Fitch Ratings has affirmed TELUS Corp.'s and TELUS Communications, Inc.'s (TELUS) Long-Term Issuer Default Ratings (IDRs) and all unsecured issue ratings at 'BBB' with a Stable Rating Outlook.

Fitch has simultaneously withdrawn all ratings.

TELUS's ratings reflect its leading market position, stable revenue and EBITDA profile and expectation of leverage to decline below 3.2x within the next 18 months-24 months supported by EBITDA growth including synergy realizations and debt repayments.

Fitch has withdrawn TELUS's ratings for commercial reasons.

Key Rating Drivers

Strong Market Position: TELUS's ratings reflect its operations as one of the three principal national mobile operators in the Canadian market, as well as its leading market position as a local wireline operator offering high-speed data, Internet protocol television (IPTV) and voice services in western Canada and eastern Quebec. The company's Digitally-Led Customer Experiences - TELUS International (TI) segment is gaining scale and contributing to growth.

Strong Operational Performance: Revenues are expected to grow in low single digits in 2024, supported by continued mobile and fixed subscriber growth as well as investments in 5G and fiber network. Fitch expects EBITDA growth in 2024 and beyond will be supported stable revenue growth, cost efficiencies and synergies from acquisitions. Since acquiring Lifeworks in 2022, the company has committed to $427 million of total synergy realizations by the end of 2025 of which $233 million have been realized by the end of FY 2023.

Deleveraging Expectations: Fitch expects gross leverage to be near mid-3x range in 2024 and trend down to the low 3x range in 2025 due to the revenue growth and EBITDA synergies from LifeWorks and WillowTree acquisitions and various spectrum auctions. Over 2022-2023, the company's EBITDA leverage was elevated as a result of the acquisition of spectrum in the 3800MHz auction in 2023, and WillowTree and LifeWorks acquisitions. Although the spectrum acquisitions and business acquisitions have pressured leverage, Fitch believes the investments will enable TELUS to maintain a strong competitive position.

Recent Acquisitions: TELUS acquired LifeWorks in September 2022 for approximately CAD2.3 billion. The transaction was funded on a 50/50 basis between debt and common equity, and TELUS assumed approximately CAD500 million in bank debt, which it refinanced. LifeWorks is a provider of digital health and benefits solutions complementary to the company's technology oriented vertical, TELUS Health. TELUS's revenues related nearly doubled in 2023 to CAD1.7 billion.

In October 2022, TI and TELUS announced the acquisition of WillowTree, a full-service digital product provider focused on end-user experiences, such as native mobile applications and unified web interface for a USD$1.225 billion transaction, including USD$210 million of assumed debt. The transaction was funded by approximately USD$125 million in TI subordinate voting shares, the reinvestment by management of approximately USD$160 million in equity, and the remainder in cash. The acquisition is closed in January 2023.

Capital Spending and Spectrum Investments: Fitch believes TELUS's spending on fiber and spectrum support its longer-term credit profile. Spectrum is a key resource that is largely available to TELUS only through auctions. During 2023, TELUS was the successful bidder for 1,430 spectrum licenses of 3800 MHZ band spectrum and acquired 72 MHz of spectrum for CAD620 million. Combined with the 3500 MHz spectrum obtained in 2021, the company has approx. 100 MHz of prime 5G mid-band spectrum nationally. Fitch expects TELUS to also participate in upcoming 2024 auction for millimeter wave spectrum.

Derivation Summary

Fitch believes TELUS's business risk profile is very similar to peer Rogers Communications Inc. (BBB-/Stable). Both have strong competitive positions with business profiles that benefit from diversified operations, including leading positions as national wireless operators in the Canadian market and strong regional market positions offering telecom-oriented services to consumers and businesses.

In addition, TELUS has diversified into health care, home security, business process outsourcing and agriculture. TELUS has demonstrated strong execution on its strategic initiatives, with growth in its wireless business, high-speed Internet services and IPTV platform. Wireless business growth has been supported by very low mobile phone customer churn.

Fitch expects TELUS's leverage will decline to low 3x by the end of FY 2025 and further to 2.9 x in FY 2026 from high 3x at the end of FY 2023. Rogers leverage is expected to decline to upper 3x area from 5x in FY 2023. Fitch expects both will refrain from material share repurchases and will focus on deleveraging.

TELUS has similar telecom and video-oriented offerings as its North American peers, but does not compete directly with them. These carriers have much larger scale and more geographical diversification.

Key Assumptions

Consolidated revenue growth in low single digits in 2024 and the rest of the rating horizon;

EBITDA margin to slightly improve and remain in the mid-30% range owing to efficiency initiatives;

Capital spending levels in 2024 is expected to approximate CAD2.6 billion based on the company's guidance;

Fitch has included placeholders for spectrum auction and acquisitions in 2024 and the rest of the forecast;

Dividends to grow within the company guided 7%-10% target range.

Recovery Analysis

Fitch has assigned one notch up for all secured debt instruments and no notching for all unsecured debt instruments.

RATING SENSITIVITIES

Rating sensitivities do not apply as the ratings have been withdrawn.

Liquidity and Debt Structure

Strong Liquidity: TELUS's financial flexibility is good, owing to its balance sheet cash (CAD864 million of cash at the end of FY 2023), undrawn revolver capacity, CP program and accounts receivable securitization program. The company's objective is to maintain at least CAD1 billion of available liquidity.

TELUS maintains a CAD2.75 billion unsecured revolving credit facility maturing July 14, 2028. The revolver backstops TELUS's maximum permitted CAD2.0 billion in CP under its USD1.5 billion CP program. There was approximately CAD1.0 billion (CAD equivalent) of CP outstanding at Dec 31, 2023, thus the revolving facility had CAD1.729 billion in net availability. The financial ratio covenants in the credit facility restrict net debt/operating cash flow of no more than 4.25x and operating cash flow/interest expense of no less than 2x.

TELUS also has CAD1.1 billion unsecured, non-revolving credit facility maturing July 9, 2024, which can be used for general corporate purposes. The facility was reduced to CAD1.1 billion from CAD1.6 billion subsequent to the end of the FY 2023. As of Dec. 31 2023, TELUS had drawn CAD1.1 billion of the credit facilities. TELUS International has a US$800 million secured revolving credit facility (TELUS Corp as a 7.2% participant) and a US$1,200 million term loan component (TELUS Corp as a 7.2% participant).

AR Securitization: The CAD600 million accounts receivable securitization program matures in December 2024, and TELUS had CAD100 million outstanding on Dec. 31, 2023. The program contains a trigger clause, which would unwind the program if TELUS Communications is rated below 'BB' by a Canadian rating agency, although Fitch believes this is unlikely given its current rating level. Fitch assumes that the facility will be renewed prior to expiration.

Maturities: TELUS' 2024 maturities are approximately CAD3.3 billion, primarily at TELUS Corp. and consist of the USD60 million amortization of the term loan at TELUS International (Cda) Inc. In general, TELUS's maturities are well laddered.

TELUS International Debt: TI has a secured bank credit facility that expires in January 2028; the facility is denominated in U.S. dollars. The facilities include a USD800 million revolving facility (TELUS is an approximately 7.1% lender) and a USD2.0 billion amortizing term loan (TELUS is an approximately 7.7% lender).

The facility is nonrecourse to TELUS but is included in leverage metrics by Fitch and the company. At Dec. 31, 2023, there was a total of USD1.0 billion (CAD1.4 billion) outstanding on the credit facility due to lenders other than TELUS, and the revolving facility had USD492 million available. Amounts owed to TELUS were USD105 million.

Financial covenants in the TELUS International facility include two quarter-end ratio tests: the quarter- end net debt/operating cash flow ratio test of no more than 4.25x during fiscal 2023, 3.75x during fiscal 2024 and 3.25x subsequently. The operating cash flow/debt service ratio must not be less than 1.5x. The term loans amortize at 5% annually, with the balance due at maturity in 2028.

Issuer Profile

TELUS is one of the three major telecommunications providers in Canada with 10.1 million mobile phone subscribers, 3.1 million connected device subscribers, 2.6 million high-speed internet customers, 1.4 million residential voice subscribers, 1.1 million security subscribers and 69.5 million health care lives covered at the end of FY 2023.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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