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

DBRS has today confirmed the Issuer Rating and Notes rating of TELUS Corporation (TELUS or the Company) at A (low), the Commercial Paper rating of TELUS at R-1 (low) and the Senior Debentures rating of TELUS Communications Inc. (TCI) at A (low). The trends on all ratings remain Stable. The rating confirmation reflects the Company’s strong operating results due to steady growth in wireless, as well as progress within its IP-based wireline services. The ratings continue to be supported by the Company’s growing subscriber base as a result of its strong market position in Western Canada. TELUS maintains a history of strong cash flow generation and sound financial management. However, DBRS’s rating also considers intensifying competition across the telecommunications industry, the risk of regulatory changes, legacy service declines and the constant innovation and capital intensity required to maintain market positioning.

TELUS’s earnings benefited from strong operating performance in wireless and steady top-line growth in wireline data services in 2012. Growth in revenue and operating income was primarily a result of wireless data gains and accelerated smart phone adoption. Wireline services also displayed moderate revenue growth due to the continued rollout of Optik TV and steady increases in high-speed internet subscribers. TELUS’s financial profile remained stable and consistent with the current rating category, based on the Company’s steady cash generating capacity and conservative leverage. Gross debt-to-EBITDA declined to 1.66x at the end of 2012, from 1.84x a year earlier, based on the combination of growth in operating income and the application of a majority of the Company’s free cash flow (after dividends) toward debt reduction.

Going forward, DBRS expects the earnings profile of TELUS to remain commensurate with the current rating category, as the Company continues to grow its wireless subscriber base and complete the rollout of its fibre expansion.

DBRS forecasts revenues to increase to between $11.3 billion and $11.6 billion in 2013, with margins to remain relatively stable, in the 36% to 37% range, as the Company continues to transition from its high-margin legacy voice services. As such, EBITDA is expected to fall in the range of $4.0 billion to $4.1 billion in 2013 (versus $4.0 billion in 2012). With regards to recent events, DBRS notes TELUS’s bid to acquire Mobilicity for $380 million and Industry Canada’s subsequent rejection of the proposed spectrum transfer. DBRS will continue to monitor Industry Canada’s stance on future spectrum transfers and new entrant consolidation as it evolves. Over the longer term, DBRS expects TELUS to grow both wireless and wireline earnings, primarily on the basis of subscriber growth and increased market share. Growth from average revenue per user (ARPU) gains remains uncertain, given potential data usage maturation and the indeterminate regulatory landscape.

In terms of the Company’s financial profile, DBRS expects TELUS to remain within a range consistent for the current rating category, based on the strength of its cash generating capacity and relatively stable capital structure. Cash flow from operations may fall slightly in 2013, as an increase in cash taxes is expected to offset earnings growth. DBRS forecasts that operating cash flow should range between $3 billion and $3.1 billion in 2013 (versus $3.2 billion in 2012). Capex requirements and investments in 2013 are expected to remain stable at $2 billion, as TELUS continues the rollout of its long-term evolution (LTE) network and progresses with its fibre expansion. Dividends are expected to increase approximately 10% from last year’s $800 million level. As such, DBRS forecasts that TELUS will generate free cash flow (after dividends) in the range of $100 million to $300 million before changes in working capital in 2013. TELUS recently announced its intention to repurchase up to $500 million of shares per year from 2013 to 2016. DBRS also notes that any investment in the upcoming 700 MHz spectrum auction would be over and above the stated capex forecast.

In April 2013, TELUS issued $1.7 billion of Notes in two tranches: C$1.1 billion with an 11-year term and C$600 million with a 30-year term. The proceeds were used to repay the Company’s outstanding $300 million 5.00% Series CB Notes due June 2013, and for early redemption of the $700 million 4.95% Series CF Notes due May 2014. The net issuance increased the Company’s leverage ratio to approximately 1.8x. That said, DBRS expects TELUS to keep net debt-to-EBITDA between 1.5x and 2.0x, noting that a material deterioration in credit metrics resulting from more aggressive financial management than expected could result in pressure on the ratings.

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 the Communications Industry, which can be found on our website under Methodologies.