DBRS Confirms TELUS Corporation at BBB (high) and R-2 (high), Trends Stable

DBRS has today confirmed the Issuer Rating and Notes rating of TELUS Corporation (TELUS or the Company) at BBB (high), the Commercial Paper rating of TELUS at R-2 (high) and the Senior Debentures rating of TELUS Communications Inc. (TCI) at BBB (high). The trends on all the ratings remain Stable. The ratings continue to be supported by TELUS’s well-entrenched market position, strong operating capabilities and growth potential. The ratings also consider intensifying competition, risks associated with regulatory and technological change, and the capital-intensive nature of the industry.

Consolidated revenues rose by 4.6% to approximately $12.4 billion for the last 12 months (LTM) ended Q3 2015 versus $12.0 billion in 2014, driven by growth in the subscriber base and data services. EBITDA grew at a slower rate than revenues, primarily as a result of the closure of Blacks Photography and higher retention spending, and was $4.3 billion for the LTM ended Q3 2015, versus $4.2 billion in 2014. In terms of financial profile, TELUS revised its long-term financial leverage policy to target a net debt-to-EBITDA ratio of up to 2.5 times (x) (from its prior policy of 1.5x to 2.0x) in May 2015, as part of a broader plan to improve its cost of capital and return value to shareholders. The combination of EBITDA growth and the debt financing of recent spectrum acquisitions resulted in gross debt-to-EBITDA of 2.76x for LTM ended Q3 2015, versus 2.23x in 2014 and 1.96x for 2013.

Going forward, DBRS expects TELUS’s earnings profile to remain supportive of the rating, based on the Company’s growing subscriber base across both wireless and wireline, increasing revenue per user and ongoing network expansion. DBRS forecasts revenues to rise to between $12.8 billion and $12.9 billion in 2016. DBRS expects EBITDA margins to remain relatively stable in the ~35% range, as the Company contends with heightened competition and economic softness in Alberta. Even still, TELUS’s differentiated customer service strategy and focus on cost reduction are expected to drive EBITDA to between $4.4 billion to $4.5 billion in 2016.

DBRS expects TELUS’s financial profile to remain stable, based on its solid cash-generating capacity and management’s stated intention to manage toward its revised financial policy guidelines. DBRS projects cash flow from operations to be between $3.5 billion and $3.6 billion in 2016. Capital expenditures combined with cash dividends will consume roughly $3.5 billion. As such, free cash flow before changes in working capital is expected to be neutral in 2016. TELUS is expected to continue to repurchase about $500 million of shares per year over the near term, which DBRS believes would effectively be debt-financed. That said, DBRS expects that TELUS’s debt-to-EBITDA ratio will likely peak by the end of 2015, due primarily to expected growth in operating income beyond 2015. DBRS also notes that deleveraging is not necessarily required to maintain the BBB (high) ratings, given the Company’s sound business profile. DBRS views TELUS as being positioned at the high-end of the rating category, thus providing the Company sufficient flexibility to use growing operating cash flow and incremental debt to fund capital investments and cash returns to shareholders.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Communications Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.