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

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 the ratings remain Stable. The rating confirmations reflect the Company’s solid operating results over the past year due to steady gains in wireless and strong wireline data growth. The ratings continue to be supported by the Company’s growing subscriber bases across both wireless and wireline, increasing revenues per user and ongoing network expansion. TELUS also has a history of strong cash flow generation and sound financial management. DBRS’s rating also considers intensifying competition across the telecommunications industry, risks associated with regulatory change, legacy declines and the capital intensive nature of the industry.

In 2013, TELUS’s earnings profile continued to benefit from strong operating performance in its wireless division and steady growth from wireline data services. Consolidated revenues increased by 4.4% year over year to $11.4 billion in 2013. Wireless revenue gains were primarily due to subscriber net additions and data revenue gains, both bolstered by accelerated smart phone adoption. Wireline services also continue to show steady growth due to the continued rollout of Optik TV and steady increases in high-speed Internet subscribers, which exceeded legacy declines. EBITDA margins remained relatively flat at 35% year over year, as the benefits of operating leverage within wireless and improving Optik TV margins offset declines in higher-margin legacy services and higher restructuring costs. As a result, operating income rose modestly to $4 billion in 2013.

TELUS raised $1.25 billion of debt in 2013, primarily to fund $1 billion of share repurchases. As a result of the fairly significant increase in debt, the Company’s gross debt-to-EBITDA rose to 2.0 times (x) at the end of 2013 from 1.7x in 2012.

Going forward, DBRS expects TELUS’s earnings profile to remain commensurate with the current rating category as the Canadian wireless market continues to grow and the Company continues with its fibre expansion. DBRS forecasts revenues to increase to between $11.9 billion and $12.1 billion in 2014. Revenue gains over the long term are likely to depend on gains in other business tangents (TELUS M2M, TELUS Health, etc.) as the market matures and the implementation of price increases becomes more difficult. Consolidated EBITDA margins are expected to remain relatively stable in 2014 as operating leverage in the wireless business and cost cutting in the wireline business help mitigate higher-margin legacy voice declines. As such, consolidated EBITDA is expected to be in the range of $4.1 billion to $4.3 billion in 2014.

In terms of financial profile, TELUS’s leverage will increase further in 2014 as the Company plans to raise debt to fund the remainder of its 700 megahertz (MHz) spectrum auction purchases. Cash flow from operations in 2014 is expected to rise in line with operating income, ranging between $3.2 billion and $3.4 billion in 2014. Capital expenditure requirements and investments in 2014 are expected to rise to between $2.2 billion and $2.3 billion as TELUS continues the rollout of its long-term evolution network and progresses with its fibre expansion. Dividends are expected to increase approximately 10% from 2013 to slightly over $900 million in 2014. As such, free cash flow is expected to be slightly over $100 million.

DBRS expects TELUS to raise approximately $1.2 billion of total debt in 2014 (most of which has already been raised) to finance its spectrum and share repurchases. That said, the Company’s gross debt-to-EBTIDA is only expected to rise to 2.1x by the end of 2014 from 2.0x, as the increase in debt is expected to be mostly offset by mid-single digit EBITDA growth. DBRS believes TELUS’s priority going forward will be to de-leverage to just under 2.0x net debt-to-EBITDA (pension expense adjusted to pre-2013 IAS 19) by the end of 2015. DBRS does not foresee any near-term pressure on the ratings if TELUS is able to reduce leverage to within this range in the aforementioned time period.

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.

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

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