DBRS Confirms TELUS Corporation at A (low) and R-1 (low), Stable Trends

DBRS has today confirmed both the long-term and short-term ratings of TELUS Corporation (TELUS or the Company) at A (low) and R-1 (low), respectively, and the Senior Debentures rating of TELUS Communications Inc. (TCI) at A (low). The trends are Stable. The rating confirmation reflects the Company’s market leading technology and infrastructure as well as its strong market position in Western Canada, a rapidly growing region with traditionally higher average revenue per user (ARPU). Furthermore, TELUS maintains a history of strong cash generation and sound financial management. DBRS’s rating also takes into account the intensifying competition in the telecommunications industry and the constant innovation and capital intensity required to maintain market positioning.

The earnings profile of TELUS remains reasonable for its current rating category. Total revenues increased by 6.2% to $10.4 billion in 2011 based primarily on the volume increase of 475,000 new customer connections split between wireless, TV and internet services. EBITDA margins decreased by 94 basis points (bps) to 36.3% as the Company saw costs in both the wireless and wireline segments increase. The net effect on consolidated EBITDA was a moderate gain (3.5%) to $3.8 billion in 2011. In terms of financial profile, cash flow from operations continued to track operating income, though capex and dividends increased moderately in 2011. This resulted in free cash flow generation of $(146) million compared to $304 million in 2010. Capex increased as TELUS continued to invest in its 4G wireless HSPA+ network and began urban construction of its 4G LTE network in the second half of 2011. As debt levels remained relatively unchanged, net debt-to-EBITDA was stable at 1.84 times (x) in 2011.

Going forward, DBRS expects the earnings profile of TELUS to remain stable as the Company continues to establish itself as Canada’s fastest growing wireless provider. DBRS forecasts revenues to increase to between $10.5 billion and $10.75 billion in 2012. In the Company’s wireless segment, increased revenue from data and roaming from the Company’s HSPA+ and LTE networks is expected to more than offset declines in voice ARPU. As for the wireline segment, revenue growth from Optik TV and high-speed internet services is expected to offset decreases in local and long-distance sales. DBRS expects EBITDA margins to remain fairly steady, resulting in EBITDA in the range of $3.8 billion to $4.0 billion in 2012 and 2013.

In terms of its financial profile, DBRS expects TELUS to remain stable on the strength of its cash generating capacity and prudent financial management. Cash flow from operations should track operating income and remain fairly steady (i.e., ranging between $2.7 billion and $2.9 billion per year in 2012 and 2013). Going forward, DBRS believes TELUS will use cash flow to continue to invest in its wireless platform and return dividends to shareholders. Capex requirements are expected to remain stable, ranging from $1.8 billion to $1.9 billion, driven by wireless capacity upgrades and construction of the new LTE network. Dividends are expected to increase twice per year until 2013, with TELUS targeting increases in the range of 10% annually. As such, DBRS believes the Company should generate steady free cash flow before working capital in the range of $200 million to $300 million in each of 2012 and 2013.

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

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