AT&T Merger: Pension Aspects May Increase Earnings Volatility

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By David B. Brandolph

Oct. 26 — Investors watching the proposed merger between media giants AT&T Inc. and Time Warner Inc. may want to familiarize themselves with the pension accounting repercussions of the potential transaction. Doing so may show the risk for increased earnings volatility ahead.

AT&T’s pension plans held assets of $42.5 billion as of Dec. 31, 2015, according to 10-K annual reports filed with the Securities and Exchange Commission. Time Warner held plan assets about one-twentieth that amount, or about $2.84 billion. As the purchaser, AT&T is likely to absorb Time Warner’s plans. However, due to separate pension accounting methods used by each company, the absorption will have a cost.

A close look at the annual statements for each company shows that AT&T has been using a pension accounting method in which it currently recognizes the credits and costs experienced by its plan assets. Time Warner, however, appears to use the more common methodology in which pension credits and costs are spread out, or “smoothed,” over a number of years.

AT&T’s use of immediate recognition accounting has resulted in swings of its recognized pension credits and costs over the past three years of about $11 billion.

This can be seen by examining the company’s net periodic benefit costs and credits. The company reported a credit of $4.7 billion in 2013, a cost of $5.5 billion in 2014 and a credit of $679 million in 2015. These credits and costs directly affect, with some changes due to tax benefits and other accounting deductions, AT&T’s corporate earnings that it reports each year.

AT&T reported earnings of $13.3 billion in 2015.

Time Warner’s reporting of net periodic benefit costs has been much more stable during the past three years, providing evidence that the company has been smoothing its pension costs. Time Warner reported a benefit cost of $205 million in 2013, $81 million in 2014 and $189 million in 2015.

The true amount of Time Warner’s pension plan costs can be seen by its net accumulated pension loss. In 2015, Time Warner reported that number as $862 million. AT&T has likely computed this number into its reported $85 billion offer to buy the company.

Time Warner’s $862 million pension accounting loss pales in comparison to the significant plan accounting volatility AT&T revealed in its annual report. However, it is a number that investors will likely take note of as they project AT&T’s future earnings.

An AT&T spokesman told Bloomberg BNA it was too early in the merger process to address any pension plan-related matters. Time Warner didn’t respond to a Bloomberg BNA request for comment.

To contact the reporter on this story: David B. Brandolph in Washington at dbrandol@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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