Wed Aug 18, 2004
By Justin Hyde

WASHINGTON, Aug 18 (Reuters) - BellSouth Corp. (BLS.N: Quote, Profile, Research) said on Wednesday its new labor contract had triggered a $3.3 billion increase in its estimates of future retiree medical costs, reducing fourth-quarter earnings by 3 cents to 4 cents a share.

BellSouth spokeswoman LeAnn Hansen said the company was still calculating the effects of the increase on earnings beyond the fourth quarter. Analysts had estimated on average that BellSouth would earn 49 cents a share, according to Reuters Estimates.

The change raises BellSouth's total retiree medical benefit obligations by about 46 percent to roughly $10.5 billion from estimates calculated at the end of 2003.

BellSouth reached a tentative five-year deal with the Communications Workers of America earlier this month covering about 45,000 BellSouth workers. As with previous contracts, the new deal includes caps on the costs BellSouth is required to pay for retiree health-care benefits.

But in past contracts, BellSouth had waived those caps and not collected fees from retired union workers, yet accounted for its future costs as if the caps were effective. BellSouth said it will now estimate its costs without the caps, even though they are still in the contract.

BellSouth said it would recognize the additional costs over the average remaining time until retirement of its union employees.

The move puts BellSouth in step with how Verizon Communications Inc. (VZ.N: Quote, Profile, Research) and SBC Communications Inc. (SBC.N: Quote, Profile, Research) account for their retiree costs. Last year, Verizon announced a $5 billion increase in its retiree medical benefits due to the same accounting change, a move that it said would decrease annual earnings by 16 cents a share.

Goldman Sachs analyst Frank Governali said in a research note that the change would cut BellSouth's annual earnings by 12 cents to 16 cents per share.

Shares of BellSouth were down 3 cents at $27.17 in midday trading on the New York Stock Exchange.

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