next generation of converged wireless technologies, expected to provide higher speeds, improved coverage LTE (long-term evolution): The leading 4G global wireless technology standard. LTE advanced (LTE-A) and LTE advanced pro offer higher and lower latency, all of which are critical as the number of connected speeds and greater capacity, moving networks closer to 5G. LTE is devices continues to increase rapidly. capable of delivering manufacturer-rated wireless data download speeds Fibre-optic network: Hair-thin glass fibres along which light pulses are transmitted. Optical fibre networks are used to transmit large amounts of data between locations at high upload and download speeds. FTTx (fibre to the x): A collective term for any broadband network architecture using optical fibre to replace all or part of the existing copper of up to 150 Mbps (typical speeds of 12 to 45 Mbps), and LTE-A can offer speeds nearly 10 times higher (in select regions). M2M (machine-to-machine): Technologies and networked devices that are able to exchange information and perform actions without human intervention. local loops. FTTH denotes fibre to the home, FTTP denotes fibre to the premises and FTTN denotes fibre to the node or neighbourhood. NCIB (normal course issuer bid): A program that enables a company to purchase its own shares, typically for cancellation, through exchanges GPON (gigabit-capable passive optical network): A fibre-based transmission technology that can deliver data download speeds of up to 2.4 Gbps and upload speeds of up to 1.2 Gbps. HSPA+ (high-speed packet access plus): A 4G technology capable of delivering manufacturer-rated wireless data download speeds of up to 21 Mbps (typical speeds of 4 to 6 Mbps). HSPA+ dual-cell technology or private purchases over a set period of time. OTT (over-the-top): Content, services and applications in a video format, for which delivery occurs through a medium other than the established video delivery infrastructure. Small cell: Low-powered radio access nodes that can operate in licensed and unlicensed spectrum within a limited range to provide densification can double those download speeds. and capacity to a macro wireless network. ILEC (incumbent local exchange carrier): An established telecommunications company providing local telephone service. Spectrum: The range of electromagnetic radio frequencies used in the transmission of voice, data and video. The capacity of a wireless network Non-ILEC refers to the telecommunications operations of TELUS outside is in part a function of the amount of spectrum licensed and utilized by its traditional ILEC operating territories, where TELUS competes with the carrier. the incumbent telephone company (e.g. Ontario and most of Quebec). IoT (Internet of Things): A network of uniquely identifiable end points (or things) that interact without human intervention, most commonly over a wireless network. These systems collect, analyze and act on information in real time and can be deployed to enable the creation of smart connected businesses, homes, vehicles and cities. IP (internet protocol): A packet-based protocol for sending and receiving data across networks. VoIP (voice over internet protocol): The transmission of voice signals over the internet or IP network. VPN (virtual private network): The extension of an encrypted, private network across a public network that allows users to securely send and receive data, as if users were directly connected to a private network. Wave 3 solutions: Next-generation wireless offerings that use IoT technology to provide solutions for businesses and consumers. IP-based network: A network designed using IP and QoS (quality of service) technology to reliably and efficiently support all types of customer traffic, including voice, data and video. An IP-based network allows a variety of IP devices and advanced applications to communicate over a single common network. Wi-Fi (wireless fidelity): Networking technology that allows any user with an enabled device to connect to a wireless access point or hotspot in high-traffic locations. xDSL: A fibre-to-the-node IP technology that allows existing telephone lines to carry voice, data and video. IP TV (internet protocol television): A television service (offered as Optik TV and Pik TV at TELUS) that uses a two-way digital broadcast signal sent through a network by way of a streamed broadband connection to a dedicated set-top box (or through an app for Pik TV). For financial definitions, see Section 11 of Management’s discussion and analysis. TELUS 2020 ANNUAL REPORT • 191 Investor information Stock exchanges and trading symbols Toronto Stock Exchange (TSX) TELUS Corporation: T CUSIP: 87971M103 TELUS International: TIXT CUSIP: 87975H100 New York Stock Exchange (NYSE) TELUS Corporation: TU CUSIP: 87971M103 Notably, in May 2019, we announced an intention to target ongoing semi-annual dividend increases, with the increase to be 7 to 10% annually, through to the end of 2022. This further extends our multi-year dividend growth program originally announced in May 2011 and extended for three-year periods in both May 2013 and May 2016, and provides investors with ongoing clarity with respect to our intentions regarding our dividend growth program. TELUS International: TIXT CUSIP: 87975H100 Notwithstanding this, dividend decisions will continue to be • Jantzi Social Index • FTSE4Good Index Member of • S&P/TSX Composite Index • S&P/TSX 60 Index • S&P/TSX Telecom Index • MSCI World Communication Services Index • Dow Jones Sustainability World Index • Dow Jones Sustainability North America Index • STOXX Global ESG Leaders indices • Euronext Vigeo Index: World 120 Share ownership facts as at December 31, 2020 Estimated share ownership 22% 78% Canada • • Foreign • Total outstanding shares were 1,291,392,613 • TELUS team members held 32,043,272 shares in employee share plans, equivalent to 2.5% of the total number of outstanding shares, which collectively made our team members the fourth largest TELUS shareholder • TELUS shares are widely held between large institutional invest- ors and smaller retail investors • Registered shareholders of common shares totalled 37,502. The Canadian Depository for Securities (CDS) represents one registration and holds securities for many non-registered shareholders. We estimate that TELUS had more than 809,000 non-registered shareholders at year-end. Dividend policy and dividend growth program Effective January 1, 2020, our long-term dividend payout ratio guideline is calculated as 60 to 75% of prospective free cash flow. In May 2020, we paused our dividend growth program to focus efforts on supporting citizens during the pandemic, including under- taking a series of initiatives as part of our COVID-19 relief efforts. In November, we resumed our dividend growth program, thanks to our team’s exceptional efforts in supporting customers, as well as our strong liquidity and cash flow position. Our January 2021 quarterly dividend paid was $0.3112, or $1.2448 on an annualized basis, representing a 7% increase over the previous year. Since 2011, we have raised our dividend 19 times, bringing the total number of our dividend increases to 26 since 2004. dependent on earnings and free cash flow and subject to the Board’s assessment and determination of TELUS’ financial situation, capital requirements and economic outlook on a quarterly basis. There can be no assurance that the Company will maintain its dividend growth program through 2022. TELUS advises that, unless noted otherwise, all quarterly dividends paid since January 2006 are eligible dividends under the Income Tax Act. Under this legislation, Canadian residents may be entitled to enhanced dividend tax credits that reduce the income tax otherwise payable. For more information, visit telus.com/dividends. Total dividends declared to shareholders ($ millions) 2020 2019 2018 2017 2016 2015 2014 2013 1,520 1,358 1,253 1,167 1,091 1,011 935 866 Dividend reinvestment and share purchase plan Investors may take advantage of the automatic dividend reinvestment and share purchase plan to acquire additional common shares without fees. Under this plan, eligible shareholders can have their dividends reinvested automatically into additional shares. TELUS may elect to purchase common shares in the open market or by issuance from treasury (less a discount, if any, of up to 5%). TELUS will provide advance notification to participants if and when an election is made to change the method of purchasing common shares, and if by treasury issuance, any discount offered or any change in the rate of discount. Effective October 1, 2019, until TELUS elects otherwise, TELUS offers shares from treasury at a 2% discount from the average market price. We also offer a share purchase feature, under which eligible shareholders can, on a monthly basis, buy TELUS shares (maximum $20,000 per calendar year and minimum $100 per transaction) without brokerage commissions or service charges. This plan is managed by Computershare Trust Company of Canada. Visit telus.com/drisp or contact Computershare for information and enrolment forms. 192 • TELUS 2020 ANNUAL REPORT 2021 expected dividend1 and earnings dates Quarter 1 Quarter 2 Quarter 3 Quarter 4 Ex-dividend dates2 Dividend record dates Dividend payment dates Earnings release dates March 10 June 9 September 9 December 9 March 11 June 10 September 10 December 10 April 1 July 2 October 1 May 7 August 4 November 5 January 4, 2022 February 10, 2022 1 Dividends are subject to Board of Directors’ approval. 2 Shares purchased on this date forward will not be entitled to the dividend payable on the corresponding dividend payment date. Normal course issuer bid programs Our 2020 normal course issuer bid (NCIB) program, under which we if requested, would be granted or that any NCIB program will be implemented. If approved, we will purchase shares only when and did not purchase or cancel any shares, concluded on January 1, 2021. if we consider it opportunistic. The share purchase program is subject We may seek TSX approval to implement a 2021 NCIB program, to the Board’s assessment and determination and there can be no which would allow us to purchase our shares if and when we consider assurance that it will be completed or maintained. it advantageous, based on our financial position and outlook and on Since May 2013, we have purchased a total of 140 million shares for the market price of our shares. There is no assurance that such approval, $2.6 billion. No shares have been purchased or cancelled since 2018. Per-share data1 Basic earnings Dividends declared Applying IFRS 16 Excluding IFRS 16 Applying IFRS 9 and IFRS 15 Excluding IFRS 9 and IFRS 15 2020 2019 $ 0.95 $ 1.45 $ 1.18495 $ 1.12625 2018 $ 1.34 $ 1.05 78% 2017 $ 1.31 $ 0.99 75% 2016 $ 1.03 $ 0.92 89% 2015 $ 1.15 $ 0.84 73% Dividends declared as per cent of basic earnings 125% 78% Free cash flow2 Common shares Closing price Dividend yield Price to earnings ratio $ 1.13 $ 0.77 $ 1.01 $ 0.81 $ 0.12 $ 0.89 $ 25.21 $ 25.14 $ 22.63 $ 23.81 $ 21.38 $ 19.13 4.7% 27 4.5% 17 4.6% 17 4.1% 18 4.3% 21 4.4% 17 1 Adjusted to reflect the two-for-one share split effective March 17, 2020. 2 For a definition of free cash flow, see Section 11 of Management’s discussion and analysis. Share prices and volumes1 Toronto Stock Exchange Common shares (T) 2020 (C$ except volume) Year 2020 Q4 Q3 Q2 Q1 Year 2019 Q4 Q3 Q2 High Low Close Volume (millions) 27.74 18.55 25.21 667.2 26.02 22.50 25.21 150.0 24.74 22.04 23.43 125.8 25.42 21.51 22.77 155.2 27.74 18.55 22.25 236.2 25.72 22.26 25.14 540.0 25.72 22.85 25.14 139.4 24.69 23.26 23.58 122.9 25.61 23.89 24.21 130.9 2019 Q1 24.92 22.26 24.73 146.8 Dividend declared (per share) 1.18495 0.31120 0.29125 0.29125 0.29125 1.12625 0.29125 0.28125 0.28125 0.27250 New York Stock Exchange Common shares (TU) 2020 (US$ except volume) Year 2020 Q4 Q3 Q2 Q1 Year 2019 Q4 Q3 Q2 High Low Close Volume (millions) Dividend declared (per share) 20.91 20.31 18.90 16.22 17.61 70.4 19.02 15.20 16.77 84.7 20.91 13.54 15.78 90.2 16.87 19.80 69.5 13.54 19.80 314.8 0.891 19.45 16.35 19.37 206.1 0.847 19.45 17.48 19.37 54.1 18.88 17.56 17.81 52.2 19.16 17.82 18.46 50.6 0.239 0.223 0.211 0.218 0.220 0.212 0.208 0.207 2019 Q1 18.68 16.35 18.52 49.2 1 Adjusted to reflect the two-for-one share split effective March 17, 2020. TELUS 2020 ANNUAL REPORT • 193 INVESTOR INFORMATIONTELUS shares – Five-year daily closing prices 30 25 20 15 10 ($) $25.21 $19.80 T Toronto Stock Exchange (TSX) (C$) TU New York Stock Exchange (NYSE) (US$) 5 Q1 Q2 Q3 2016 Q4 Q1 Q2 Q3 2017 Q4 Q1 Q2 Q3 2018 Q4 Q1 Q2 Q3 2019 Q4 Q1 Q2 Q3 2020 Q4 TELUS total shareholder return comparison Assuming an investment of $100 on December 31, 2015 and reinvestment of dividends 175 150 125 100 TELUS common shares S&P/TSX Composite Index ($) $165 $156 75 Q1 Q2 Q3 2016 Q4 Q1 Q2 Q3 2017 Q4 Q1 Q2 Q3 2018 Q4 Q1 Q2 Q3 2019 Q4 Q1 Q2 Q3 2020 Q4 TELUS Corporation senior notes Long-term debt Canadian Dollar Notes Coupon rate Face value Maturing Series CT Series CJ Series CK Series CQ Series CV Series CZ Series CAC Series CX Series CY Series CAA Series CAD Series CL Series CN Series CP1 Series CR Series CU Series CW2 Series CAB3 U.S. Dollar Notes U.S. Dollar Notes U.S. Dollar Notes U.S. Dollar Notes 2.35% 3.35% 3.35% 3.75% 3.75% 2.75% 2.35% 3.625% 3.30% 3.15% 2.05% 4.40% 5.15% 4.85% 4.75% 4.40% 4.70% 3.95% 2.80% 3.70% 4.60% 4.30% $1.0 billion $500 million $1.1 billion $800 million $600 million $800 million $600 million $600 million $1.0 billion $600 million $500 million $600 million $400 million $900 million $400 million $500 million $475 million $800 million US$600 million US$500 million US$750 million US$500 million March 2022 March 2023 April 2024 January 2025 March 2026 July 2026 January 2028 March 2028 May 2029 February 2030 October 2030 April 2043 November 2043 April 2044 January 2045 January 2046 March 2048 February 2050 February 2027 September 2027 November 2048 June 2049 1 2 3 Includes $500 million originally issued in April 2014 and $400 million issued in December 2015. Includes $325 million originally issued in March 2017 and $150 million issued in February 2018. Includes $400 million originally issued in December 2019 and $400 million issued in May 2020. Credit rating summary As of December 31, 2020 DBRS Ltd. TELUS Corporation Notes Commercial paper TELUS Communications Inc. Debentures BBB (high) R-2 (high) BBB (high) Standard & Poor’s Rating Services Moody’s Investors Service BBB+ A-2 Baa1 P-2 Fitch Ratings BBB+ – BBB+ – BBB+ Average term to maturity and weighted average cost of our long-term debt1 Years 15 12 9 6 3 12.2 years 4.75% 4.50% 4.25% 4.00% 3.80% 3.75% Average term to maturity Weighted average cost of long-term debt 2015 2016 2017 2018 2019 2020 1 Excluding commercial paper, the revolving component of the TELUS International credit facility, lease liabilities and other long-term debt. Details of our long-term debt At the end of 2020, the average term to maturity of our long-term debt (excluding commercial paper, the revolving component of the TELUS International credit facility, lease liabilities and other long-term debt) was 12.2 years, compared to 12.8 years at the end of 2019. Additionally, the weighted average cost of our long-term debt (excluding commercial paper, the revolving component of the TELUS International credit facility, lease liabilities and other long-term debt) was 3.80% at the end of 2020, compared to 3.94% at the end of 2019. For a detailed list of long- term debt of the Company and our subsidiaries, see Note 26 of the Consolidated financial statements. 194 • TELUS 2020 ANNUAL REPORT Key TELUS events for investors • Completed an equity issuance consisting of 57.5 million common shares (post-share split), with $1.5 billion in gross proceeds used • Corporate Knights Best 50 Corporate Citizens in Canada for the 14th time • Corporate Knights 2021 Global 100 Most Sustainable to fund growth opportunities, capital expenditures and the reduction Corporations in the World for the ninth time of indebtedness • Completed our two-for-one share split of TELUS common shares • Paused our dividend growth program in May to focus efforts on supporting citizens during the pandemic, including undertaking a series of initiatives as part of our COVID-19 relief efforts • Resumed our dividend growth program in November, thanks to our team’s exceptional efforts in supporting customers, as well as our strong liquidity and cash flow position • Issued a total of approximately $1.5 billion in senior unsecured notes in 2020, in several financings, with 7-year, 10-year and 30-year maturities. We also early redeemed $400 million in senior unsecured 3.60% notes with a January 2021 maturity, and $500 million in senior unsecured 3.20% notes with an April 2021 maturity • Acquired Mobile Klinik, a wireless storefront business, providing customers with greater flexibility and affordability in how they buy, protect, trade in or repair their smartphones and tablets • Acquired AFS Technologies Inc., a global provider of software • Recognized for employer excellence by: • Ranking as Canada’s leading global workplace in the Forbes World’s Best Employers 2020 report, and 40th globally • Receiving the BEST Award for excellence in employee learning and development from the Association for Talent Development for the 15th time • Mediacorp Canada as one of Canada’s Top 100 Employers for the 12th time • Mediacorp Canada as one of Canada’s Best Diversity Employers (2020). Analyst coverage As of February 2021, 15 equity analysts covered TELUS. For a full list, see analyst coverage on telus.com/investors. Information for security holders outside of Canada Cash dividends paid to shareholders resident in countries with which solutions for consumer goods companies and distributors, adding Canada has an income tax convention are usually subject to Canadian further scale and scope to TELUS Agriculture • Acquired EQ Care, a national virtual healthcare provider offering bilingual and on-demand access to doctors and specialists, bolstering TELUS Health’s virtual care strategy • TELUS International acquired Lionbridge AI, a provider of crowd- based training data and annotation platform solutions used in the development of AI algorithms to power machine learning. This will elevate TI’s innovative digital solutions and improve data functionality for customers, as we benefit from Lionbridge AI’s community of more than one million expert data annotators, linguists and in-country speakers. Awards • Earned the top spot in major independent network awards, including Opensignal, Ookla and Tutela, for the coverage, speed, reliability or experience of our network • Named Best Gaming Internet Service Provider for 2020, among all major internet service providers (ISP) in Canada, by PCMag • Recognized as the Fastest ISP in Canada by PCMag • Recognized for annual reporting excellence in the 2020 Annual Report on Annual Reports by ReportWatch for the TELUS 2019 annual report, ranking 19th out of 350 global reports • Received the Business Continuity Institute (BCI) Americas Award for Most Effective Recovery for our response and recovery efforts to the 2019 Northern Alberta fires in High Level, Alberta and the Lesser Slave Lake region • Acknowledged for corporate social responsibility by being included in the: • Wall Street Journal’s ranking of the world’s Top 100 Most Sustainably Managed Companies, by placing 29th in the world overall and 15th in respect of social capitalism • Dow Jones Sustainability World Index for the fifth year in a row • Dow Jones Sustainability North America Index for the 20th consecutive year non-resident withholding tax of 15%. If you have any questions, contact Computershare. For individual investors who are U.S. citizens and/or U.S. residents, quarterly dividends paid on TELUS shares are considered qualified dividends under the Internal Revenue Code and may be eligible for special U.S. tax treatment. Foreign ownership monitoring – Non-Canadian common shares Under federal legislation, total non-Canadian ownership of common shares of Canadian telecommunications companies, including TELUS, is limited to 33 ⅓%. For registered shareholders and shares trading on the TSX, a reservation system controls and monitors this level. This system requires non-Canadian purchasers of common shares to obtain a reservation number from Computershare by contacting the Reservations Unit at 1-877-267-2236 (toll-free) or telusreservations@computershare.com. The purchaser is notified within two hours if common shares are available for registration. For shares trading on the NYSE, non-Canadian ownership is monitored by utilizing the Depository Trust & Clearing Corporation’s SEG-100 Account program. All TELUS common shares held by non-Canadians must be transferred to this account (no reservation application is required). Mergers and acquisitions – Shareholder impacts Visit telus.com/m&a for information on how your shareholdings have been affected by various merger and acquisition transactions. Information is also available regarding capital gains, valuation dates and share prices for 1971 and 1994. TELUS 2020 ANNUAL REPORT • 195 INVESTOR INFORMATIONFor more information For questions regarding: • Direct registration system (DRS) advice or accounts • Dividend payments and the dividend reinvestment and share purchase plan • Change of address and e-delivery of shareholder documents • Transfer or loss of share certificates and estate settlements • Exchange of share certificates due to a merger or acquisition Contact the transfer agent and registrar Computershare Trust Company of Canada 1-800-558-0046 or 1 (514) 982-7129 (outside North America) email: telus@computershare.com visit: computershare.com For questions regarding: • Additional financial or statistical information • Industry and Company developments • The latest news releases and investor presentations Contact TELUS Investor Relations 1-800-667-4871 or 1 (604) 643-4113 (outside North America) email: ir@telus.com visit: telus.com/investors TELUS executive office 510 West Georgia Street TELUS general information 1-800-308-5992 Ethics Line As part of our ethics policy, this hotline allows team members and Vancouver, British Columbia (604) 432-2151 others to anonymously and confidentially raise accounting, internal Canada V6B 0M3 (604) 697-8044 Auditors Deloitte LLP control and ethical inquiries or complaints. 1-888-265-4112 visit: telus.ethicspoint.com 196 • TELUS 2020 ANNUAL REPORT Help us preserve the world our children will inherit Sign up for electronic delivery of shareholder documents and help us protect the environment for future generations. The benefits of e-delivery include access to important Company documents in a convenient, timely and environmentally friendly way that also reduces our environmental impact, as well as printing and mailing costs. Approximately 48,000 of our shareholders currently receive the annual report by e-delivery. To help make a difference, sign up for e-delivery of TELUS information at telus.com/electronicdelivery. Stay connected with TELUS TELUS Corporation 510 West Georgia Street Vancouver, British Columbia Canada V6B 0M3 (604) 697-8044 telus.com twitter.com/telus Instagram.com/telus facebook.com/telus youtube.com/telus Instagram.com/darren_entwistle Linkedin.com/company/telus Printed in Canada Please recycle WHY INVEST IN TELUS Leading with social capitalism Our social purpose Leveraging our technology to create meaningful outcomes for the benefit of our customers and the communities we serve Technology leadership Enhancing our world-class networks to enrich the customer experience and enable Canadians to thrive in the digital world Putting customers first Delivering exceptional customer experiences across both digital and traditional distribution channels Strong financial profile Maintaining a robust balance sheet and investment grade credit ratings, enabling ready access to capital markets Leading disclosure Providing extensive and transparent financial, corporate governance and sustainability disclosure Cultivating a brighter future Digitizing the healthcare and agriculture ecosystems to deliver better health outcomes and enable a safer and more plentiful food supply Consistent shareholder returns Supporting citizens through the pandemic, while thoughtfully returning capital to shareholders Proven track record of growth Driving consistent profitable revenue and customer growth by leveraging our world-class networks, leading customer service and evolving product bundling capabilities Unique and diversified asset mix Advancing our long-term growth strategy through diversified growth engines across TELUS International, TELUS Health and TELUS Agriculture Commitment to operational efficiency Amplifying our cost efficiency efforts and enhancing our effectiveness in serving our growing customer base telus.com/annualreport telus.com/rapportannuel 

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