), including the 'BB+' corporate credit rating, on CreditWatch with positive implications. Nextel's total operating lease-adjusted debt was around $10.4 billion at Sept. 30.
The CreditWatch placement is based on continued solid operating metrics as reflected in the third quarter, which include industry-leading average revenue per user of about $69, industry-leading low churn rate of about 1.5%, continued momentum in contract subscriber net additions, and EBITDA (earnings before interest, taxes, depreciation and amortization) growth, which was driven by a year-over-year revenue gain of about 18% and stable EBITDA margins of about 39%.
The combination of EBITDA growth and some debt reduction enabled the ratio of operating lease-adjusted debt to annualized EBITDA to improve to about 1.9 times for the third quarter of 2004, from about 2.2 times for the previous quarter. Given Nextel's competitive advantages of its differentiated push-to-talk service and captive subscriber base, there is the potential for further cash flow improvement.
Since August of this year, there has been good visibility that Nextel will spend an aggregate of up to $3.3 billion over the next three to four years. This will be used to cover the costs of relocating some existing users of spectrum in the 800 MHz and 1.9 GHz bands, adjusting the company's own network, and making a payment to the U.S. government that represents the difference between the value of spectrum to be vacated by Nextel and various credits allowed by the FCC in the transaction.
However, it has been far less clear as to the magnitude of that portion of capital spending that will be used for network improvement. This spending will likely be substantial, given that Nextel is expected to install a new technology platform based on code division multiple access (CDMA) or orthogonal frequency division multiplexing (OFDM) to supplement its existing integrated digital enhanced network (iDEN) platform developed exclusively by Motorola.
The current rating incorporates the lack of certainty on aggregate capital spending needs, and the previously discussed financial factors constrain the rating despite the company's good business position. Therefore, the potential for an upgrade will hinge on Nextel's ability to sustain the pace of growth shown in the third quarter, the magnitude of aggregate network-related spending over the next three to four years. Other factors in any potential upgrade include its ability to finance network spending while maintaining financial parameters, and a financial policy consistent with an investment-grade rating. Kalinowski is a credit analyst for Standard & Poor's Ratings Services