DBRS Confirms Ratings of Bell Aliant Regional Communications at BBB, R-2 (middle)

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. DBRS’s confirmation reflects the Company’s steady progress with its fibre expansion over the past year as increased network coverage, strong growth in IP-based subscribers and rising data revenues have helped mitigate legacy landline erosion.

The ratings continue to be supported by the Company’s incumbent position in Atlantic Canada and the expectation of increasing Fibre-to-the-Home (FTTH) coverage and improving penetration rates in these regions. The ratings also continue to reflect legacy declines, the risks associated with the Company’s transformational strategy, the increasing competition in Atlantic Canada and the low growth profile of Bell Aliant’s core markets.

Bell Aliant’s fibre expansion offset legacy declines and enabled the Company to maintain relatively steady operating performance last year. Revenues in 2013 remained stable year over year at $2.76 billion as growth in data/IP service revenues was balanced by declines in the Company’s traditional local and access, and long distance businesses. EBITDA margins declined 77 basis points to 46.5% in 2013 due to a combination of lower revenues and an increase in operating expenses related to higher TV content and support costs associated with FibreOp customer growth, as well as higher marketing and sales costs in response to aggressive competition. As a result, operating income fell modestly to $1,284 million in 2013.

Bell Aliant’s financial profile has also remained stable over the past year. DBRS notes that the Company continues to direct the majority of its cash flow after capex toward funding its dividend. Cash flow from operations tracked operating income in 2013, remaining relatively stable at just over $1 billion. Capex and dividends remained relatively flat, resulting in a modest free cash flow deficit. Bell Aliant used proceeds from a preferred share offering (approximately $230 million) to repay short- and long-term debt. As such, gross debt-to-EBITDA fell modestly to 2.23 times (x) in 2014 from 2.33x the year prior.

DBRS expects Bell Aliant’s earnings profile to remain stable going forward as the Company continues with its FTTH expansion while increasing its Internet protocol television (IPTV) and high-speed Internet (HSI) subscriber base. By the end of 2014, Bell Aliant expects to grow its fibre services footprint to approximately 1,000,000 homes passed from 842,205 currently. DBRS notes the average penetration rate within the Company’s FTTH coverage areas is almost 23% and continues to grow. Revenue in 2014 is likely to remain relatively flat between $2.7 billion and $2.8 billion, as increases in IPTV and HSI subscribers are expected to be largely offset by declines in the Company’s legacy business lines. DBRS forecasts EBITDA margins to decline modestly to between 45% and 46% in 2014 due to higher margin network access server declines, with EBITDA standing between $1.2 billion and $1.3 billion.

In terms of financial profile, operating cash flow is expected to decline below $900 million in 2014, primarily because of an increase in cash taxes. Capital expenditures in 2014 are expect to be between $550 million and $600 million, with the annual figure expected to fall to between $450 million and $500 million in 2015 once Bell Aliant’s fibre footprint reaches 1,000,000 homes passed. Common stock dividends to Bell Aliant Inc. are expected to remain steady at approximately $430 million ($460 million including preferreds). The dividend payout will likely exceed 100% of free cash flow (before dividends) in 2014 because of higher capex and increased cash taxes. Bell Aliant raised $150 million of debt in April 2014 to finance its capex program while maintaining its dividend. DBRS expects Bell Aliant to maintain a dividend payout ratio of 75% to 85% of its free cash flow (before dividends and lump sum pension contributions) over the longer term. DBRS notes that the Company's Stable trends reflect Bell Aliant's entrenched market position, stable leverage going forward, and the prospects of the Company's FibreOp strategy.

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 Companies in the Communications Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.