DBRS Confirms Verizon Communications Inc. at “A”/R-1 (low) with Stable Trend

DBRS has today confirmed the ratings of the Senior Unsecured Notes and Commercial Paper of Verizon Communications Inc. (Verizon or the Company) at “A” and R-1 (low) respectively, with a Stable trend. Verizon’s ratings continue to remain stable, given its balanced business-risk profile and strong financial-risk profile with good free cash flow generation, ample liquidity and a manageable debt-maturity profile. DBRS notes that Verizon continues to benefit from a change in its business focus towards its growing wireless business. This came after further refining its focus on its wireless and wireline businesses in 2006 by spinning off its directory operations and selling non-core assets.

Verizon Wireless continues to demonstrate strong EBITDA growth, given good subscriber growth, industry-leading churn levels and strong data growth more than offsetting pressure on voice average revenue per unit (ARPU). While the wireless market in the United States continues to be highly competitive, DBRS believes Verizon Wireless will continue to benefit from its robust national wireless network and strong wireless operating metrics. DBRS expects that Verizon Wireless’ EBITDA margins will continue to move closer to the 40% level in 2007, which is strong for a wireless carrier.

DBRS notes that Verizon Wireless accounts for approximately 50% of Verizon’s total revenue and EBITDA. Furthermore, DBRS expects its wireless exposure to increase with Verizon’s (1) plans to spin-off some New England access lines in January, 2008 and (2) its recent announcement of its intention to acquire Rural Cellular Corporation for $2.67 billion. Rural Cellular appears to be a strong fit for Verizon despite the dual network platforms as the bulk of the synergies will come from reduced roaming costs.

Verizon’s wireline business continues to experience some EBITDA pressure given the highly competitive residential and enterprise markets, ongoing technology substitution and further pressure on MCI’s legacy consumer business. Despite this environment, Verizon continues to be gaining some traction by (1) slowing the rate of access-line erosion by bundling (including video with FiOS TV in some markets), (2) growing its business revenue after years of pressure in this segment and (3) reducing is costs to gain greater efficiencies. While DBRS acknowledges the significant investment required to deploy its FiOS data and video service, the Company plans to continue to be measured (three million homes to be passed each year) with good subscriber uptake and progress on reducing its costs as it procures this fibre deployment. While DBRS notes the near-term investment in FiOS is sizeable, the payback appears to be reasonable, albeit spread over the medium to longer term.

DBRS notes that Verizon’s financial-risk profile has continuously improved. As a result, it currently exhibits the strongest key credit metrics since 2000. The Company’s strong balance sheet and cash flow from operations generation allow Verizon to continue to invest healthy levels of capex in its businesses to remain competitive and position them as supporting growth services. With just under $3 billion in free cash flow expected in 2007 (DBRS estimate), strong liquidity and a manageable maturity schedule, DBRS believes that its share-repurchases activity and modest acquisitions do not impact its financial-risk profile.

Overall, DBRS believes that Verizon can preserve its current ratings provided it can maintain its strong wireless business while repositioning its wireline business to remain competitive. DBRS believes that a strong balance sheet and cash flow from operations generation will continue to allow Verizon to invest in its business, pursue acquisitions and repurchase shares without significantly altering its financial-risk profile.

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