DBRS Morningstar Confirms TELUS Ratings With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed TELUS Corporation’s (TELUS or the Company) Issuer Rating and the rating of the Company’s Notes at BBB (high). DBRS Morningstar also confirmed the rating of TELUS’ Commercial Paper rating of at R-2 (high) and the rating of TELUS Communications Inc.’s Senior Debentures at BBB (high). All trends are Stable. The confirmations acknowledge TELUS’ increase in leverage at year-end (YE) 2020 but reflect the outlook for continued solid telecommunication operating results, rapid growth in non-telecommunication business exposure, and improving leverage over the near to medium term. The ratings continue to be supported by TELUS’ 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’ earnings profile continued to be supported by its strong incumbent wireline position in Western Canada, industry-leading wireless network performance, and solid mobile device loading, despite facing wireless roaming headwinds and higher employee costs related to the rapidly changing marketplace as a result of Coronavirus Disease (COVID-19)-related operating pressures. The acceleration of TELUS’ non-telecommunications business exposure creates material integration and execution risk; however, recent acquisition activity has not been fully reflected in reported earnings.

TELUS’ leverage increased at YE2020, primarily driven by modest EBITDA pressure in the telecom business related to coronavirus headwinds (the absence of roaming and coronavirus-related expenses) and debt-financed acquisition activity. Although YE leverage was above what would be appropriate for the current rating, it reflects debt-financed acquisition activity without the benefit of the associated earnings. Further, Q1 2021 witnessed several material capital market activities that suggest TELUS' leverage peaked at YE2020 and that, while currently weakener in comparison with prior historical periods, the Company's forecast financial profile remains sufficient for the current rating.

TELUS’ EBITDA is expected to grow in the high single- to low-double-digit range over the near term, which should support a recovery of the earnings profile within the rating category beginning in 2021.

TELUS’ decision to aggressively diversify its operating business exposure while continuing to invest heavily in its telecommunications network has elevated TELUS’ financial leverage. DBRS Morningstar believes the Company's financial profile will remain supportive of the current rating over the near to medium term based primarily on EBITDA growth, while capital allocation is managed in such a manner that debt levels remain near current levels, resulting in leverage moving towards 3.0x by 2022.

If TELUS were to experience a fundamental deterioration in operating performance and/or pursue more aggressive financial management, including large debt financed acquisitions such that leverage is maintained in a sustainable manner above 3.5x, a negative rating action may occur. While not currently anticipated, a positive rating action may occur if the Company’s earnings profile accelerates meaningfully for a sustained period and gross leverage moves structurally toward 2.5x.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Communications Industry (July 30, 2020, https://www.dbrsmorningstar.com/research/364691), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021, https://www.dbrsmorningstar.com/research/379424) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021, https://www.dbrsmorningstar.com/research/375001), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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