DBRS Confirms AT&T Inc.’s Ratings at “A”/R-1 (low), Trend Stable

DBRS notes the ratings of AT&T Inc. (the Company) remain stable at “A” and R-1 (low) at this time following DBRS’s rating confirmation on January 2, 2007. This was preceded by the Company closing its acquisition of BellSouth Corporation (December 29, 2006) which resulted in the consolidation of their jointly owned wireless business, AT&T Mobility II, LLC (rated A (low) – see the rating report published on May 31, 2007). DBRS notes that AT&T Inc. has a strong credit profile overall with a well diversified mix of communications services and a good balance sheet with healthy levels of free cash flow.

Despite AT&T Inc. facing an increasingly competitive operating environment, it has the opportunity to improve its EBITDA and EBITDA margins while adapting to a competitive operating environment. DBRS expects that AT&T Inc. will be in a position to (1) realize significant annual synergies from its recent acquisitions; (2) continue to improve the performance of its wireless business; (3) deploy its new services (including video with its IPTV deployment) as part of a bundle to both defend its existing subscriber base and increase its ARPU levels; and (4) stabilize the revenue pressure in its enterprise services business. While DBRS notes that these factors along with the successful re-branding of all of its consumer and enterprise services to the AT&T brand remain a critical component. Should these factors not materialize as DBRS has anticipated this may signal that the Company’s business risk profile has greater risk attributes.

From a financial perspective, DBRS expects AT&T Inc. to maintain a good balance sheet with good levels of free cash flow generated on an annual basis (at least $6 billion expected in 2007). While in 2007 this is expected to be directed to the remaining $7.3 billion of its two-year $10 billion share repurchase program, DBRS expects AT&T Inc.’s free cash flow will improve over the next couple of years with merger synergies being realized and as the bulk of its fixed-line and wireless network upgrades are completed by the end of 2008. DBRS notes that AT&T Inc.’s total capex levels are expected to remain reasonable in the mid-teens as a percentage of total revenue over the next few years. DBRS notes that for 2007 lower wireless capex is being offset by higher spending for its three-year FTTN deployment which is underpinning its data and IPTV service deployment. Additionally, DBRS notes the Company has indicated that it would examine select international investment opportunities to enhance its global position in the enterprise services business. (DBRS notes AT&T Inc. was in discussions to acquire an indirect stake in Telecom Italia S.p.A. earlier in 2007 but did not pursue it past its initial discussions.)

Overall, DBRS believes that AT&T Inc. will need to execute on its merger synergies while remaining competitive in a new operating environment. These factors, in addition to maintaining a strong balance sheet, will be critical to AT&T Inc. maintaining its current ratings.

Note:
All figures are in U.S. dollars unless otherwise noted.