Bell Aliant reports fourth quarter 2010 results and announces 2011 financial guidance
HALIFAX,
"Our investment in fibre-to-the-home is the key to changing our revenue trajectory going forward and our fourth quarter results give us confidence that our strategy is the right one," said Karen Sheriff, President and Chief Executive Officer, Bell Aliant. "Our customers are migrating to our higher value Internet services, our TV subscribers are growing, and net NAS declines were lower than the same period a year earlier for the third consecutive quarter."
"Importantly, we are on the verge of positive revenue growth in our Atlantic residential markets after a period of decline," continued Sheriff. "Even in these very early stages of our FibreOP(TM) services rollout, we are seeing Internet and TV revenue growth that is offsetting declines in our legacy voice revenues in these markets."
Fourth quarter 2010 highlights
Highlights
Operating revenues of $709 million in the fourth quarter of 2010 were down $10 million (1.4 per cent) compared to the same quarter a year earlier driven by declines in local, long distance and data revenues as a result of lower network access services (NAS) and migration to alternative technologies. Increases in Internet revenues and product sales somewhat offset the declines.
Net NAS declines in the fourth quarter of 2010 improved from the same quarter in 2009, due to a slowdown in competitive footprint expansion, and better bundling and retention programs enabled by the expansion of FibreOP Internet and TV service coverage. At the end of December 2010, FibreOP services passed 138,000 homes and businesses in Atlantic Canada, up from 33,000 homes and businesses at the end of 2009.
EBITDA declined $6 million (1.7 per cent) in the fourth quarter of 2010 compared to the same quarter in 2009, largely driven by the declines in revenues. EBITDA margin remained strong at 50.5 per cent of revenues in the fourth quarter of 2010, although changes in revenue mix with a shift towards revenues that have a lower margin, and lower cost reductions than experienced in prior periods lowered EBITDA margin from that experienced in prior quarters of 2010 and the same quarter a year earlier.
In the fourth quarter of 2010, Bell Aliant completed the one-time re-purchase of telephone poles from Newfoundland Power and Fortis Inc. for approximately $57 million (the Pole Transaction). This transaction drove increases in capital expenditures and reduced distributable cash in the fourth quarter of 2010 compared to the same quarter in 2009. The Pole Transaction is expected to reduce Bell Aliant's pole rental cash outlays and improve EBITDA going forward.
Bell Aliant Holdings LP's fourth quarter financial highlights are summarized as follows:
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(In millions of
dollars) Q4 Q4 Percentage 2010 2009 Percentage
(unaudited) 2010 2009 Change Change
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Operating Revenue $709 $719 (1.4%) $2,785 $2,870 (3.0%)
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EBITDA 359 365 (1.7%) 1,430 1,458 (1.9%)
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Capital Expenditures
(Capex) 162 120 35.0% 494 462 6.8%
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Capex excluding
Pole Transaction 105 120 (12.5%) 437 462 (5.5%)
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Distributable Cash
(DC) 140 183 (23.1%) 711 773 (8.1%)
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DC excluding Pole
Transaction 198 183 8.2% 768 773 (0.8%)
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Intangible write-down
In the fourth quarter of 2010, as part of its annual balance sheet reviews, and in preparation for conversion to a corporate structure and International Financial Reporting Standards (IFRS), Bell Aliant revisited the original estimates used in valuing assets acquired from Bell Canada in 2006 when Bell Aliant was created. Using revised estimates in 2010, under Canadian Generally Accepted Accounting Principles (GAAP), an impairment in the carrying value of the finite-life intangibles was identified and Bell Aliant recorded a non-cash write-down of $1.5 billion in the fourth quarter of 2010. The write-down is a non-cash accounting entry required under Generally Accepted Accounting Principles. It has no effect on Bell Aliant's current or future cash flows and does not change management's business outlook.
Results
Local service and long distance revenue declined $11 million (3.2 per cent) and $6 million (5.9 per cent), respectively, in the fourth quarter of 2010 compared to the same quarter in 2009, primarily as a result of lower NAS from increased competitive activity. Residential and business net NAS declines in the fourth quarter of 2010 were 35,000 and 8,000 respectively with total net NAS declines improving from the same quarter a year earlier for the third consecutive quarter. For the full year, both residential and business net NAS declines were lower in 2010 compared to 2009 with total NAS down 140,000 (4.8 per cent) in 2010 compared to declines of 156,000 (5.1 per cent) in 2009.
Internet revenue grew by $9 million (8.3 per cent) in the fourth quarter of 2010 compared to the same period in 2009. The growth was driven by higher residential high-speed average revenue per customer (ARPC), a 4.3 per cent increase in the number of high-speed Internet customers from the end of 2009, and growth in TV subscribers.
High-speed Internet subscriber net additions in the fourth quarter of 2010 were 5,000, down from 12,000 in the same quarter of 2009. An increased focus on expanding FibreOP service coverage and loading FibreOP subscribers, particularly in the fourth quarter of 2010, reduced the number of digital subscriber line (DSL) high-speed net additions from prior periods. However, customer demand for more bandwidth and premium services fueled migration of existing DSL subscribers to FibreOP services, which along with selected pricing action and customer upgrades to other higher-speed Internet services, pushed residential High-speed Internet ARPC in the quarter to exceed $40, its highest value to date, with an increase of 6.7 per cent over the same quarter a year earlier.
Other data revenue declined $9 million (9.1 per cent) in the fourth quarter of 2010 from the same quarter a year earlier as a result of competitive pressures and migration to alternate technologies.
Other revenues increased $7 million (14.7 per cent) in the fourth quarter of 2010 compared to the same quarter in 2009 driven by increases in support structure fees and stronger product sales than the same quarter in 2009.
Excluding cost of sales, operating expenses declined $8 million in the fourth quarter of 2010 compared to the same quarter a year earlier due to labour reductions from a smaller workforce and continued productivity and cost containment initiatives.
Capital expenditures in the fourth quarter of 2010 were $162 million, up $42 million from the same quarter in 2009, driven by the Pole Transaction. Excluding the Pole Transaction, capital expenditures for the year were $437 million, resulting in an annual capital intensity of 15.7 per cent, down from 16.1 per cent in 2009.
Distributable cash decreased $42 million (23.1 per cent) in the fourth quarter of 2010 from the same period in 2009, mainly as a result of the Pole Transaction. Without the Pole Transaction, distributable cash for 2010 was $768 million, compared to $773 million in 2009.
The Fund reported distributions to unitholders of $92 million or $0.725 per unit for the quarter ended December 31, 2010.
Dividend Declared
The Bell Aliant Board of Directors today declared a quarterly dividend of $0.475 per common share, payable on March 31, 2011 to common shareholders of record at the close of business on March 15, 2011. The expected annual dividend of $1.90 per share represents a yield of 7.0 per cent based on the February 8, 2011 closing price.
Unless otherwise stated, dividends paid by Bell Aliant to Canadian residents are "eligible dividends" as defined by the Canadian Income Tax Act and corresponding provincial legislation.
2011 Guidance
"2011 will be a year of significant investment for us," said Ms. Sheriff. "Our planned fibre-to-the-home expansion is the cornerstone of our strategy and supports all of our strategic initiatives: improving the customer experience, retaining customers, growing broadband, resetting our cost structure and engaging employees. Accelerating this investment will give scale to this area of revenue growth allowing us to improve our profitability going forward."
As announced in May 2010, Bell Aliant expects to invest $350 million over 2011 and 2012 in fibre-to-the-home, making the service available to over 600,000 homes and businesses or approximately one third of Bell Aliant's competitive territory by the end of 2012. Bell Aliant expects to pass over 430,000 homes and business with the service by the end of 2011, up from 138,000 at the end of 2010. The investment will give customers access to this leading edge technology, significantly increasing Bell Aliant's TV coverage area and advancing its competitive position.
Bell Aliant's 2011 guidance also includes a planned $200 million voluntary contribution to its pension plans. Funding for this contribution is expected to come from a preferred share issue, which Bell Aliant intends to pursue soon, as market conditions allow.
"The $200 million voluntary pension contribution that we are making in 2011 is a good investment for us. It will address a meaningful portion of our solvency deficit, while placing us on a path to returning our defined benefit pension plans to fully funded status in the coming years," said Glen LeBlanc, Executive Vice President and Chief Financial Officer of Bell Aliant. "Taking this step now will remove future volatility that pension solvency valuations have on our cash flows, strengthen our credit profile, improve our cash flow generation and enhance the security of pension benefits for retirees and employees in our defined benefit pension plans."
"We expect that using preferred shares as part of our 2011 financing plan will help us improve the strength of our balance sheet and reduce debt levels, while giving investors another way to invest in Bell Aliant," continued LeBlanc.
The $200 million contribution to the pension plans is expected to be made following the completion of an anticipated issuance of preferred shares in the Canadian capital markets and is fully tax deductible, leading to higher tax losses available for carry forward and further delaying the incurrence of cash taxes into 2013.
As with other Canadian publicly traded entities, Bell Aliant has adopted International Financial Reporting Standards (IFRS) effective January 1, 2011. Bell Aliant's financial guidance for 2011 and comparative 2010 metrics, reflecting the new corporate structure and the adoption of IFRS, are as follows:
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2010 2011
IFRS Restated Guidance
Results*
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Operating Revenues $2,807 million $2,650 million -
$2,750 million
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EBITDA before pension expense $1,430 million $1,360 million-
$1,400 million
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EBITDA after pension expense $1,377 million $1,300 million -
$1,340 million
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Capital Expenditures $494 million $520 million -
$560 million
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Free Cash Flow $531 million $525 million -
$575 million(xx)
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Earnings per share before not meaningful $1.60 - $1.80
purchase price allocation
amortizations
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* 2010 IFRS restated results are unaudited
(xx) Excludes voluntary pension contribution
Operating Revenues
Operating revenues are expected to be between $2,650 million and $2,750 million in 2011, down from IFRS restated 2010 revenues of $2,807 million, as competitive activity continues to result in decreases in legacy local, long distance and data service revenues. Internet and TV revenues are expected to increase with the expansion of FibreOP services, contributing to expected positive growth in overall Atlantic Residential revenues in 2011. However, growth from these services is not expected to have sufficient scale in 2011 to offset overall legacy revenue declines.
EBITDA
EBITDA before pension expense is expected to be between $1,360 million and $1,400 million in 2011, down from an IFRS restated figure of $1,430 million in 2010. Operating cost reductions from the flow-through of actions taken in 2010 and further productivity initiatives are expected in 2011, however, at lower levels than those achieved in 2009 and 2010. Accordingly, cost reductions in 2011 are not expected have the same mitigating effects on margin erosion as experienced in recent years. EBITDA in 2011 is also expected to be negatively affected by the short-term dilutive effects of strong FibreOP services subscriber growth.
Under IFRS, EBITDA will include the current service cost of pension expense, which is expected to increase to between $60 million and $65 million in 2011 compared to $53 million in 2010. EBITDA after pension expense is expected to be between $1,300 million and $1,340 million down from a comparable IFRS restated figure of $1,377 million in 2010.
Capital Expenditures
Capital expenditures are expected to increase to between $520 million and $560 million in 2011, up from $494 million in 2010, with the costs of the acceleration of the fibre-to-the-home rollout in 2011 more than off-setting the non-recurring cost of the Pole Transaction in 2010.
Free Cash Flow
Free cash flow is expected to be between $525 million and $575 million in 2011, excluding the voluntary pension contribution. The reductions in free cash flow from 2010 levels associated with the increased capital program and lower EBITDA are expected to be offset by increases in free cash flow from lower regular pension deficit funding, lower restructuring payments and improvements in cash from working capital.
Earnings per share before purchase price allocation amortizations
As the amortization of purchase price allocations relates to non-cash assets that will largely not be replaced, Bell Aliant has excluded the amortization to provide what it believes is a more meaningful earnings per share metric. Earnings per share before purchase price allocation amortizations is expected to be between $1.60 and $1.80 in 2011.
Supplementary Financial Information
More information on the Fund's and Bell Aliant Holdings LP's fourth quarter 2010 results can be found in Bell Aliant's fourth quarter 2010 supplementary information package and Bell Aliant Holdings LP's fourth quarter 2010 Management's Discussion and Analysis (MD&A), available at www.bellaliant.ca/investors.
Analyst conference call
A conference call with the financial community is scheduled for Wednesday, February 9, 2011 at 8:00 a.m. (Eastern). The dial-in numbers are (866) 226-1792 or (416) 340-2216 for Toronto area participants. Media are invited to attend in a listen-only mode. The title of the call is "Bell Aliant Fourth Quarter 2010 Financial Results and 2011 Guidance." A replay of the session can be heard until February 19, 2011. To access the replay, dial (800) 408-3053 or (905) 694-9451 and enter the passcode 6141477#.
A live audio webcast of the conference call can be accessed on www.bellaliant.ca under the Investor Relations section. A replay of the conference call will be available on the website for one year.
Notes
The information contained in this news release is unaudited.
(1) The Fund derived virtually all of its income from its indirect
ownership in Bell Aliant Holdings LP. Bell Aliant Holdings LP's
results combine the results of Bell Aliant Regional Communications,
Limited Partnership (Bell Aliant LP), Télébec, Limited Partnership
(Télébec) and NorthernTel, Limited Partnership (NorthernTel).
(2) Under the corporate structure Bell Aliant Inc. will derive virtually
all of its income from its ownership in Bell Aliant Regional
Communications Inc. (Bell Aliant GP), the successor corporation to
Bell Aliant Holdings LP.
(3) Definitions
a. EBITDA: Bell Aliant Holdings LP defined EBITDA, a non-GAAP
measure, as operating revenue less expenses (earnings) before
interest, income taxes, depreciation and amortization expense, net
benefit plans cost, and restructuring and other charges. For a
reconciliation of EBITDA to the most closely comparable GAAP
measure, please refer to Bell Aliant Holdings LP's MD&A for the
fourth quarter of 2010.
Beginning in 2011, Bell Aliant defines EBITDA as operating revenue
less expenses (earnings) before interest, income taxes,
depreciation and amortization expense, restructuring and other
charges.
Bell Aliant defines EBITDA margin as EBITDA as a percentage of
operating revenue.
b. Capital Intensity: Bell Aliant defines capital intensity as
capital expenditures as a percentage of operating revenue.
c. Distributable Cash: The Fund defined distributable cash, a non-
GAAP measure, as cash from operating activities of continuing and
discontinued operations of Bell Aliant Holdings LP and of the
Fund, plus operating items funded through cash reserves or
borrowings, such as working capital, pension deficit funding,
restructuring and other charges and cash capital taxes in excess
of normalized levels, plus amounts for current income tax
provisions plus other elements of working capital changes that do
not affect cash flow, less capital expenditures. For a
reconciliation of distributable cash to the most closely
comparable GAAP measure, please refer to Bell Aliant Holdings LP's
MD&A for the fourth quarter of 2010.
d. Free Cash Flow: Bell Aliant defines free cash flow, a non-GAAP
measure, as cash generated from operating activities less capital
expenditures. For a reconciliation of free cash flow to the most
closely comparable GAAP measure, please refer to Bell Aliant
Holdings LP's MD&A for the fourth quarter of 2010.
e. Earnings per share before purchase price allocation (PPA)
amortizations: Bell Aliant defines earnings per share before
purchase price amortizations, a non-GAAP measure, as basic
earnings per share adjusted for the after-tax per share impact of
amortizing PPA amounts, which represent the adjustments to
historical cost of tangible and intangible assets acquired in
business combinations.
(4) Percentage changes quoted in this release related to dollar values
are based on amounts rounded to the nearest hundred-thousand,
consistent with disclosure in the Fund's supplementary information
package and Bell Aliant Holdings LP's MD&A for the fourth quarter of
2010. Dollar values quoted in this release are rounded to the nearest
million unless otherwise stated.
Forward-looking Information
This news release contains forward-looking statements concerning anticipated future events, results, circumstances or expectations, in particular as described in the "2011 Guidance" section of this news release. Unless otherwise indicated, such forward-looking statements describe management's expectations at February 8, 2011. These statements are based on management's beliefs regarding future events, many of which, by their nature are inherently uncertain and beyond management's control. These statements are not guarantees of future performance and are subject to assumptions which may prove to be inaccurate and numerous risks and uncertainties which are difficult to predict.
Key Assumptions
Several assumptions were made in the preparation of Bell Aliant's 2011 financial guidance and in making forward-looking statements in this news release. For 2011, Bell Aliant expects:
Market Assumptions
a) Competition in both business and consumer markets will continue to be
intense with the cable telephony competitive footprint growing from
its current level of 69 percent to reach a peak of 75 - 80 per cent
over the next several years;
b) Wireless substitution for voice services will increase in Bell Aliant
territories but will continue to lag other regions of Canada;
Operational Assumptions
c) NAS declines will be similar to those experienced in 2010;
d) High-speed Internet subscriber net additions will be similar to those
experienced in 2010;
e) Bell Aliant will invest $350 million in fibre-to-the-home between 2011
and 2012 to pass over 430,000 homes and businesses by the end of 2011
and over 600,000 by the end of 2012, which should result in higher
total residential ARPC and significant TV subscriber and revenue
growth;
f) Data revenue will decline at a similar rate as 2010 due to price
pressures and competitive losses;
g) Cost reductions will continue in 2011 but at a lower rate than that
achieved in recent years;
Financial Assumptions
h) Bell Aliant will issue preferred shares and use the proceeds to fund a
voluntary pension contribution of $200 million and reduce debt;
i) Net benefit plans cost (pension expense) using IFRS in 2011 will be
$60-65 million based on a discount rate of 5.3% and a long-term rate
of return on plan assets of 6.1%, up from a comparable 2010 IFRS
restated pension expense of $53 million;
j) Pension current service cost funding will be $65-$75 million, compared
to $69 million in 2010. Required pension deficit funding will be $100-
$120 million, compared to $86 million in 2010. In addition to the $200
million voluntary pension contribution, Bell Aliant will contribute
$25-$50 million of regular cash pension deficit funding, which
approximates expected going concern funding requirements for 2011;
k) Taxable income is expected to be subject to blended federal and
provincial corporate income tax rates of 29 per cent in 2011, dropping
to 27 per cent by 2013 with a 2011 income tax provision of
approximately $130 - $140 million. The utilization of accumulated tax-
loss carryforwards will result in minimal cash taxes being paid in
2011 and 2012;
l) Bell Aliant's depreciation and amortization expense for 2011 will be
$625-640 million, including approximately $145-$150 million of
amortization of intangibles;
m) Dividends paid by Bell Aliant are expected to qualify as eligible
dividends entitling Canadian resident individuals who receive them to
the enhanced dividend gross-up and tax credit mechanism that will
reduce the income tax otherwise payable.
Bell Aliant encourages investors to review the risk factors section below, and related disclosures, for a discussion of the various factors that could cause actual results to differ from what is currently expected.
Risk Factors
There are many factors that could cause results or events to differ materially from current expectations. The most significant factors that Bell Aliant has identified that may affect Bell Aliant's results or events in 2011 include but are not limited to: increasing competition; management's ability to achieve strategies and plans, including expansion of fibre-to-the home and managing the cost structure; general economic conditions; the market for preferred shares; the implementation of revised pension funding rules; reliance on systems; changing technology; required operating and capital expenditures; demand for our services; the relationship with BCE and Bell Canada and the allocation of business opportunities; changing regulations; dependence on key suppliers; liquidity and financing risk; leverage and restrictive covenants; BCE's governance rights; reliance on key personnel and labour relations, including the requirement for effective business continuity planning; legal contingencies and changes in laws, including laws pertaining to privacy and security of customer information; foreign exchange rates; changing tax rates and changing taxation rules. For a detailed discussion of these risk factors and how they could impact our results, please refer to the "Risk management" sections of the Fund's and Bell Aliant Holdings LP's 2009 annual MD&A, as updated by their 2010 quarterly MD&As, as well as the "Risk Factors" sections of their 2009 Annual Information Forms. These documents are available at www.bellaliant.ca and www.sedar.com.
Should any factor impact Bell Aliant in an unexpected manner, or should assumptions underlying the forward-looking statements prove incorrect, the actual results or events may differ materially from the results or events predicted. All of the forward-looking statements made in this press release are qualified by these cautionary statements, and there can be no assurance that the results or developments anticipated by Bell Aliant will be realized or, even if substantially realized, that they will have the expected consequences for Bell Aliant.
Except as may be required by Canadian securities laws, Bell Aliant disclaims any intention and assumes no obligation to update or revise any forward-looking statement even if new information becomes available, as a result of future events or for any other reason. Readers should not place undue reliance on any forward-looking statements. Forward-looking statements are provided for the purpose of providing information about management's current expectations and plans relating to fiscal 2011. Readers are cautioned that such information may not be appropriate for other purposes.
About Bell Aliant
Bell Aliant (TSX: BA) is one of North America's largest regional communications providers and the first company in Canada to cover an entire city with fibre-to-the-home (FTTH) technology with its FibreOP(TM) services. Through its operating entities it serves customers in six Canadian provinces with innovative information, communication and technology services including voice, data, Internet, video and value-added business solutions. Bell Aliant's employees deliver the highest quality of customer service, choice and convenience.
For further information: Media Relations: Alyson Queen, (866) 696-6700, alyson.queen@bellaliant.ca; Investor Relations: Zeda Redden, (877) 487-5726, zeda.redden@bellaliant.ca
SOURCE Bell Aliant