DBRS Confirms TELUS Corporation at BBB (high) with a Stable Trend

DBRS Limited (DBRS) confirmed TELUS Corporation’s (TELUS or the Company) Issuer Rating and the rating of the Company’s Notes at BBB (high). DBRS also confirmed the rating of TELUS’s Commercial Paper at R-2 (high) and the rating of TELUS Communications Inc.’s Senior Debentures at BBB (high). All trends are Stable. The confirmations are supported by steady operating income growth and stable financial performance. The ratings continue to be supported by TELUS’s well-entrenched market position and proven track record of profitable growth, while also reflecting intensifying competition, risks associated with regulatory and technological change as well as the industry’s capital-intensive nature.

TELUS posted solid operating performance in 2018. Consolidated revenues increased 7.2% year over year (YOY) to $14.4 billion, driven primarily by an increase in wireless network revenue and growth in Wireline data services and equipment revenue. EBITDA margin was 35.5%, down 110 basis points YOY as margin performance in both operating divisions narrowed. Despite the margin decline, EBITDA increased 4.0% YOY to $5.1 billion, with growth in both operating divisions.

TELUS’s financial profile was essentially unchanged in 2018 as the Company continued to finance its capital spending and dividend programs largely through internally generated cash flow and as incremental debt is effectively offset by an increase in operating income. Cash flow from operations was $3.7 billion in 2018 (versus $4.1 billion in 2017). The decline was primarily attributable to the favourable impact of a deferred income tax benefit in 2017. Although capex and dividends combined declined modestly YOY, free cash flow (before changes in working capital) was negative. Credit metrics were essentially unchanged YOY as an increase in debt was offset by operating income growth, resulting in DBRS gross debt-to-EBITDA and EBITDA coverage of 2.93 times (x) and 7.81x in 2018, respectively, compared with 2.94x and 8.01x in 2017.

DBRS expects TELUS to continue to leverage the steady, positive secular tailwinds in the communications industry to drive long-term earnings growth. DBRS’s outlook is primarily driven by the expectation of continued growth in its Wireless, high-speed Internet and IPTV segments. DBRS forecasts 2019 consolidated revenue of $14.8 billion to $14.9 billion, reflecting growth in both operating divisions. DBRS expects EBITDA margins to increase in 2019 to between 37.5% and 38.0% on an International Financial Reporting Standard 16-adjusted basis and forecasts EBITDA of between $5.6 billion and $5.7 billion.

DBRS expects TELUS’s financial metrics to remain similar to 2018 over the near to medium term, although DBRS-calculated free cash flow (after dividends, but before changes in working capital, acquisitions or spectrum license purchases) is forecast to be positive in 2019 and is expected to remain modestly positive through DBRS’s forecast horizon. Although TELUS is at the high end of the 2.5x to 3.0x DBRS leverage range (i.e., gross debt-to-EBITDA), which is sufficient for this rating, DBRS does not require a reduction in leverage to maintain its view on TELUS due to the strength of the Company’s business profile.

Should operating performance deteriorate and/or financial management become more aggressive such that gross debt-to EBITDA increases materially above 3.0x for a sustained period, a negative rating action may result. Conversely, DBRS believes a positive rating action is highly unlikely over the foreseeable future due to the competitive landscape, high level of capital intensity of the industry and material distributions to shareholders.

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

The principal methodologies are Rating Companies in the Communications Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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