AT&T CEO Sees Little Health Risk From Lead-Sheathed Cable

AT&T is working with the EPA to address questions about its legacy lead-sheathed telecom cable (see 2307210004) but questions the health risk to the public, CEO John Stankey said Wednesday as the company reported Q2 results. In April, AT&T’s stock price fell more than 10% after free cash flow (FCF) was below analyst expectations. AT&T reported FCF of $4.2 billion, up $1 billion in the first-half of 2023 compared with last year, and projected full-year FCF of $16 billion or better. AT&T’s stock price rose less than 1% Wednesday, closing at $14.90.

“From power cables to telecommunication cables, lead has been used to protect interior wires from exposure to the elements, because lead is very stable, and it doesn’t rust,” Stankey said on a call with analysts. “The practice has long been known and its risks of exposure to those in close contact to it has been regulated by federal and state authorities for decades,” he said. “Independent experts, long-standing science have given us no reason to believe these cables pose a public health risk,” Stankey said.

AT&T believes “a deliberate review in collaboration with the EPA and our industry partners, with reliable science at the forefront, is the responsible way to evaluate this issue,” Stankey said. Similar to Verizon (see 2307250046), AT&T is doing additional testing and is providing voluntary testing for employees involved in cable removal on company time and expense, he said.

AT&T reported 326,000 postpaid phone net adds in Q2, compared with only 8,000 reported by Verizon Tuesday (see 2307250046). Much of that appeared to be driven by FirstNet, which now has more than 5 million connections. Postpaid churn was 0.95%, up slightly from 0.93% in Q1. The company reported revenue of $29.9 billion, up 0.9% over last year and cash from operations was $9.9 billion, up 28.2%. AT&T projected capital spending of $24 billion for the year.

“Over the past three years, we've added 8.3 million postpaid phone net adds. That's up from fewer than 1 million in the three years prior to July 2020,” Stankey said. Churn is at historic lows, he said. AT&T now covers 175 million POPs with mid-band 5G spectrum, he said.

Stankey said the wireless market remains healthy. “I don't see anything that gives me near term concern about demand.,” he said: “I don't know what happens down the road. It's anybody's guess what the economy does. I've had a fairly conservative bent on that. I think it served us well.”

The most important development was the improvement on FCF, UBS’ John Hodulik said on CNBC Wednesday. FCF “worries” will “subside” as a result of the new numbers, he said. “Things are very much on track at AT&T,” he said.

Lead remains a concern, Hodulik said. AT&T “has done a good job … in terms of how much lead they’ve got in their infrastructure, and then the cost per-mile of remediation,” he said. Based on discussions with construction experts, UBS estimates the cost will range $5,000-$25,000 per mile, he said. The overall impact is likely less than $5 billion, while AT&T at this point is spending $25 billion annually on capital improvements, he said.

AT&T will have to have “a stronger second half” to hit its FCF targets, MoffettNathanson’s Craig Moffett told investors. “As with Verizon, it may well be the case that the market has overreacted to the financial risks posed by lead-sheathed cables that in many cases date back a century,” Moffett said: “But longer-term value creation will require not just good execution” and “we believe AT&T is executing relatively well -- but also getting the strategy right. Which will, of course, require more clearly articulating … well, a strategy.”

About 350,000 of the postpaid phone adds are attributable to FirstNet, said New Street’s Jonathan Chaplin. “At first blush, one might think that all the growth is coming from business, like Verizon, but AT&T attributes as much as two-thirds of the FirstNet connections to Consumer (family members of FirstNet employees),” he said.