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Fitch Affirms TELUS' IDR at 'BBB+'; Outlook StableFitch Ratings has affirmed the ratings for TELUS (News - Alert) Corporation (TSX: T, T.A., NYSE: TU) and its subsidiary as follows: TELUS Corporation (TELUS) --Issuer Default Rating (IDR) at 'BBB+'; --Senior unsecured notes at 'BBB+'. TELUS Communications Inc. (TCI) --IDR at 'BBB+'; --Senior unsecured debentures at 'BBB+'. The Rating Outlook is Stable. KEY RATING DRIVERS Strong Position in a Competitive Market: TELUS' ratings reflect the stability of the company's diversified operations, its position as one of the three principal national wireless operators in the Canadian market, and its leading market position as a local wireline operator in Western Canada and Eastern Quebec. Growing Wireless and Wireline Data Revenues: Fitch believes the rating is supported by the continued strong performance of the wireless business, which generates solid growth in revenues, EBITDA and simple free cash flow (FCF; EBITDA less capital spending). Wireline results have also been solid, as TELUS has experienced consistent wireline revenue growth since 2011. Leverage: Fitch estimates TELUS' gross leverage at year-end 2014 was 2.15x, up from 1.9x at year-end 2013. During the year, debt rose, in part, owing to the acquisition of 700 MHz spectrum for CAD1.14 billion and as a result of a Fitch-estimated CAD600 million in stock repurchases in 2014. Fitch believes continued moderate EBITDA growth will provide the company with the flexibility to manage net leverage down to its 1.5x to 2.0x target range over the longer term. Spectrum (News - Alert) auctions in 2014 and 2015 will boost leverage while the company continues to repurchase stock, but spectrum spending tends to be uneven. Over 2014-2016, the company intends to repurchase CAD1.5 billion of stock. FCF and Capital Spending: In 2015, Fitch expects FCF (net cash from operating activities less capital spending and dividends) to be in the CAD300 million to CAD400 million range, and estimates 2014 FCF was in the range of CAD50 million to CAD100 million. FCF in 2014 was affected by a rise in cash taxes to a range of CAD540 million to CAD600 million from CAD438 million in 2013; in 2015, Fitch expects the range to decline to CAD350 million to CAD450 million. Fitch estimates capital spending will register a slight decline in 2015 to approximately CAD2.25 billion from an estimated CAD2.3 billion spent in 2014. Capital spending in the last 12 months ending Sept. 30, 2014 was CAD2.26 billion. Spectrum Spending: In Fitch's opinion, the acquisition of additional spectrum supports the long-term credit profile of TELUS. However, leverage is temporarily elevated as a result of outlays for this key resource in 2014, and there may be more in 2015. In 2014, a spectrum auction was held for 700 MHz spectrum, and in 2015, there will be auctions for AWS-3 spectrum and 2.5/2.6 GHz spectrum in March 2015 and April 2015, respectively. In the 700 MHz auction, TELUS spent CAD1.14 billion. In Fitch's view, the level of spending on advanced wireless services-3 (AWS-3) sectrum is uncertain. While spending on similar spectrum in the U.S. has been high, unlike the U.S. 60% of this spectrum has been set aside for new entrants and there are only two small blocks available to incumbents in each market. Fitch believes TELUS will also be interested in adding capacity-type spectrum in the 2.5/2.6 GHz spectrum auction. Liquidity and Financial Flexibility: TELUS' financial flexibility is good, owing to its undrawn revolver capacity, commercial paper program, and accounts receivable securitization program. TELUS maintains a CAD2.25 billion revolving credit facility maturing in May 2019. The financial ratio covenants in the credit facility restrict net debt to operating cash flow to no more than 4x and operating cash flow to interest expense to no less than 2x. The revolver backstops TELUS' CAD1.2 billion commercial paper program, which had CAD155 million outstanding at Sept. 30, 2014. Consequently, the CAD2.25 billion revolving facility had CAD2.095 billion in net availability. The company's CAD500 million accounts receivable securitization program matures in December 2016, and TELUS had CAD100 million outstanding on Sept. 30, 2014, down from the CAD400 million outstanding at the end of 2013. The program contains a trigger clause, which would unwind the program if TELUS Communications Inc. is rated below 'BB' by a Canadian rating agency, though Fitch believes this is unlikely given its current rating level. Maturities in 2015 are manageable at CAD125 million; CAD600 matures in 2016. TELUS early redeemed CAD500 maturing in April 2015 in September 2014. RATING SENSITIVITIES A positive rating action could occur if: --The company committed to maintaining leverage at a level lower than anticipated, i.e. at the low to middle part of its stated target range of 1.5x to 2.0x, along with continued strong wireless operating performance and stable wireline performance. A negative rating action could occur if: --Gross leverage is 2.5x or higher due to a combination of acquisitions, spectrum purchases, and stock repurchases in the absence of a credible delevering plan; --Operating profit declines owing to greater than anticipated competition could lead to a negative action if a return to stability is uncertain. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (May 28, 2014); --'Telecommunications - Rating Navigator Companion' (Nov. 17, 2014). Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393 Telecommunications: Ratings Navigator Companion http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809869 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=977855 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
