OREANDA-NEWS. Fitch Ratings has affirmed the ratings for TELUS Corporation (TSX: T, 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

Capital Allocation Uncertainty: Fitch's Stable Outlook relies upon a more conservative posture toward capital allocation (to shareholders) in the next few years than TELUS has recently demonstrated. Fitch expects TELUS to provide more clarity on capital allocation following the company's May 2016 annual general meeting (AGM) when a multi-year program may be disclosed. A more aggressive posture to shareholder returns than in Fitch's assumptions could lead to a Negative Outlook, given the resulting slower decline in leverage.

Strong Position in a Competitive Market: TELUS's 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: TELUS's year-end 2015 gross leverage rose to 2.65x, up from year-end 2014 leverage of 2.17x and slightly higher than Fitch's expectations. 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 within its 2.0x to 2.5x target range over the longer term; however, Fitch does not expect TELUS to get back within this range until around the end of 2017.

Spectrum Spending: In 2014 and 2015, TELUS faced a more concentrated than usual schedule of spectrum auctions and spent approximately CAD3.2 billion to acquire spectrum in the 700 MHz, AWS-3 and 2.5 GHz auctions, more than doubling its nationwide spectrum holdings.

FCF and Capital Spending: In 2015, FCF (net cash from operating activities less capital spending and dividends) was CAD28 million, slightly less than the CAD121 million generated in 2014. A rise in cash provided by operating activities and decline in cash taxes (to CAD256 million in 2015 from CAD464 million in the prior year) did not quite offset the increase in capital spending and cash dividends. TELUS's guidance for 2016 capital spending is CAD2.65 billion, about a 3% increase over 2015 levels.

KEY ASSUMPTIONS

--Fitch's base case forecast assumes the completion of the current, CAD500 million normal course issuer bid (NCIB) program in 2016, which was approximately half finished in 2015, and a 10% dividend increase in 2016, the last year of its multi-year 2014-2016 dividend strategy. Fitch has assumed more moderate dividend increases after 2016 (5% per annum), and that there will not be share repurchases after the completion of the current program given recent spectrum spending and expectations for relatively high spending on wireline and wireless networks that will enable the company to maintain a strong competitive position.

--Fitch assumes consolidated revenue grows 2.45% in 2016, just below the midpoint of the company guidance of 2% to 3% in 2016. A similar level is projected for 2017. The lower growth rates than historical reflect the slow economy in Canada, particularly in energy and resource intensive areas of its service territory (Alberta), as well as wireless competition.

--Fitch expects the EBITDA margin to improve owing to efficiency initiatives. In addition, slower growth in the wireless area can lead to higher margins as fewer subsidized handsets are sold, although this effect could be somewhat muted by retention initiatives (which are expected to moderate in 2016 as the coterminous contract issues ameliorate). Restructuring costs are excluded from EBITDA but are included in non-operating cash flow as projected (CAD175 million total).

--Cash taxes in 2016 are expected to increase over 2015 before declining in 2017. The use of Public Mobile losses in 2014 enabled the deferment of a portion of 2015 taxes until 2016 and leads to the increase in relative instalments payable. The effects go away in 2017, reducing cash payments by approximately CAD150 million relative to 2016.

RATING SENSITIVITIES

Positive: The rating could be upgraded if the company committed to maintaining leverage at a level lower than anticipated, i.e. in the range of 1.5x to 1.75x, along with continued strong wireless operating performance and stable wireline performance.

Negative: A negative rating action could be prompted by gross leverage of 2.5x or higher due to a combination of acquisitions, spectrum purchases and stock repurchases in the absence of a credible deleveraging plan. In addition, operating profit declines owing to greater-than-anticipated competition could lead to a negative action if a return to stability is uncertain.

LIQUIDITY AND DEBT STRUCTURE

TELUS's 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 of no more than 4x and operating cash flow to interest expense of no less than 2x. The revolver backstops TELUS's CAD1.4 billion commercial paper program, which had CAD256 million outstanding at Dec. 31, 2015. Consequently, the CAD2.25 billion revolving facility had CAD1.994 billion in net availability. Commercial paper is denominated in U.S. dollars.

The company's CAD500 million accounts receivable securitization program matures in December 2016, and TELUS had CAD100 million outstanding on Dec. 31, 2015, flat with the amount outstanding at the end of 2014. 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. This requirement was lowered from the previous 'BBB-'.

Maturities in 2016 are manageable at CAD600 million (excluding commercial paper); CAD700 million matures in 2017.