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.
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. An important consideration in the rating is the strong performance of the wireless business, which continues to generate solid growth in revenues, EBITDA and simple FCF (EBITDA less capital spending). Improved wireline results are supportive of the rating as TELUS has experienced consistent wireline revenue growth since 2011. Growth has been in the low single digits as strong data and video revenues have been more than offsetting continued pressure on wireless voice revenues. Overall, revenues from the key growth areas of wireless and wireline data were approximately 80% of consolidated revenues in the first nine months of 2012 and grew 8.4% over the prior year.
Concerns include the continued competition from other wireless operators as well as ongoing pressure on wireline voice revenues. There is uncertainty regarding the costs to acquire additional spectrum in auctions to take place in 2013 and 2014. Auctions are expected to be held for two main spectrum bands, 700 MHz and 2.5/2.6 GHz, in 2013 and 2014, respectively. In 2013, the amount TELUS may spend on in the 700 MHz auction is uncertain but Fitch's expectations incorporate amounts similar to the nearly CAD900 million spent for spectrum in 2008 in the advanced wireless services (AWS) auction.
Fitch expects TELUS' leverage to approximate 1.7 times (x) at year-end 2012 and remain flat in 2013. In Fitch's view, the company has sufficient financial flexibility to acquire spectrum in upcoming auctions without materially affecting its credit profile as long as bidding levels do not materially exceed the 2008 auction levels. For the last 12 months (LTM) ended Sept. 30, 2012, leverage was approximately 1.64x, slightly lower than the 1.8x recorded at year-end 2011.
TELUS' financial flexibility is good, owing to its undrawn revolver capacity, commercial paper program, and accounts receivable securitization program. TELUS maintains a CAD2 billion revolving credit facility maturing in November 2016. The financial ratio covenants in the credit facility include net debt to operating cash flow of less than 4x and operating cash flow to interest expense greater than 2x. The revolver backstops TELUS' commercial paper program, which had CAD669 million outstanding at Sept. 30, 2012. Consequently, the CAD2 billion revolving facility had CAD1.331 billion in net availability.
The company's CAD500 million accounts receivable securitization program matures in August 2014, and TELUS had CAD400 million outstanding at the end of the third quarter of 2012, remaining flat with the amount outstanding at the end of 2011. The program contains a trigger clause, which would unwind the program if TCI is rated below investment grade by a Canadian rating agency, though Fitch believes this is unlikely given its current rating level.
Fitch estimates FCF (cash from operating activities less capital spending and dividends) will be in the CAD400 million to CAD500 million range in 2012; in 2013 Fitch expects the level to decline slightly to the CAD300 million to CAD400 million range. TELUS' capital spending for the LTM ended Sept. 30, 2012 approximates its guidance of CAD1.95 billion for 2012. Balance sheet cash and temporary investments amounted to CAD45 million as of Sept. 30, 2012.
Near-term debt maturities consist of approximately CAD669 million of commercial paper, and long-term maturities of CAD300 million due in 2013 and CAD700 million due 2014.
What Could Trigger A Rating Action
A positive rating action could occur if:
--The company committed to maintaining leverage at a level lower than anticipated, that is, at the low end of its stated target range of 1.5x to 2.0x, along with continued strong wireless operating performance.
A negative rating action could occur if:
--Leverage exceeds 2.0x for a sustained period of time, for example, due to aggressive share repurchases;
--Pressure on operating results through greater than anticipated competition in either of its lines of business.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Telecom Companies
John C. Culver, CFA, +1-312-368-3216
70 W. Madison Street
Chicago, IL 60602
Bill Densmore, +1-312-368-3125
Michael Weaver, +1-312-368-3156
Brian Bertsch, +1-212-908-0549
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