Morningstar DBRS Confirms Credit Ratings of TELUS Corporation at BBB With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Notes rating of TELUS Corporation (TELUS or the Company) at BBB. Morningstar DBRS also confirmed the Company's Commercial Paper rating at R-2 (middle) and the Senior Debentures of TELUS Communications Inc. at BBB. The trend on all ratings remains Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect the Company's industry-leading earnings growth, strong business risk assessment (BRA) that leverages TELUS' position as a national telecommunications provider operating a highly advanced fibreoptic and 5G network, and the continued growth and diversification of its non-telecommunications businesses. The Stable trends reflect Morningstar DBRS' expectation of mid-to-high single digit EBITDA growth through the forecast horizon, continued moderation in capital intensity over the next several years, annual dividend growth in line with the historical average, and steady improvement in the Company's financial profile in 2024 and 2025.

CREDIT RATING DRIVERS
A positive rating action may occur if TELUS is able to de-lever as a result of EBITDA growth and/or liquidity events in which the proceeds are directed toward debt reduction such that leverage declines sustainably towards 3.0 times (x), while balancing capital allocation between growth, investment, spectrum, and shareholder returns.

Conversely, a negative rating action may occur if TELUS experiences soft operating performance that falls materially below current expectations and pursues a more aggressive financial management strategy such as increasing shareholder returns beyond current expectations, material debt-financed acquisition activity, or a combination of these factors such that leverage is expected to be sustained above 3.75x.

EARNINGS OUTLOOK
Morningstar DBRS expects TELUS' earnings profile to strengthen in 2024 and 2025, as the Company leverages its considerable wireline (PureFibre) and wireless (5G) network investment to increase product and service density, scale cross-selling with Health services, and enhance subscriber loyalty, thus reducing churn. Morningstar DBRS also anticipates an operating margin tailwind from the long-term migration to a fibreoptic network (i.e., a lower cost to service/maintain and higher energy efficiency), the application of artificial intelligence to improve and streamline the customer experience, and cost efficiencies associated with internal operating initiatives. Looking ahead, Morningstar DBRS forecasts TELUS' consolidated revenue to increase in the mid-single-digit range per year in 2024 and 2025 and sees positive adjusted EBITDA margin expansion in the same timeframe.

FINANCIAL OUTLOOK
Morningstar DBRS expects TELUS' financial profile to remain appropriate for the current credit ratings as key credit metrics are expected to begin to modestly improve over the next two years primarily reflecting earnings growth, a lower level of capital intensity, and the absence of unexpected and/or significant debt-funded capital requirements (i.e., spectrum license auction, material acquisitions). Morningstar DBRS forecasts capex of approximately $2.6 billion in 2024 and 2025, thus resulting in a decline in capital intensity toward the low teens to high double-digit range. Morningstar DBRS expects 2024 free cash flow after dividends, but before working capital, to increase to approximately $1.0 billion, up from $888 million in 2023, and continue to increase year over year (YOY) in 2025. Annualized dividend payments are expected to increase in the mid-to-high single digits per year in 2024 and 2025. Morningstar DBRS forecasts TELUS' leverage to trend down YOY in both 2024 and 2025 to approximately 3.5x.

CREDIT RATING RATIONALE
TELUS' credit ratings reflect its position as a national wireline and wireless network provider. Its wireless networks cover more than 99% of Canada's population, allowing the Company to service more than 9.85 million mobile phone subscribers and 19.2 million telecommunications subscribers across all devices and services.

TELUS is also the incumbent communications service provider in Alberta and British Columbia with a strong market share in both wireless and wireline services. Wireless average billing per user rates in Western Canada are supported by some of the highest smartphone penetration rates in the country as well as higher household incomes and income growth rates.

Despite the rapid changes within the telecommunications sector, TELUS continues to invest heavily in its network. Further, the Company continues to diversify its revenue base through its ownership of TELUS International, TELUS Health, and TELUS Agriculture & Consumer Goods.

TELUS' credit ratings also reflect the intensely competitive nature of the Canadian telecommunications industry, which is populated by numerous well funded operators from coast to coast.

Morningstar DBRS notes that telecommunications operations are subject to a high degree of regulation by the Canadian Radio-television and Telecommunications Commission; Innovation, Science and Economic Development Canada (formerly Industry Canada); and the Competition Bureau Canada, all of which are focused on keeping the Canadian communications landscape competitive.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of TELUS, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of TELUS, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of TELUS, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Communications Industry (April 15, 2024)
https://dbrs.morningstar.com/research/431168/global-methodology-for-rating-companies-in-the-communications-industry

The following methodology has also been applied:

Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186/morningstar-dbrs-global-corporate-criteria

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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