DBRS Confirms Télébec and NorthernTel at BBB (high), Stable

DBRS has today confirmed the long-term ratings of Télébec, Limited Partnership (Télébec) and NorthernTel, Limited Partnership (NorthernTel or, collectively, the Partnerships), both at BBB (high). The trends are Stable.

Concurrently, DBRS has confirmed the long-term and short-term ratings of Bell Aliant Regional Communications, Limited Partnership (Bell Aliant) at BBB (high) and R-1 (low), respectively. The trend is Stable. Bell Aliant Regional Communications Income Fund’s stability rating has also been confirmed at STA-2 (high).

DBRS has also taken various rating actions on Bell Aliant’s controlling shareholder, BCE Inc. (BCE), and BCE’s wholly owned subsidiary, Bell Canada Inc. (Please see separate press releases for Bell Aliant, and BCE/Bell Canada, dated October 7, 2008.)

The Partnerships’ ratings remain supported by the dominant market position they enjoy in each of the regions they serve, predominantly rural geographic service areas largely isolated from direct competition. This has afforded the Partnerships some insulation from the general trends affecting North American telecommunications providers, as evidenced by below-average access line (NAS) erosion (averaging roughly 2% per year versus roughly 4% per year for telcos operating in competitive markets), and above-average EBITDA margins, which have come under pressure but continue to remain healthy at just over 48%.

For the remainder of 2008 and into 2009, DBRS expects similar trends to continue to affect the Partnerships’ earnings profile, with mild, but steady rates of NAS erosion and pressure in long-distance services offset by growth in high-speed Internet and wireless. These trends are expected to result in revenue and EBITDA remaining roughly flat on a year-over-year basis at the end of the year; however, weak economic conditions could further challenge the Partnerships’ ability to generate meaningful EBITDA growth.

The Partnerships’ financial profile is expected to remain stable for 2008 as debt reduction capacity should be limited given expectations of break-even free cash flow (primarily due to distributions to its parent, Bell Aliant), with near-term improvement in the Partnerships’ financial profile driven by EBITDA and cash flow from operations, both of which are also expected to remain stable during the year.

Revenue growth rates in both of the Partnerships’ high-speed Internet and wireless service areas have begun to show evidence of slowing, which could indicate a potential maturation of these products and services in the markets served by the Partnerships. As a result, future ratings consideration will be dependent on the Partnerships’ longer-term EBITDA growth and their ability to improve cost efficiency in order to maintain and improve EBITDA margins despite a shifting revenue mix toward lower margin services.

Note:
All figures are in Canadian dollars unless otherwise noted.