OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to TELUS Corporation's (TSX: T, NYSE: TU) offering of CAD250 million 1.5% senior unsecured notes due 2018, CAD1 billion 2.35% senior unsecured notes due 2022 and CAD500 million 4.4% senior unsecured notes due 2046.

Net proceeds are expected to be used to fund all or a portion of the remaining CAD1.2 billion required to acquire AWS-3 spectrum licenses, to repay credit facility and commercial paper borrowings with any remaining balance to be used for general corporate purposes.

TELUS' Issuer Default Rating (IDR) is currently 'BBB+', and 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 expects TELUS' yearend 2015 gross leverage to rise to approximately 2.4x, up from year-end 2014 leverage of 2.14x. In Fitch's view, this level is still appropriate for the current 'BBB+' rating; leverage sustained above 2.5x without a credible delevering plan would be a cause for a concern. The primary cause of the rise in leverage has been the acquisition of spectrum in 2014 and 2015, a key resource that is largely only available to TELUS' through the auction process. 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 Spending: In 2014, TELUS spent CAD1.14 billion to acquire spectrum in the 700 MHz auction and in 2015, its winning bids in the AWS-3 auction approximated CAD1.5 billion. With the AWS-3 auction and the 700 MHz auction (completed in 2014) behind the company, the only remaining auction in the near term is the 2.5/2.6 GHz spectrum in April 2015. Fitch believes TELUS will also be interested in adding capacity-type spectrum in the 2.5/2.6 GHz spectrum auction.

Stock repurchases: To a lesser extent, leverage has also resulted from TELUS' continued stock repurchases, as a total of CAD612 in stock repurchases were made in 2014. 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, an improvement over the CAD121 million in 2014. FCF in 2014 was affected by a rise in cash taxes to a range of CAD464 million CAD438 million in 2013; in 2015, company guidance calls for the range to decline to CAD280 million to CAD340 million. TELUS' guidance for capital spending indicates it will be similar to the CAD2.36 billion spend in 2014.

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 CAD130 million outstanding at Dec. 31, 2014. Consequently, the CAD2.25 billion revolving facility had CAD2.12 billion in net availability.

The company's CAD500 million accounts receivable securitization program matures in December 2016, and TELUS had CAD100 million outstanding on Dec. 31, 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 (excluding CAD130 million of commercial paper); CAD600 matures in 2016.

KEY ASSUMPTIONS

--Fitch assumes revenues will grow in the mid-single digits in 2015 and taper off to the low- to mid-single digits thereafter. EBITDA margins are expected to remain relatively stable in the 36% to 38% range.

--Fitch believes that through EBITDA growth and debt repayment TELUS is likely to reach gross leverage of approximately 2.1x to 2.2x by the end of 2017.

--In 2015, Fitch expects consolidated capital spending to be in line with company guidance of CAD2.3 billion to CAD2.4 billion, similar to the \$2.36 billion spent in 2014. TELUS continues to focus on its wireline and wireless broadband infrastructure, as well as the continued deployment of 700 MHz spectrum.

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.