Moody's Updates Outlook on Telus (TU) to Stable; Unsecured Ratings Affirmed

Moody's Investors Service (Moody's) confirmed TELUS Corporation's (NYSE: TU)(TELUS) Baa1 senior unsecured ratings and changed the ratings outlook to stable from under review down. As part of the same ratings action, Moody's also affirmed TELUS' Prime-2 commercial paper rating. The action concludes a ratings review initiated on 31 May 2016.

Moody's indicated that the rating was confirmed and stabilized at Baa1 because management is committed to reducing leverage into its policy range (2.0x-2.5x company-defined Net Debt-to-EBITDA) over the mid-term, which Moody's interprets as being by 2018, with EBITDA growth more than offsetting expected negative free cash flow and debt increases. TELUS' capital spending is elevated as a result of a fibre optic network upgrade, which Moody's views as being strategically appropriate, although shareholder payments are high at the same time and the combination pressures cash flow and deleveraging plans.

The following summarizes today's rating actions and TELUS' ratings:

..Issuer: TELUS Corporation

Ratings:

....Senior Unsecured Regular Bonds/Debentures, Confirmed at Baa1

....Senior Unsecured Shelf, Confirmed at (P)Baa1

....Commercial Paper Program, Affirmed at P-2

Outlook:

.... Outlook, Changed To Stable from Rating Under Review

RATINGS RATIONALE

TELUS' Baa1 senior unsecured rating is predicated on a solid business profile that includes a stable business platform, strong margins, moderately growing cash flow from operations and expectations of company-defined Net Debt-to-EBITDA declining into TELUS' 2.0x-2.5x policy range by 2018. The company has a large and diversified franchise and is well-managed with a clear and well-executed strategy. TELUS' capital spending is elevated as a result of a strategically appropriate fibre optic network upgrade, although simultaneously elevated shareholder returns combine to pressure cash flow and deleveraging plans. Moody's expects TELUS to be free cash flow negative to only modestly free cash flow positive over the next two-plus years, and interprets that circumstance, together with elevated leverage, as signaling a relative lack of financial flexibility at the Baa1 rating level.

Moody's rates TELUS' commercial paper P-2, based on the company maintaining a $2.25 billion revolving credit facility, which was recently extended through May 2021 and which, at 31 March 2016, provided $1.3 billion of available funding (pro forma for a $600 million debt maturity which came due in May and net of 31 March 2016's $478 million cash balance). Moody's does not anticipate that covenant compliance will limit access to the facility. Liquidity is supplemented by $400 million of availability under a $500 million accounts receivable securitization facility which is committed through December 2018, bringing total liquidity to $1.7 billion.

Moody's views the facilities as providing critical compensation for its expectation that TELUS will be cash flow negative (prior to share buy-backs) by about $350 million over the coming year. Additionally, TELUS also has a $700 million debt maturity in March 2017.

Rating Outlook

TELUS' stable ratings outlook is based on expectations that leverage of Debt-to-EBITDA (Moody's adjusted) will decline to 2.5x by 2018 (2.9x at 31 March 2016).

What Could Change the Rating - Up

Presuming expectations of a stable operating environment and business model, solid operating performance and liquidity, the rating could be upgraded to A3 if:

• Debt-to-EBITDA (Moody's adjusted) was expected to be sustained below 2.5x (2.9x at 31 March 2016); and

• Free Cash Flow-to-Debt (Moody's adjusted) was expected to be sustained at or above 5% (-1.3% at 31 March 2016).

What Could Change the Rating - Down

The rating could be downgraded to Baa2 if:

• Debt-to-EBITDA (Moody's adjusted) was expected to be sustained above 3.0x (2.9x at 31 March 2016); or

• Free Cash Flow-to-Debt (Moody's adjusted) was expected to be negative for a protracted period (-1.3% at 31 March 2016).

The principal methodology used in these ratings was Global Telecommunications Industry published in December 2010. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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