DBRS Confirms Stability Rating of Bell Aliant Income Fund at STA-2 (high)

DBRS has today confirmed the Stability Rating of Bell Aliant Regional Communications Income Fund (Bell Aliant or the Fund) at STA-2 (high). The Fund’s Stability Rating confirmation reflects its underlying stable cash flows, supported by its large regional and rural geographic coverage, which is less susceptible to competition; above-average EBITDA margins of roughly 40%; and reasonable and manageable long-term payout ratio of approximately 90%.

Bell Aliant’s cash flow from operations remains consistently solid (despite what would have been a pro forma decline in cash flow from operations of slightly more than 1% in 2007) at roughly $1.18 billion in the last 12 months to June 30, 2008, while lower capital investments in the same period resulted in cash available for distribution improving to a little more than $670 million. As a result, the Fund’s payout ratio reverted to a more normal, sustainable level at just less than 94% on a DBRS-adjusted basis.

DBRS expects similar trends to continue to drive modest growth in cash available for distributions through 2008 and into 2009. Roughly flat cash flow from operations and lower year-over-year capital expenditures (estimated at just over $500 million in 2008) should allow Bell Aliant’s cash available for distribution to increase to just under $700 million on a DBRS-adjusted basis in 2008 (just over $700 million, as calculated by the Fund). Assuming a payout ratio (as a percentage of distributable cash) of just over 90% in 2008, DBRS expects the Fund’s distributions to remain steady at roughly $650 million.

Given the Fund’s low-growth profile and taking into consideration the Canadian income fund tax legislation, DBRS does not expect the Fund to increase distributions materially in the near term as it continues to explore strategies to mitigate the effect cash taxes could have on distributions in 2011. To date, the Fund has not detailed its corporate conversion plans; however, DBRS does not expect material changes to the Fund’s organizational structure for the time being.

Bell Aliant continues to remain unaffected by the privatization of BCE Inc. (which owns 44.7% of the Fund’s outstanding units). However, DBRS expects the Fund could gain from some of the residual benefits of its controlling shareholder’s new ownership and management structure. This could include initiatives that would benefit all unitholders, such as similar operating synergies to those initiated at BCE Inc., including enhanced operating efficiencies, and a stronger competitive focus in an evolving competitive marketplace.

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