Verizon, AT&T and the Lead Cables Controversy

When is a study the real story, rather than its results?

With combined market value of about $250 billion, AT&T Inc (NYSE: T) and Verizon Communications (NYSE: VZ) are two of the most widely held stocks in America. So it’s hardly a surprise the Wall Street Journal’s recent allegations that they own “very likely many more” than 2,000 toxic lead-encased cables would cause a stir.

WSJ alleges the companies have known for years these cables are “toxic” and a danger to both the surrounding environment and the workers who installed and serviced them. And it’s implied wireline telecoms are potentially liable for hundreds of billions of dollars of cleanup costs and damages from future health and safety lawsuits.

As evidence, WSJ says its reporters visited “about 300 cable sites” in the US and collected “roughly 200 environmental samples” at “nearly 130” of those sites. It claims “roughly 80 percent” of sediment samples taken next to underwater cables showed “elevated” levels of lead. And it quotes statements from medical professionals that “no amount of lead is safe,” specifically likening it to asbestos.

WSJ further charges telecom companies have known about the dangers of lead-encased cables for decades and have intentionally done nothing. And it cites testimonials from several former employees, including a former manager who stated in a 2010 presentation “some older metropolitan areas may still have over 50 percent lead cable.”

To be sure, lead was an integral part of the old AT&T’s nationwide copper wireline communications network. Bell System documents indicate the company was using around 100 million pounds of lead a year in 1956 to insulate its wires.

By the 1960s, however, scientific research had confirmed lead’s less savory effects. The Bell System stopped deploying lead cables. And by the time the local phone Baby Bells were spun off by the 1982 consent decree, remediation and removal were already in full swing.

According to the WSJ, those efforts have fallen woefully short. And at least at first, Wall Street analysts appeared to agree. Bloomberg Intelligence estimated a “cleanup” could cost the industry $43 billion before litigation, “which we expect to last at least 5 to 10 years.”

Such projections, however, started to fall rapidly once companies began to issue responses. Taking point—in part because it has the most to lose--AT&T released a statement that “less than 10 percent” of its copper-wire network has lead-encased cables, with only a “very small portion” of those running underwater. And much smaller rural service provider Telephone & Data Systems (NYSE: TDS) estimates just 10 miles of its cables are lead covered.

Verizon and other companies thought to have heavy potential exposure are yet to issue such detailed analyses. But one major Wall Street research house has already slashed its estimate of the company’s likely liability from $8 billion to as little as $500 million. And most projections for AT&T are now coming in around $5 billion or less, down from as much as $60 billion following the WSJ story.

Even the reduced figures would be a lot of money for most companies. They’re just not to Verizon and AT&T, which are on track to generate $16 billion and $17 billion in free cash flow, respectively, in 2023.

That’s more than $8 billion for AT&T after dividends are paid, enough to retire all maturing debt this year and more than half of what’s coming due in 2024. For Verizon, it’s $6 billion plus after dividends, which is enough to retire all debt maturing through 2024 plus half the company’s remaining floating rate debt.

Those estimates could of course change with Q2 results next week. And outcomes of civil suits are notoriously unpredictable.

But plaintiffs will still have to prove that Verizon, AT&T and others owned toxic assets AND willfully endangered the public by not removing them. And that’s no easy task, as frustrated trial lawyers now attempting to sue oil companies for allegedly willfully triggering global warming can attest.

The prospective awards for successfully suing companies as deep pocketed as major telecoms are immense. And that may be all the incentive well-funded trial lawyers will need to take a shot at them, including “shareholder rights” firms that always surface when a widely owned stock drops enough.

When the WSJ article broke, one prominent analyst commented, “investors are likely to shoot first and ask questions later,” meaning bail out before the facts are fully known. That’s clearly happened here.

But the bottom line here is, despite expansive rhetoric, WSJ is hardly making a case that’s open and shut. And that means the damage to shares of Verizon, AT&T, Lumen Technologies (NSDQ: LUMN), Frontier Communications (NSDQ: FYBR) and every other publicly traded company owning and operating a wireline telephone network—past or present—should hardly be considered permanent.

We’ll get a better idea of how telecom companies stand on lead cables liability when they announce Q2 earnings and update guidance—mainly because Wall Street will demand it. For Verizon, that’s happening July 25. For AT&T, it’s the 26^th. Lumen, meanwhile, will report August 1, while Frontier reports August 4.

The stakes for what management says on the earnings calls will be quite high, especially for companies that show weakness in revenue. But it’s worth pointing out that neither AT&T’s BBB credit rating nor Verizon’s BBB+ are under pressure, with both still drawing stable outlooks. And rater Moody’s this week stated its view that both companies “have ample resources to deal with settlements or remediation,” though “junk-rated” companies like Lumen and Frontier “may face more financial pressure.”

A couple more points: The presence of lead-encased telecom cables is hardly news. In fact, environmental regulators have been aware of them for decades. So it’s easily arguable AT&T and others have been following best practices as have been prescribed.

Also, it’s a fact that the true golden age of investigative reporting is now well in the rear view mirror. Not even prominent national newspapers like the Washington Post can afford to carry in-house reporters like Woodward and Bernstein to spend hours upon hours on dead ends before discovering “the story.” Nor are there Ben and Katherine Grahams with the willingness and deep pockets to support them.

Rather, the WSJ’s investigation into telecom’s lead cables had to rely on an third party—Marine Taxonomic Services—which the paper later admitted “has received guidance and funding from EDF.” That’s where this story gets positively weird, since the Environmental Defense Fund has stated aims very much at odds with the WSJ’s avowed conservative politics.

Ben Franklin wittily converted Shakespeare’s phrase “misery makes strange bedfellows” into “politics makes strange bedfellows.” And I’ll twist the Bard’s words further to include litigation as well.

The main point here is investors should never take “big” stories in mainstream media at face value. Telecoms may wind up having some liability. But whatever happens, they’ve already lost tens of billions of dollars of market value. And when there’s this much money sloshing around, that can’t be ruled out as the point all along.