DBRS Confirms Bell Aliant at BBB, R-2 (middle) and Pfd-3, Stable Trends

DBRS has today confirmed Bell Aliant Regional Communications, Limited Partnership’s (Bell Aliant or the Company) Issuer Rating at BBB, its Commercial Paper rating at R-2 (middle), its Senior Unsecured Debt rating at BBB and its Preferred Shares rating at Pfd-3, all with Stable trends. On September 11, 2012, DBRS stated that it felt supplanting traditional voice services was necessary for the Company’s long-term viability, and that FibreOP presents a viable initiative with strong potential, based on its current network advantage. DBRS’s confirmation follows the Company’s steady progress with its FibreOP expansion over the past year, as data revenues have grown steadily, almost completely offsetting legacy declines.

The ratings continue to be supported by the Company’s incumbent position in Atlantic Canada and the potential of Bell Aliant’s FibreOP expansion. The ratings also continue to reflect the risks associated with the Company’s transformational strategy, the competitive landscape in Atlantic Canada and Bell Aliant’s smaller scale as a regional operator. The Stable trends incorporate the expectation of improving penetration rates in areas covered by Fibre-to-the-Home (FTTH).

Bell Aliant’s earnings profile remained commensurate with the current rating category, as the Company’s execution of its fibre expansion has enabled Bell Aliant to maintain relatively steady operating income and returns on invested capital. Declines in the Company’s traditional local and access/long distance segments were balanced by growth in data/IP service revenues. The Company’s financial profile also remained relatively stable over the past year. Cash flow from operations was just over $1 billion in 2012, compared to $800 million in 2011, primarily due to increased lump sum pension contributions in 2011. Capex and dividends remained relatively flat, resulting in neutral free cash flow. DBRS notes that debt levels remained steady and that the Company did not repurchase or issue equity in 2012.

DBRS expects Bell Aliant’s earnings profile to remain stable going forward. The Company should continue to increase its IPTV and high-speed Internet (HSI) subscriber base, as it expects to grow its fibre services footprint to approximately 800,000 homes passed by the end of 2013, from 694,000 currently. DBRS notes the average penetration rate within the Company’s FTTH coverage areas is 20% (closer to 30% in established markets). That said, DBRS also expects declines of Network Access Services (NAS) will continue in the near term. As such, DBRS expects revenue to remain relatively flat in 2013, between $2.7 and $2.8 billion. Bell Aliant suggests EBITDA margins should remain stable at close to 48%, leading to operating income of roughly $1.3 billion.

The Company’s financial profile is also expected to remain commensurate with its current rating category over the near to medium term. Although operating cash flow is expected to remain relatively stable in 2013, it is likely to decline to approximately $850 million in 2014, as Bell Aliant will become cash taxable. As the Company intends to maintain its shareholder distributions at approximately $460 million per year going forward, DBRS believes Bell Aliant will either modify the pace of its capital investment program (originally expected by DBRS to be approximately $550 million in 2014) or raise additional debt in the range of $100 million to $150 million. DBRS believes that Bell Aliant is more likely to alter the pace of its capital program once the Company reaches 800,000 homes passed by the end of 2013. DBRS also notes that neither a moderate modification in the pace of capex or a moderate change in debt would have a significant effect on the Company’s credit risk profile.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating the Communications Industry, which can be found on our website under Methodologies.