DBRS Morningstar Changes Trend on TELUS to Negative, Confirms Ratings at BBB (high)

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 have been changed to Negative from Stable. The rating confirmations reflect TELUS’ well-entrenched position in the Canadian telecom sector, growing diversification, and operating resilience during the Coronavirus Disease (COVID-19) pandemic. The trend changes reflect TELUS’ expected increased debt balance post the 3500MHz spectrum auction, longer period of balance sheet deleveraging than initially contemplated, and that, in DBRS Morningstar’s view, the Company must execute to precision on its business plan in order to achieve industry-leading earnings growth as previously forecast by DBRS Morningstar to ensure key credit metrics achieve a level considered appropriate for the current rating category.

On June 3, 2021, DBRS Morningstar confirmed TELUS’ Issuer Rating at BBB (high) with a Stable trend. The rating confirmation reflected the outlook for strong telecommunication operating results and the expectation of rapid growth in non-telecommunication business exposure. It also acknowledged the increase in year-end (YE) 2020 leverage, however noting the expectation of improving leverage over the near to medium term (i.e., reflecting the cumulative impact of acquisition activity but without the benefit of the associated earnings).

At that time, DBRS Morningstar forecast EBITDA to grow in the high-single to low-double-digit range over the near term (i.e., one to two years) and for gross leverage to move meaningfully toward 3.0 times (x) by YE2022. DBRS Morningstar’s outlook on TELUS’ earnings remains unchanged; however, the uptick in the Company’s deleveraging profile related to the incremental spend during the 3500MHz spectrum licence auction has diminished the margin for error in DBRS Morningstar’s view and has likely extended the Company’s ability to deleverage to a level nearing 3.0x within approximately 6 to 12 months.

TELUS reported solid Q2 2021 results with industry-leading net subscriber additions in both mobile and fixed products and services and a blended wireless churn of 0.81%. Additionally, TELUS Health revenue increased 25.7% year over year (YOY) and TELUS Agriculture revenue growth was up double digits, supporting TELUS Technology Solutions (TTech) revenue up 10.6% YOY to $3.57 billion. TELUS International revenue was $658 million (up 7.5% YOY), which resulted in consolidated revenue and EBITDA growth of 10.3% and 6.8%, respectively. It was also the first full quarter of the Company’s accelerated capex program, with capex of $913 million (up 20.8%) as TELUS continues to transition its remaining copper customers to its PureFibre (optic-fibre) network.

In terms of financial profile, Q2 2021 cash from operations of $1.13 billion was up 6.5% YOY, although DBRS Morningstar free cash flow (after dividends, but before changes in working capital) was $105 million compared with $124 million in the year-ago period, primarily reflecting a significant rise in capex YOY owing largely to the accelerated broadband program and an increase in 5G investment. Q2 2021 dividends of $251 million were up 4.6% YOY reflecting an increase in dividend payments per share and shares outstanding. Gross debt at Q2 2021 was approximately $20.0 billion, compared with $20.4 billion at YE2020. At Q2 2021, TELUS had a cash balance of $2.18 billion and approximately $5.1 billion of total liquidity available.

TELUS’ decision to aggressively diversify its operating business exposure, increase network capex, and continue to provide attractive equity holder returns, in addition to the higher than previously expected cost of wireless spectrum licences has elevated TELUS’ financial leverage beyond DBRS Morningstar’s initially contemplated profile. While industry-leading consolidated revenue and EBITDA growth resulting from both acquisition and organic growth across TELUS’ operating businesses should enable the Company’s financial profile to remain supportive of the current rating, the specter of an operating miss and/or impact from an unplanned negative factor exposes the risk that leverage may rise to a level that is outside the appropriate range for an extended period.

Looking ahead, a change of the trend to Stable would reflect the expectation that TELUS will be able to achieve high-single to low-double-digit EBITDA growth in the near-term (i.e. in 2021 and 2022), which would enable gross leverage to steadily move nearer to 3.0x during this period.

Conversely, if TELUS were to experience soft operating performance that falls materially below current expectations and/or pursue more aggressive financial management, including large debt financed acquisitions and/or share repurchase activity such that deleveraging toward 3.0x would appear unlikely by H2 2023, a negative rating action may occur.

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 27, 2021, https://www.dbrsmorningstar.com/research/382119), 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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