Feb 29 - Standard & Poor’s Ratings Services said today that its ratings and outlook on Verizon Communications Inc. (A-/Stable/A-2) are not immediately affected by the company’s 2011 audited financial results, which included a $3 billion year-over-year increase in the underfunded pension and OPEB liabilities, adjusted for future tax benefits.
The increase mostly reflected a decrease in the discount rate used to calculate the liabilities, a lower return on plan assets than originally estimated, and various plan assumption revisions. Largely as a result of the increase in underfunded postretirement liabilities, our adjusted debt to EBITDA was 3.2x as of the end of 2011, from 2.7x a year earlier, including the present value of operating leases, net pension and OPEB obligations, and excluding 45% of Verizon Wireless’ adjusted debt and EBITDA, reflecting the minority ownership of the joint venture by Vodafone. Adjusted for debt repayments in early 2012 and $3 billion in anticipated pension and OPEB cash contributions by Verizon in 2012, 2011 leverage would have been closer to 3x.
While this would still be at the high end of our range for the ‘A-’ rating, our stable outlook assumes that the company can achieve modest improvement in this metric in 2012 and 2013. In particular, the company’s wireless EBITDA levels and margin were dampened in the fourth quarter of 2011 by its aggressive sales of smartphones, including the iPhone; smartphones represented 70% of total postpaid phone sales in the quarter, and these carry higher costs per gross addition than other devices. As a result, while the company’s EBITDA service margin remains one of the highest in the industry, this metric declined to 42.2% in the fourth quarter of 2011, from 47.8% in the prior quarter and 47.5% a year earlier. The addition of higher average revenue per user (ARPU) smartphone subscribers, while pressuring near-term margins, provides Verizon the ability to increase wireless cash flow over time, which would contribute to modest improvement in the company’s overall leverage. However, if the company does not remain on a trajectory to achieve leverage of below 3x, we would likely revise the outlook to negative or lower the rating.